Tax and Audit Essentials for Tech Companies with Aprio’s Mitchell Kopelman

This is Textron tv. Hey everyone. Welcome back here to techron tv.

You know, in our never ending quest to introduce you to new companies, new services, think about things. I think we've got a, a company here we've not introduced you to before. The company's name is Ario.

I hope I pronounced that right. Yeah. And, and joining us today is Mitchell Kopelman.

I hope I pronounced that right. And Mitchell is the partner in charge, national National Technology Practice Leader at ario. Hey Mitchell, welcome and thanks for being here on Tech Drunk tv.

Thanks for having me, Alan. Pleasure. All right.

So Mitchell, let, well, let's start with a little bit about Mitchell, partner in charge, national technology Practice Leader. How, how'd you get there? What, you know, give us a little bit of your journey.

Well, I joined Ario, believe it or not, 39 years ago. And the Ricky Ario Ario is a traditional accounting firm that's more than just a traditional accounting firm today, but was a traditional accounting firm 39 years ago. We were, start, started 75 years ago.

So the firm's been around a while. And about 30 years ago, 35 years ago, we started bringing to the company technology companies and international technology companies. That was our fo that was a focus that, that I started at the firm and have led that effort for the last, uh, 35 years here at the firm.

And we have a national footprint and a national team today. That's fantastic. You know, look, my my entrepreneur friends out here, founders, co-founders know all too well the value of a partner, right?

Handling, helping you with finances and accounting and, and financial strategy. Right. I, i, having done multiple startups, I, I've been through the stages where, you know, you, maybe you don't need a full-time, CFO, you have a bookkeeper and a fractional person, and then maybe you go to a, you know, eventually you grow big enough to get a full-time, CFO or VP Finance, what have you, and, you know, bookkeepers and stuff under them.

But at some level, especially, you know, most of the companies we deal with out here are venture backed companies. It's, it's very important, Which is a large percentage of our technology clients are venture backed. Yeah, no, that's, because that's when you need, I mean, even here, we're, we're not venture backed, but, you know, having been part of venture backed companies for the last 20, 25 years, even before, you know, well, I had a fractional CFO who brought us to a, a firm that, you know, has been handling our finances all these years and, and it's been good, right?

We've been an Inc 5,000 winner three times already. And, you know, they, the insight they give you and the, what's the word, peace of mind is the best way I could say, to know that things are, you know, no one's knocking on your door that you did something wrong or you, you know, you if you get audited, okay, audits happen, but you know, everything was done right. And you're getting sound advice.

It's an important piece of it. Um, now we live in kind of crazy times though, Mitch, all right. Between the AI stuff and, and the macroeconomic cycles and the state of the world with wars and everything else, a lot of, a lot, especially venture backed companies, they're, they're struggling.

They're, you know, it's a, it's a hard time. It's kind of, you know, I, I think we've bottomed out and we're coming back this way on the cycle, but it's nevertheless a hard time. I'm wondering what you are seeing, and maybe you can share some advice and anecdotal kind of, uh, information with, with them.

Let me tell you what's happened at Ario for the last 35 years since we started working with technology companies, and I'll do it really quick. We've looked at these companies that we've started working with over the last three decades, and how technology has changed and how the funding cycle has changed. And we see peaks and valleys, we've seen it over the last three decades.

We we're seeing it today, we're seeing two years ago, 18 months ago, higher valuations than what I would call the norm for historic history, historical purposes, where we're seeing the trend come back down to more realistic. And what AEO has done is we've aimed to meet our clients where they are in their life cycle. So, whether you're a startup and you're coming outta college and you're a college funded startup, or whether you're a mature entrepreneur, a mature person that's been in big, big tech for 15 years, and you just left and started a new company, or whether you're young, 20 something or 30 something and you've just raised 10, 20, 40, $50 million in venture capital, we like to meet our clients where they are in their life cycle.

And that could be targeting to go public, it could be targeting to be acquired, it could be targeting to do a private equity go from being venture backed to private equity backed. And what we've done is we've positioned our team to be able to support all these companies wherever they are in their life cycle. It might be outsourcing your financial accounting initially, because you don't really have the need to employ a full-time.

Forget CFO for a second, even a bookkeeper, Really. It's then gonna be, um, helping you sell into enterprise your technology. So it's having a SOC two report or an ISO 27,001 if you're going into Europe or Asia, or if you're ai, it's a new ISO report around AI that we're doing.

If it's health, if you're in health tech and you need to comply with hipaa, it's doing high trust. So that wasn't even work that we did. It didn't exist 30 years ago, that work.

But as the business has evolved for tech companies and as have our clients have changed, we've grown with them. And we're doing that. We started doing r and d credits 30 years ago, but over the last 15 years, it's become much more popular and much more applicable and more beneficial as the federal government and different state governments have provided refundable benefits for RD incentives where companies have losses.

You couldn't do that 20 years ago and 30 years ago now you can do it. We see our technology clients going international so quick, Alan, where the average type of company might not think of going international until they're 10 or 20 years old. We see technology companies going public in their first five years in business.

We have professionals that speak over 60 languages professionals. So we're able to work with our clients wherever they go around the world or whether they come to the US from outside the world, and we have key languages that we cover. Um, of the 60, there's probably like 10, 12 really popular places that our clients are going to and coming from.

So we not only have the international tax expertise, but we have the expertise to, to be able to communicate with them versus everyone's broken English. Yeah. When it, when it comes to privacy and security, this, this, this concept of the soc, the SOC two reporting and the ISO reporting and fed rant for companies doing gov.

Government work is so, so critical. Obviously these companies, they audited financial statements and we've seen that evolve tremendously. Where 30 years ago, every venture capital firm said, oh, you had to have a big four firm do it.

Well, at the time it was the big eight. And fortunately they kind of backed down 'cause they realized that a venture backed company really doesn't need a big four firm. They really need ario Ario in the 2022 year was ranked in 23.

We were ranked based on 22 revenues as the 26 largest accounting firm in the country, and the fastest growing accounting firm in the country. The 2023 stats haven't come out yet. We're hoping to see similar results and moving up from maybe 26 into the, to 25 or 24, let you know in a few weeks, Alan.

All right. So we're meeting our clients where they are. We prep 'em to go public.

We're not gonna do the audit of a company that's public. It's not what we do. Private equity backed, venture backed, you know, generationally backed.

That's our focus. But if you're go, if you're public or going public, we're doing your SOC two report. We're prepping you for audit, we're putting in place all your SOX controls, uh, we're, we're with you along that way, and we're planning for the founders and the stock option holders, the whole gamut.

And if you're a FinTech company, it's A-M-L-K-Y-C. So we're here along the whole journey from start, absolutely exit. And then I was on a call with a client the other day, had a, had a company they started and sold 20 years ago.

Now they're a venture capitalist. We're working with that venture capitalist and the companies that they invest in. Fantastic.

You know, that, that's been a, uh, over the last five years, I'd say five, seven years, a lot of entrepreneurs who had exits turned around and, and started, you know, sort of small venture capital firms. Um, now of course, this last year or two is as things got tight, a lot of 'em, you know, are, uh, and I don't wanna make this about venture capital, but you know, you gotta hold some dry powder to, to keep doing your inve, you know, to keep, as your investments grow, they require more funding. Right?

If you don't want to get, It's a big challenge with, with early stage funds that invested in companies. And, and I'm a partner in a couple of early stage funds, and I got a report yesterday and they talked about how they've, the investments they've made and which companies the funds is, is doing follow on investments. And it's a big challenge because the big question is, is where's your series B where your series C coming from right now?

And we're seeing down rounds. We're seeing up rounds. We're, we're seeing the companies that are really hitting their stride, hitting their numbers, making, hitting their goals, okay.

That are reasonable goals. They're raising more money, they're able to grow and expand. The company's not hitting their goals.

They're struggling, they're having down rounds, they're going outta business. We're still, you know, selling off assets to, to other companies. We're maybe really interested.

Investors will just come and buy the assets of the company and, and complete start, complete restart of a, of a business. We really have seen everything, um, over the last year, year and a half. And there is still billions of dollars on the sidelines looking for the right companies to invest in.

We saw companies raise money at, I would call, elevated valuations over the last few years. And now a company that's doing well and that's raising money, well, even though they're doing so much better than they were, the valuations may be similar or just a little higher than it was two years ago because it was essentially inflated two years ago. It was elevated two years ago.

But there's a lot of planning that goes into that. Um, and working and cons can, can only counseling in a lot of cases, it's, it's a founder who's gonna be, um, crammed down from a down run, right? It's a big issue about really planning.

And it goes to not only having that, the venture capital funds need to have the, they, they've got the dry powder, but the companies are doing a much better job. And we're working with companies. We're also have an outsource CFO practice.

We're working with companies and helping them manage and understand, you know, what their burn rate is, what they need to do to change, to preserve the capital that they've raised, especially if they're not hitting some of their targets that they've laid out in their forecast. Sure. So, Mitchell, you know, look, I unfortunately have a lot of experience having been a venture to startups for before starting this company, 20 something years.

Here's a common mistake, though, I see, especially with, you know, first time entrepreneurs, first time founders, they, they know that raising more money's gonna be an expensive proposition. 'cause maybe they're not growing 50%, 75% that they had forecast. However, what's the first thing they cut?

Marketing and sales, right? Because you don't want to cut engineering 'cause you gotta keep those debt product, Right? You gotta keep it alive, you gotta reinvent it, improve it.

Yep. Continuous improvement on that product. Yep.

But the problem is, it's kind of a catch 22 where if you ever want to be able to raise money, you no. As you said, if you're not growing, if you can't show a good story, it's very hard to raise money today at a, at an up round or even a, an even round. Right?

And no one wants to get crammed down in a down round. So these companies, I I, you know, I call them zombie companies. Yep.

There's, there's an enormous amount of these zombie companies. They raised hundreds of millions of dollars to three years ago. Valuations were high.

They've got a ton of money in their coffers, okay? And we're working with zombie companies, okay? We have clients, they're zombie companies.

Now, these companies, they've got their burn rate, okay? They're losing money, but they've got so much money stockpile, essentially they can do that. The challenge is you've got the venture investor who's a minority investor that put a ton of money into these companies, really doesn't have a lot, really may not have a lot of say so in management today.

And the company is just coasting. The people are doing well. They're, they're, they're working on making sure that they, they don't have a lot of churn.

They're, they're, they're trying to get to a point where they can break even. And the people working there are actually doing well from a compensation standpoint, but the valuation is lower because they raise money and elevated valuation. The valuation, today's lower the venture capital funds looking at like they've got a 10 or 20% interest in a company that probably is not worth nearly what they invested on a liquidation print.

And, and they're looking at, oh, we might have to write down our investment. And companies, well, their Window is, you know, VCs basically have a seven, eight year tops window here. Right?

And they, and they, we, you know, they have a situation where like they want to close their fund and they're gonna have some of these companies left. Like either they can't close the fund or they have to fund maybe a related fund or someone else to buy 'em out. They're going to take a loss at some point on these zombie companies.

We're working with zombie companies and we're helping them understand how they can be more successful, and also how to manage your minority investors in a way that can be a win-win. And it's not gonna be easy, depending on what the valuation was when they raised an enormous amount of money that they were able to stockpile. Now, some of the, some of the companies that are also zombie companies, the founders did second, took money out on the secondary rounds, which was very, very smart for them to take absolutely money out when the valuations were high.

And depending on, you know, how much, how hungry those founders are might actually dictate how these zombie some of these zombie companies perform in the future. Yeah, You're Right. They may, they may not be hungry enough to really ever get it to the point of where the valuation was for the minority investors to really make a return on investment.

I think they already get out with their skids. Yeah, there's a, there's a, there's a divergent, we're diverging, you know, in, in some of the priorities here. And, um, there are a lot of zombie companies.

We're working with several, you know, quite a few. And, uh, we're talking to a lot of 'em. By the way, we're also about tough company struggling to survive.

Alan, I don't want to, you know, we're seeing it all. Oh, I, I, so do you know, unfortunately though, our audience is a worldwide audience, right? The people who pay us money, our sponsors are mostly venture backed tech tool vendors.

Yeah. But we are seeing it all, and I see it in their budgets and what they're prioritizing. It used to be these startups were very keen on, you know, thought leadership and branding and, and getting their name out there, right?

They would get top of funnel leads because they would work those leads down. Right? Now everybody wants something that's gonna close in 30 days and, you know, the middle funnel and down.

And they don't, you know, they're not as interested in the branding aspect of, of stuff. And it's Hard. It goes to the wholesale and marketing process and, and what you just keyed in on, Alan, we're seeing with companies very intent.

I was on a call yesterday with, with a new company that we're working with, and they've got a product that they are so focused on being able to set it up so they can do quick closes. 'cause even though it's an enterprise sale, they're, they're focused on how do we make this enterprise sale work where we can actually close in a faster cycle versus a lot of enterprise deals or 90, 120, even 180 days. I mean, we see it in all kinds of companies, and it's a real focus to say, how do we almost like make it simplify the process and simplify the, the, um, onboarding and the implementation so that you can get in there quicker, you can bring benefits, you know, our software clients can bring benefits to their customers faster.

It's, it's really important. And it's, um, it's challenging and we're seeing all the, all the changes in ai. Uh, we've got a cadre of, you know, a group of clients that are, that are AI focused, that have been very successful in raising money and are working very hard to get their products in the marketplace and penetrating the marketplace.

And we see a lot of regulation coming up around ai. So we're talking about how do we help companies navigate AI regulation that's coming. So there's like, you want to transform your company to be ready for that regulation.

You want to be prepared. It's like regulation preparedness. How do you prepare for regulation that doesn't exist today?

New York City has AI around a regulation around, if you use AI in the hiring process, how do we make sure the AI is not biased? Right? So we're, And there is a bias built in It, it could be built in.

And so is a software company gonna need some type of ISO certification around AI that says it's not biased to comply with New York law today. What's California law gonna be tomorrow? And what's the federal government law gonna be in the US versus in Europe versus elsewhere?

Well, EU already have draft, the EU has draft legislation Yep. Coming out already. Um, you know, this is real.

We're getting, We're getting ahead of that with clients. Okay? Mm-Hmm.

We're looking at doing these ISO certifications different than a SOC report, but ISO around ai. And there's a protocol for that already that we're working with. Is there?

Yes. Interesting stuff. Interesting.

Hey, Mitchell, we're, we're almost outta time here, but for people who, you know, say, Hey, I'd like to find out more about ario and, and what you guys do, what, what's their best on-ramp here? com. That's our website.

Uh, we have a lot of thought leadership that we put out all the time. We're a 2200 person accounting firm with team members all over the us and we have a, a couple hundred people in offices that we own and control outside the United States. And we are working with global tech companies, whether they're coming to the US or coming, going from the US elsewhere.

And whether it's SaaS, FinTech, blockchain, healthtech, MarTech, prop, PropTech, you name it, we're in it. And we're supporting over a thousand technology clients today around the globe. And we're here ready to serve.

Got it. Mitchell, thank you so much for coming on and, and introducing Ario to our audience. Um, you know, like that Irish proverb that you live in interesting times.

It, it certainly is interesting times and it's, but it's times where you need a solid financial partner. We're here, We've been through the cycle before. com heyday?

I was there. Yeah, no bin. I wrote it up and wrote it.

I could tell you about that someday. But anyway, man, thanks for coming on here today. Thank you.

Best of luck. Keep doing what you do. Mitchell Kopelman, uh, partner in charge, national technology practice leader at ario here on text on tv.

We're gonna take a break. We'll be back.