Overcoming SMB Roadblocks: Expert tips from Gusto's Josh Reeves | Episode 1988
03 Aug 2024 (1 month ago)
Josh Reeves joins Alex Wilhelm
- Josh Reeves, co-founder and CEO of Gusto, emphasizes the importance of building a product that people love and organically recommend. He explains that for smaller businesses, relying solely on paid acquisition is not sustainable due to lower revenue per customer.
- Reeves highlights that a product's value and usefulness should drive organic word-of-mouth marketing, leading to top-of-funnel leads and growth.
- The conversation then transitions to the HR Tech space, which Alex Wilhelm describes as a crucial and often overlooked sector that has produced some of the largest and most valuable tech companies globally. He introduces Josh Reeves as the co-founder and CEO of Gusto, a unicorn valued at nearly $10 billion.
Josh's previous startups and the early days of web development
- Josh Reeves, co-founder of Gusto, previously co-founded and sold a company called Unwrap in 2010. Unwrap was a Facebook platform company that focused on bringing e-commerce products into the Facebook ecosystem. The company was acquired by ContextOp, which was then acquired by aFishingFrontier, which was ultimately acquired by Adobe.
- Reeves' experience with Unwrap exposed him to the challenges of running payroll for a small team, including hiring contractors, setting up state tax registration, and managing health insurance.
- The acquisition of Unwrap was part of a broader trend of mergers and acquisitions in the social media space, as companies like Salesforce and Google sought to capitalize on the growing popularity of social media platforms.
- Reeves notes that the early days of the web were heavily desktop-centric, and that the shift towards mobile-first experiences has been significant. He acknowledges that this shift has made him feel somewhat left behind, as he prefers to work on a multi-monitor setup.
- However, Reeves emphasizes that the mobile revolution has been crucial for the success of Gusto, as many small businesses do not have access to desktop computers and rely on mobile devices for their operations. The shift towards mobile-first solutions has made it possible for Gusto to provide a more accessible and user-friendly payroll experience for small businesses.
Transition to digital solutions and security for small businesses
- Gusto's commitment to data security: Gusto, a payroll and HR platform, prioritizes data security from its inception. The company recognizes the sensitive nature of the information it handles, including SSNs, bank details, and payroll data. This commitment stems from the founders' prior experiences with startups and a desire to build a reliable and secure system.
- The importance of digital solutions for SMBs: The text highlights the increasing reliance of small businesses on digital solutions and the potential risks associated with data breaches. The speaker emphasizes the need for SMBs to partner with companies that prioritize data security and have robust measures in place.
- The evolving landscape of cybersecurity: The speaker acknowledges the ongoing challenges of cybersecurity and the difficulty of completely eliminating the risk of data breaches. However, he emphasizes the importance of working with companies that are dedicated to data security and have a proven track record. He also highlights the benefits of using digital solutions, such as payroll processing, which can improve efficiency and reduce errors.
Gusto's growth, success metrics, and market penetration
- Gusto is experiencing rapid growth. While specific financial figures are not disclosed, the company is focused on long-term growth and compounding its success.
- Gusto has a significant market share in the US. They currently serve approximately 5% of all US employers, with a focus on new businesses. This represents a substantial market penetration, but still leaves significant room for growth.
- Gusto is optimistic about the future of small businesses. The company recognizes the cyclical nature of business creation and the importance of supporting new entrepreneurs. They are committed to helping businesses succeed and survive beyond the initial five-year mark.
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Gusto's north star, marketing strategies, and channel growth
- Gusto's North Star: Gusto aims to reach a significant portion of new employers, with a goal of exceeding 10% market share and eventually reaching 20% (one in five new employers). This reflects their focus on the SMB market, which is a large and largely untapped segment.
- Marketing Strategies: Gusto employs three main go-to-market strategies:
- Gusto Pro (Accounting Channel Program): This program partners with accounting and bookkeeping firms, allowing them to add their clients directly onto Gusto's platform. This strategy leverages the existing relationships between accounting firms and their clients, creating a win-win situation for both parties.
- Embedded Payroll: This strategy allows other companies to integrate Gusto's payroll technology into their own products and services. This approach expands Gusto's reach by leveraging the existing customer bases of partner companies.
- Direct Sales: This is Gusto's traditional approach, focusing on acquiring new SMB customers directly. This strategy remains a key driver of growth for Gusto.
- Channel Growth: All three of Gusto's go-to-market strategies are experiencing significant growth. While Gusto Pro and Embedded Payroll are growing rapidly, the direct sales channel remains a core focus and is expected to drive Gusto to over a million SMB customers in the coming years.
Building a product people love with good unit economics
- Good unit economics are crucial for success in the SMB market. This means having a strong gross margin and demonstrating positive net dollar retention through cohort performance. While some SMBs may fail, others will grow and use more of your product suite, leading to a profitable business.
- A multi-product setup is beneficial for SMBs. This allows for a relatively strong long-term net dollar retention for surviving companies, offsetting the higher churn rate common in this segment.
- Building a product that people love is essential for SMB success. This fosters organic word-of-mouth and referrals, which are crucial for driving leads and growth in a market where revenue per customer is lower. A product that is highly useful and encourages evangelization is key to building a strong funnel and attracting new customers.
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Challenges of selling to SMBs and Gusto's product expansion
- Selling to SMBs is challenging but rewarding: While some believe selling to SMBs is difficult, the CEO of Gusto shares a positive experience. He attributes this to the fact that payroll is a necessity for all businesses, making it a viable segment to target. However, the diversity of SMBs requires a product that is widely needed and easy to use.
- Gusto's product expansion is driven by customer needs: Gusto has expanded its product offerings beyond payroll to include HR onboarding, benefits, and international contractor support. The company prioritizes product expansion based on customer requests and ensures that new products offer a "Better Together" value proposition, meaning they integrate seamlessly with existing services and simplify processes.
- Maintaining focus while expanding is key: Gusto balances expansion with its core focus by ensuring new products align with its vision for the future of the employer-employee relationship. They prioritize customer feedback and only launch products that demonstrate a clear benefit to existing users. The company also strives to keep its products simple and easy to use, even as they become more powerful.
Maintaining simplicity in product development
- Gusto prioritizes simplicity in product development, focusing on creating a "minimum lovable product" (MLP) rather than a traditional minimum viable product (MVP). This means they aim to build a product that is not only functional but also enjoyable and easy to use, addressing the specific needs of busy small business owners.
- The MLP concept is rooted in the understanding that small business owners are often juggling multiple roles and need tools that simplify their workload. Gusto believes that their products should take a significant burden off their customers' shoulders, making their lives easier and more efficient.
- Gusto emphasizes customer proximity and empathy throughout the product development process. This involves ensuring that everyone within the organization, from leadership to design teams, has a clear understanding of customer needs and challenges. This approach contrasts with the more complex and often less user-friendly software solutions found in enterprise settings.
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Ensuring product quality and the role of organic growth in marketing
- Direct sales to SMBs require high-quality products: The speaker emphasizes that selling directly to small business owners necessitates a superior product due to the direct feedback loop. Unlike enterprise sales, where end-users are not involved in the selection process, SMB owners directly experience the product and are likely to share their opinions with others.
- Organic growth is crucial for SMB-focused businesses: Gusto initially focused on organic growth through word-of-mouth referrals and content marketing. This approach was essential for building trust and credibility, especially during the early stages of the company.
- Content marketing plays a vital role in organic growth: Creating valuable content that addresses the needs and challenges of small business owners is a key strategy for attracting and engaging potential customers. This content can establish brand authority and drive organic traffic.
Competitive landscape in payroll and HR space
- The market for payroll and HR solutions is vast and growing rapidly. This is due to several factors, including the digital transformation of businesses and the increasing need for efficient and compliant payroll and HR processes.
- Payroll is a foundational element of any economy. It is a necessary process for every company, regardless of size or industry. This makes the market for payroll solutions inherently large and with a high demand.
- The market is highly fragmented, with many players competing for market share. This includes both established players like ADP and newer entrants like Gusto. The continued shift from pen-and-paper processes to digital solutions presents a significant opportunity for growth in the market.
Gusto's potential fintech ventures and communication styles among founders
- Gusto's potential fintech ventures: While Gusto currently focuses on payroll and HR solutions for small and medium-sized businesses (SMBs), the company is exploring potential expansion into fintech. The text suggests that Gusto might offer a payment solution similar to Stripe, integrated within their existing platform. However, the company emphasizes a customer-centric approach, meaning they will only pursue such ventures if there is a clear need and a proven solution that benefits SMBs.
- Gusto's communication style and its contrast with other founders: The text highlights a stark contrast between Gusto's communication style and that of some other founders in the tech industry. While other founders often engage in public debates and discussions about various topics, Gusto's CEO, Josh Reeves, prefers to focus on building and delivering products that directly address the needs of SMBs. He believes that engaging in public controversies distracts from the core mission of serving customers and building a successful business.
- The importance of customer-centricity in communication: The text argues that a customer-centric approach to communication is more beneficial for both the company and its customers. By focusing on solving real problems for SMBs, Gusto avoids getting caught up in unnecessary debates and controversies that might not directly benefit their target audience. This approach allows them to allocate resources and energy towards building valuable products and services that truly make a difference for their customers.
IT spending growth among SMBs and international expansion
- IT spending among SMBs is growing rapidly, particularly in areas like compliance, healthcare, and hiring in multiple locations. The text highlights that businesses spent over $40 billion on compliance pain points alone in the past year, demonstrating the significant investment SMBs are making in IT solutions.
- Gusto is playing a key role in simplifying and democratizing access to tools previously available only to large companies. The company is focused on making complex processes like hiring, payroll, and compliance easier for SMBs, mirroring the approach of fintech companies that aim to make investment opportunities accessible to a wider audience.
- Gusto's international expansion is strategic and focused, prioritizing growth in areas where it can provide the most value to its US-based customer base. While Gusto currently serves employers in the US, it is expanding its contractor hiring capabilities to over 100 countries and is exploring opportunities to expand its employee hiring services to additional countries in the future.
Navigating competition and partnerships
- Josh Reeves, from Gusto, acknowledges that the company's expansion into international markets could lead to competition with their existing remote partnerships.
- He emphasizes the importance of an ecosystem approach, citing the example of Gusto's partnership with Chase for embedded payroll. This partnership allows Gusto to reach a wider audience while potentially overlapping with their direct offerings.
- Reeves believes that having multiple ways to reach small businesses and multiple products to serve them is beneficial for Gusto's growth and scalability. He sees this as a strength compared to companies with a single product and go-to-market strategy.
Diversification of go-to-market strategies
- Diversification of go-to-market strategies is important for reaching a wider audience. Josh Reeves, the speaker, emphasizes the importance of exploring different marketing avenues, even if they seem unconventional, to connect with potential customers. He suggests sponsoring sports teams, like WNBA or NWSL teams, as a way to engage with a specific audience.
- Reeves acknowledges the importance of data-driven decision-making. He emphasizes that he would only pursue such marketing strategies if data indicated a strong connection between the target audience and the chosen platform. He prioritizes effectiveness over personal ego.
- Gusto has achieved free cash flow positivity and is reinvesting in growth. Reeves confirms that the company has reached free cash flow positivity, a significant milestone. He emphasizes that this success allows them to reinvest in product development, engineering, hiring, and expanding their go-to-market strategies to further increase their market share.
Financial strategies and thoughts on going public
- Josh Reeves, CEO of Gusto, does not believe there is a simple formula for when a company should go public. He emphasizes that Gusto will eventually go public, but it is not a primary goal.
- Reeves believes that many things companies wait to do until they are public should be done by large private companies. He views going public as a milestone, similar to a high school graduation, and the real work and impact happen after that point.
- Reeves's personal motivation for building Gusto stems from his desire to help people, particularly those in service-oriented roles like his parents, who were teachers. This desire to help others is a core value at Gusto and is reflected in their hiring philosophy.