From a Palo Alto Closet to $1 Billion Revenue: How Gusto Cracked Small Business Software | Term Sheet

9:38Josh Reeves:And so we're only one decade in. We have decades to go.

9:41Allie Garfinkle:Walk me through the very beginning.

9:44Josh Reeves:Let's go back in the day. I had less white hair. I had no kids. This is in my 20s. We came together, me, Tomer, and Eddie, and the three of us are as committed, as involved today as we were back then.

9:57Allie Garfinkle:You guys lived in a house together, I think?

9:58Josh Reeves:We were living in a house in Palo Alto. Two of us were living there with other roommates. Eddie was actually living in San Francisco. Early on, all we wanted to go prove was we could build a product that worked that actually helped the customer.

10:11Allie Garfinkle:How did the three of you meet again?

10:12Josh Reeves:Eddie was an undergraduate classmate at Stanford. Tomer came out for grad school. and we had all had prior startups. Tomer became my roommate, so we were living together. Eddie and I ran into each other at the beginning of a half marathon race that he was dared to run by a friend of his with no training and no practice whatsoever.

10:32Allie Garfinkle:Wait, what? That I didn't know.

10:34Josh Reeves:And so that's fortuitous. We had kept in touch, but also not been super close. Literally ran into each other and then grabbed lunch together and realized we were at this point in life where we wanted to tackle a really big problem, make it better. And again, small business really connected for us because you had, we had family working and helping small business. We had our own prior startup experience. And we really wanted to tackle something that wasn't just going to be for Silicon Valley. That was important to us. And you have to think back to this timeframe, 2010, 2011, Instagram had just got bought by Facebook.

11:07Josh Reeves:And there was a lot of attention on what was called social mobile local, if you remember. And we just really, I don't know, I've always had a mindset of like, go to first principles, think about like, what the actual root cause need is. And if that happens to be against what's popular at the time, so much the better. And what was popular at the time was doing stuff in social, mobile, local. And so when we did YC, we were part of the YC winter 2012 batch. Like we were the outlier company that was kind of like doing stuff for businesses. It was like back office. It was for small business.

11:41Allie Garfinkle:What was the hot thing in YC that year?

11:43Josh Reeves:iPhone apps for social media and social networking. It's a different market, different segment, not what we focused on. You're being more diplomatic than I am.

11:50Allie Garfinkle:But I imagine there are only so many companies out of that batch that survived, let alone have reached the scale of something like Gusto. I ask because it does make me wonder about all of these people who are going through accelerators right now who are like, we're doing AI for enterprise X. And I'm kind of like...

12:05Josh Reeves:I mean, my advice when I meet founders, I know you share this, is what is the thing you're trying to fix? What is the underlying problem that really deeply activates you, where you almost feel like you have to start a company to go fix it, and that's the best way to fix it, but like you're trying to go fix something, right? I don't think companies exist for the sake of it, any company, Gusto included. We exist to go make something better, and we just really got excited. I didn't know if we would be excited about small business, to be honest, right? Like obviously that's a learning that happened in those first few weeks, months, but as we spent more and more time talking, interviewing, getting their feedback, asking about what they were frustrated about related to payroll to start.

12:44Josh Reeves:You know, that's one big input. We realized, wow, there's a lot of pain and frustration here. Then it was, can we build something actually useful to your earlier question? Like if you, if you find a pain point, amazing. If it's a big pain point, so much the better, but if you can't fix it, you don't have a company, right? You have no purpose to exist. You have to make it better. You have to actually do something where the customer goes, this is amazing. You've I've made my life XYZ so much better." So we didn't know that until a few months in. So we were building, building, building. Eddie was actually living in SF.

13:14Josh Reeves:You know, commuting two hours a day when you're a three person team doesn't make sense. So we had a spare closet upstairs in our house and he actually lived in that closet for three months. Our roommates decided to charge him rent.

13:26Allie Garfinkle:Oh, well that's very rude.

13:28Josh Reeves:I mean...

13:29Allie Garfinkle:I mean, I see how they got there. It's tough.

13:31Josh Reeves:There was logic. Another human in the house.

13:34Allie Garfinkle:He is in a closet though. It did have a skylight and it fit a queen air mattress. It's actually a pretty big closet. Actually, if we're talking about New York apartments, there are New York apartments the size of Eddie's closet. It was very spacious. This is like suburban Palo Alto.

13:47Josh Reeves:But our other roommate did have all of her clothes and shoes and stuff in there too still.

13:51Allie Garfinkle:I hope he didn't pay that much at rent. It was a couple hundred dollars. It was a couple hundred bucks. That's still a lot for a closet, I would say. Good for Eddie though. You can't say Eddie didn't commit.

14:01Josh Reeves:The first kind of user of Gusto was ourselves. We actually didn't pay ourselves till we could do it using our own product. We felt like that was just additional incentive. So it was really exciting when we could start paying ourselves.

14:13Allie Garfinkle:Do you recommend that to other entrepreneurs?

14:14Josh Reeves:I mean, you want to have skin in the game. I mean, if you're a founder, you already have skin in the game. But like, yeah, I liked that dynamic, actually. Then we talked to family, friends. That was our first 510 customers. But I would say the thing that was most important for us was when we launched and we had a website that you could come to, set up, run payroll in a very intuitive, self-service way. If you had questions, you could talk to us. Tomer, Eddie, or I would pick up the phone and help you. But when we started having customers sign up who we did not know, we had never met. And we started finding out they heard from someone else who was using Gusto.

14:49Josh Reeves:That's when we knew we were onto something really interesting.

14:51Allie Garfinkle:And you started to see the network effect.

14:53Josh Reeves:Yeah, and even today, the biggest way we grow is through word of mouth. It's literally through small business owners telling other small business owners or their accountants and bookkeepers telling other accountants bookkeepers, you should go check out Gusto. Family is still really important to us. They have since retired, but Eddie's mom ran a doctor's office. His dad was the doctor. And so he had a lot of exposure to them running payroll as a child. Absolutely, they became customers of Gusto when the practice was still alive. And one of the funny anecdotes there, she would call into our customer care, customer support team more to just like stress test the system and then at the end of the call she would be like by the way I met his mom she even at one point like bought a local ad in her newspaper and created her own ad for the company

15:41Allie Garfinkle:walk me through what it took to get from we're building the product yeah so it's good enough that we can at least pay ourselves with it yes to we're getting phone calls now from people we don't know what was the space between those two things.

15:56Josh Reeves:So I think we ran payroll for the first time in like March of 2012. We onboarded, I would say, friends and family in those following several months. So we actually didn't launch publicly. Like you could go sign up for Gusto and not know us at all till about December of 2012. So December 2012 was our launch moment. And that's because we knew, first off, that one of the biggest things for us to prove wasn't, I mean, step one was that we could build a system that was easy to use, intuitive, obviously was accurate, reliable, could scale, could process millions of dollars, do tax filings, tax calculations correctly.

16:33Josh Reeves:But the next big thing we had to prove was since we're focused on small business, this has to be an inbound engine where word of mouth drives top of funnel. And then you have a onboarding experience that takes something that people thought of as very complex and messy and has a lot of very sensitive data, right? You're giving us information about your business, about you as an individual, it's bank information, it's social security numbers, it's your children's information. And so, and then, you know, five days later, guess what? We're debiting$10 ,000 from your bank account, right? For payroll, to pay taxes, to pay your team.

17:05Josh Reeves:But the trust that's required for that, we knew it had to be a system that was very easy to use so that the customer could just go through it and have it be this magical, it was that fast, it was that simple. And I remember actually when we did the run payroll flow for the first time, it would just run and it'd be done. It would say, you ran payroll. And we had customers early on going, it's not possible for people to be run that fast. And so we put in like a loading animation and it didn't do anything. It was just a delay to give the person the sense that actually it was being done correctly.

17:38Allie Garfinkle:What is the lesson in that?

17:39Josh Reeves:The lesson is you got to listen to the customer, give them a chance to give feedback. But like software done right that was a magical experience literally it just being done they set up they ran

17:51Allie Garfinkle:payroll like that was it they thought it they thought it was fake thought it so you had to backtrack and create an animation that basically said okay this is taking a minute everybody to sort of create so i mean i wonder about it in terms of adoption of ai stuff too right because a lot of people are like oh that can't be right or i would never use that but maybe sometimes people want a little bit of friction.

18:13Josh Reeves:I mean, I think people, for me, there's two insights maybe. One is when software truly, truly changes the game or technology and makes something that was hard into something dramatically simpler. For us, it was like a lot of our customers never had run a business before. And even today, this is our first time being a business owner. And like they have intimidation or fear of what could be wrong or not, you know, difficult and hard to do. And when we make it easy and simple, that feels like magic. So there's like this core of like, if you don't get magic when you're building software and technology.

18:43Josh Reeves:You're probably not adding enough value yet. But second is you've got to really obsess over the user experience and make sure that you're not going too far ahead so that they can't follow. Because also, in that case, they just needed to know and have confidence that we're doing this correctly. And it helped for a little bit for some folks to just see the gears spinning and know complex calculations were happening, even though it literally took us a microsecond to do the calculation.

19:07Allie Garfinkle:You've talked before about minimum lovable product. What is the distinction between minimum lovable product and minimum viable product? How did you know when you reached minimum lovable product?

19:18Josh Reeves:I mean, the most simple, I would say, difference is if a minimum lovable product, like you have that word of mouth, customer love, flywheel, which for our business, again, was critical to us actually getting more awareness and actually driving growth. For some companies, it might not be as important, but you can think of it through the lens of NPS, if you and your listeners are familiar. is this someone that it's not just it worked or it was clean or it was simple but like their heart starts racing with this oh my god like this is amazing this is incredible and I still think that's what anyone that builds software should aspire for I think a lot of times when I use software in products I feel like I'm being told what to do or told how to use it software built correctly gives you superpowers it literally makes you feel and become like dramatically smarter and more capable than you've ever been.

20:07Josh Reeves:And that's our goal. I mean, that's how we build Gusto, and we hope to keep hitting that goal.

20:11Allie Garfinkle:Do you vibe code sort of to this end? What do you think of vibe coding?

20:15Josh Reeves:So to jump there really quick.

20:16Allie Garfinkle:Yeah, I didn't mean to go there, but we're here.

20:18Josh Reeves:That's the terminology. What I like to say is, like, literally anyone now can build software without knowing they're building software. Now, that's an incredible, you know, empowerment dynamic. I also like what I read or heard somewhere, which is the most popular programming language of the moment is just natural language, English, right? Or whatever language people use. I think that's fantastic. Now, I'll caveat that by saying, obviously, there's different skill levels in building software.

20:46Allie Garfinkle:Yeah, like you couldn't vibe code payroll software, or could you? I don't think so.

20:51Josh Reeves:I mean, I can break that down. So software, like the interface piece of it, has now become easier than ever to build, right? That's amazing. Gusto has never been a pure software company. We go do actions for people. That means that we go not just show you how to give us information. We take that information. We then go do the tax calculation. We go determine what filing to do. We go then do it for you. We put our name against it and say we'll make sure it's done correctly. And if there's any follow-up issues or challenges, we're responsible to go fix it. So I think there's a big difference on this topic between pure software companies where it's just like a web application and a database and you can go do stuff and it helps you, but you kind of just use it as a tool versus companies that do actions on your behalf.

21:33Josh Reeves:I call it a system of actions. Gusto has always been a company that does actions for the customer. And that's a big difference between the two. So like we're using a lot of these tools and technologies to build more product faster and quicker for our customer. And that's really, really exciting. But I'm, with all the change that's underway, I'm more excited than I've ever been because it feels like the ingredients are there for us to go do more for small businesses faster than ever before.

21:59Allie Garfinkle:So now Gusto did not start out as Gusto. It started out as Zen Payroll and then in 2015 you rebranded to Gusto. Can you tell us a little bit about that trajectory, that change? Because most companies do not successfully rebrand at all.

22:14Josh Reeves:Yeah. So the backdrop is when we were in 2012, we had about 10 minutes to choose a name because we're focused on building the product. We looked on GoDaddy, found a name for I think it was like seven or eight bucks and it was in payroll. And we knew that was going to probably be a placeholder. But now that we have a name, we can focus back on building the product. Fast forward to 2014, we discovered and got really excited about the name Gusto. it's a more flexible vessel. My philosophy on naming is ultimately what you do with your product is what matters. Like, do you actually deliver value? But you want a vessel that has the potential for you to tell your story.

22:51Josh Reeves:And Gusto is just a better vessel for our company. We then did the change in 2015. We coupled it with the launch of our second big product area, which is health benefits. And then we had about 10 ,000 customers at the time.

23:05Allie Garfinkle:And you called all of them, right? Yeah, we wanted to make sure they all knew we were the same company with the product they loved and wanted to obviously keep using.

23:13Josh Reeves:And that there's no surprises here, right? Nothing is changing behind the scenes.

23:16Allie Garfinkle:What is this Gusto company that has shown up on my bank statement?

23:19Josh Reeves:And we're going to debit money from their account. We wanted there to be nice surprises. We wanted to be very intentional about it. And so, yeah, we thought of with about 150 people at Gusto at that point, 10 ,000 customers. We did the math. We're like, hey, let's everyone, the whole company, me, the entire company, just do phone calls to every single customer, share with them that, you know, we made a name change. We're the same company. You know, give us feedback if you have any. And, you know, we're launching this additional product around health benefits. Let us know how we can help you better.

23:50Josh Reeves:And it was a really, really fun couple of days.

23:52Allie Garfinkle:How much job dislocation are you seeing from AI? Like what can actually, what is clear through Gusto data and what is kind of hazy?

24:00Josh Reeves:Yeah, so what's clear in our data, which again is small business data, is the pace of hiring in companies. You know, if a company might have previously gone from two to three employees in this time period and three to four employees, that's slower than historical. Or maybe they would have jumped, you know, to four or five employees and they're not making that jump as fast. So we see less of that ramp in headcount. We think that's logical. That actually doesn't affect our business model very much because, again, for us, most companies stay very, very small anyways.

24:31Allie Garfinkle:What do you think is most misunderstood about the state of small businesses?

24:35Josh Reeves:I guess for me, it's just, you know, maybe putting on the capitalist hat. Like, it is an enormous market. I think everyone feels the, what gets us going is the heart part of it. Like, I love being at events, activities. We hosted a bunch of customers yesterday, and obviously we hosted them at a restaurant that happens to be a customer as well. So, you know, small business being all around us, it being a joy to help them has always been true. We've had this blip of 150 years of large companies having lots of control and lots of power. And I think it'd be amazing if that shifts back to small business.

25:09Josh Reeves:We see some of that happening today. I think it's going to continue.

25:12Allie Garfinkle:How do you think about going public?

25:13Josh Reeves:No timeline to share, but I would say if we're going to build for many decades, you know, the companies I most admire, respect are public companies. And I think there's a huge, one of the positives of being public is how cool would it be for many of our small business customers to become shareholders. Yeah, right. And actually be able to like love Gusto, tell their friends about Gusto, but also buy stock in Gusto. That's probably the most positive thing I can think of. and like again no timeline to share we're focused right now especially with AI on how to bring all these amazing tools and technology to bear to help accelerate and bring more Gusto product to more small businesses but at some point in the future it'll make sense for us to be a public company and I'd be really excited to have many many of our small business customers or even non-customers own Gusto in the future.

26:00Allie Garfinkle:Josh you have a unique distinction in sort of my career You are one of the few sources, few people I've ever covered, whose mother I have actually met and spent some time with. Your mom is a really important part of your story. Your families are a really important part of the story. You, Tomer, and Eddie all come from immigrant families in some capacity or another. Can you talk a little bit about how that's influenced you and how it's influenced the trajectory of Gusto?

26:25Josh Reeves:Tomer Giles Yeah, absolutely. My mom's an immigrant from Bolivia. Eddie's parents are immigrants from Korea.

26:31Allie Garfinkle:She's lovely, by the way.

26:32Josh Reeves:Tomer Giles Yeah, yeah. Yeah, you met obviously all the moms. Hi, Josh's mom. You met Eddie's mom and you met.

26:36Allie Garfinkle:Hi, Eddie's mom. Hi, Tomer's mom.

26:37Josh Reeves:The core concept there that I really, really deeply believe in is a mindset of turning nothing into something. And I think anyone that knows an immigrant or has an immigrant in their family, obviously you can have this mindset if you're not an immigrant, but it almost is a requirement if you're an immigrant. You're going to a place, you don't know anyone, and you're going to have to figure out and learn how to live there. My mom happened to have to learn a new language. She was in university at the time, so she put herself through school. And so this idea of turning nothing into something, taking on that responsibility, taking action, going and doing something that hasn't been done.

27:14Josh Reeves:For her, it meant being the first in her family to go to college. For my dad, it meant being the first in his family to go to college. It meant, you know, both became teachers. This has nothing to do with tech and startups. To me, entrepreneurship is this concept of going and turning nothing into something. They were entrepreneurs to me in their life, even though their livelihood became teaching. And so that mindset to me was a big exposure to how I was raised. You know, it happened to be the same for Tomer and Eddie. You know, for me, the way we apply it in like the context of software and technology is we're builders.

27:46Josh Reeves:But, you know, any company that is creating something for the first time is doing this dynamic, is turning nothing into something. And today we've turned a lot of these ingredients into, you know, helping over 500 ,000 companies.

27:59Allie Garfinkle:Tomer, Eddie, and Josh's moms all hang out. They've been on trips to Disneyland together, for example. And I was sort of, as someone who's been very influenced by my own family, I really believe in that old Southern saying, you got to dance with the one who brung you. And I do think that our families do distinctly influence not only how we see the world, but when something is the right choice for us. Like, I don't think it's an accident, for example, that there's a lot of small business in your families. I don't think it's an accident that you come from immigrant backgrounds and specifically went on to build Gusto.

28:27Allie Garfinkle:It's kind of like art in that way. The art could have only been made by the artist.

28:31Josh Reeves:I mean, I think there's a connection there. For me, it's like core value system. And it's not just about founders, right? Like when we think about growing the team, when I give advice to founders, when they're hiring their first employee, second employee, today Gusto has over 3 ,000 teammates, Gusties in the company. It's this, what brings you together? It should hopefully be a shared purpose. But what is the underlying life philosophy that brings you together? And if someone's not aligned with Gusto's values, they're not a bad person. It just means they'll be more successful in a different company.

29:01Josh Reeves:Now, where do values come from? It comes from your life experience. It comes from family. It comes from parents. It comes from the life you've lived, what you've done, the experiences, the activities that you've had. And so, you know, this is to me the whole bucket of the how. The what is important. The how is also important. And in our case, probably just adds even more like magic to the mix because small businesses themselves have so many incredible, interesting stories to tell. And, you know, we're in a position to connect with them and tell those stories.

29:31Allie Garfinkle:It reminds me of something you once said to me where you're like, we are not a family business, but we do try to treat each other like family and be informed by family. Well, I would say, I don't think family, yeah, I mean, to unpack that, I don't think

29:43Josh Reeves:family is a good analogy. Yeah, for businesses, I agree. I think team is a good one. Yeah. Right. Like team is where you come together because, you know, there could be teams where they come together, do amazing, you know, either work or compete if they're a sports team. And then at some point it makes doesn't make sense for that team to be together. There's next chapters for those folks to have in their life. So I like I like the team metaphor analogy and it's fantastic. It's wonderful when there's Gusties that have had, you know, multiple chapters inside the company and we celebrate, you know, these different Gustiversaries, whether it's five years, eight years, ten years.

30:15Josh Reeves:I think of life as chapters. And one can have many chapters in one company and or they can have chapters across many companies. Life is long.

30:24Allie Garfinkle:We've talked a lot about some very serious things from the state of small business to the possibility of the public markets. But I have a very important final question. Yes. Shoes. What is up with the shoe policy at Gusto or lack thereof? It seems like there is a policy. Tell us about the shoe optional policy at Gusto. Yeah.

30:45Josh Reeves:I just think it's telling. For the audience I'd say there's going to be two camps here. If you were raised, Tomer, Eddie, and I happen to be raised by our parents taking our shoes off in our homes, then this will probably connect. If you were raised wearing your shoes inside you might be more confused.

31:02Allie Garfinkle:So I was a shoeless home as well. Yeah.

31:05Josh Reeves:So again no right or wrong. For us we were in this house in Palo Alto where we were living and working. All of our roommates had the same policy. So it was kind of very clear that our little upstairs kind of spare bedroom office was going to be a shoes-off workspace. We then moved to a loft in San Francisco. No one lived there, but we had our first, you know, set of teammates. We actually grew up to about 20 people in that loft. It got pretty tight. And because it kind of had that home feel to it, we had a shoe rack at the entrance. And, you know, our first hire also was like, can we keep doing the shoes-off thing?

31:40Josh Reeves:And so it just kind of became this organic dynamic where then when we moved to kind of a more formal office, the team literally said, hey, Josh, like can we keep this going? And I was like, well, sure, if this is what people prefer. And so the way it evolved at scale was, you know, there's cubbies at the entrance of the office. If you're a guest, we can give you socks or slippers. But we kind of treated the office the way people treat their home. And that actually affected the design of the office too. We have couches, we have lots of soft seating, dining spaces, tables. And so today, I would say it's a more optional policy.

32:18Josh Reeves:If someone wants to wear shoes in our spaces, they can. But there are still Gusties who treat the office the way they treat their home environment, and they walk around in slippers or socks.

32:27Allie Garfinkle:I have never taken advantage of that, but I would actually love to wear some slippers in an office. Maybe I'll try it here. Will Fortune let me? We'll find out.

32:35Josh Reeves:Be an entrepreneur and just do it.

32:37Allie Garfinkle:Vila, start a company expressly for the purpose of wearing shoes. Never. When I talk to VCs, one of the first things they always say when I ask, how do companies break up? The answer is always, yep, the co-founders have a falling out. You, Tomer and Eddie, have hung in there for a long time. You still seem to really hang out as well, from what I've gathered.

32:58Josh Reeves:We love each other.

32:59Allie Garfinkle:What has been the key to maintaining a good relationship?

33:03Josh Reeves:There's a couple ingredients and then there's a couple very concrete things that we've been very intentional about. I think ingredients are like core values, core motivation. You know, literally like the three of us independently and then together it just amplifies. Really really want to dedicate our working life to helping small business. Like we want and care about the same mission. And that's what really really matters to each of us. So that's a fantastic ingredient. If that isn't in sync with other founders, I can see why that would create issues early on. Value system ties to how we debate, discuss, you know, the way that we solve problems, this customer obsession, this service mindset, this combination of like very competitive and ambitious, but also very kind with humility that we've spent time talking about, which kind of comes from our families and how we're raised.

33:51Josh Reeves:Like that's a very aligned underlying philosophy that also affects how we do company building. So those are the ingredients. I think the things to invest in are how we give feedback to each other, right? And like this might sound like I'm just repeating what people would do in like couples therapy, right? But like it's a relationship. It is like a marriage though. It is a relationship that we would like to last decades that has deep, deep connection around shared purpose, but lots of discussions, work, projects, and activities. Pretty analogous to like, you know, spousal relationships. And like those, you know, what makes them work really well is being really direct.

34:32Josh Reeves:If something is in disagreement, you engage in that discussion. You have a foundation of deep trust, but, you know, how you navigate those disagreements is what usually defines the strength of that relationship. And I love the fact that we don't agree all the time. We have lots of debates. We have lots of discussions. And from it, we get to better ideas. That's how we run gusto, right? We don't want everyone nodding their heads saying, Josh is right. Let's agree with him. We want to have debates. We want to have discussions, whether it's founders, leaders, or broader company. Then we want to make decisions.

35:00Josh Reeves:Then we want to lock in and go deliver on that thing that we're committing to. So that's been really helpful. And then there's probably some random type of stuff. I mean, Eddie would probably say one of his funny spotlight. We were at a panel with customers yesterday. Like, you know, one of the things I initiated, which I'm grateful he has continued to support, is after any one of our Tomer, Eddie, Josh work sessions, we end with a long hug. Literally. You all just like group hug. Like a long group hug. And like Eddie is always the one that's most uncomfortable, earliest. And we just - Years later.

35:36Josh Reeves:Long hug it. Years later, he still does it. He bails first, yeah.

35:39Allie Garfinkle:So basically what you're telling me is next time we should bring Tomer and Eddie, we should put all three of you on this couch.

35:45Josh Reeves:If you want, we will long hug on camera.

35:47Allie Garfinkle:And you will long hug on camera. Perfect. Josh, thank you so much.

35:51Josh Reeves:Grateful to be here, grateful to celebrate small business. We're still early in the journey.

35:56Allie Garfinkle:That interview was really a reminder that as we have the conversation about how AI is going to reorganize labor over the coming years, that we really need to be watching small businesses, not only because they are important, but because they will be an indicator. That's it for Term Sheet. I'm Ali Garfinkel. See you soon.

36:21Josh Reeves:Thank you.