Deal Dive: This AI startup is racking up government customers

Tax evasion, money laundering and other financial crimes are massive, costly issues. In 2021, the Internal Revenue Service estimated that the U.S. loses $1 trillion a year due to tax evasion alone. IVIX thinks AI can help with that.

The Israeli startup uses AI, machine learning and public databases of business activity to help government entities spot tax noncompliance, in addition to other financial crimes. IVIX was founded by Matan Fattal and Doron Passov in 2020. Fattal was working at his prior cybersecurity startup, Silverfort, at the time, but when he discovered how large of an issue these financial crimes are — and how governments didn’t have the technology to fight them — he switched gears.

“I was shocked by the magnitude of the problem and the technical gap that they had,” Fattal told TechCrunch+. “State or federal, there are pretty much the same [technological] gaps.”

Three years later, the startup has landed government contracts with federal agencies, including the IRS criminal investigation bureau; made notable hires like Don Fort, the former chief of criminal investigations at the IRS; and raised a $12.5 million Series A led by Insight Partners, which was announced last week.

This announcement landed at a particularly interesting time. Earlier this week, President Joe Biden announced an executive order that essentially banned U.S. financial institutions — largely venture capital and PE firms — from investing in companies in China that could have adverse impacts on the U.S. in sectors like quantum computing, AI and semiconductors.

While IVIX and its funding round isn’t directly related to that order by any means — the U.S. and Israel are friendly — it did get me thinking about how unusual it is to see a company based outside the U.S. have such luck landing government contracts. It stands out even more when you consider how hard it is for U.S.-based startups to get contracts with the U.S. government.

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But Fattal said these optics issues haven’t come up, though he acknowledged that there are certain governments the startup won’t work with. Plus, he said, the nature of the company’s focus — financial crimes — and the way its platform is designed for privacy might be why it hasn’t had those issues.

IVIX develops its own AI algorithms, but once they are in the hands of their customers, they become a closed-loop system. Each government org’s AI will learn exclusively from itself, and the information is stored with them, not IVIX. It probably also doesn’t hurt that Fattal has a background in intelligence and had founded a cybersecurity startup.

Still, it’s really neat to see a startup that is doing work so universally important that it can transcend country borders. My main interactions with startups selling to the government thus far have been defense-flavored companies that have to target just one government — their own. Generally, they can’t rely on government contracts alone to make meaningful revenue.

It’s also worth pointing out that IVIX has already sold to 10 government entities. Governments have much slower sales cycles than private companies, so Fattal couldn’t rely on some of the same sales tactics he was used to from his last startup.

Still, he feels there are pros and cons to dealing with governments. “There is much more clarity and visibility [than with a private company],” he said. “You love it or you don’t love it. The process will happen based more on actual value to provide than other sales stuff. Sometimes, in the private sector, you can do more things under marketing that are perfectly part of the game and so on.”

IVIX has also managed to do so pretty early. Last year I covered Dcode Capital, a venture fund that backs companies and then helps them land government contracts. At the time, the fund was targeting Series B stage companies because the managing partners found it’s not common for the U.S. government to work with companies younger than that.

With IVIX only now raising its Series A, that means it was able to gain significant traction far earlier than other companies selling to the government have.

Also, this just seems like a cool and important use of AI. No offense to the startups looking to use it for SEO marketing or reading your texts to give you relationship advice, but helping governments solve financial crimes that, as IVIX’s press release says, take government money away from schools and public infrastructure is a much better use case.

It’s refreshing to see AI companies solving real problems get funded.

This story was updated to clarify where IVIX is based.