Competing in the payroll and benefits space with Josh Reeves from Gusto

Challenges of Payroll Management for Small Businesses and Gusto's Solution

• Payroll management can be challenging for small businesses, particularly in areas like tax withholding and timely employee payments, which were historically prone to manual errors. (9s)
• Gusto is a company that simplifies payroll, benefits, and HR for small and medium-sized businesses, aiming to help them thrive by making these processes easier. (32s)
• Josh Reeves, the CEO and co-founder of Gusto, started the company 13 years ago with two other co-founders, all of whom have backgrounds in electrical engineering. (1m35s)
• The founders were motivated to start Gusto due to their personal experiences running small businesses and setting up payroll and benefits, as well as having family connections to small businesses. (2m2s)
• The founders identified a need to improve how companies form, build teams, and stay compliant, which led them to develop solutions to make these processes better and easier. (3m0s)
• Gusto was founded by three people who initially focused on addressing payroll issues, particularly the challenges faced by small businesses in managing payroll taxes. Many small businesses in the United States, nearly 40% at the time, were fined annually for payroll tax errors. (3m18s)
• The founders of Gusto identified a common pain point among small business owners who were frustrated with the time-consuming and error-prone process of handling payroll manually, which often led to government fines and penalties. (3m39s)
• Gusto's approach to compliance involves navigating a complex landscape of over 15,000 local, state, and federal rules that are frequently changing. This complexity arises from the decentralized nature of the United States' regulatory environment, with different jurisdictions and agencies having varied goals and requirements. (5m0s)
• Small business owners typically start their businesses to pursue their ideas and products, not to manage regulatory compliance. They often lack the resources to hire specialists, making it challenging to keep up with the numerous rules and requirements. (5m33s)
• Historically, technology and software companies have focused on larger businesses, as small businesses were not seen as an accessible market. However, Gusto hypothesized that modern software could effectively serve small businesses, alleviating their pain points and creating a successful business model in this segment. (6m2s)

Gusto's Founding and Initial Focus

• The company was founded 13 years ago with a focus on helping customers, particularly mainstream small businesses, rather than for the founders' personal benefit. (6m24s)
• Initially, the company engaged directly with customers, including small businesses like dentist offices, to gather feedback and understand their needs. (6m43s)
• The company utilized technology tools such as cloud, paperless, and mobile solutions, which are now complemented by AI, to create user-friendly products. (6m57s)
• The initial product was developed with a narrow focus, targeting new employers and full-time employees in California, to ensure it was useful and effective. (7m31s)
• After receiving positive feedback from the first 10 to 15 customers, the company began scaling its operations to more complex businesses across California and eventually the United States. (7m42s)
• The company maintained a balance between rapid iteration and responsible product development, especially since their services include critical functions like payroll and health benefits. (8m14s)
• Scaling involved challenges such as reaching a fragmented market of small and medium businesses, which required effective customer acquisition strategies beyond high-touch sales methods. (8m37s)
• Gusto launched in December 2012 and quickly gained 100 customers within the first month, primarily through word of mouth and referrals, without any paid acquisition efforts. (9m31s)
• Initially, Gusto's customer base was concentrated in California, and the company relied on organic growth driven by customer satisfaction and recommendations. (9m39s)
• After the first year, Gusto began using paid advertising to supplement its organic growth, emphasizing the importance of creating a product that small businesses find genuinely useful. (10m2s)
• Gusto has expanded its target market from companies with 1 to 10 employees in California to serving businesses with 1 to 500 employees across the United States. (11m0s)
• The company focuses on being a good business by measuring success through metrics like gross margin, customer acquisition payback, and net dollar retention. (11m19s)
• Payroll services are considered essential, making Gusto a crucial partner for its customers, as payroll is a non-optional service that businesses must maintain. (11m32s)
• Gusto's success in the small business sector is compared to other companies like Intuit, Square, and Shopify, highlighting the significant market potential in serving small businesses. (12m8s)
• The company initially started with the name Zen Payroll, which was chosen quickly due to the need to present at a Y Combinator demo day. The founders prioritized building their product over selecting a name, purchasing the domain ZenPayroll.com for a low cost. (12m17s)
• The founders anticipated changing the name in the future to accommodate additional products and chose the name Gusto, which was announced in 2015 alongside the launch of health benefits. At that time, the company had about 10,000 customers and 150 employees, referred to as "gusties." (13m24s)
• The transition to the name Gusto involved the entire company calling each customer to inform them of the change and to introduce the new product offerings, emphasizing that the company remained the same despite the name change. (13m48s)
• The name Gusto was chosen for its positive connotations, such as energy and optimism, which align with the company's values and the spirit of their customers, who are often small to medium-sized businesses. (14m20s)

Gusto's Growth and Expansion

• Expanding into the healthcare sector involved navigating significant regulatory challenges. As a broker, Gusto collaborates with major carriers like Blue Cross Blue Shield and Kaiser to facilitate healthcare offerings for small to medium-sized businesses, many of which were previously unaware they could provide such benefits. (15m2s)
• Gusto provides technology and benefits advisers to help smaller businesses manage payroll and benefits efficiently, similar to how larger companies operate. This involves navigating complex systems like local, state, and federal tax agencies, as well as insurance carriers, which are not always technologically advanced. (15m23s)
• Gusto's payroll system handles over a billion dollars a day, and the company has expanded its offerings to include benefits, time tracking, 401(k), and Workers Compensation Insurance. These expansions are driven by customer requests and are integrated into the payroll system to provide a seamless experience compared to using separate third-party services. (15m42s)
• The decision to expand into new product lines or geographies involves careful prioritization. Gusto uses three-year planning arcs and an 18-month rolling product roadmap to determine focus areas. Initially, the company focused solely on payroll and had to decide between launching new products or expanding payroll services nationwide, considering the complexities of multi-state operations. (17m1s)
• Gusto initially focused on expanding its payroll services across all 50 states in the United States before considering international expansion or additional product lines. This decision was driven by strong customer demand for benefits, leading the company to prioritize health benefits alongside payroll. (18m18s)
• As Gusto grew, it reached a scale where it could manage multiple product lines simultaneously with different teams working in parallel. However, the company remains cautious of the pitfalls of overextending itself while maintaining an ambition to launch more product lines and serve millions of businesses. (18m52s)
• The company has adapted to changes in remote work and hiring practices, influenced by the pandemic and technological advancements. Gusto's early adoption of Slack as a collaboration tool exemplifies its adaptability and forward-thinking approach. (19m22s)
• Gusto has evolved from being entirely in-person to having multiple hubs with varying office setups, emphasizing the importance of digital collaboration. The company believes in iterating and adapting its strategies to fit its unique business needs rather than adhering to a one-size-fits-all approach. (20m30s)
• The speaker's first entrepreneurial experience was in college, where they co-founded a nonprofit aimed at fostering relationships between students from the US and China through service projects, such as teaching English and computer literacy in rural China and the US. (21m7s)
• They later worked as a product manager at Zazzle, gaining experience in building software professionally. (21m37s)
• In 2008, they started their first startup, which involved creating apps for the Facebook platform. This venture lacked a clear mission or vision and was focused on optimization and iteration, eventually leading to the sale of the company. (21m44s)
• Reflecting on this experience, they realized the importance of starting a business with a clear purpose and addressing a specific customer pain point, which influenced the approach to building Gusto. (22m25s)
• They emphasize the significance of maintaining passion and excitement for a business idea, even after discussing it numerous times, and suggest that founders should consider this when planning to build something long-term. (22m49s)
• The speaker expresses a deep passion for helping small businesses and enabling entrepreneurship, which they intend to focus on for the rest of their professional life. (23m0s)
• There is a discussion on different types of founders: those driven by personal passion and those who identify business opportunities, with curiosity about how these different motivations impact the success of companies. (23m29s)
• The discussion highlights the importance of choosing a business problem that is both personally inspiring and widely experienced by others, allowing for long-term dedication and impact. The founders of Gusto aimed to address a significant issue that affected many businesses, rather than a problem unique to themselves. (24m1s)
• The payroll and benefits space has become increasingly competitive, with many new entrants since Gusto's inception. Despite this, the market remains large and fragmented, with established companies like Intuit, ADP, and Paychex holding significant market shares. (25m27s)
• Gusto focuses on the underserved segment of smaller and new employers, which historically relied on manual processes. This strategy allows Gusto to capture market share from both manual users and those switching from established companies. (26m33s)
• The company operates in various sectors, including banking, accounting, bookkeeping, credit card and spend management, payroll, and benefits. It believes that starting with payroll provides a significant advantage due to its essential nature and the data it involves. (27m2s)
• The company serves over 300,000 businesses in America and aims to maintain its market advantage through product quality, innovation, and expanding product lines. It welcomes competition and seeks to succeed based on the merits and quality of its products. (27m23s)

Gusto's Company Culture and Values

• A notable mishap occurred early on when a banking partner's mistake on Christmas Eve almost prevented people from getting paid. The company quickly resolved the issue using wire transfers, ensuring customers received their salaries on time. (28m31s)
• The company has a unique tradition of employees walking around the office in socks and slippers, a practice that started when the founders lived together and continued until 2020. This tradition was authentic to the company culture, although it became optional after the pandemic. (29m20s)
• The company Gusto has a tradition of wearing house shoes in the office, which is a fun and organic practice that has developed over time. (30m5s)
• Gusto started with two co-founders and has grown to a team of around 2,600 employees, referred to as "gusties." The company has been intentional about team building and maintaining its culture as it expands. (30m58s)
• In the early stages, the founders focused on hiring employees who not only had the necessary skills but also aligned with the company's values and were motivated by the problem space Gusto focuses on. (31m2s)
• Initially, every new hire was interviewed by a founder, but as the company scaled, they developed a "values and motivation alignment" interview process to ensure new team members fit the company culture. (31m52s)
• Gusto emphasizes the importance of aligning new hires with company values, suggesting that if someone does not align, they might be better suited to work elsewhere. (32m3s)
• Communication is a key aspect of scaling at Gusto. The company holds all-hands meetings every two weeks to discuss performance and key topics, adapting to changes such as the pandemic by using Zoom and other communication tools. (32m27s)
• Leaders in larger organizations should avoid isolation and echo chambers by maintaining a connection to customers, which can be operationalized through activities like shadowing and direct involvement in customer processes, such as running payroll for a customer. (32m51s)
• In the early days of Gusto, the co-founders decided on roles through open and direct conversations, focusing on their strengths and interests. Josh Reeves became CEO, while Tomer and Eddie focused on product, engineering, and customer experience. (33m15s)
• Effective communication and trust among founders are crucial to prevent internal friction that can lead to the failure of a company. Open dialogue on roles and responsibilities helps maintain a healthy relationship among founders. (33m42s)
• Gusto does not use traditional C-suite titles but instead uses "head of" titles, with Josh Reeves focusing on go-to-market strategies, distribution, customer acquisition, and operations. (34m20s)
• As the company grows, building a leadership team to complement and augment the founders' efforts is essential. Founders scaling within the company is beneficial, as seen with Tomer and Eddie's continued involvement in key roles at Gusto. (34m32s)
• The sustained involvement of all co-founders in Gusto is attributed to their shared mission and purpose, as well as their growth mindset and curiosity. This alignment and commitment to a long-term vision have kept them engaged in the company. (35m12s)
• The aspiration and ideal for the founders of Gusto were significant driving factors in their journey, alongside building a useful product, delivering value to customers, and proving a viable business model. (35m48s)
• A growth mindset and curiosity are crucial for the founders, allowing them to stay committed and involved in the company for 13 years. This mindset involves learning from leadership teams and external stakeholders. (36m1s)
• Despite the passage of time and personal life changes, the founders remain passionate about helping businesses and solving problems, feeling that they are still early in their mission with much work to do. (36m41s)
• The discussion highlights the importance of passion in building a company, contrasting founders who remain with their companies for a long time with those who step away after reaching certain milestones. (37m36s)

Gusto's Leadership and Founders' Journey

• There is a critique of founders who chase trends without genuine interest in their products, as seen in shifts from web 3 to AI, questioning the sustainability of such approaches. (38m15s)
• The discussion highlights the competitive nature of the payroll and benefits industry, noting the presence of legacy companies and the potential for startups to disrupt these established players. (39m2s)
• There is a significant number of startups entering the payroll space, especially after the COVID-19 pandemic, leading to a crowded market. (39m18s)
• Gusto, a company in this space, has been around for a while and is perceived to be doing well despite the competition. (39m51s)
• The payroll and healthcare benefits industry is highly regulated, which creates a barrier to entry and limits the ability for companies to differentiate themselves creatively. (40m3s)
• Compliance with regulations is complex, involving different rules across states and revenue thresholds, making it challenging for companies to navigate without specialized help. (40m57s)
• Companies often invest significant resources into payroll and benefits systems, but they must balance this with funding for their core products to ensure effective use of their finances. (41m46s)
• The competitive landscape in the payroll and benefits space is diverse, with many companies finding success by focusing on specific niches, such as small businesses. This competition is seen as beneficial, as it allows for specialization and market ownership. (42m12s)
• Automation is transforming traditionally manual processes like payroll calculation, making these tasks more efficient. The potential for AI to further disrupt and enhance these processes, especially in compliance and enterprise SaaS, is a topic of interest. (42m48s)
• Despite technological advancements, certain regulatory requirements, such as mailing documents in specific states, limit the extent to which AI can currently streamline processes. The evolving regulatory landscape will influence AI's role in the future. (43m10s)
• The discussion also touches on the logistical challenges of traditional mailing systems, highlighting the contrast between modern technology and older methods. (43m36s)
• The video is produced by TechCrunch, with contributions from Becca Scac, Dominic Madori Davis, Maggie Stamitz, Kell, Bryce Durban, Morgan Little, Alyssa Stringer, Natalie Chman, and Henry Pikovit. (43m48s)