Customer Obsession Made Gusto A $9.6 Billion Company

0:28I love being in tech. pen and paper still. 40 % of companies in the US were making mistakes and getting penalized every year. Like we saw stats like that. We were like, oh, good God, like we could help these people, these small businesses, these mainstream business owners. And that just resonated with us more.

0:51Hi, everyone. I'm Hodge Tagger, one of the partners here at Y Combinator. And today I'm very excited to be joined by Josh Reeves, co-founder and CEO of Gusto. I've known Josh for almost 15 years now, and we met when he went through Y Combinator with Gusto in 2011. Welcome, Josh. Excited to be here. Looking forward to chatting. Why don't we start by just telling us a bit about what does Gusto do? Yeah. So our purpose is to make entrepreneurship easier and more accessible. What that means today in terms of our product is we do things like payroll, we set up health benefits, we We have a whole bunch of products around hourly workforce, things like time tracking, shift scheduling.

1:29We also make it easier for you to hire in different locations. Could be multi-state, could be international, contractors, employees. And there's a whole bunch more. But broadly in this world of back office and more people-centric products today. But more to come. Let's rewind and go all the way to the start. You actually applied to Y Combinator with a very different idea to Gusto. Can you tell us about that? That's what you applied with and why did you change the idea? So I'll take us back to 2011. This is kind of when we were talking about, you know, when we connected. I have four kids now. I had no kids then.

2:04I had definitely much less white hair. And more time. More time. I was living in Palo Alto. Now, Gusto was started by three co-founders. So Tomer was one of my roommates and Eddie was living in San Francisco at the time. And we had all had prior startups. And so when we came together, we were really excited about wanting to tackle something that we could spend decades on. And then to your question, you know, you got to start iterating, find problems, build solutions. So one of the first things we got excited about was actually, and not surprising, many people think to their own personal experience.

2:41You know, my mom is a teacher, but, you know, at that point I had a lot of friends contacting her for advice on having children. Eddie's mom actually helps his dad who's a doctor. A lot of people were pinging his dad for medical advice. So we thought of this pain point around accessing experts who are not going to write, and you have to think back to 2011, they're not going to write blog posts. They're not in the online kind of web environment. How do we make that knowledge more accessible to people? And so we started brainstorming from there. Within a week, we had a prototype where you could basically call a number.

3:16It would ping us. We'd have it route effectively. You could just buy some keywords on Google and then all of a sudden start, you know, getting real people calling you with questions they have that they want expert advice on. And what we realized within a week or two was the questions were not related to the things we really were interested in helping people with. It was a lot of questions around astrology and relationship advice. And none of us felt equipped to answer those questions first and foremost. But also we thought about, you know, is this the type of space we want to be in, given what we initially see as the signal on the type of questions people are going to have?

3:55So this was all actually within like November, December of 2011. You interviewed, I remember you interviewed with this idea and we accepted you. And behind the scenes, we were more excited about the team. The team was good, but worried about this idea, which, you know, might still be a good idea to some folks, but it wasn't the right one for us. uh do you the batch started in january did you when exactly do you change the idea so all before the batch started so like i think the exact mapping here it's a while ago but like we were thinking through this expert thing you're gonna have multiple stakeholders they're gonna be contractors you got to pay them as well as like connect them with who that person is calling in so that kind of became more of like a payments concept and then there was like marketplaces in general at that point, not just expert marketplaces.

4:41So then it was, you know, how are payouts happening in all of these marketplaces? And then from payouts, you go, well, that's just for contractor, like what's actually the way people get paid? Well, that's called payroll. And so, you know, it was actually, you know, all within a few weeks of like that, that bridge to, well, you know, payroll, we all use payroll products. Is that really a broken system? Is it, you know, in need of a better solution. And we realized after talking to a bunch of other small business owners, family and friends, that there actually was something really broken here that we could start working on.

5:14So by the time we started YC in January, we were already building a payroll system. I think tactical advice and details of this phase, trying to find ideas is really helpful for people who want to be founders. So when you're in that phase, you already had an idea, you're like maybe this isn't the idea and you're trying to find new ones like what does that look like day to day like how much time are you spending continuing to work on the idea even though you're not fully like bought into it just what's your advice to people who are in there right now so i think there's like all the logical stuff and i'm going to get to like my actual answer is in this separate bucket but like you got to prove that there's actually something broken and painful then you have to prove you actually create a thing that makes it better and fixes it Otherwise, you're not creating any value.

5:59Then you have to kind of prove or have a line of sight to like a business model where you're actually a company, not a project. And then eventually you have to have a way to like scale it and like acquire and serve those customers in a way that, you know, again, makes sense. So those all need to happen. Otherwise, there isn't a business. But we obviously didn't explore all of that in two weeks with the whole expert idea. What we proved was like you could build something and it would somewhat work to connect people. But the other bucket, I think, is actually even more important when you're early on.

6:27And it's that you're going to be living and breathing this problem space. And not every problem space is for everyone. And why we shifted only after a few weeks to a different problem space was we just weren't obsessed. And it wasn't deeply internally like keeping us up at night, this whole idea around connecting experts. And so that's where within even a few weeks of signal, it not resonating gave us reason to start exploring other things. Now, when it came to what we were doing around like enabling, you know, payroll to start to be easier or simpler, this is a mainstream small business customer.

7:02It's people we were talking to that we connected with. Like we looked at the lay of the land and saw how painful and frustrating it was. You saw how many folks were doing it on pen and paper still. 40 % of companies in the U.S. were making mistakes and getting penalized every year. Like we saw stats like that. We were like, oh, good God, like we could help these people, these small businesses, these mainstream business owners. and that just resonated with us more. I love being in tech. I went to Stanford. I studied electrical engineering. I've lived and breathed software since I was young. But there was something that all three of us really were drawn to, which is tackling a problem that wasn't just for Silicon Valley, right?

7:39Something that was across the country, across the world, frankly. So this definitely met that trait. I think we probably also liked a little bit that we took pride in the fact that it wasn't what everyone was focused on. It's kind of fun to like jump to the stuff that isn't popular at the time. I'm glad you brought that up because absolutely during that era, 2011, everybody wanted to work on a mobile social app. And a characteristic of working on that sort of application is it's very easy to just get going. If I want to build an app to find my friend's favorite restaurants, I just like start building the app.

8:15Starting a payroll company, especially then, was just a lot more complicated. it like how once you got the excitement okay we want to do payroll you had no experience running payroll right had you ever you no domain expertise we we got really excited about this you know broader back offer us like pain point space but like my advice to founders and it was to us too was you got to start with like one thing so payroll was always going to be our first product it's uh what we will call our primary front door um but we always thought we'd be adding more products over time. But focus, focus, focus is the key.

8:49So first thing we had to prove, not just to, you know, potential investors around Demo Day, but to ourselves was like, could we even build a functioning payroll system? So we actually scoped the solution we were building, you know, to the bare, bare bones. It had to be a way to go do tax filings. It had to be a way to go do tax payments. It had to be a way to go obviously do tax calculations to drive that. It had to be a way to go move money from like an employer account into an employee account. You know, actually, that's the basic building blocks. And so that's all we focused on doing, like building a functioning system in California.

9:27You know, you could scope there too, because every single state has different rules and requirements for a new company that had never paid people before. So you don't have to do any historical tax import. And, you know, fortunately, this mapped to our company, right? So we also then added the additional incentive of, well, we're not just going to try to get there for all the good reasons of wanting to build a business. We're also going to add the pressure of, well, we won't pay ourselves until we can use our own system to pay ourselves. So that was kind of the first few months. So once we did that, we did onboard some other companies in YC.

10:02And that was a very manual process because we'd only built this back end. But we at that point could say accurately, honestly, that we are now processing payment to the tune of thousands of dollars, tens of thousands of dollars. But when you do that over an annualized basis, millions of dollars of payroll, which was one of the key messages I wanted to be able to tell during our demo day presentation. How did you convince these early customers to trust you? So I think there's like two phases of like how to answer this. One is, you know, we had fellow companies in YC. There were also new companies who had never paid themselves, who were based in California.

10:38And so that was just a low-hanging fruit. Now, that obviously wasn't going to be our long-term strategy. There's not enough. We knew that there's, you know, for Backdrop, there's about 6 million employers in the U.S. And so, you know, if you're going to get to real, real volume in the space, you have to go into many, many industries. It was going to be more of a horizontal solution. But after Demo Day, we actually did not launch the product. That was also kind of a non-obvious choice we made. We'll probably talk about the seed round we did, but we actually didn't launch publicly where you could come up as a stranger who we've never met.

11:10All the other YC companies we had met and knew. But a stranger who we've never met could come to our website, could set up, could add employees, could go run payroll, and it would all work. And if they wanted to call us, they could, but it would actually all be there ready for them to use. We didn't actually do that till December of 2012. So several months later. You mentioned the seed round. As I remember it at the time, you actually ended up raising, I think, the largest seed round any YC company had raised sort of at the end of the batch around demo day. But as you said, you didn't actually launch until officially launch until after the batch.

11:46And so you didn't have sort of like this obvious traction story. Hey, we're like growing revenue week over week by 10, 15%. So what did you do to convince investors and why did it go so well? I think a couple of building blocks. Number one, I think we stood out simply because we weren't like everyone else. So that was interesting, at least to some folks who were kind of ready for like tackling or evaluating or meeting founders who like had a business with a straightforward business model. Like we were going to charge our customers for using the product. It's a SaaS business. But if you look at the space we're in, I think this is where, you know, folks that aren't in the space aren't aware of this.

12:25But you had this amazing combination of, you know, some big incumbents like Paychex and ADP worth, you know, over$100 billion together at that point. So like, clearly big, big incumbent market presence in terms of like economic value, but also an incredibly fragmented market. Like ADP and Paychex at that point were, you know, less than, you know, 20, 30 % of the customers out there. So you had tons of folks on pen and paper. And so we had, I think, a good story to tell on, like, this is a real pain point. People get that. And then there's this big disruption happening, which we're going to be leveraging.

13:00And the disruption is in both technology and go-to-market. On the technology front, it's, you know, at that point, it was cloud, paperless, and mobile. Three trends we didn't create, but we definitely leveraged to our benefit. And on the distribution side, it was search, like SEO, SEM, and then social. No one's ever cracked the small business side of this market. There's these technology changes and distribution changes underway that typically benefit a disruptor, not the incumbent. And now maybe now is the time finally when like small business will start getting amazing software and they won't just be into it as the one example of a company that like can serve small business.

13:39And I would actually argue investors are pretty much always excited about big, big markets with like clear business models. And then always a hypothesis if you're a seed stage on like, how are you going to go capture that market? But we had, I think, like over 11 VC firms offer to invest. We actually chose to do the round with no VC firms. It was all angels. So we raised from, you know, 20 plus CEOs and founders. It was, you know, the CEOs and founders of PayPal and Stripe. Stripe and, you know, Mint and Instagram and a whole bunch of amazing businesses. And it was great to have them be sounding boards.

14:15So I think that that helped with the story. But I would always say, like, no matter what's hot at the moment, I think most founders or most investors are pretty excited about, you know, a huge market, you know, industries going through disruption and a, you know, new company coming in that has a pretty good strategy, at least at that point on how to go turn it into reality. So I think I personally have been getting paid through Gusto for over a decade at this point. And what's always stood out to me as a user is just your product has always had this sense of like fun and whimsy and just design, which is obviously not what you associate with the payroll companies that came before you.

14:53Can you speak to like, when did that start? And why has that sort of fun design sort of heart been important to you? Yeah, we think of it as like warmth, hopefully, because, you know, it's obviously still a really business critical task we're doing. Reliability, accuracy is, you know, stuff that we're obsessed with. That's more, I think, a byproduct of how we view what software should be, right? Like, you know, there's a world where like software, you know, is hard and difficult and you kind of feel like it's a cumbersome thing to navigate. There's also a world where it's like this cold, frictionless sterile machine that just works and hums for our product product space our problem space like we just really believed you you need both like the stuff we abstract needs to be super automated and like very powerful but like we're going to ultimately be this partner to you in navigating really important decisions like you know paying someone choosing their pay or the employee side getting paid like these are magical moments to be a part of it just we didn't even debate it it just felt weird like why wouldn't you want to bring warmth and humanity into that interaction during that time so i hadn't thought of this before but like you were building a company that wasn't the typical type of company people were building during this era so did you have like a peer group to lean to where this sort of stuff like figuring out compliance in multiple states um growing like to small businesses and doing sales and getting them on board like were there other founders you could lean on for advice or were you sort of figuring this out a lot for yourselves while everyone else is building photo sharing apps?

16:25Well, Kevin is a friend from college and Instagram. I mean, he's an investor in Augusto. So, you know, it was fun to talk to him about some of the scaling stuff. But actually, I think, you know, you know this more than anyone, like tech is pretty broad. So even back then, right, like was everyone building mobile showing apps? No, like Jeremy Stoffelman from Yelp is one of our angel investors. He's been passionate about small business forever, right? Dharmesh Shah from HubSpot cares a lot about small business. He was also one of our angel investors. It was fun to talk to him about how they approached the front office component to this.

16:57Max Levchin, PayPal, you know, obviously FinTech, and that was, you know, predating that time period, but like really cool to talk to him and geek out on how he approached company building. Patrick at Stripe was an angel investor. So we actually had plenty of, again, folks I would have honestly paid money to, to give us advice. Instead, they gave us money, but they also got stocks. Definitely benefit. Yeah, I felt fine for that. But like, no, we felt like we had a really good network of folks that honestly, I think part of why they got excited about investing was they realized how foundational this problem is.

17:25Right. They had all felt it. They're all founders in building their companies when they were small. Like all of that complexity, that compliance, that back office headache type stuff, all the things that are manual. Like, you know, we talked about it and then we had to go prove it. But like we were clearly going to be a company obsessed with how to go make that stuff easier and simpler. and I think a lot of them just got excited about like making that mission real. You launch your first product when it's three of you in a house and you launch your second product when you have hundreds of employees and lots more investors and just like a lot more going on.

17:59Like what are some of the big differences between those two and how do you keep the startup speed when you're launching new products at scale? So some of the first similarities are like the benefits team at Gusto started as like a small team of five people. you know, with the same dynamic as when we were just five people. And the painful part was it meant we had to pull five people off of payroll. So that's the puzzle when you shift from one product to multi-product. You do it too early and you're spreading yourself too thin. You do it too late and you're kind of just not helping your customer with all these things you could help them with.

18:32And so we had to make sure we were, you know, still have tons to do even today around payroll. And there's a lot more coming there in terms of innovations in payroll, but, you know, separate out of the team, create a separate swim lane, give them lots of autonomy, align on like that deep, deep connection to the customer. It was a little bit easier actually, because it's not prospective customers. These are existing Gusto customers. When we say, can we talk to you about doing benefits? Most were like, oh yeah, we're happy to give you feedback. Let me tell you exactly what would be awesome. Let me react to your, you know, spec, your, you know, wireframe, your diagram, your early like beta usage.

19:05And like, there was a lot of like, oh, that'd be incredible. That'd be amazing. We'd love for you to do that. Please do it faster. And so, you know, you still face the challenges of like, how do you allocate money in a company? How do you allocate headcount? But the mindset of like create different swim lanes actually persists today. Like we have many, many products now. And most of those teams operate as different swim lanes inside the company. And we want people that are in that swim lane to be obsessed with that pain point, that problem and solving it. And frankly, there's other guesties focused on, you know, the other problems that we're solving.

19:36Especially as you've gone multi-product it also means you run into more competition and competitors um at the very very early stages i often feel like one of the things i hear a lot from founders when they're trying to pick an idea is oh i'm worried there's too much competition um how do you think about that like what's your advice to founders on should they should they be worried about competition or not thinking about it at all so i think when you're really really early you know you got to look at like the market and like if and this wasn't the case for gusto like someone has like 90 market could share, that's definitely like trickier, right?

20:09Like the cool thing for us was in all of the products we've done so far, they are massively fragmented markets. So, you know, I would be weirded out if there wasn't competition because that means like almost for somehow the only ones that saw the insight that you could build a big business here. So competition is good. It means that people also see the opportunity you have. But, you know, fragmented market means there's a lot more opportunity to focus on what you're doing versus get distracted by what someone else is doing. And then you just got to make sure you have, you know, a strategy that's unique to you.

20:39And then, you know, beyond that, you just got to execute. Like, at the end of the day, build the best product, build the best go-to-market, like be, you know, the one that's winning the most market share based on, like, you know, conversion, retention, etc. And the rest, you know, works its way out. I think it's more challenging if you have the same strategy as someone that's much bigger than you, who has more money and resources and is moving as fast as you. In our case, there was definitely companies bigger than us, but they're moving much, much, much slower than us. And so we could just really focus on executing as fast as possible.

21:11So speaking of founders, you have three co-founders, and all three of you are still very actively involved in the company. And every time I see you, it's very clear that all three of you are very pumped and excited to work on the company and with each other. Really? We have so much to do. Well, I think it's pretty unusual to see three co-founders actually stick at the company for this long. um what's your secret there like did you guys get lucky and the stars aligned or did you something behind the scenes that's made it work so well i think there's like luck for sure but there's some things that have to align like one way to think about it and make it you know actionable for everyone is like how do you build long-term relationships well you know it takes work and there's like ingredients that have to be there already so the three of us like loving technology, wanting to dedicate ourselves to building products that go solve meaningful problems, deriving a lot of joy from like helping others and like also really having this deep, like we call it today, productive discontent.

22:10Like we're just constantly both, you know, proud of the progress slash like really eager to get to the next step, the next step, the next step, because there's so many people we can help. There's so many more problems we could solve. You know, those were the ingredients that had to line up. and then you know you got to invest in good communication how to give feedback to each other um but but yeah you know 13 years in like we're even more excited and more focused on like how can we do more faster um and i'm really grateful to my co-founders for the important roles they play in the company the number one thing everyone wants to talk about at the moment is ai um how how do you think about ai impacting both gusto's business and the product but then also gusto the organization.

22:54We've always said like small business, you know, they want an opinionated partner, right? They don't want just a tool. They want just a set of menu of options. They're super busy. They're wearing many, many different hats and they don't frankly have the resources to go hire all of the specialists that a big company has. So they're either left on their own Googling it or, you know, they start working with a company like Gusto. And so what AI enables us to do is is turn that vision into reality even faster, right? Like you can imagine Gusto as we continue to add more and more capabilities and keep evolving our interface to kind of become that back office agent, that set of capabilities for a business owner that's highly personalized, unique to their needs, pattern matching on their industry, growth rate and profile, and like being proactive in helping solve pain in their life, not just waiting for them to log into our website and go click some things.

23:50Final question for me, just, you know, you're past the first decade of Gusto into the second decade. What does the second decade look like? What do we have to look forward to? And what's your vision of Gusto 10 years from now? Yeah, I mean, two stats I'll just share. There's about 550 ,000 new employers each year in the U.S. And the historical stat is that about 52 % make it to year five. So, you know, 500 ,000 new employers half make it to year five. Like we want to increase both numbers and that's the simplest way I can put it. So there's a whole bunch of product behind that. I won't do any secret unveil right now.

24:28Something we did announce recently though is a compliance hub. So just like a one-stop shop for all those compliance tasks, pain points, like could be payroll, could be benefits, could ultimately be anything. Like we're going to be the company that takes care of all of that for you. And you're going to see us be pretty aggressive in that area. Well, thanks so much for the time, Josh. This was a lot of fun. Yeah, thank you. Thanks.