Josh Reeves, Tomer London, and Edward Kim are the co-founders of Gusto, a software company focused on helping businesses onboard, pay, insure, and support their teams. Since they started the company in 2012, Gusto has grown to an estimated $100 million in annual revenue as of 2018, has over 100,000 customers, raised over $515 million from investors like General Catalyst, Kleiner Perkins, and Fidelity, and is valued at $3.8 billion in its latest funding round.
With these sky-high numbers after just eight years of operation, you’d think that Gusto focuses on high-ticket enterprise customers. But then you’d be surprised to find that it’s actually quite the opposite; Reeves, London, and Kim built Gusto with the core belief that small businesses have been underserved for years and that they needed to do something about it. To them, there was simply no reason payroll, taxes, and benefits still needed to be like pulling teeth — and done with a pen and paper or spreadsheets too.
Recently, I sat down with Reeves, Gusto’s CEO, to dive deeper into the Gusto story, starting with its mission — why the company decided to focus on small businesses — and transitioning into the company’s sentiment around launching new products and features, and finally ending with why Gusto fundamentally isn’t and will never be a pure software company.
The Personal Story Behind Gusto’s Focus On Small Business
From my conversation with Reeves, I learned that Gusto’s commitment to helping small businesses was personal to all three co-founders. “Our founding team had each run startups prior to Gusto. In addition, each of us has family ties to small businesses: Tomer’s dad runs a clothing store in Haifa, Israel, Eddie’s parents run a medical office in Southern California, and my mother-in-law handles payroll for her company,” Reeves tells me.
These various experiences both running and closely observing small businesses showed the co-founders the impact they could have on the people involved, their surrounding communities, society, and the economy at large. But the injustice, to them, was that while these businesses were playing crucial roles, they seemed to have been “getting the leftovers or ignored, and they deserved better,” Reeves explains.
What Reeves is talking about specifically is payroll, taxes, and benefits. “Running payroll and staying compliant with taxes was overly manual, complicated, and painful; adding a new employee to [a] team was complex and required using lots of different systems; and offering benefits as a small business always seemed difficult and daunting, if not downright impossible.”
Small businesses already have a tough time competing with incumbents — and that requires them to focus on their business and their people. To Gusto’s co-founders, that meant that they needed to take away the red tape and complexity around these three processes. If they could make it happen, they would free up much-needed time for startup founders to do the work they love.
That Strong Belief Set Up Early Temptations To Move Quickly — And Why Gusto Didn’t Build A Minimum Viable Product As Fast As Possible
With a strong belief in what he and his co-founders wanted to build and the consideration of how big an impact a product like Gusto could provide to small businesses, Reeves could have worked to “make that future real as quickly as possible” through a Minimum Viable Product. “But that’s one of the biggest pitfalls in Silicon Valley, where sometimes speed for the sake of speed is celebrated,” Reeves tells me.
“We had had prior start-up experiences like that and with Gusto we were endeavoring to build a multi-decade business, so we knew we needed to go slow, to then go faster later.” So a big challenge in the early days was focusing on nailing product features and customer experience, factors that would help Gusto build “a multi-decade business, instead of ‘flash in the pan’ technology,” Reeves explains.
To translate that principle into action, what Reeves and his team really needed was to build what he calls aMinimum Lovable Product, not just the bare bones of a working product. Here’s an example:
“[Gusto] started with payroll as the core product of our people platform, and we only offered it in California. Could we have blitzed our way state-to-state from the get-go? Absolutely. But instead, we paced ourselves for three years and made sure we were delivering the actual value we needed to, before we offered nationwide coverage. And we waited to add health insurance 401(k) and other benefits until after we scaled payroll nationally and were able to maintain a high level of service.”
But To Do That, Gusto Needed To Bake Simplicity Into Its Product
If we were to look for a word to describe payroll, taxes, and benefits, it certainly would not be “simple.” A small business could look for a firm to help them, but the pricing wouldn’t be straightforward (or, in many cases, affordable). And if a business owner were to take a stab at navigating the processes alone, it would be difficult to get everything right — and mistakes meant fines.
But this would be a challenging problem to tackle for Gusto, with a vision to be a simple, primarily automated software solution. What it needed to build was a platform that would be easy for customers (both employers and employees) to use. To do that, it would need a clean interface that abstracts away the complexity of the processes, stray from the retainer model used at larger firms, and make someone available to chat when customers need help.
Why Gusto Never Wants To Be A Pure Software Play — And Why That’s A Crucial Competitive Advantage
While there are other companies in the space that see the value in abstracting away the complexities of payroll, taxes, and benefits, Gusto’s mantra is that it never really wanted to just be a tool for its customers, Reeves tells me. Instead, the company “wants small businesses to know we’re not just there to run their payroll, or manage their benefits, or help them onboard a new employee. We’re here to help them navigate choppy waters and weather the storm through whatever challenges their business might face.”
That last piece goes beyond software’s capabilities — and Gusto recognizes has made that principle core to its operations. Reeves tells me: “We automate what can and should be done in software, but we also make sure that, when a customer does reach out to us, they can speak to a real person with real expertise.”
The mix of software and customer service is crucial to Gusto’s competitive advantage over other pure software plays. And it helps Gusto build more personal relationships with its customers.
During our conversation, Reeves shared an interesting example with me:
“The day the global pandemic hit, [a customer]’s wife (and co-founder) went into labor with their third child and, overnight, his revenue dropped substantially. There he was, in the hospital, waiting for the arrival of his newborn son while also trying to make business decisions and communicate effectively to his membership. He had also just transitioned the company’s benefits over to Gusto (including his own), but had yet to send us his kids’ names to set them up on the plan. Our team here at Gusto snapped into action, enrolled his kids quickly, and even enrolled his newborn son on the spot. Four days after he was born, when the family took him back to the hospital for his first weigh-in and check-up, the receptionist couldn’t believe it. She said she had never seen newborn insurance paperwork done so quickly before.”
It’s relationships like these that reinforce Gusto’s mantra that a pure software solution is not the way to win in this market.
“Delight”: Gusto’s Approach To Drumming Up Engagement And Word Of Mouth
Besides making its staff available to customers to chat with when problems or questions arise, another part of Gusto’s approach to fostering strong customer relationships comes from what Reeves refers to as “delight.”
“There needs to be an element of joy, so that people want to interact with the platform. Running payroll and dealing with compliance issues was often a source of dread for small business owners; our goal is to make it something employers look forward to doing — because what it’s really about is sharing appreciation with your team and ensuring they feel valued for their hard work,” Reeves says. “That’s why we give employers a virtual pat-on-the-back when they run payroll, send celebratory payday emails, and have an animated pig (who dresses seasonally) trot across our loading screens.”
Gusto’s focus on creating a platform that customers are “delighted” to use has helped it garner free testimonials, which has helped the company win customers over from both pen-and-paper and competing software solutions.
In light of the recent pandemic, Gusto has launched over 40 Covid-19 related features for small businesses. One of those features is a one-click, fast-tracked report that enables small business owners to efficiently collect their average monthly payroll documents, which they can send to lenders to apply for PPP loans.
Gusto’s communications team tells me that the company has helped enable over $1 billion in PPP loans approved and continues to help its customers through banking partnerships with Cross River Bank, Fundera, and Lendio.