Customer Obsession Made Gusto A $9.6 Billion Company

Gusto (https://gusto.com) made payroll and HR painless for small businesses, growing into a $9.6B company along the way. Co-founder & CEO Josh Reeves joined YC's Harj Taggar to share how they built a payroll company from scratch and their customer-first approach to product design and culture.

• 0:00Speaker 00

  I love being in stack. You know, 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 like tackling a problem that, you know, wasn't just for Silicon Valley, right? Something that was like across the country, across the world, frankly. When it came to what we were doing around like enabling, you know, payroll to start to be easier, simpler. This is a mainstream small business customer. It'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. Forty percent 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

• 0:43Speaker 00

  business owners, and that just resonated with us more.

• 0:51Speaker 01

  Hi, everyone. I'm Harsh Tagg, 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.

• 1:10Speaker 00

  Excited to be here. Looking forward to chatting.

• 1:12Speaker 01

  Why don't we start by just telling us a bit about what does Gusto do?

• 1:15Speaker 00

  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 have a whole bunch of products around hourly workforce, things like time tracking, shift scheduling. We 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.

• 1:43Speaker 01

  Let's like 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, tell us about that? So that's what you applied with, and why did you change the idea?

• 1:55Speaker 00

  So I'll take us back to 2011. This is kind of when we were talking about, you know, when we connected.

• 2:01Speaker 00

  I had, I have four kids now. I had no kids then. I had definitely much less white hair.

• 2:07Speaker 01

  And more time.

• 2:08Speaker 00

  More time. I was living in Palo Alto. Now Gusto was started by three co-founders. So Tomer was my, 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, you 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 is, actually helps his dad is a doctor. A lot of people were

• 2:53Speaker 00

  pinging his dad for medical advice. So we thought of this like 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. Like, how do we make that knowledge more accessible to people? And so we started brainstorming from there. Within like a week, we had a prototype where you could basically call a number, it would ping us, we'd have it routed 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

• 3:36Speaker 00

  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? So this was all actually within like November, December of 2011.

• 4:00Speaker 01

  You interviewed, I remember you interviewed with this idea, and we accepted you.

• 4:04Speaker 00

  Yeah.

• 4:04Speaker 01

  And behind the scenes, we were more excited about the team.

• 4:06Speaker 00

  Yeah, the team is good, but worried about this idea, which, you know, might still be a good idea to some folks, but wasn't the right one for us.

• 4:13Speaker 01

  Do you, the batch started in January. Did you, when exactly did you change the idea?

• 4:19Speaker 00

  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 going to have multiple stakeholders, they're going to 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. So 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, 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?

• 5:01Speaker 00

  Is it, you know, in need of a better solution? And we realized, um, after talking to a bunch of other small business owners, family and friends, that like, there actually was something really broken here that we could start working on. So by the time we started Y C in January, uh, we were already building a payroll system.

• 5:19Speaker 01

  I, I think like tactical advice and details of this phase trying to find ideas is really helpful for people who want to be founders. So, um, when you're in that phase, like you, you already had an idea. You're like, maybe this isn't the idea and you're trying to find new ones. So 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, what's your advice to people who are, who are in there right now?

• 5:44Speaker 00

  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 gotta prove that there's actually something broken and painful. Then you have to prove that you actually create a thing that makes it better and fixes it. Otherwise you're not creating any value. Then 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.

• 6:17Speaker 01

  Yeah.

• 6:17Speaker 00

  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. And 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, simpler. This is a mainstream small business customer.

• 7:02Speaker 00

  It'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. Forty percent of companies in the US were making mistakes and getting penalized every year. Like, when 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. You know, 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 like tackling a problem that, you know, wasn't just for Silicon Valley, right? Something that was like across the country, across the world, frankly. So this definitely met that trait.

• 7:46Speaker 00

  I think we probably also liked a little bit that it, like, 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.

• 7:54Speaker 01

  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, if I want to build an app to find my friend's favorite restaurants, I just like start building the app.

• 8:14Speaker 00

  Yeah.

• 8:14Speaker 01

  Um, starting a payroll company, especially then, was just a lot more complicated. 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.

• 8:28Speaker 00

  We, we got really excited about this, you know, broader back office, like, pain point space. But like, my advice to founders, and it was to us too, is you got to start with like one thing. So payroll was always going to be our first product. It's what we will call our, our primary front door. But we always thought we'd be adding more products over time. But focus, focus, focus is the key. So 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, um, 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.

• 9:13Speaker 00

  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, you 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 gonna, you know, try to get there, you know, 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.

• 9:57Speaker 00

  So, once we did that, we did onboard some other companies in Y C. And that was a very manual process, because we'd only built this backend. But we, at that point, could say accurately, honestly, that we are now processing payment to the tune of, you know, 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.

• 10:24Speaker 01

  How did you convince these early customers to trust you?

• 10:27Speaker 00

  So I think there's like two phases of like, how to answer this. One is, you know, we had fellow companies in Y C. There were also new companies who had never paid themselves, who were based in California. And so that was just the 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 six 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 like come up as a stranger who we've never met, right?

• 11:11Speaker 00

  All the other Y C companies we had met and knew. But like, 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.

• 11:33Speaker 01

  You mentioned the seed round. As I remember it, at the time, you actually ended up raising, I think, the largest seed round any Y C 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. And so... You didn't have sort of like this obvious traction story here with like growing revenue week over week by 10, 15%. So what did you do to convince investors and why did it go so well?

• 11:59Speaker 00

  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, but 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.

• 12:42Speaker 00

  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. And 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.

• 13:23Speaker 00

  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. And 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 offered to invest, which you 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, CEOs and founders of PayPal and Stripe and, you know,

• 14:09Speaker 00

  Mint and Instagram and a whole bunch of amazing businesses. And it was great to have them be sounding boards. So 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, huge market. You know, industry is 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.

• 14:36Speaker 01

  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. Can you speak to like, when did that start and why has that sort of fun, design, sort of heart been important to you?

• 15:01Speaker 00

  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 space, our problem space, like we just really believed 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,

• 15:46Speaker 00

  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?

• 15:58Speaker 01

  During that time, you know, 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, growing like to small businesses and doing sales and getting them on board? 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.

• 16:24Speaker 00

  Well, Kevin is a friend from college and Instagram, I mean, he's an investor in Gusto. So 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 Stolman 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. Max 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.

• 17:07Speaker 00

  So we actually had plenty of, again, the folks I would have honestly paid money to, to give us advice and said they gave us money, but they also got stocks.

• 17:14Speaker 01

  Yeah, I felt fine for that.

• 17:16Speaker 00

  But like, no, we felt 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, right? They had all felt it. They're all founders and 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.

• 17:48Speaker 01

  You launched your first product when it's three of you in a house.

• 17:52Speaker 00

  Yeah.

• 17:53Speaker 01

  And you launched your second product when you have hundreds of employees and lots more investors and just like a lot more going on. Like, 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?

• 18:07Speaker 00

  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, you know, 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. And 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 a 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.

• 18:52Speaker 00

  These are existing Gusto customers. When they 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. And 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, um, you know, you still face the, the challenges of like, how do you allocate money in a company? How do you allocate headcount? Um, but the, 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. Uh, and frankly, there's other guesties focused on, you know, the other problems that we're solving.

• 19:36Speaker 01

  Especially 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?

• 19:57Speaker 00

  So I think when you're really, really early, you know, you gotta look at like the market. And like if, and this wasn't the case for Gusto, like someone has like 90% market share. That's definitely like trickier, right? Like, 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 we're somehow the only ones that saw the insight that you could build a big business here. So competition's 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've just got to make sure you have, you know, a strategy that's unique to you. And then, you know, beyond that, you've just got to execute.

• 20:41Speaker 00

  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, et cetera. And, and the rest, you know, works its, works its way out. I think it's, 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, it was, 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.

• 21:11Speaker 01

  So, 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 like pumped and excited to work on the company and with each other.

• 21:23Speaker 00

  We're early. We have some.

• 21:25Speaker 01

  Well, I, I, I think it's pretty unusual to see like the three co-founders actually stick at the company for this long. And 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?

• 21:39Speaker 00

  So 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. Like, 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.

• 22:23Speaker 00

  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. 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? And I'm really grateful to my co-founders for the important roles they play in the company.

• 22:42Speaker 01

  The number one thing everyone wants to talk about at the moment is AI. How, how do you think about AI impacting both Gusto's business and the product, but then also Gusto, the organization?

• 22:54Speaker 00

  We'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, you know, set of capabilities for a business owner that's highly personalized,

• 23:39Speaker 00

  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.

• 23:50Speaker 01

  Final question for me, just, you know, you're, you're past the first decade of Gusto into the second decade. Like, what, what does the second decade look like? Like, what, what do we have to look forward to? And what's sort of your vision of, of Gusto 10 years from now?

• 24:04Speaker 00

  Yeah, I mean, two stats I'll just share. There's about 550,000 new employers each year in the US. 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. Something we did announce recently, though, is a compliance hub, so just like a one stop. 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.