Main Pointers of the article “The Rise of Vertical AI in Accounting”

• The video linked in the article details the following challenges confronting the accounting industry:

1. Significant CPA retirement (75% expected in next decade).
2. Declining number of people entering the field.
3. Increasing demand for accounting professionals.
4. Growing complexity of accounting work (especially taxes).
5. Massive market with over 3 million professionals and $100 billion in wages.
6. Workload staying the same or growing, but accountant numbers are flat or declining.
7. Immense pressure on existing staff and difficulty maintaining service levels.
8. Accounting lacks a legal-tech equivalent to Harvey, according to their research.
9. Firms seeking efficiency and improved employee satisfaction.
10. Accounting firms desire to shift staff from “doing” to “reviewing.”
11. Promise of Large Language Models (LLMs) for automation (data collection, ingestion).
12. LLMs potentially reduce the need for large accounting/engineering teams.
13. LLMs handle “doing,” allowing accountants to focus on higher-level analysis.

• Client Advisory Services (CAS): CAS is a growing and important part of accounting firms, It offers recurring revenue, faster growth than traditional accounting, and broader advisory opportunities.  However, it’s labor-intensive, particularly in data collection and ingestion.   

1. Services offered beyond traditional audits and taxes.
2. Examples:
   1. Outsourced CFO/Controller services.
   2. Financial planning and analysis.
   3. Business consulting.
   4. Technology implementation.
   5. Risk management.
   6. Key area for accounting firm expansion and revenue increase.

• Horizontal vs. Vertical Approach (in CAS):

1. 1. 1. Horizontal:
         1. Aims to build general-purpose accounting automation tools for any industry.
         2. Requires dealing with numerous integrations and industry-specific rules.
         3. Complex development and sales.
         4. Described as “whack-a-mole” due to constant new needs.
      2. Vertical:
         1. Focuses on building specialized tools for a single industry (e.g., construction).
         2. Allows deep understanding of specific industry needs.
         3. Enables building highly accurate and relevant solutions.

• Recommendation for CAS Startups:

1. Startups should consider verticalization: The authors suggest that startups focusing on accounting AI should consider specializing in a vertical.  This targeted approach allows for building deep expertise and a strong brand within a specific industry, making it easier to gain customer trust and expand within that niche. Trying to be everything to everyone (“horizontal”) is much harder.  

• Example in the article:

1. The article highlights Adaptive, a construction-focused accounting automation platform, as an example of a successful vertical approach. It also briefly mentions other AI applications within the financial sector, including using LLMs for regulatory compliance and AI-powered platforms for credit unions and debt repayment.  Recent M&A activity further emphasizes the growing interest in AI-powered solutions in finance.  

Here are the findings from the article:

• Accounting Industry Crisis: The accounting industry faces a significant talent shortage due to impending retirements and declining new entrants, even as demand and work complexity (especially in taxes) increase.  This puts immense pressure on existing staff.
• CAS as Growth Opportunity: Client Advisory Services (CAS) represent a key area of growth for accounting firms, encompassing services beyond traditional audits and taxes, such as outsourced CFO/Controller services, financial planning, business consulting, technology implementation, and risk management.
• LLMs as Potential Solution: Large Language Models (LLMs) offer a promising avenue for automating tasks like data collection and ingestion, potentially alleviating the workload on accounting professionals and allowing them to focus on higher-level analysis and review.  This could help address the talent shortage.
• Vertical CAS Strategy is Superior:  A vertical approach to CAS, focusing on a specific industry (e.g., construction, as exemplified by Adaptive), is more effective than a horizontal approach (trying to serve all industries).
• Horizontal Challenges: The horizontal approach struggles with the complexity of numerous integrations, industry-specific rules, and constant adaptation, leading to a “whack-a-mole” scenario.
• Vertical Advantages: The vertical strategy allows for deep understanding of a single industry’s needs, enabling the development of highly accurate and relevant solutions, including necessary integrations (especially with ERPs and banks) and industry-specific accounting logic.  This leads to faster adoption, demonstrable ROI, and shorter sales cycles.
• Focus on ROI and Accuracy: For CAS startups, demonstrating a clear ROI and high accuracy within a niche vertical is crucial for building trust and facilitating expansion within accounting firms.
• Key Takeaway: CAS startups should prioritize a vertical strategy, focusing on a specific industry to develop specialized tools and capitalize on the growing demand for these services within a manageable and efficient framework.  LLMs can play a crucial role in automating tasks within these vertical solutions.

The Impact on Venture Capital

Our research reveals that vertical AI accounting offers significant benefits for Venture Capital firms as well:

1. Enhanced Accuracy and Efficiency:

• Automated Data Entry: AI can automate the tedious process of manual data entry, reducing the risk of human error and freeing up accountants to focus on more strategic tasks.  
• Real-time Reporting: AI can generate real-time financial reports, providing VCs with up-to-date insights into the performance of their portfolio companies.  
• Improved Forecasting: AI algorithms can analyze historical data and market trends to generate more accurate financial forecasts, helping VCs make better investment decisions.  

2. Deeper Insights and Analysis:

• Predictive Analytics: AI can identify patterns and trends in financial data that may not be immediately obvious to humans, providing VCs with valuable insights into the potential risks and opportunities associated with their investments.  
• Portfolio Management: AI can help VCs manage their portfolios more effectively by identifying underperforming investments and recommending strategies for improvement.  
• Due Diligence: AI can streamline the due diligence process by quickly analyzing vast amounts of financial data and identifying potential red flags.  

3. Reduced Costs and Risks:

• Lower Accounting Fees: By automating many accounting tasks, AI can help VCs reduce their accounting fees.
• Improved Compliance: AI can help VCs ensure that their portfolio companies are in compliance with all relevant regulations, reducing the risk of fines and penalties.  
• Fraud Detection: AI can identify suspicious transactions and patterns that may indicate fraud, helping VCs protect their investments.  

4. Scalability and Flexibility:

• Scalable Solutions: AI-powered accounting solutions can easily scale to accommodate the growth of a VC’s portfolio.
• Customization: AI solutions can be customized to meet the specific needs of each VC firm.

5. Competitive Advantage:

• Better Decision-Making: By providing VCs with more accurate and timely financial information, AI can help them make better investment decisions.
• Improved Performance: AI can help VCs improve the performance of their portfolio companies by identifying areas for improvement.  
• Increased Efficiency: By automating many accounting tasks, AI can free up VCs to focus on more strategic initiatives.  

Overall, Vertical AI accounting has the potential to revolutionize the way Venture Capital firms operate. By leveraging the power of AI, VCs can gain a significant competitive advantage in the market.