How Ardius Automated R&D Tax Credits for Startups Before Exiting to Gusto (Interview with Founder Josh Lee)

Introduction and Overview of Ardius

Nathan Latka

00:00Hey folks, my guest today is Josh Lee. He's the founder of ardius.com, which helps you automate R and D tax credits for companies that innovate. And he was the first M and A deal that Gusto did, which we'll talk about. Josh, you ready to take us to the top?

Josh Lee

00:11>> Absolutely. Thanks for having me, Nathan. You bet.

Nathan Latka

00:14All right, tax credits is a really interesting space. MainStreet seems to be growing like wildfire. Boast.AI in Canada also seems to be taking up. Were you sort of in that same space?

Josh Lee's Background at Ernst and Young

Josh Lee

00:23>> Yeah, I actually started back at Ernst and Young, right? It was my first real job out of college and went right into tax credits and incentives. So yeah, for sure, we started way back in the early two thousand period. And so this is now all coming to light with technology.

Nathan Latka

00:40So you, sorry, you did not launch in 2018, you launched earlier than that?

Founding Ardius in 2018

Josh Lee

00:45>> I was at Ernst and Young, which actually is where I first started. And so that's where the genesis of learning about tax credits and trying to automate the process started. But Ardius itself started in 2018.

Nathan Latka

00:58I see. Okay, so you launched it in 2018. How much did you spend getting the MVP Live?

Serving the VC Portfolio as First Clients

Josh Lee

01:04>> Actually, it was funny because right before that, I was actually in the venture capital space, and so we had invested in about 23 plus companies. And so it was actually a function of servicing our own portfolio that we actually came up with this. Because once people find out you're a CPA, naturally they want free advice. And so we actually took them to my former big four and they couldn't service us. We were just too small. Some

01:30>> of our companies were pre revenue and the labor intensity and the bill rates were just too high for the startups to actually afford. So that's why we actually came up with Ardius to help serve them.

Nathan Latka

01:41So you spin that out. Did your firm that you were with take a percent of the business at the spin out or did you own 100% at the start?

Josh Lee

01:50>> Oh, well, the company itself. It was me and another two gentlemen who helped the first MVP. This is summer of twenty eighteen. And so from there, we serviced our own portfolio of companies. And it wasn't much about the revenue so much it was about, Hey, can this work? And then we did take obviously a percentage of the tax savings, the credits itself. So from a cash flow perspective, it wasn't a burden for the actual startups themselves.

02:18>> So it was a win win in that regard.

Nathan Latka

02:20Yeah, no, that makes a lot of sense. Now, you ever go I mean, you go full time on this in 2019 at some point and really say,

Going Full Time and Mucker Capital's Encouragement

Josh Lee

02:26>> let's build a real business? Well, that was the funny part. So right after we finished with this first portfolio, we had a couple of CPA firms approach us, people I had mentored, said, Hey Josh, we heard you're back in the game. The CPA game. I was like, No, I'm just doing this as a love project, honestly. And then from there we had a couple other venture funds who we had co invested with at the time. One

02:49>> in particular was Mucker, Mucker Capital here in LA. And Eric and Will saw this, right, who were the managing partners at Mucker. And we're like, Hey Josh, what are you doing exactly? And tell them about these credits. I was excited to share with them how much money we'd save for each of our startup companies. And they were looking at me and they were like, Josh, we're working on venture fund number four. We have three venture funds.

03:13>> We'd love to run our portfolio companies through this as well. And we think you should go full time. And it was actually based on their encouragement that we thought about long and hard about, Hey, why don't we just do this full time and start Ardius as not just a love project anymore, but an actual real start up.

Nathan Latka

03:31Did Mucker invest?

Mucker Seed Check and Ordermark as First Client

Josh Lee

03:33>> They did, they wrote me the first check. It was more of them convincing my wife, who at the time was like, What? You want to become a Founder again? That's absolutely nuts, right? But they were great, they wrote the first check and have believed in it from day one. What

Nathan Latka

03:48was that check size?

Josh Lee

03:50>> They have an accelerator program, so that check size was roughly about 200,000.

Nathan Latka

03:55Were you in that same accelerator as Alex at Ordermark, same cohort?

Josh Lee

03:59>> Yeah, Alex Canter, great, good friend with Mike Jacobs and that whole crew. So they actually were one of our first clients Oh, love from the Yeah, it's great. And so having been in restaurant tech ourselves or having some investments in those areas is great. Obviously a big fan of Canter's Deli as well and so we helped them with their R and D credits. Not only in improving out some of the scalability of the platform, but also

04:25>> they were a big proponent. They were working with Techstars at the time, got us in front of Techstars. We worked with their portfolio a lot. And so instead of going door to door, started looking at some enterprise value with the accelerator funds, the venture funds around town, and even some other institutions that have a plethora of startups that could actually use this. And that's the crazy thing, right? Alex had never heard of it. Most of these

04:51>> startup companies have never heard about the R and D credit.

Fee Model: Percentage of Tax Savings

Nathan Latka

04:53And so your model, what percentage do you typically think of the savings?

Josh Lee

04:57>> Right now we're averaging anywhere from 10 to about 30. I say that with a grain of salt just because it depends on sometimes the size of the company, the complexities. We're also starting to discount further in different cycles. So that first cycle is kind of a beast. We're trying to automate, create a framework, and then once we get past the first cycle we can obviously have economies of scale to go forward. So we also will look

05:23>> to do that. We're also looking into maybe tiering it into maybe more of a fixed cost depending on a variety of different variables. Know, raising a Series A, maybe being pre funded, pre revenue, things of that sort, but trying to be flexible. And again, end goal here is to get more credits into the hands of companies that need it.

Early Tax Savings Milestones in 2018 and 2019

Nathan Latka

05:44And do you remember in the first year, always like to ask first year questions, do you remember how much, like, I guess, tax savings you got for founders in 2018?

Josh Lee

05:52>> Oh, wow. I know it was a benchmark when we hit our first million. When was that?

Nathan Latka

05:572018?

Josh Lee

05:58>> Yeah. Well, we started at the end of twenty eighteen, so this was in 2019. So we hit that mark, and then from one to 10 to Yeah, I think there was I mean, we stopped losing track. It was almost like McDonald's, right? How many hamburgers have you served? And so I got to a certain point, we hit certain milestones, we celebrated, and then from there we just kept going.

Nathan Latka

06:20So you broke $10,000,000 the same year in 2019 in terms of tax savings?

Josh Lee

06:24>> Yeah, for tax savings, yeah. I mean, had companies that came to us that were in the $34,000,000 range. So it was, yeah, we had a huge client.

Nathan Latka

06:34Like just the

Josh Lee

06:35>> one client alone, Nathan. Was crazy. Yeah, they were in manufacturing, had never thought they would qualify for the life of them. And we were actually able to go back four or five years, right? Because it is a refundable credit. So we went back four or five years and it culminated to about, you know, $34,000,000 for federal and state credits. So it was a huge win.

Nathan Latka

06:58Yeah. And so if you look at between your start date, your first deal all the way up to today, have you guys passed 500,000,000 in tax savings?

Josh Lee

07:06>> That's a good question. I'd say I should go back. Come on,

Nathan Latka

07:09Josh, you have to know that number. That's like a magic moment.

Josh Lee

07:12>> Yeah, actually, if had grabbed my colleague, Janice, she would actually be able to tell you. She keeps track of all the numbers. But I'm willing to guess, yeah, we probably would be pretty close just because we have hit some pretty big hitters, right, in the Fortune 500 space. And so their credits get relatively large. Yep. Right? So I do believe we're probably close. I don't know if we've exceeded it, but we probably have come pretty close.

Capital History: Seed and Convertible Note

Nathan Latka

07:35That's pretty cool. Okay, great. A little bit more capital history here. Did you only raise the

07:39$200 or did you raise more capital?

Josh Lee

07:41>> We actually raised one other note. We raised one convertible note. This was at the time when you brought up MainStreet, there was another company that was just starting to raise capital. We were always profitable from day one, so we never really thought about raising beyond Mucker's first investment. But we were scaling and we were looking at a very linear growth like, hey, if we can build this in twice the budget and half the time, let's

Investors in the Convertible Note Round

Josh Lee

08:12>> do it. That kind of mentality. So we did go out and raise one other note, relatively small to that end. And it an opportunity to almost include and integrate folks who believed in us from twenty eighteen-twenty nineteen. So Hustle Fund came in, Operate Studios here in OC, Sterling Road, companies that backed us, AVG, Alumni Ventures. So they all had portfolio companies that was the one

08:46>> characteristic we were looking for that they could also offer this to their portfolio companies as well.

Nathan Latka

08:51And what was the total size of that second note?

Josh Lee

08:54>> It was a million dollars. A million.

Nathan Latka

08:55Okay, pretty capital efficient then,

08:571,200,000 raised total.

Josh Lee

08:59>> Yeah, I mean, have our, like I said, competitors out there raising it like $500,000,000 valuations, right, or in the hundreds of millions. And so I thought relatively for what we were offering and in terms of the size that we were growing at relative to what they were raising at, was fair. And also just in light of the acceptance, I guess, in this market it's pretty hot, but with FinTech, I call it tax tech, it's kind of

09:28>> brand new, and so people trying to understand what credits are and trying to automate that, it's still relatively new, I think, in that space.

Team Size at Acquisition

Nathan Latka

09:36So before the Gusto acquisition, so

09:39right up to that, what was the total team size?

Josh Lee

09:42>> We were at roughly 15 at the time.

09:49>> Of the 15, we had half.

Nathan Latka

09:52Okay. So was

09:54it a tech heavy product? I mean, really, you're basically reading thousands of pages of tax code and trying to figure out to automate that for folks, right? Was it heavy

Josh Lee

10:02>> It is, yeah. And so I think tax is one of those areas that we feel are most conducive for software because the tax code, Internal Revenue Code changes all the time. And it actually makes a lot of sense to change and program that at the top level and then disseminate that down to our customers or clients. So it doesn't matter, Republican, Democrat, who's in office, it's going to change. And so now we can kind of make

10:27>> those adjustments up front. And we feel that there's a digital footprint. If you look at QuickBooks, payroll information like Gusto, there's information in there that we can actually flag that's a good indicator of things that could potentially qualify for the credit. Tax returns are the same way. They give rise to, hey, I think you may qualify for this, you're in this demographic, you're in this location, you have this job title. All these different things I think

10:54>> we can connect into a platform and really be able to at least identify or discover things that we've missed.

Nathan Latka

11:01And so looking back to 2018, if you feel like you're sort of maybe flirting with that 500,000,000 in tax credits sort of awarded today and your low end is 10%, I mean, I could take 10% times 500,000,000, that's $50,000,000 in total revenue over three years?

Josh Lee

11:15>> Well, there's a timing difference, right? In this case, we were of the mindset and the model, like we didn't do the big four model where we charge an upfront retainer and we charge everything upfront. So for us there is a timing difference. I want to caveat that. We basically base our fee on utilization. It's a big proponent of us working with startups is we don't want to be a burden on your cash flow. So as cash

11:39>> flow comes in, right, so there off we also are invoicing or billing for that time. So even though it could be $500,000,000 or something thereof, it doesn't all hit at once.

Nathan Latka

11:53Founders? If you told them at Ardius that a founder could get a million dollars, why wouldn't they draw down that million from the government immediately?

Josh Lee

12:00>> Yeah, so some examples could be, you know, the way you utilize credits are in two major pathways. One is if you're utilizing it against payroll, or sorry, your income tax, right? That's an easy one. It's right away. So you're right. So for those, you could be a large company that's profitable. If I save you $100, right, you're going get a $100,000 credit, then we can invoice right away. In instances where let's say you're a pre revenue

12:24>> company, you have no profitability, there's another pathway where the IRS will allow you to offset that against your payroll taxes. And so your payroll taxes come every quarter, right? It's being filed. And so you may have a credit of let's say a million dollars, but your payroll taxes may not hit that million dollars until year number two, three, or four. So that comes in time, and so therefore, you know, if you're only hitting, let's say $50,000

12:55>> per quarter, you may only use $200,000 in credits for that one. Yeah,

Nathan Latka

13:00you're identifying what the total credit base is, and then the founders are saying, Okay, we have enough income here where it's worth offsetting with this portion of the tax credits Ardius and Josh have given me, but they're not going to do it all today. They might do some 2022, 2023, etcetera. Yeah,

Josh Lee

13:13>> And so that's where we want to grow with startups as well. So the fact that they can take this money back or raise around or hire more people, the more people, the more payroll tax. The more payroll tax, the quicker they utilize their tax credits.

Revenue at Time of Sale

Nathan Latka

13:28Yeah. So what was revenue in 2020 before the sale?

Josh Lee

13:31>> Oh, that's a good question. That's something that we're not at liberty to discuss.

Nathan Latka

13:37Were you past the million dollar run rate in the magical moment there?

Josh Lee

13:40>> We were close, yeah.

Why Gusto Was the Right Exit Partner

Nathan Latka

13:42Okay, fair enough. Fair enough. And then as we wrap up here, why was it the right time to exit?

Josh Lee

13:47>> You know, I think it was the right partner, right? I think with us, Gusto has been ahead of the curve in terms of automating the R and D credit itself, number one. Having the vision of integrated and embedded payroll, number two, right? And then us being

14:06>> able to access that information, being able to identify customers that qualify for the credit, that have not taken their credit. So all these different things, having access to that information together made a lot of sense. And we thought we could accelerate, right, just because our alternative might have been a Series A raise, you know, and to scale, a lot of that would be for marketing, for getting in front of customers, but they already had all the

14:32>> customers. It was a big deal for us.

Nathan Latka

14:35What were you mean, come from VC, so you probably know this well. If you were gonna do a Series A, how much would you raise and what valuation do you think you could have raised at?

Josh Lee

14:42>> Our target was somewhere close to probably about 10, was what we were thinking about raising 10,000,000.

Nathan Latka

14:48On a white balance or something?

Josh Lee

14:49>> No, that was the thing. We were all over the place. We got offers

14:54>> anywhere at 50,000,000, 100,000,000, I mean even one that was above that as well. So it could have been all over the place, again, depending on terms.

Nathan Latka

15:04So what do you do? You the term sheet with the highest valuation and say, Gusto, pay this amount and we won't go raise a Series A?

Josh Lee

15:11>> No, I think we were at a different place. I mean, again, there was nobody that was literally on our cap table at the time, right? We had a convertible note at best. And so it was easy for us to make a decision quicker and faster. So we didn't really have to worry about valuations at that time.

Nathan Latka

15:28All right, Josh. Good stuff. Let's close with the Famous Five. Number one favorite book.

Josh Lee

15:32>> Favorite book is by John Maxwell. Which one? 21 Irrefutable Laws of Leadership. One of my first business books that I still have on my desk or in my bookshelf here in the back. Love that book.

Nathan Latka

15:48Is there a CEO you're following or studying?

Josh Lee

15:51>> Well, he's a good friend of mine. His name is Kevin Chou. You know, was the CEO of Kabam, right, in the gaming space, and now is doing I don't know how many ventures. Founded Gen G, which is probably the number one esports team, and now doing a company called Rally in the areas of, you know, NFT and blockchain and all that stuff. So I love what he's doing, always have, and following a lot of his stuff.

Nathan Latka

16:19Three, what's your favorite online tool for building the business?

Josh Lee

16:23>> Oh, it's gotta be Gusto and Ardius, come on.

Nathan Latka

16:25No, no, it can't be Gusto.

Josh Lee

16:26>> What's that?

Nathan Latka

16:27Number one, so tool, that's a good question. Like go to playbook. Mean, we always use HubSpot for CRM.

16:37What do you use for data ingestion? Do you use anything like flat file?

Josh Lee

16:41>> We've tried a couple other things. The ones who I love love love, I'll give them a plug, is Carbon.

Nathan Latka

16:47Carbon?

Josh Lee

16:47>> Carbon. Yeah. CarbonHQ. I think they're really conducive for the back and forth chatter between a potential client customer and sorting out through lots of information. I think they're great for organizing information, following threads, right? Obviously, Slack is doing that on a more real time and eliminating emails. But I think Carbon is a good, solid roadmap and framework for actually organizing data and information.

Nathan Latka

17:17Very cool. Number four, how

17:19many hours of sleep do you eat every night?

Josh Lee

17:22>> Oh man, well, that's not fair because I have four kids. Oh my gosh! So aside from the startup world, being a dad of four, I'm probably averaging about six.

Nathan Latka

17:32That's not bad for four kids.

Josh Lee

17:33>> It isn't bad, yeah. And so that again, it fluctuates from probably four to eight, but I'm averaging six.

Nathan Latka

17:40So married, four kids. And how old are you, Josh?

Josh Lee

17:44>> I just turned 41.

Nathan Latka

17:4741. That's exciting.

Josh Lee

17:48>> I'm in my forties. Yeah. I heard the average age of a startup founder now is 45. I

17:55>> felt like a dinosaur when I started, but now I It's feel like

Nathan Latka

17:59all ahead of you. All right, last question. What's something you wish you knew when you were 20?

Josh Lee

18:04>> Well, what's something I wish that when I was 20?

Nathan Latka

18:06Something you wish you knew when you were 20.

Josh Lee

18:09>> Oh, so I wish I had taken more risks. Mean, I started with Ernst and Young, was there for fourteen years. And by all accounts, I thought I was gonna be a historian there or a lifer. And so I got really comfortable really fast, right? Great job, great people, great firm, but fell in love with the startup world in my 30s, right? And I've never looked back. And I wish someone had come to me and said, Hey,

18:36>> maybe take a few more chances, right? What's the worst that could happen? You could always go back to your nine to five or a really good paying job. But I mean, there's nothing I would trade like doing what I do now.

Nathan Latka

18:48Guys, tax credit company, Ardius recently sold to Gusto, started in 2018 serving as portfolio companies, eventually spun it out with three co founders, took it live in 2018 and in 2019 broke the $10.20, 30,000,000 before you know it $5,060,000,000 in tax credits identified for these firms, flirting with a $500,000,000 number there now as they've teamed up full time with Gusto. They were looking at maybe doing a series A in 2020 and said, you know, instead of

19:12raising like a 10 on a 50 or a 100, it makes more sense to partner up with Gusto and keep building. We'll see what happens next. Josh, thanks for taking us to the top.

Josh Lee

19:19>> Thanks for having me, Nathan. Appreciate it.

Nathan Latka

19:23One more thing before you go. We have a brand new show every Thursday at 1PM Central. It's called Shark Tank for SaaS. We call it deal or bust. One founder comes on, three hungry buyers, they try and do a deal live and the founder shares back end dashboards, their expenses, their revenue, ARPU, CAC, LTV, you name it, they share it and the buyers try and make a deal live. It is fun to watch every Thursday 1PM

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