The Great Financial Services Debate

23:39Now do you not need a whole other, like, class of products? You sort of still do. Like, Redis is great technology, but you still need the actual experience around it. Do you think we're close to you having the problem of someone gets an accountant who that accountant is using language models that are trying to interact with your software, and then you're trying to figure out how much to serve them? Or have you started to see that, or are we too early? We're a little too early. The accountants aren't that quite. They're not the cutting edge of agents. But we think deeply about the collaborative flows.

24:09Like the accountant is in the picture. And this is actually an interesting point for folks. As we talk with business owners, they do not want AI accounting, i.e. the AI does 100%. They actually want the AI to do most of it. And they want their books blessed by a real CPA. Because you can't sue the AI, right? You need someone to sue. I need a human. I can blame. And so that is actually really, really important. And that's why the industry is not going anywhere. They will up-level and be able to serve more clients, but you still need that human to have blessed the books. Gabe, the wrapper question.

24:43I mean, we sort of, in the presentation earlier today, we've moved to a point where it's okay to be a wrapper. We don't use that term because it's pejorative. I love to use pejorative words positively. I've been on the case. It's like, no, you differentiate on the product in software, not necessarily on the model. How would you calibrate that in terms of how much you need to have, at some point, your own models, your own thinking, or we're going to be the best at directing ChachiBete and Anthropic and everybody towards our use case? Look, it kind of goes back to how Jeff answered the question, which is even if you have a profoundly intelligent model, you still need the tools to do the accounting workflow, right?

25:23It's like even if you have a robot that can move the way a human hand, they still need a drill to go install whatever they're installing. For us, we're building the tools that some eventual agent intelligence, either owned by us or someone else, might use. Whether that's an Excel interface for an agent, whether that's a PowerPoint interface, whether that's structured financial data querying or unstructured financial data querying, or integrations into the internal data systems of the banks and private equity firms we work with. That said, I think it's very clear that reinforcement learning is working and post-training is working on top of these frontier models.

25:57and with very great specific evals, you can actually outperform the frontier. With post-training alone, you can find a lot of technological differentiation that makes it more valuable. Yeah, I mean, I think that's what early results are showing. I don't know if there's... I mean, actually, Cognition had a great paper that they... I mean, not paper, it was a Twitter thread. But it was a great Twitter thread. That sums up something in the current moment. It was a great Twitter thread. Like, maybe a week ago, They had post-trained a model with RFT for writing like CUDA kernels or something that's quite difficult for O3.

26:32And they got a lot of outperformance with the types of technologies and reinforcement techniques that are now diffusing through industry. And so I think we'll start to see a lot more of that. It reminds me of when folks used to overclock their CPUs. And now CPUs are fast enough where no one really bothers as much. Yeah. No, no. I mean, it's totally possible. I mean, I think the way that I think about RFT in post training is not necessarily that it's going to make the model smarter, but it's going to sort of prune the decision tree and make it better at using your tools, right? So, like, OpenAI is never going to have your tool structure and its training data unless you collaborate with them.

27:04And so the same way if you get a super smart human starting at your firm on Monday, they're going to need to learn how to use QuickBooks and Xero and, I hope, digits. You know, the model, you want to teach it how to use those tools, too. Yep. Jeff, last question, last word. Would you tell a founder today to build a services business powered by AI? You've done the sort of flirtation with having the accountant firm. Do you buy that investor narrative, or do you think it's oversold? I think it's oversold, and it's so tough because it is such a tempting narrative. It's build your services business, look at what's slow, automate that, move on, right?

27:38You can drive a high-margin business. The change management, the actual people management is so challenging because it depends on which profession you're trying to automate, but there's so much built in just like native practices in that profession that in order to really automate everything and build the trust, it's a long journey to get to that margin versus just trying to do it in software. It turns out people outside Silicon Valley, they know their businesses too. They're hard businesses. Exactly. Right. And again, with accounting, accounting is complicated. Like there is no way to simplify that.

28:06Great. Thank you very much. Thank you.

28:12Super excited about this conversation. Two things. One, Gusto's the rare startup where I sort of have a rooting interest in that we are a small business. And every time Gusto solves a problem, I am relieved that you get to take it off my plate. The second thing is it's funny to be hanging out with you with shoes on. Do you guys still, have you gotten rid of your no shoes policy or are you still? I feel like I have to give context to people here. So excited to be here. This is a fun space for me because we had a Gusto holiday party here in 2015. But our three first offices were only a block away, and we were raised by our parents to take our shoes off at home.

28:49So for many years, our offices were shoes off, walking around in slippers, socks. We passed them out to folks. And then when the pandemic started, obviously, people can do whatever they want at their home. Today, it's more of an optional policy. But I do describe it as a tradition that felt right for Gusto at the time. You know, yeah, in some ways it's like you've become this grown-up company. Can you give, you know, obviously payroll is at the heart of it, but talk through just briefly what the pieces of Gusto's businesses are today in terms of the focus and where you're really strong. So something really important to know about Gusto is we obsess over a small business.

29:26So if we have any customers here, we're honored to serve you. And just know that there are more dentist offices in the U.S. than tech startups. And so we really focus on mainstream small business. Of the six million-ish employers in America, two-thirds are less than five employees. And so with that customer focus, payroll is our first product. I always like to say if you don't pay someone, they quit. So it's a pretty non-optional product. So we're really happy we started there. But kind of broadening through the back office would be the way to describe it. We really obsess over customer pull versus company push.

30:04But benefits is a big investment area for us. There's many, many types of benefits. Something I know we're excited to get into more, we have a pretty broad product group inside Gusto called Gusto Money that's focused on things related to cash flow management. For a lot of our customers, their biggest expense is payroll, paying their team. And one of the biggest points of stress is when APAR don't line up and they don't have the money in their bank account at the right moment to fund payroll. So we launched bill payment not too long ago. Actually, next Wednesday, we're going live with invoicing.

30:36So you'll see us do a lot more product investments, more in that B2B FinTech part. But again, really, really focused on small business. And overall business, sort of somewhere between 500 million and a billion in revenue? Yeah, you can describe it that way. We serve over 400 ,000 companies. I mean, one fun way, we always ground it in customer. We're in the range of 8%, 9 % now of all employers in America. And with the business model, that leads to good revenue. We've been free cash flow positive for many years. We reinvest that money back into building new product to solve more pain for our customer.

31:10And I mean, you're an important sort of partner to other fintech companies. I know, I think the Guideline CEO was here at one point. What do you see in terms of like the partnership strategy for Gusso? Yeah, so a big part of our approach to, we're here to build a multi-decade company. We're still early in the journey, even though it's, you know, over 10 years. And that to me is a factual statement, right? We're only at about 8, 9 % of employers. You still have 30 % of companies in the U.S. doing even things like payroll by hand on pen and paper. So with the obsession on small business, a lot of what we're doing is replacing manual process.

31:46But there's just a lot of other pain points we want to help with. And if we're going to get there, it's not going to be entirely through first party products. So we've had a playbook, which we will continue to use, of choosing product by product. Are we going to build? Are we going to partner? 401K is a good example where we've partnered historically. And then there's also, obviously, acquisition. We've done that a few times. We'll do that more going forward for where we deem something that was third party becoming first party. But we're not going to build it all ourselves, and we're excited to partner where it makes sense.

32:16has artificial intelligence changed the pace of product development i mean you're you're an interesting case in that on the one end it's sort of the you know i don't know clarna's the world where they're like well we'll build everything internally like you know payroll could be imagined that way on the other hand it can accelerate your growth like how do you how are you seeing sort of artificial intelligence the ability to build faster impacting gusto today i mean i'm surprised Why has it took this long to get to AI as a topic? I mean, there's so many threads. I think a lot of folks here are technologists.

32:48I'll have to just choose, like, on productivity and how we build. We have 1 ,000-person plus R &D team. I don't think we're that different than most software companies in that it's obviously driving a pretty meaningful shift in how we build, you know, the iteration speed. I think we're going to talk later about, you know, there's the service as a software, software as a service. Everyone gets SaaS. A lot of what we do is taking stuff that involves compliance, involves manual filings, and digitizing it into software. In the past, I said we use paperless cloud mobile. Now, obviously, AI is a key ingredient to that.

33:24But that's on the more internal how we build side. It doesn't mean fewer engineers, just to put a fine line on it. Yeah. It doesn't mean fewer engineers. Given the scope of our ambition, it means the amount of work we can do per Gusti grows dramatically. But probably in the grand scheme of things, it means less hiring than if AI didn't exist. But we're also pretty ambitious, so we're doing a lot of hiring anyways. But it's because we want to go solve more pain points for our customers. And then on the sort of, do you feel the threat of customers building in-house versions of Gusto? Honestly, as a small business, that's sort of incoherent, right?

34:02Because it's like, I'm not going to build an AI team as a five-person startup. It would matter more to your enterprise-level competitors, or how do you think about that challenge? I mean, I don't think too many dentists want to go build software. That said, the reality is most of what we're doing for a dentist office or other small businesses, they haven't had access to in the past. They've been on their own. They've kind of had to do it manually or just not do it. And so for us, AI is enabling products to exist in a small business category that never existed. I think in mid-market enterprise, you're navigating more of this complexity of displacing jobs.

34:38but our due north is to like grow the small business economy right and so we want to bring all of the things big companies have had historically to a small company the only way we're going to do that right with a ratio that makes sense and with a scalability that makes sense is through leveraging technology I mean if I did this still the angst of a small business it's like I want to know that I'm in good standing and I don't know everything I'm supposed to do and you guys are good in the product sometimes we like you know in New York you're supposed to have sexual harassment training. Okay, I'll pay you some money for that.

35:09Do you think AI is going to move us further along of just being able to give me an assessment? Have you done everything you're supposed to do? I call that the am I good question. Our customers, including you, do not want to be stressed or worrying about that. It's our job to make sure you know fully if you're good or if there's something you need to do what that exact thing is. If we can do it for you, even better. But yeah, compliance maps to most of our products, right? Payroll involves a lot of compliance. Time tracking, PTO involves a lot of compliance, local, state, federal rules. And so AI fits in there in terms of like ingesting.

35:48But at the end of the day, it's a compliance engine where accuracy needs to be to the like, you know, six sigma. And that's always been true. Pre-AI, post-AI, that's been true since we started the company. How much do you think your customers want to talk to the product? Like, do you see a move to text interfaces now that they're more capable? Or you're like, we really need to flow whatever advances we have into actually the layout and design of the product? So we always start with, like, small businesses are busy. And it's way too hard to run and build a small business still. You can attest to that.

36:21And so how can we help them? We can help them by saving time. We can help them by taking 5 or 20 or 30 of the hats on their head off their head and doing it for them. Pre-AI, I would say we did that through really clean, elegant, easy-to-use workflows, primarily in a web app or a mobile app. That's gotten us pretty far, right? Like, that's what we're known for. Anyone can use Gusto with no training, no background in running a business. We have high NPS, high customer satisfaction. Our primary way of growing is word of mouth. With AI, it's not about the technology. The interface, that's what we get excited about.

36:55A conversational interface for a lot of use cases that Gusto does is a more intuitive, more accessible way to use Gusto. You like it. You think it's promising. We think it's very promising. Our interface for that is called Gus, which people should hopefully get. I think it's somewhat like this, right? And then, yeah, well, Penny the pig is a little mascot. Oh, that's a different logo. Okay. But then you're, like, cracking Penny in half, but, like, Penny's being sacrificed for the sake of your conference. But yeah, conversational interface, we don't think replaces web app, replaces mobile app. It's just a different surface area.

37:28But we are taking 14 years of functionality and giving Gus those superpowers. So we have customers today, thousands of customers, using Gus to go create shift schedules. You want to go change who's working which day, take Sally off Friday, add 20 hours to Jim. We go do that all for you. You can just tell us that in a conversational interface. Or you can go through and navigate, but that saves time for a small business, which they really appreciate. I wanted to put one of the big themes of today to you. I mean, we saw Matt Harris give a presentation where he's making sort of a case that other investors have also made, that it's like there's now, thanks to language models, this opportunity to go after services businesses and sort of be the services business while being a tech company.

38:15Then later I had Jeff, the CEO of Digits, who's building accounting software. He's hired accountants to figure it out and then software. And I think he was much more skeptical of that sort of you can be a services tech business. Where do you land? You've built a big business and you touch a lot of services. Are you bullish on that argument? So I think we've had a kind of unique perspective to this because the first product we launched, Payroll, mostly if you put aside like ADP paychecks which are a minority of the market the majority of companies in America did payroll by hand or with a local payroll service bureau which was basically a service manual localized business solution so a lot of our journey has been taking and did it with health benefits right we are a broker there are thousands of brokerage firms across the country that mostly do things by hand so we take these complex compliance centric spaces and we do what we do best, which is we digitize the heck out of it.

39:16Because if we're going to go do it for 400 ,000, 500 ,000, a million businesses, we cannot do it ourselves, mainly. So I don't think it's a 0, 100, 100, 0. We have operations teams at Gusto, but we have over 400 ,000 companies today. Our Gusti to employee ratio is over 1 to 1 ,000. That's only possible with technology. Right. So you only want to do it if you can get to the point where it's fairly automated, not sort of for a long time keep the humans sort of trying to figure it out? Or yeah, how long do you spend sort of like, we'll do the human business to try and get to the point where we can automate it before saying, oh, I guess this is sort of, at least with the technology today, a perpetually human business?

39:58Well, we were joking before, right? Like if a company is scaling a service offering to large, large volumes and it's staying service-based, that's to me not a tech company. That's just a service business. Different multiple profile, different overhead costs, different operational complexity. We work backwards from what's best for the customer. For us to solve these pain points, it has to be technology. It has to be digital. It's just more accurate. We process several hundred billion dollars a year of payroll taxes. If we were doing that manually, it would create human error potential. It would be too time consuming.

40:30So we digitize because it's a better experience. But when we're subscale and trying out new products early, early on, I think it's totally fine to start more manual. It's about getting that feedback loop going, getting that learning going. But that's typically with less than 100 customers, right? If we're going to scale something, it better have good unit economics, good CAC, good gross margin. And we should have confidence that it can scale in a technology-enabled way. Otherwise, we're just going to build a huge operations team. Somehow in payroll, you're in one of the wildest categories in Silicon Valley.

41:03You have, you know, like Rippling and Deal, you know, making huge accusations, obviously Rippling and Accusing Deal of spying on it. Have you done an internal check to see whether anyone's spying on you? And what do you make of sort of your high profile sort of same category businesses having so much drama? We just focus on the customer. Have you checked? Have you checked? We have a very, very intense, super, super expensive and worth it security team. Yeah. But that's because we have hundreds of billions of dollars of our customer money sitting in our accounts. And we do tax filings and tax payments.

41:50And we hold social security numbers and a whole bunch of very sensitive data that we take that job very seriously. So I can tell you with confidence, we do not believe anyone is spying on Gusto. But that's because that's what our customers should demand of us, that we're obsessed with protecting them in every possible way. Do you see much competition? I mean, you're very focused on small businesses, and I like that focus, and it gives you a great mandate and sort of a mission to motivate the company. On the other hand, most businesses want to keep their customers. It's like it's much easier to keep the customer you have and grow with them than to find new ones.

42:25How do you think about sizing up with your customers? So we're both in a very crowded space and a very fragmented space. And then, yes, I think it's even very simplistic to say small business, medium-sized business, large business. These are huge cuts. And even within small business, you have different industry types, different geographies. So hopefully everyone gets by now, we are obsessed with small business. We tend to see they're less of the kind of frothy, Silicon Valley tech kind of drama, frankly. But there's still legitimate companies that have lots of good product in market. Intuit is a company we highly respect and we compete with on multiple fronts.

43:09And there's a bunch of other companies. I used to say it was only Intuit, folks that have built really incredible franchises and small business. Shopify has a huge part of their company that's focused there, Square, Toast, HubSpot. So we feel like we're in good company. And I always encourage more entrepreneurs to tackle the small business category. The playbook still is generally for SaaS just to move up market and move to bigger enterprise. And in the past, that just meant small business was left. Do you want 100-person business on Gusto? We have a lot of 100-person business on Gusto. Most of them started on Gusto when they were one employee.

43:44So our focus is on small business, the vast majority will stay small. If some grow bigger, we're honored and happy to serve them. There's probably a point at some point where they graduate, but I like to remind folks, you know, that's very rare, right? Like the number of companies that start at one or two and grow to a hundred in our entire history is less than 0.1%. Is a, you know, we all at the end of the day, live or die by the economy in some ways, and you have a great sort of vantage into a part of it. is small business in America strong right now? What's your read of the mood among your customers?

44:20Yeah, so we have economists on team. We publish a lot of content under Gustonomics, and a lot of folks are interested in the data. I'd say high level, two things we track a lot, new employer starts and then net hiring across our customer base. I'd say on the second, that is quite depressed. New hiring. New hiring, net hiring, so just the propensity of our customers to add more to their team. that's been depressed for a few years now. On the new employer starts, that really with the pandemic got dramatically elevated and it's stayed fairly high. But yeah, it's more interesting to track given our size and scale.

44:56We feel like we're pretty diversified. It's more just net-net a bet on small business broadly and it tends to be a pretty durable segment. Can you talk about the embedded payroll part of your business and sort of, I mean, there is this other trend of API-based businesses right now where it's like, okay, you're helping other people interact with your service, but not necessarily building out the product yourself. How do you think about that as a piece of Gusto's business? Yeah, so we're always going to be driven by customer pull. So I'm very excited. Our direct business will keep growing past half a million, a million businesses in the coming years.

45:33But a couple years ago, we noticed, and maybe some of you are a part of this trend, but Vertical SaaS in particular, we got really excited about, where you have companies tackling a very specific industry. It could be very esoteric. But if you obsess over that one category, kind of build business in a box, you can actually create a viable tech company there. And every one of these folks kept coming to us and saying, we don't want to build payroll. No one really wants to build payroll, because it tends to be quite difficult. But we really want to provide payroll to our customer. And we don't want to just keep routing customers to you.

46:06We want to have it be native, a native product experience. And so we have some great reference points in embedded, in FinTech especially, like Stripe as a good example. And so that was where the genesis of embedded payroll came about. That's what we call Gusto embedded payroll. And we're really excited there. We have a number of partners. On the banking side, Chase payroll is powered by Gusto. We recently announced US Bank will be rolling out payroll powered by Gusto. Xero is another good example on the account tech side. And so anyone that does want to launch or offer a payroll natively within your product, but doesn't want to build it from scratch, please let us know.

46:44We're eager and excited to partner with you. That whole business is more of an infrastructure business. My last question, you know, we have a lot of founders here. You've been at this a while. Like, what's your main piece of advice to somebody starting a company today? Or what would you do differently if you were starting Gusto right now? So I'll answer both. with my main advice I'm pretty consistent with, but I really believe it, it's imagine the 10 ,000th time you're describing what you're doing. Will you be as excited as the first time? Because at that point, you can't fake it. It will show.

47:16And you have to have a deeper interest, passion, borderline obsession with the thing you're trying to fix, the problem you're trying to make better, because that's what gets you through all the ups and downs of company building. And in our case, I was with a team earlier today that's an incubation team launching a new product. And we went around the room, and it was an easy first question. I didn't even have to ask it. Everyone just shared their favorite small business. And so in our case, that obsession with small business comes through hopefully very clearly. It's a big part of our hiring filter.

47:48And as long as they're in pain, we feel like we have purpose, and we have so much to do that we feel like we're really still early. There's a lot more ahead. And if I reflect on learnings from prior chapters, I had a prior startup where that wasn't the case. and that's where you can start a company or maybe join a company, feel like there's a miss there and wonder what's off, right? And I would argue, go back to like, what is the purpose? What is the reason why you exist? And it should not be about you. It should be about your customer. Great. Well, thank you very much. Thank you.