How Gusto Built a $9.5B Company with Co-founder Tomer London

0:03

Tomer, welcome to the show. Good to be here. So Gusto is about 15 years old. You're doing over a billion in revenue. You have over 500,000 customers. I'm curious... how the product has changed, how you build things inside of Gusto has changed over the past 15 years. Yeah, well, okay. Well, there is a lot that has changed for sure, but I'll tell you what did not change.

0:28

Because I think there is, in a way, that's kind of the secret sauce and the thing that really makes Gusto special, in my opinion. And that's just the obsession with the customer and understanding, building empathy towards the small business. Um, have a true understanding of how the day to day looks like understanding their pain points, then going and building real solutions for them to just build a better business for them to, you know, we talked about it earlier, right? Like everyone has an entrepreneurial side of them.

0:57

You know, some people, um, go and build, uh, to Some people go and build whatever, a baking business. Some people go and build something else. And some folks have this dream in the back of their mind that one day they're going to go and do it. And what we're trying to do with Gusto is to make that dream come true, like make it easier for folks to take that dream, take that idea, and then go and build a whole business behind it.

1:19

So, you know, when we build products, we start with really focusing on the customer. Now, I think, you know, I heard that expression when we started the company. So we started the company in YC. Yeah. my combinator. And I remember talking about like, hey, it's so important to focus on customers. Don't forget to focus on customers. I remember just thinking like, it sounds like such an obvious advice.

1:38

Like, how can you not focus on the customer? I also think it's hilarious. Like that's, it's become like a meme almost, but it's so simple and it's actually really hard. Exactly. So why is it hard though? Why is it hard? And I think, I think when you work at a larger company, you kind of understand that because what happens is, you know, you launch something or you build something could be like a pricing, you're changing your pricing of your product, or you're developing a new feature or you're, you know, building a marketing.

2:02

There's so much going on inside the company that, that just distracts you and takes your mind space every single day that you just, sometimes the, the, the kind of the prioritization of the time that you end up spending on the customer just goes smaller and smaller and smaller over time. It's kind of like, you know, think about it as a small business, right? Like if you're like, let's say, you know, you're selling, I don't know, like you're selling lemonade in the street, right? And it's just you and you have your little lemonade stand.

2:28

What do you do? Well, you just focus on the customer all day, right? Exactly. But now you have a huge, now you, you know, 10 years later, look at you, you have 5,000 employees. And you're still, your lemonade business now is this huge, you know, industry, this huge, you know, you have multiple plants across multiple places in the country.

2:45

Well, what do you spend all your time on? The operations, right? Like the machines and the financing and the people and all that stuff. You kind of forget about the customer. So I think that's one thing that startups are incredibly, you know, have potential in is like, hey, focus on the customer, build a great product for customer. And then the challenge is how you do it, not just when you're three people out of Y Combinator or when you're just starting, but how do you scale it when you get to like 2,000, 3,000 people? Yeah.

3:15

Well, it's almost like at that point, your customer is the coworker that you're working with on your team or your boss or the vendor that you work with in whatever, like it's not the end consumer of the product in a way. So you still kind of talk to, you know, the quote unquote customer, right? But it's not the customer in the same sense that we kind of think about when we describe this.

3:41

Exactly. Yeah. You're not in the lemonade stand selling to the customer and asking them, what do you think? Is it too cold?

3:47

Or too sweet? You're inside the office talking with your coworkers about how do you make the next OKR meeting successful? Yeah. Have you been able to resist that? of getting pulled into that world like how do you guys stay focused on just building things that the customer that the the small businesses that run on gusto actually need i think it starts by just you know setting an example as a leadership team and just spending time with customers um and there's in the company like us with a product like us that ours that you know serves like again hundreds of thousands of small businesses and millions of employees you know, at this point, it's not that hard actually to find

4:24

a customer. I can walk around with a Gasto t-shirt and, you know, people do say hi. And like, they tell us, they talk with us or talk with me about their experience or, you know, on social media and things like that. So it's actually not that hard to find a customer and not talk about, you know, your internal resources and everything. So it's really just you deciding to prioritize that time.

4:42

And one thing that we do, for example, in our product meetings is, you know, it's a simple question of like, you know, raise your hands if you talk with a customer in the past week. And if you have not raised your hand, like you've got to, you're feeling some pressure here. Like, oh crap, I'm probably not doing my job here. And product managers need to, in my opinion, need to be the closest advocate for the customer.

5:06

They need to bring in the voice of the customer every single day to what they do, and they need to inform everyone. And then it's not just like, hey, a customer told me this, or hey, here's some research and 10 quotes and some data analysis. It's making it lively, making it real. But that's often actually taking videos, obviously with permission, or bringing the customer in the office and have them speak with your engineering team.

5:28

And it's incredible how, I would say, inspiring it is. for people across, no matter what function it is, to meet the actual customer and say, hey, I remember Tomer said that when we talked with him, and maybe let's go work and fix this because it's going to make a big difference for his life. It's super interesting, the whole raise your hand if you didn't talk to a customer.

5:50

You kind of put people on the spot. You force them to do it. When I think a lot, some of the bigger companies I've worked at, I don't know if I ever actually talked to any customer. Like I was just like a low man on the totem pole. Like my job was to update a spreadsheet or something. Like I was an intern and you don't actually talk to any customers.

6:13

And there's a whole different side tangent of like, you're just a cog in the machine versus at a startup. But also like, there's just no, there's no like structures and incentives around like, hey, make sure you guys are talking to the people that actually use our product every day. We start every, so we have an all-hands meeting every two weeks.

6:31

Every all-hands meeting starts with a conversation with a customer, whether it's a live conversation or like a recorded video talking with us about their business. Again, it's important not just to understand how they use your product, but also like how they live their lives, what's important for them, what are the big challenges, how are they feeling about the economy? Like you just need to be able to kind of, you know, be in their shoes a little bit as a part of this.

6:50

So that's just like one example. The other example is, you know, when you hire people, you need to see the motivation um around small businesses and you know it's interesting but everyone has something to do with small business you know whether you know you know someone who's running a small business or works at a small business or um or you know someone your family or just you just have a favorite small business down the street that you walk to and go get your coffee or whatever that is um people have small businesses in their in kind of as a part of their lives and what we're looking for when we hire people are people who are just genuinely interested in small

7:23

businesses in the entrepreneurial journey and you know um in kind of that day-to-day and that type of customer um you know these these are people that you know are are not mission are not like you know mercenaries they're missionaries they care about the mission they want to help small businesses succeed in the us so um that's also part of how you maintain that culture over uh over a long time

7:45

One thing we were going to talk a little bit about, about how Gusto has incorporated AI into the product to go faster. You have this thing that you made recently that you launched. It's called Gusto Co-Founder. Right. I think there was five people on the team launched in eight weeks. So what is Gusto Co-Founder and how did that kind of go launching this and why did you do it?

8:09

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10:20

We want them to be more successful. And as a part of that, again, we've been doing this for 15 years. And over the past 15 years, there's been a lot of new technologies coming in. And every time a technology comes in, you need to ask yourself, okay, cool, how does this enable us to solve the problem for the customer better, right? And AI is obviously a fantastic example.

10:37

There's a bunch of ways, right? So co-founder is one particular way, which is around basically a new type of interface with the customer, right? So we have capabilities and you have interfaces. Capability would be, for example, that we help people instead of building their timesheets for their employees, like in a manual way, you can click a button and boom, like us to already...

10:57

using AI, figures out like the optimal timesheets for you or can kind of rejigger things for you and things like that. Just like an example of a capability, an example of like an interface is co-founder. So co-founder basically is this idea of like, hey, what if instead of logging into gusto.com, you never needed to log in and you could just text gusto and run your whole you know, back office basically through, through texting.

11:23

So it's all on SMS, like iMessage. So we can do it on iMessage. You can do it on, use it on Slack. You can use it on WhatsApp. You can use it on, you could actually still log into co-founder and like text over there. But the idea in general is, um,

11:35

to have a new interface for Gusto that's based on text. And then what does that actually mean? Because there's so many things that actually text is not a good fit for. So with that comes a lot of, again, new kind of concepts. So for example, this idea of proactive messaging towards you, right? So, you know, in the old SaaS world, you had to log in, there's a navigation, you need to click on the right navigation items, like first navigation.

12:00

There's like multiple layers of menus to like find the one thing. Exactly. Primary, secondary, tertiary, you get to it, there's a modal, you got to do some work, save, you know, this whole thing. You know, but in this new world of AI, like, again, the concept here, the idea here is like, well, what if it was just, guess it was just a person, you can just text, hey, you know, change this person's salary, hey, run a bonus payroll, hey, pay a contract, or, you know, help me kind of figure out my time sheets and, you know, approving PTO.

12:29

So it's kind of like having a co-founder. You can be like, hey, Tomer, fix this thing that just came up. Exactly. And the sort of co-founder that's most helpful is not someone who's just sitting there waiting for you to text them, but rather they do stuff proactively for you and they ask you questions. What kind of stuff? So one of the things that we do, for example, is a co-founder wakes up in the morning and they're obviously within that kind of data center somewhere.

12:53

looks over your account and asks itself, okay, what can I do to help really, right? So it could be things like, hey, you know, you have seven PTO requests that you need to approve before this payroll. You know, those five look totally ordinary, so I'm going to approve it for you. But those other two, I need your input from. All that happens over text, right? So that's the sort of like experience, like proactive experience.

13:16

But it could also be something else, which is like, hey, you know, you know, payroll is going to run smoothly. We got your benefits. There's a new, you know, a new employee is joining. Onboarding is ready. So we're all good to go. But I noticed that you started hiring more and more engineers and those and but you're not claiming any R&D tax credits.

13:35

And this R&D tax rate is something that can save you $15,000 next year. You want me to go set this up for you? All right. Sure.

13:44

Sounds good. An extra 15K per person. Exactly. And again, that's the sort of stuff that if that co-founder was a human, you would say, ah, this is a pretty good employee, pretty good person on my team. I'm happy that they brought this in because I didn't know about it. I think you guys have some interesting data around kind of like AI adoption by SMBs.

14:04

Right. I think the number, you can correct whatever I get wrong here, but I think the number is like a 10% increase in AI, I think, exposure. I'm actually interested in how you define this, but that leads to about 2% increase in revenue every month. So

14:19

what's kind of the data showing you about AI adoption by small businesses? Right. I have actually a post about this. Okay. All right. So check this out. So in July,

14:30

the National Jobs Board came out and the economy shed 23,000 jobs. We lost 23,000 jobs in July, the US economy. Across the whole country. Which was major disappointment. There was a bunch of revisions downwards. But when we looked at our picture, again, small businesses, the picture was really, really different. There was actually net growth of 38,000 net jobs in July.

14:56

And that's kind of across every region, every sector, every company size and all that stuff. And when you look deeper, I think there's a good case to be said that actually AI is a big contributor to this. Because what we're seeing happening is that companies who, small businesses who end up using AI as they start their business, as they operate their business, they end up hiring more, they end up growing faster, they end up, you know, being more successful and more resilient.

15:21

So, you know, there's a case to be said here that, you know,

15:25

when you're a small business, AI can be like, you can get the impact of AI much, much faster. And for larger companies, it's just much more complicated to implement AI. And as a result of that, small businesses actually benefit tremendously from AI.

15:39

And, you know, we're seeing it in numbers, in the economic numbers. So that's pretty interesting. And I think you currently have about, I think it's like 9% of all SMBs in the country that use Gusto. And of that 9% that you see in touch, they added the 38,000 jobs that you said versus the 23 that were lost across the country. No, so what we do is we do like this economic reporting.

16:02

So that means statistically, we look at all the customers on Gusto. We look at specifically a representative set of the whole economy. We dedupe. And then from there, we project, you know, the basically economic numbers for the whole economy. That's the same way of like, you know, people do like serving methodologies in general. Yeah. You know, you survey a thousand people and that can tell you how the whole nation is going to vote for something, for example.

16:29

Sure. So the average small business, you're saying in general, was adding jobs. Exactly. And it's across sectors and it's across geographies. And again, with that additional set about, you know, kind of knowledge about AI, that's quite interesting. Yeah. I don't think people talk about this enough. Well, yeah, because I mean, a lot of people, I feel like kind of the headline is AI is stealing your job.

16:54

Right. Like that's kind of like the soundbite. Right. But it's super interesting in terms of if I'm an SMB, like if I wanted to hire a marketer or if I want to hire, you know, someone to do something, it's kind of like a fixed unit of labor and you need to like support someone's life. So you can't say, oh, I'll pay you $100. Like you kind of have to pay them more.

17:15

a livable wage, like a unit of compensation that they can pay for rent and housing and maybe they have a family. Yeah, these are serious businesses. If you end up using payroll and actually paying people, yeah, it's a serious business. You're responsible for a livelihood for your team, even if it's a team of one or two. Yeah, and so if you hire someone, even on the low end, because there's a lot of taxes and everything, you're probably committing $30,000, $50,000 at a minimum of cash outlay for the business.

17:44

Versus if you want to use an AI product to make some Instagram posts or something, you might pay $2 to get that. And it's not the same commitment. So the accessibility of using AI to increase your productivity is actually like... pretty interesting from that side of like, it's actually very accessible for SMBs who don't have a lot of capital to like test this stuff and use it.

18:09

And if it works, they'll make, they'll grow revenue, they'll get bigger and then they can invest more and spend even more either on hiring people or on more AI tools. I think, think about it as like two different profiles, two different moments. Okay. So first you have the entrepreneur who is, again, has this dream in the back of their mind.

18:26

They want to one day start a business. How can AI help them? Actually, it's super helpful. Like whether it's the compliance stuff, so registering your business, like much faster than ever before, getting a bank account much faster than ever before, paying yourself, figuring out like, you know, like kind of getting up, setting up and going.

18:41

Getting a website, much faster than before. Getting your customers through marketing, you know, automated marketing, posting, all that stuff, much faster than before. So again, like you, every part of starting a small business is now faster and easier to do using AI. So, so,

18:57

for that particular audience, great. Like we're making it easy if that's a funnel, right? Of like some sort of like what it takes from like just having an idea and an ambition to all the way of like, okay, I'm running actually a business. That funnel, we optimize it a little bit using AI, right? So that's first audience. The second audience is like, oh, you're already running a business, right? And then to your point, like if you look at all the different functions of the business, each one of them in a way is already being, there's a bunch of tools out there to accelerate using AI.

19:26

using AI, whether it's, again, it's like making marketing more efficient, so you get more customers, whether it's service, to make the service more efficient, whether it's upsell, additional products you want to sell to your customers. So I think also AI improves survivability. And I think that's why we're seeing it across sectors. It's not like a sector-specific thing.

19:46

It's not just, you know, like whatever, just tech or just HVAC. So are we going to see more small businesses? Cause it sounds like it's generally, it generally helps them. Like is there going to be almost like a resurgence of, of the small business across like America or across the world? That's what we hope. And that's what we're seeing.

20:05

Yeah. And I can tell you one thing, like that wasn't always the case that it was, I would say at this point, you know, they say the numbers tell the story of, you know, small businesses are becoming more and more important part of the economy, as well as I would say just the sentiment of like you're seeing small businesses around you. But it wasn't like this every single day.

20:23

I remember in COVID, for example, there was like one of the most, like one of the major newspapers, I think it was Wall Street Journal, read with this like headline front page was like the end of small business. Really? Yeah. Because of COVID, everything is closed. You see that picture, like everything's blocked with like whatever. So this was like a couple weeks into COVID type of a timing of this headline? Exactly.

20:45

And everything was shut down. And that was before the PPP loans or when people were talking about PPP loans. And, you know, that whole period, there was like a period of like at least called like nine months where lots of major like analysts and people out there

21:01

you know, where the consensus was like small business is going to shrink and shrink and shrink

21:08

because, you know, again, if you're a restaurant, how are you, It's kind of an obvious thing for a restaurant. People can't show up because they're stuck at home. How are you going to survive? And I'll tell you that this was one of the craziest moments for us as a company, not just because, okay, we all had to, like a thousand people now had to go work from home, but just like the very, very focus, our entire reason for existence as a company and our heart is focused on small businesses and how can we make them you know, successful.

21:39

And all of a sudden you see this headline in Wall Street Journal and you're talking with people and they're freaked out. So anyway, that was a difficult moment. So what happened... over the course of March and April, like externally with your customers, like inside of Gusto, like how did that kind of go just throughout the, like going into COVID, the depths of it coming out, what was kind of like series of events, anything interesting that was showing up in the data, like initially where you're like, oh wow, something is going on.

22:08

Oh yeah. Yeah, so what was like that rollercoaster of events? Okay, well, there's a bunch in there, but I'll say, okay. I want to hear all the events. When you can build anything, Amplitude lets you know how to build the right thing. Use human language to get complex answers about your products. No more manually selecting events or building charts or dashboards just to ask.

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23:40

We basically have an economic dashboard internally in Gusto, and we see things like hiring, we see things like wages, we see PTO. We really see how employment works in the world of small business in the US. And you saw the rate of terminations just jump to a rate that we've never seen anything even close really um the rate of new hires dropped to all times low by far like kind of like i don't know it was five or eight times you know worse than the worst times was this like by the end of march this was already showing up or even before that i was for sure by the middle of the year but i it's hard for me to know exactly when it was but like by june i know that we definitely

24:22

saw this so within like a couple months of covid it was like very clear in the data right exactly exactly okay And then we, you know, similarly, when we look at, you know, people's cashflow, you can see also, we can see like cashflow issues. We have access to understand that as well. So all the economic indicators were quite bad in those kind of first few months.

24:44

But it made sense. It's not surprising. It's not, you know, you open the data and you're like, oh my gosh, it was... You see this every day when you walk around, if you walk around or if you open the TV. So that's the first thing. Second thing is that as a company, it was a really interesting moment because, again, we were 100% in office and then we had to all move or go home.

25:05

So that's kind of work from home. That was interesting that we're not the only ones there. We were around 1,000 people, I want to say, at that point. So, you know, it's not a small company. change. But the other thing is we just finished the planning cycle. And again, sounds like a big corporate thing, but actually it's quite important. You basically decide what are the big efforts you're going to do this year? What are the new products you're going to release? Where are you going to put your energy as a team, right?

25:32

And then COVID happened. And we looked at this and we looked at the world and we just threw the whole thing. We just threw it out

25:41

into the trash can. And we asked ourselves, okay, what do customers need right now? And what customers needed when you spend time with small businesses is,

25:49

What they need is this guidance. They need reassurance. They need to understand, okay, so what's the playbook here, right? What's the playbook? You know, there's a national or actually a worldwide pandemic. What's the playbook? And there isn't the playbook. I was going to say, yeah, that happened very many times before. Exactly. So we try to build a playbook for it.

26:09

We try to say, hey, here are the things, you know, the best practices across all companies we speak with, across, you know, like our conversations with different government agencies. Here's the best resources available for you right now. Let's make it really, really easy for you. So, you know, there's a bunch of new, I don't know if you remember, but there was like a couple of weeks, a few weeks period where Every other day, there was a new regulation or a new type of program that was launched by different states or the government in order to try to help people get through this.

26:38

So there was like a furlough program. Like, how do you maintain people through furlough? There's like a tax incentive program to keep your employees. if you're a small business. And then there was the PPP loans. And each one of these, we went in really, really, really seriously. And we actually changed our, we talked about left navs earlier in the conversation, right? We changed our left nav, and the first item was not run payroll anymore.

27:01

It was actually COVID-19 and what to do with it. So you click on it, and then there was all these programs ready for you. We try to be super proactive, like, hey, listen, in your state right now, there's this new tax credit, click here. We're gonna automatically fill up the form for you, faxes for the government. Get the answer back and kind of make sure you got the, you know, the funding that you need.

27:21

And then with PPP, we spent incredible amount of time with banks in order to quickly take the requirements for the government and make money available for our customers. And I feel incredibly proud of that work because we were, I think it's, I think we were able to save quite a bit of businesses, quite a few businesses from shutting down.

27:43

It sounds like, so you kind of like productized a lot of these pretty complicated things that were happening and just made it as simple as possible for your customers to access and get to them. Instead of you going to the, you know, the government, the US government website, downloading a form, slowly kind of filling it, trying to figure out from your data, like, know um try to justify the size and like the impact of the ppp loan take that to your branch talk with a teller hope that they will do the right job and then you know wait until they're them kind of giving you a response and all that stuff like you can just like in one click we pre-filled all this information for

28:17

you there's a couple questions that you had to answer on spot you click a button and you know you you should get access to the pp loan very very quickly um so something that we're really proud of and interesting, like, you know, in product land, we use NPS a lot over the years and net promoter score. It's a number that we care a lot about more, less about like the actual number of, you know, in an absolute term and more about the the trajectory, right? And kind of the reading in terms of like, where's the momentum going? Up and down, obviously.

28:50

What are the comments? So people who are promoters to you, what are the comments and what do trackers say? And then also like segmented according to different type of customers. So that's how we use NPS. something really special happened. We didn't expect it at all, or in that respect, it sounds obvious maybe, but like NPS just jumped up to like, I want to say 88, 89, and stayed there for a very, very long time.

29:10

And by the way, in our industry, if you have a positive NPS, meaning like larger than zero, you're ahead of the curve. Okay. This is in... The payroll, the world of payroll and HR and all that. Well, NPS is very, very low. Augusta, when we started the company, like, you know, first few years was always, you know, and still today, actually, like our focus is in our where we're trying to get to and where we're what we call success is when we're above 70.

29:37

But all of a sudden, it jumped to like over 80. And when you talk with customers, you read what promoters say. It's all about like, hey, I noticed that you were there for me. You're, at that point, mostly a payroll product. But for some reason, you helped me finance my business through the pandemic. I didn't expect you to do that. That was really cool.

29:56

It shows you care. I think a lot of people, if you don't run a small business, you don't realize how hard the financing aspect is. I mean, a lot of times what happens is you're on the hook for you employ some people. You got to pay them. You have suppliers that you're paying. You have equipment that you need to buy. And then you have some revenue coming in from your customers.

30:16

But at the end of the day, if you're mostly selling to consumers in your community, you might have... If you hire someone on your team, like... that isn't, you really don't usually think about it as like a monthly kind of liability overhang. It's kind of like a perpetual thing. Like I have 10 people, I need to make a million dollars a year to pay them and keep them on, on my team.

30:40

And then you also maybe have, I got this big order. I got to order all my stuff for the year. So it's another like million dollars. You might have like a couple, you might have seven figures of like cash outlays that you know is coming. And then suddenly when your revenue goes to zero, you like, that's, that's huge. So if you can say like, Hey, we'll help you offset that.

30:59

We'll help step in there for you. I think that's, I could see why people were so, so in love with gusto after that. And you know, the interesting thing of like how the world of, of product and kind of, you know, I guess creative work happens in some ways that, you know, you don't know, like it's very path dependent. So what does it mean? So this is the first foray that Augusto has ever had in basically called like lending, right? It wasn't our, it wasn't our money.

31:23

We worked with the banks as partners, but we kind of got into what you're saying, which is this world of cashflow, like understanding what does it mean when, you know, you have to pay this team, but you don't have income to use that for payroll. And, you know, by getting exposed to that world more and more and like spending more time on that problem area, we ended up actually building a product years later.

31:47

It's called Payroll Bridge. What that's solved is not the case of the pandemic, of a new pandemic. But what that solves is something that happens all the time for small businesses, which is like, okay, I need to go pay my employees this Friday and I have this awesome customer that's going to pay well more than you know what i need to to pay for but unfortunately they're going to pay me on monday yeah i'm going to get paid on monday or tuesday the company gets paid on monday tuesday but i need to pay for on this friday so what do i do am i going to tell my team that they can't they can't you know like go and do their groceries they can't pay their rent because they can't

32:20

it's technically illegal to not pay payroll or something there's like a lot of like laws of course around like of course yeah i remember like that was a big deal i think with svb right when svb happened it's like it was on a payroll week right yes where how did that go inside gusto were you guys using svb or exposed to it anyway yeah we're not we would not use svb exclusively so so what we did is is at that moment um we had we had multiple banks the whole time that we use for payment processing so if one bank goes down like the other bank is something that we can rely on and You know, that's exactly why you built resilience for cases like that.

32:58

It's not that I knew that SVB is going to go down or anything like that, but more like, you know, resilience system, you want to have like multiple. So no, it did not affect us as a processor. However, some of our customers were banked with SVB. So then when they, on Wednesday, had to go and say, okay, I'm going to go pay my employees, run payroll, you know, there's no bank.

33:20

There's no bank to pull cash from. So, you know, so they obviously, you know, if we did not step in to help them, they would not make payroll for their employees. So what we did is we reached out to, we identified all these people ahead of time, all these companies ahead of time, we reached out to them. And we actually, you know, we researched and we understood that this is a temporary issue and it's going to be probably resolved in the next few days or a week through like the acquisition of the bank or whatever kind of ends up happening.

33:46

So we knew that, you know, that those dollars are there. They're just not accessible right now because of the whole SVB collapse situation. So we ended up extending credit for them. Basically, we paid payroll for them. We reached out to them. We told them, hey, you're an SVB customer. You're impacted. We're going to be make, you can run payroll safely.

34:06

We're going to make payroll for you. And we're just going to debit your account to get paid back next week. That works extremely well. I spent, you know, several days on the phone with customers, like one customer at a time, calling them and kind of a lot of people were very, very worried about it, obviously. So we went and helped them do that.

34:22

And I think that there's a couple of kind of big learnings here, I think, which is, You know, if you're building a social network for dogs, it's okay then maybe not to have redundancy. Yeah, yeah, it's fine. You know, like it's going to be annoying if like your service goes down for a few minutes or even like two days. Like your dog is trying to check their phone and they can't like their other friend's dog's post.

34:47

Like, oh, it'd be a little unfortunate for the dog. Exactly, exactly. Donors are going to be pissed for a little bit, but they're going to forget a week later. Yeah. But if you're running financial services, if you're moving real money, if you calculate people's taxes, you know, Redundancy is the name, and system stability is the name of the game.

35:04

And that's really, really important to build it. And in fact, you should build it, I think, in a way that's so resilient that you can resell it later. Now, whether you decide to do it or not is a business question. But I think when you build an internal system where the bar is, hey, this needs to be good enough to be its own product on its own, that you think about things differently.

35:23

And that's what we ended up doing as well.

35:26

We have a business called Gusto Embedded where we actually take a lot of our payments processing, our tax processing, and we result as an embedded payroll product for large platforms like JPMorgan Chase uses it and US Bank uses it and Xero Accounting uses it. There's a bunch of other kind of business platforms that offer payroll that's powered by Gusto.

35:52

And in that way, kind of like the AWS thing, right? In that way, you can really ensure that you have an amazing internal system if it's truly at the scale of serving external customers. That's kind of interesting because you could say there's different lenses to look through that kind of product where Gusto should be going out and acquiring all these customers and getting them on your own platform.

36:16

is this good or bad idea to be like outsourcing it? Or you can also think of it as like maybe Xero or JP Morgan is now like a go-to-market partner essentially for the Gusto payroll rails. How did you know when it was like, okay, because you're basically saying like, hey, we were going to try to acquire these customers, but now we're like, US Bank is probably going to get them for payroll.

36:37

How do you think through that calculus of like, okay, this is probably the move to do? Totally. Yeah, yeah, yeah. That's a great question. So the way I think about this is, One, Gusto serves under 10% of the market today still. This is like Gusto customers? Gusto.com. Okay. Like small businesses. Only 9% of small businesses use Gusto today.

36:58

So there's 91% more to go. Okay. So, you know, it's a huge market. So this is like a way for us to go and enable, you know, small businesses to reach and use Gusto technology through other means. That's one thing. The other thing is small businesses, there's lots of different types of small businesses, lots of different reasons and ways of running your back office.

37:19

I think that some people are going to... Vertical SaaS, for example, is one area where I still think very highly of as a way for people to run their business. So vertical SaaS, this would be like if you're a bakery, there's a software provider that makes... software that's custom tailored to running a bakery. It does specific things that only bakers need.

37:46

And the payroll button, there's like a payroll button in the software, just like pay all your bakers or pay the cashier, pay the employees. Exactly, exactly. So, you know, if you're a spa and salon, like if you're a spa, business there's a bunch of those uh kind of vertical sass like vagaro is one of them for example and they have that payroll tab there and the payroll tab you run payroll it's using gusto um and there so so that's an example so there's a bunch of businesses i think out there that small businesses that will benefit from a business in a box um that and then they will need payroll in that box and gastos have to be that that you know that's going in the box

38:19

for them So that's how we're thinking about this in terms of like competitive, you know, landscape and all that stuff. The other thing I'll say is that Gusto is not just payroll. So this is Gusto embedded payroll at this point we're talking about. Like Gusto is, you know, way more than payroll at this point. We're really doing a bunch of things around like compliance of running your business, your HR compliance, your benefits, your, you know, time tracking, timesheets, all that stuff.

38:41

Like it's really all about, you know, I mentioned like, you know, cashflow, tax credits. So there's a bunch of things that we're doing way beyond payroll. So, you know, I think every business can decide how they want to run their back office. And it could be through one of our partners, it could be,

38:57

you know, through Gusto. And then By the way, again, the market when we started had, since 15 years ago, right, had, you know, ADP and Paychex is the biggest payroll companies out there.

39:12

They still exist. They're still doing really well. So that's quite interesting, right? Like, so again, there's, there's, this is a very, very large market. So there's a lot, a lot of different, there's room for a lot of products. And so, like, talking about back when you started, so what was running payroll like if, like, when I think it was called Zen Payroll? Right.

39:33

So Zen Payroll doesn't exist. How am I paying people? Like, because couldn't I just, like, go to the bank and say, like, just wire this money to this person? Like, what was so hard about running payroll? Yeah, that's a good question. Okay, so first, like, what is payroll and how is it different than payment, right? So, okay, payroll is not just, like, wiring someone money.

39:49

That's actually illegal to do if you're...

39:53

You know, it's crazy, right? The payroll means that you get somebody a proper W-2 at the end of the year, that you as an employer withhold taxes, that you pay the different government agencies in the right time. You do the right filings at the right time. So there's a bunch of kind of taxes. There's a bunch of compliance. There's a bunch of payments.

40:12

Could you technically do all that yourself if you were calculating it in a spreadsheet or something? People used to kind of do that, right? Yes, you could. And then you'd have to go get the W-2 filings and fill them in also to match the spreadsheet? Exactly. So the IRS has a fax machine you can use and

40:30

the fax number you can use. You can print in your printer and fax things in. um the same thing you need to do for every state agency that you're that you are employing people in so you know even if you have only one employee like in a place like new york or washington state like um you may have four different agencies you need to report um on a quarterly basis on an annual basis you need to pay them sometimes on a weekly basis depending on your pay schedule So it gets complicated really, really fast in the US.

40:56

So that's why payroll companies existed. We didn't invent payroll companies. But when we started, to answer your question, the way it worked is that, and this is like, it's a fun story. So my co-founder Josh actually has this story where in his previous company, he wanted to kind of go set up payroll to pay himself and his co-founders.

41:18

And, you know, you go to their website. Obviously, there's nothing you can do on the website. You could just call. So, okay, you call. Then you get a person on the phone. And for you to go actually pay yourself, you actually need to meet a salesperson in person in a random coffee shop in your area, in your neighborhood. It's like a dude in a suit with, like, a briefcase.

41:36

A dude with a suit with a briefcase that comes with a big stack of paperwork, explains to you, like, asks you, like, basically onwards to the payroll, asks you all the questions about, you know. in the coffee shop live in the coffee shop like josh does not drink coffee so the the rep bought him like a hot cocoa so imagine a founder of a company sitting down with a hot cocoa with a rep of the other person sitting there for hours and hours and hours instead of uh you know and he's like dude i have all this work to do why am i sitting here with this guy yeah um but uh that's how that's how it was just to set up so you had to meet the person and you know then if you had the

42:10

Fill out the paperwork. You can't obviously pay someone on the spot. It needs to go to the headquarters and takes a couple of weeks to go. And then every time you need to run payroll, you need to call in the hours. Really? Or if you're a techie, you can fax

42:26

the timesheet. Wow. So that was kind of how the big companies worked. There were a lot of small kind of mom and pop kind of payroll processing shops that did similar things, but maybe gave you even more of a warm kind of day-to-day kind of number to call and ask questions about HR stuff as well. So these are kind of local payroll bureaus.

42:47

But that's how it looked like. I know today it sounds insane. um i remember my first big corporate internship i had there was like a payroll room oh yeah there's like four ladies who ran payroll all day yes like that's all they did and anytime i think i definitely had to go like talk to them a couple times which is usually like i had different hours or something i had to like change something i had to like literally go and tell them like hey this number is different now or something yes and this is probably i mean there's probably like couple thousand people that worked at the company and we literally had four payroll ladies yeah yes and one of the craziest thing about

43:24

payroll i think is what's the cost of a mistake um what is it if you if you if you're late You can get sued, obviously. Like in terms of like the wire going to the employee? Yeah, if you didn't pay your employee on time, you can get sued, can take down your business. These are really important, you know, rules and regulations in order to protect the employees.

43:51

They make a lot of sense. Yeah, I'm assuming there's probably times throughout history where just people just straight up didn't pay their employees. And that's obviously bad. So, like, let's get some laws in there. This thing is so important that there's literally verses in the Bible explaining what are the terms that you should be paying employees.

44:06

Really? Yes. Okay, so this goes back to the beginning of humanity. Think about how important it is. Like, it's about like, hey, you know, if you hire someone to do a job for you, like, you should pay them on time. Yeah. That's like, it's kind of like the stuff societies are built on. Yeah. Right? Well, like, why would I work for you if you're not going to pay me? Like, that's kind of how it works.

44:25

That's a part of the contract. And here's the other thing that people don't think about, which is like, what happens if you don't file your taxes correctly as an employer, right? So... Imagine, you know, you paid an employee and then, you know, the payroll company or you made, just put the wrong number in the wrong box in like some sort of a quarterly filings.

44:45

That's, you only figure out the mistake, that mistake. Sometimes, sometimes it takes a year and a half for you to learn that you made a mistake. Why? Why does it take so long? Because you put it in a, let's say you put it in the beginning of the year. It's only in the end process, it gets processed at the end of the year when you do your W-2.

45:01

And that's actually more than the end of the year because it's like April, right? Or even later. And then that employee gets that in their W-2 and they're like, okay, that looks good. They go, they file their taxes with it. And only then it can get discovered. So, and then by the way, that employee at that point may not even work for you anymore.

45:18

So the government comes back to you and say, hey, you made this mistake and you need to go fix it. And here's the employee that's impacted. And you need to go and find that employee and tell them, hey, they're now moved. They're in a different part of the country. And you're responsible to make sure that they know that they need to fix. Here's your new W-2, the W-2C, the correction for your W-2.

45:37

And you need to refile your taxes with it right now. So these things are, you know,

45:43

are incredibly complex and the repercussion of an error is very, very high. And I think that's, One of the things that I think software could be really, really, really good at is ensuring accuracy,

45:59

precision, reliability over the long tail for many, many, many types of customers. And that's why we spend so much time building our infrastructure. That's why we build our embedded business. That's why this is something that we're just absolutely insane about in terms of

46:14

the reliability of the infrastructure that we build. You mentioned that you can, you know, it sounds like a lot of faxing of stuff. And so, so like the, probably like the average listener of this podcast is saying like, I've not used a fax machine. Like some people probably be like ever. Yeah. Right. So like, why is that still going on? Like, why have we not made better tools? Like why is the government some of this stuff? Like, why is it so outdated? Yeah.

46:41

seemingly yeah so the the the story of the us a beautiful story one of the parts of it is the fact that it's incredibly like one of the principles that how distributed things are and how you know localized things are right um so you have um tens of thousands of localities from a payroll standpoint really um is this like a county is its own it's a county based in some in some states it's a county based some states it's it's a school district base Yeah, that's true.

47:08

You'll sometimes get these like just weird, like a couple of dollars deducted on your W-2 for like the city district, school district or like special interest district or whatever. Exactly. So you have like, like streets in the U.S. where at the end of, you look at the end of the street in the cul-de-sac and you have three neighboring homes and each one of them has a different set of tax codes.

47:28

Really? Yes. And so those all might work at the same or different companies that then need to figure that stuff out, right? When they're paying. Exactly. So I need to know which side of the street you are on in order to know how to calculate your taxes correctly. So that's kind of one crazy kind of payroll fact. Another crazy payroll fact is some of these localities are so small, they don't have like, you know, big robust systems or something like that.

47:47

It's literally a... a person who was working in the office. And, you know, there's like a new resolution that was passed by the town committee about like a new tax or kind of a new thing we're gonna do differently. And, you know, that person now updates the town and the way they update the town is they put it on the bulletin board and maybe there's like, you know, puts it on the local newspaper.

48:12

how are you supposed to know as a small business who employs someone in that particular, you know, call it like county, but this person is the kind of working remotely or something like that, right? How are you supposed to know that? So what Gusto does today, and it's not just getting, I talk a lot about the infrastructure and the software, but there's also a lot of operations involved.

48:31

And like, these are, these are, for example, people who've been in the industry for decades, and they know to call that lady, they know their phone number.

48:40

to ask her how her kids and grandkids are doing and then ask her, did anything change recently that we should know about as a payroll processor? And then we bring it and update our software with that. So you asked about faxes. I answered about like, hey, it's actually much more than just the faxes. It's like these kind of- It's literally bulletin boards.

48:57

It's literally bulletin boards, but that's the sort of stuff that we love doing because it saves the headache from the business owner to figure this out. And it gives them peace of mind that they don't need to know all this random shit. We got this for them. Yeah, I know your dad ran a clothing store for like 40 years. I mean, maybe that's an outdated number.

49:19

He's still running it. Yeah, he's still running it. So yes, I guess that would make now, yeah, over 40 years. This was back home? Yeah, in Israel. Okay. What else did you learn from your dad? Like anything specific about running a small business? The biggest thing for me is the many hats that small businesses wear. And, you know, I think society right now for many, many, many people built in a way that kind of feels so structured and built for you.

49:47

So in other words, you graduate from school, you decide you want to be um you know what's your profession and many professions have sort of career ladder and you go from like one thing like you know an analyst to like a uh you know an associate and whatever that is and then maybe you do like a master's like whatever that is like there's kind of a career ladder the same thing happens like in so many professions not just like in um you know in a few and um all of this is obviously made up it's all made up because um In the end of the day, what matters is serving the customer, right? So the company created all these, the companies created all these ladders in order to build

50:21

an organization that ends up actually on the other side of it, you know, supporting customer. But when you're a small business owner, you don't have any of that stuff. What you have is yourself and you need to figure out how do I get customers in? How do I finance my inventory? My dad has a clothing store. So how do I finance my inventory? How do I sell? How do I know what to sell so I can get more of, right? How do I price things? A new competitor moved in.

50:44

How do I deal with that? Yeah, he's undercutting me or better product maybe. Exactly, exactly. Different product. And then, you know, taxes are changing. How do I do that? Like, again, the interest rates goes up, but all of a sudden I can't afford these, you know, the cash flow here. These are all things that, again, business owners need to think about.

51:01

They need to protect. There's a bunch of ways of doing this, so this is not new. But you, as a small business owner, need to think about Every department, everything. You hire a person and there's all these different teams. There's a marketing team, there's an inventory team, there's a fraud team. It's literally just you. You're a team of one.

51:21

Exactly. That's how you start. Now then over time, you obviously do build teams. And if you get really large, you do build these career ladders and all that stuff that we talked about. But the most incredible and inspiring thing for me about um you know entrepreneurs builder business owners business operators is this point that there is no walls between departments it is this this you and you need to you need to figure out how do you serve the customer and build a good business and grow it um and you know if you did it great you get the reward if you if you failed you're out of job

52:00

that's beautiful i think i mean yeah that's i mean that's kind of like the beauty of capitalism in a way and then if you if you did fail I mean, especially in San Francisco and Silicon Valley, like people like, oh, you built this thing. You did like, well, come work for us. Like, so it's like, there's almost like a, there's a little bit of a safety net.

52:17

Maybe that's not the right way to describe it, but like, as long as you're like ambitious and. Yeah, I think here's the real, so I agree with you in startup world, but like in, in kind of real world, like SMB, small businesses, um,

52:31

Like, the entrepreneurial dream is the safety net. Like, enabling, having us as a society, as a, you know, as a country, as a state, making it easy for people to start businesses, that is the safety net. Again, and that's why you see so many immigrants, for example, start businesses. It's not because, you know, like... You're not being forced into starting a business.

52:59

Like, you want to. Exactly. It's like your dream almost in a lot of cases. And often it's really hard. Like if you're coming in again from a different culture, I came from Israel, you're coming in from a different culture, it's really hard to get a job. It's really hard because you don't know how to say, you don't know that there's so much nuance in culture.

53:15

There's so much nuance in language. There's so much nuance in you know, in like

53:19

the workforce, I would say, one country over another, that, you know, having the opportunity to start a business helps you, you know, actually show your worth out there and create something valuable and provide for yourself and your family. So, you know, I think the safety net is that. And by the way, what's the opposite of the safety net is when things get harder, if, you know, if we as a society make it harder for small businesses to start and to people to go on their own.

53:43

And I think that's something that we should always be you know, very mindful of, like, you know, how the rules and the regulations that we put down as a society, the culture that we do, that we have, how that enables, does that enable entrepreneurship or not? Are there any cases where we're getting too close to that going away? Like, do you feel like there's anything we need to be cognizant about? Like, hey, we are maybe limiting entrepreneurship in some cases.

54:14

I think... There is a gravity for just, you know, government democracy regulation, where it's very easy to add and it's very hard to remove. You know, it's very easy. Like, it's very, very, very, so we call this like the, you know, it's a different type of inflation, right? It's a regulatory inflation. So that's, again, one of the things that, going back to Gusto's mission, government's going to keep regulating.

54:45

They're going to keep adding rules. It doesn't matter which party. It doesn't matter which side. That's kind of, you know, lawmakers make laws. Yeah, I think there's some chart that just shows a number of laws or the length of the tax code. They always just go like this. They just go straight up over time. Yeah, exactly. It's kind of like, you know, in software engineering, you know, the kind of level one way of being part of your work is to count like how many lines of code you added to the code base.

55:13

But the level two, the true, you know, people who are kind of, you know, deeper in, you know, understanding the architecture often like actually get much more excited about removing lines of code, you know. And it still works or works better maybe. Works better and like more, you know, easier to read, easier to use, easier to, you know, reuse.

55:32

Yeah. So, but we are in a place where there's going to be, I believe, regulation, inflation, we're going to continue. So then that's where technology companies could come in and help. I think the nice thing, again, about technology is that we can take all these rules, all these regulations you throw at us, and, you know, we work really, really hard to codify it and, you know, build robust systems around this.

55:52

So you don't need to worry about this stuff. Yeah, it's like almost your role, the job you're serving for your customers is removing the complexity, removing the navigation of all the laws and the regulations. Like, you don't want to all comply. You want to do them all, but it's really hard. Exactly. So there's the, and also one more thing, there is the, the, all these regulations also come from a good place, you know, no Senator or like, you know, uh, you know, government, you know, official comes in and say, I want to ask, I want to make it hard for you to start your business.

56:24

No one, you know, it always comes from a, from a good place. Um, So there is the one part of it, which is, as I mentioned, like making it easy to navigate all these rules and just, we just do it for you. So don't need to worry about it. We just, it's just done for you. But there's the other part, which is like, actually, there's a bunch of these, you know, programs, government programs that are really helpful for you, but they're so complex.

56:45

that it may be hard for you to actually take advantage of them. And as a result of that, only big companies end up having access to it because they have whole departments to read the tax law and the tax code and figure out how to get those. So again, the example, you know, I shared earlier is like, you know, tax credits, right? So there's all these, you know, different types of tax credits.

57:04

There's, you know, dozens of them. Every state has their own flavor of it. And they're all coming from a good place. Like, hey, you know, did you... Did you hire a veteran? Great. There is like some incentives, tax incentives for that. Hey, did you, again, invest in research and development? Great. There's a tax incentive for that, you know, and so forth.

57:22

There's a bunch of these. So we help you find those opportunities and then go and do the filings for you so you can get the benefit of these programs and not just, you know, leave them for the big companies to enjoy. Yeah, because in theory, there's a lot of, if I've just got a, know lawyers on staff they can just spend all their time where like the tax professionals like i mean the same company i was mentioning earlier that i worked at there was like a tax department we had i don't know there was like eight or ten people it was an international company so again like an smb competing against selling international with someone who can maneuver around a lot of that stuff

58:00

easier like it just gets really tough I think probably one thing I thought was kind of funny was basically the one piece of advice your dad gave you was like, never start a company. Don't start a business. But you did. So what's the story of actually starting Zen Payroll back when, I think it was like 2012? Yeah, yeah. How did it all get started? So I was like, Josh was in the coffee shop with the sales guy filling out the forms.

58:26

Like, what the hell going on? Yeah. Yeah, so...

58:32

So yeah, my dad gave me that advice of like, you know, son, whatever you do, don't start your own company. Just go work in it. It's somewhere that pays well and, you know, take care of your family. And the reason is like, again, where he came from is just incredible amount of stress of, you know, like it's just so many ups and downs in running the business and not knowing if you can make next payroll and not knowing if you can, you know, you'll survive basically.

58:53

Is he able to use Gusto? Are you guys in Israel? No, we're not in Israel. So you can't use Gusto yet. Um, but, um, he, so, so I think that kind of mental thing is something that was very instructive for us as we started the company, because we understood that we're not just building a business tool. We're trying to build a partner for the small business owner.

59:13

And the different, if you think about like the, the place it's in your brain with like a partner versus a tools, like a tool is something that you're responsible to do it correctly. Here's a hammer, like make sure you don't, you don't hurt yourself with a hammer. But a partner is someone who is like, helps you take stuff off your plate and like, and gives you some sort of reassurance.

59:28

Like, hey, you know, I got this for you. Gives you that peace of mind. That's what we're trying to do. We try to do it like, honestly, since day one, if you go through our user experience in the early days, the way we wrote the copy, the way we built, you know, proactive moments in the application where, you know, we remind you of things or, you know, ask you of things just when you, just when we absolutely have to.

59:47

And then we speak to you as a human and not as a, you know, like whatever data processor. Yeah. And there's like hearts in like fun graphics and the UI and stuff makes it feel a little more like you're, you know, it's like human, like kind of personable. Yeah, that's some of the visuals involved. But I would say, you know, there is a bunch of just user experience components around like, you know, how do we only ask you the very, very few, like the fewest questions possible in order to get the job done.

1:00:15

And then every time we introduce... If we ever introduce a new concept for you to know, we treat you respectfully and talk to you like a human to be explaining it very, very, very well. So we assume you're not a tax expert, but you're, again, you're a small business owner. You're now walking from your desk to the bathroom. And during that, you're trying to, those one minute walk, you're trying to pay a contractor, right? So how do we do that for you? So it's really, really easy to use.

1:00:43

So there's a bunch of these kind of user experience. We can talk about user experience, like principles and all that stuff if you want. But that was a huge innovation for us. And it did, this user experience innovation, and it did come from thinking about, you know, our small businesses, how their lives are doing, how their day-to-day looks like from an emotional standpoint.

1:01:01

And we wanted to be in a place in their lives that gives them relief and even like a smile to their face and not just like, here's another cold tool that is, you know, whatever, you know, powerful and efficient. So now, by the way, the good news is that that language about having a partner that's on your side and an assistant and all that stuff is like, oh crap, we're now in the world of AI and agents.

1:01:23

Like this is exactly the time for it. So we're super, super excited about this because this is technology in a way that we were always waiting for. So, you know, we're building a bunch of these, you know, experiences now that really do feel like you're talking with someone that's kind of the agent experience with co-founder and some other stuff.

1:01:42

But, yeah, that's kind of the story of like some of the inspirations to sing the emotional up and down that my dad has. And then, yeah, how we started the company, you know,

1:01:53

I came in from Israel. Were you in school at the time? I was, uh, yeah, I came here for a PhD program at Stanford, um, in electrical engineering. I had a startup company back in Israel and we talked about my dad already. I was all around small businesses. I started small, small businesses like that kind of world was, you know, was kind of my, my world.

1:02:13

And I was lucky to meet Josh and then Eddie, uh, as a part of this kind of Stanford community, wider community. And, uh, we connected on that small business experiences connection. And we looked at the software and, um, uh, kind of the world of software in general, we all were entrepreneurs. We built companies in the past. So, you know, we wanted to build something together.

1:02:34

And it's this obvious, there was this moment that was kind of felt obvious to us, which is like, hey, there's so many companies that are technology companies that are focused on consumers. So many technology companies are focused on enterprises, but in small business, for some reason, it's a huge market, but there's just not a lot of success stories there.

1:02:51

What's going on? Do you know what the disconnect or the issue was? Like why weren't there at the time? I did not know it at the time, but like my explanation by seeing the past 15 years of this still being the case, I would say. although much better, but still being the case, is that often companies start, like software companies or technology companies start focusing on small businesses because it's easier, more available to them to kind of reach as their first set of customers.

1:03:15

But as soon as humanly possible, they go off market. Why do they do that? Because of ACB, because of the size of the deal. So you can make more revenue from those customers. So imagine, you know, you need to sell, you know, whatever you sell your, your CRM product for like a small business with five employees, you can make a thousand dollars a year, or if you sell exactly the same CRM, but for a 5,000 employee companies, like, you know, that 1,000 now becomes like 50,000 or a hundred thousand dollars in there.

1:03:42

And that's the same amount of work. but a hundred times more revenue. Exactly. Same software, same product. So

1:03:52

by the way, that means it's not just like more money coming in. It also means that it's now you like, there's just, there are just simple playbooks. So if you have a product that can sell for a hundred thousand dollars, software product that can sell for $100,000, there's a playbook that's very, very simple about, okay, what do you do now to get customers, which is, you know, you hire salespeople to go down and establish relationships.

1:04:13

There's, you know, enterprise sales and all that stuff. You know, there's a whole playbook with, you know, how do you market to these people, target lists and all that good stuff. But it's well done. It's something that's been done many, many times before. And there's a playbook for that. For small business, not as much. By the way, consumers on the other side, there is also a playbook.

1:04:31

And that's obviously, you know, mass marketing and all the good stuff that we learn, you know, from,

1:04:36

you know, from just consumer products over the years. But small business is kind of weird. It's in the middle. You don't make as much money as enterprises so you can put salespeople in the street, right? But you also, there's not that many of them that like a billboard is going to, you know, in a marketing company, it's going to get you a bunch of customers.

1:04:53

It's kind of just in the middle. So that's why I think, yeah, There hasn't been a lot of companies that stayed in small business. So how did you approach just getting people to start using it and scaling it up? What's the trick? Because you cracked it, it seems like. Yeah, so the thing that I think we realized is to think about the small business owner as

1:05:23

a single decision maker. Um, so that's like more like feels like consumer, but on the other side is professional. So that feels more like enterprise. So you took like an, an element from enterprise, which is professionalism of decision-making. This is not like a emotional decision-making of like, I prefer purple over green for my, whatever, for my, uh, iPad cover.

1:05:42

Um, But it's professional, it's considered. But on the other side, it is also a single decision maker. So it doesn't have the complexity of an enterprise deal where you have like 10 different departments that all need to align on the strategy and getting a budget and all that stuff. So it's kind of like a consumer that's making a decision that will improve their business or something.

1:06:02

There's an objective behind it. Exactly. It's an objective decision that's done by someone who feels like a consumer. Okay, so what does that mean actually? So what it meant for us is that is the whole name of the game is word of mouth. And to make word of mouth successful, like you really need a product worth talking about and a product that people really love.

1:06:25

So our thesis to start was like, hey, we're not going to be able to afford salespeople walking down the streets in order to go and sell our product. The way that we're going to be, you know, we're going to grow is have incredible customer love. I mentioned that NPS of over 80, over 70,

1:06:44

Small businesses, they do talk with one another and they do recommend products to one another. And then that's going to be really the engine for growth, just referrals and word of mouth. And that ended up being the right hypothesis and that's been working really well for us. And it's not that we haven't added scalable marketing around it and scalable sales processes around it.

1:07:06

Of course we did. Because, you know, it works. Like, you know, if you take a product people love, you also, you know, go show up on Instagram or in social. Like, guess what? You just sell more of the same product people love. You add a salesperson who gives you a call to help you, you know, finish onboarding. That works. You know, it's positive for the business.

1:07:24

Great. But like the core of it is customer love. And you have this concept of minimum lovable product versus any of the other ones, minimum viable products, like what most people think. So is there a difference between those two of like minimum to get it out there and then minimum of like the customers actually love it and recommend it? The problem with minimal viable products is that often they are...

1:07:51

You get a product out there that works, but when the customer sees it, it solves their problem in a very, very, you know, called like a local way and not thinking end-to-end across like, you know, the whole user experience. So in other words, it's like often minimal viable product is focused on what is the smallest product we can ship in the shortest amount of time that checks the box of saying we did the thing that we said it's going to do.

1:08:20

Okay? The problem with that is that sometimes you launch a product like this, you're proud that you were able to ship it quickly, and then people don't use it. And you're like, okay, I guess this was not a good product idea. Let's throw it away. It doesn't work for us. Because again... Did you run into that issue at all? Like you tried something and it was minimum viable and it just didn't work, but the...

1:08:40

pushing it over the edge to minimum lovable. Suddenly it was like, oh, this is amazing. Honestly, we kind of went with the minimal lovable product since the beginning. Oh, really? And it's because of, again, this point that I made earlier around like for Gusto to grow, for Gusto to get new customers, we had to have people love the product.

1:08:56

So you can't launch anything that's not lovable. It's very, very, very important to do it lovable. So, okay, so what does that actually mean, right? To be lovable? There's kind of three parts to a great user experience, in my opinion. The first part is that the thing works. It solves the problem, right? You're trying to get your employees insured, let's say health insurance.

1:09:14

Like the health insurance works when you go to the doctor, right? And you can kind of enroll quickly and all that stuff. That's called like kind of the functional side of things, right? The second is intuitive. So what does intuitive mean? Well, if you're a small business owner, the bar for intuitive is very, very high because again, small business owners and us normal people are not experts.

1:09:33

You might be doing it in like a minute. Just make sure this click a button and it works. I know where to go. You don't need to watch videos to understand how you work. You don't need to read like manuals. It's just like very, very intuitive. You go and you say, I want, you know, I want to get health insurance. Great. Here's the options for you.

1:09:48

Um, here's what it means. And then, you know, we go and you kind of get, get, um, you know, um, get the health insurance for that you need for your, for your, for your, uh, And I think for that kind of, these two things already kind of clear the bar for a minimal viable product for the MVP, right? But to really get to the minimal lovable product, that's kind of where you add the last piece of the puzzle, which, you know, I would call just delightful.

1:10:12

So what makes a product delightful? What makes the user experience delightful? Well, it's something, it's a product that anticipates your needs, right? It's a product that just looks at you and already knows, hey, you know what? You know, I know this is the first time you're getting health insurance. So, I'm going to assume that you're not sure which healthy choice is right for you.

1:10:28

So I'm going to proactively tell you, hey, companies like you in your industry, in this area, usually offer this sort of benefits package, right? Because they would be looking that up probably like on the side while they're signing up. That's exactly right. It anticipates the sort of problems that you have, the sort of questions you have in your head.

1:10:46

It tries to answer it for you already without you going and looking for like the last now, find like where is the tool for like benefits comparison, right? That would be the MVP approach. The MVP approach is like, okay, great. Let's build a benefits comparison tool, like a benefits benchmarking tool. And there's a tab somewhere that you can go and find it and click on it and you see graphs.

1:11:03

That's great MVP. But how does the customer know how to find it in exactly the right time, right? So that should just be a part of that strategy. minimal lovable product that's all about like helping you, like the headline of the product is not health insurance, but rather, you know, help you find and get health insurance for your employees.

1:11:21

And that includes that obviously important point, which is like help you figure out what package to offer. and then how has AI enabled you to incorporate more of that into the product because it's probably you can include more things or like move faster or something like how has that changed yeah so there's a bunch of places but I'll say okay so a couple things come to mind so first just understanding the sort of questions people have in their minds like you can Now, every PM at Gusto, every engineer, every designer can just go to Claude and ask our data questions about our customer behavior, customer questions, everything anonymized, of course.

1:11:58

But you can ask- This is like internal, like amplitude type of dashboard data, or this is like usage data inside Gusto? So you have access to all the comments from our NPS surveys, all the comments from our, you know, different customer feedback surveys, things that our salespeople, our customer care people write down and like the actual like, you know, transcripts of the kind of conversations, again, everything anonymized.

1:12:24

And then you can go in and ask, hey, you know, when people ask, when people start the, in this example, people are trying to get health insurance, what questions do they usually have in their minds? And Cloud can go and kind of help you find those things and start this research for you. It used to be that this is a research question that you would need to come up with.

1:12:42

And then, you know, like either you do it as a designer, PM, engineer, or you get a user researcher to go and kind of recruit customers and go and kind of go through this process that can take weeks or even months. Now you can just like ask that question to Cloud. And that's kind of really helps you accelerate it. It's not the end, obviously.

1:13:00

The question is just the beginning of the work, but it can really help you accelerate. That's one example. And then the other example is like execution, right? You can just build much more than you used to be able to. So, you know, Gary Tan had this really great post that I really loved around like, you know, boil the ocean.

1:13:17

The often advice you get for product and design is, you know, don't spread yourself too thin, right? Don't peanut butter your roadmap. Like it needs to be really, really focused. And I actually really agreed with it for the longest time. But his argument, which I think is a really good one, which is like, if there was a time to boil the ocean, if there was a time to actually go and try to build multiple products at the same time and increase your ambition, this is the time to do it because it does make it much easier to build new things.

1:13:44

So I do feel like that's something we're seeing at Gusto too. Yeah, that was actually one philosophy of Sam Blond at Monaco, prior guest of the show. He's like, we're building this like all-in-one CRM, no point solutions here. Like we build every single feature. And it's because it just takes like a day to make the feature, like just make everything.

1:14:04

Like it's like the compound startup kind of philosophy of just build all these different things because, you know, it takes, again, it's like, just cloud will just do it in the background for a day and then it's done. Like, why would you not do that? We used to launch, call it like four to six major feature announcements a year. Um, we're not, we now easily do the same amount and call it like six months, like, like twice a year.

1:14:32

And we're well on our way to do it once a quarter. And I think once a month, like I think this is happening, it's going to happen. So there's no question about it. So you have already, we're already doubled the, the, the, the velocity of like just the pair engineer ability to get features out there, out, out and running. Yeah. And you think you'll be able to 10 or 12 exit.

1:14:50

I think we can double again and probably double again. Really? Yeah. And this is because using AI coding ships the code faster, and then there's a process of reviewing it and designing the features like it just happens quicker? I think it's the whole software development process. So it starts, as I said earlier, about researching. It's much, much, much faster to understand what the customer is issues are and the fine detail around it to then help you design a good product, right? So that's kind of the first thing.

1:15:17

You know, same thing with like kind of now coming up with prototypes to kind of make the fine product decisions. Then it's like actually shipping, like building the code for this and then kind of shipping and taking it outside to the world, even like kind of just like actually exposing the world to your new product and like telling the world about it and doing the launch and, you know, doing the experimentation, all that stuff is, is, and, and the reason I'm so confident is, um, not just because the models are getting better and better, but also just, you know, it's just like looking at Gusto, Gusto has many teams at this point, different teams are, have different, um,

1:15:47

you know, um, I would say, um, kind of strength in how they use AI and like different proficiency in AI. And there's just tons of opportunities. So, you know, and it's very clear that that's the direction where we're going. Oh, one thing I know you did recently, you made like a, like a kind of a big acquisition, like for the scale of Gusco.

1:16:03

It sounds like it was like, maybe like a little under 10% of the size of the company. It was called Guideline. The company you guys acquired. How, like, what was that? How did you approach it? Are you doing more acquisitions? Like, how do you, how do you think about that as a, as a company like Gusto right now. Yeah, yeah, yeah. OK, so we acquired Guideline.

1:16:21

Guideline is one of the leading 401 providers in the US, and they are very similar to Gusto, where they kind of say everything you said, like I just said about payroll in the past hour or so. Now, copy-paste it, but change it to 401k. You will hear the same thing from Kevin and their team over there. They really took this approach of building a delightful, easy-to-use product that's easy for the employee side, easy for the company side.

1:16:49

And they built it in a way that's extremely robust and scalable to, again, tens and hundreds of thousands of companies. So we've been partnering with them since they started.

1:17:01

Many of our customers already use Deadline, so that match worked extremely well together. Now, bringing the two companies together, same code base, same database, same application, it just opens a bunch of doors to even better products, whether it's like payment speed stuff, get your money faster, invest it faster. Whether it's things like, you know, just the integration, like you feel like you're all in the same mobile app, for example, as an employee.

1:17:29

Take your 401k with you where your Gusto wallet is, which is kind of the mobile app where you get paid in Gusto. So that is that acquisition that was very significant. But yeah, we're excited to do this. And I think the M&A is a very interesting way of just adding fuel to the fire of what Gusto is already doing. And I would just call it accelerating the roadmap that we already have.

1:17:58

And that's the bar when we think about, you know, companies to acquire and products is we ask ourselves, what is the acceleration value of this company to Gusto? So in other words, like looking at our roadmap, where does whatever that company has, where does that sit in our roadmap? And what would it mean for us if we make it, you know, bringing it now? That's how we figure out whether this is a good idea or not.

1:18:23

And so it's like, could we build this ourselves? Yes or no? How many customers do they have? What's the value of bringing that all inside of Gusto? It's kind of like an equation there where you decide if it's worth kind of pursuing versus not. Yeah, so everything is around acceleration, right? So it could be acceleration of the product roadmap.

1:18:43

So, hey, this is something we thought we're only going to get to in two years, but actually we'll be able to get it quicker, right? So what's the value of actually getting that quicker? By the way, with AI, now that equation changes because, well, we know we can build it, but maybe it wouldn't take us two years. Maybe now with AI, it's going to take us one year.

1:19:00

So the bar is higher, actually, on acceleration on product development. There's also, to your point, acceleration of customer base. So perhaps we're bringing in a customer base and we can

1:19:13

accelerate again at that point. And then there is the acceleration of go-to-market motions or talent that we bring in and all of that stuff. So that's how we look at it. It's kind of like there's two different values. There's the value to acceleration to gusto. That's one number. You can put a dollar amount on that. And then there's the other number, which is like...

1:19:31

you know, what's the valuation of this company if it goes out there and tries to shop itself, right? And those numbers have to align, obviously. You can't, you can't, but there are two very, very different numbers. Oh yeah. What's been the biggest example of like a contrast, like difference in, kind of like perceived and implied and or like market value of some of these things.

1:19:53

Like whether Gusto or other- So I won't give the name of the company, but honestly it happened multiple times. So, you know, we go and we measure the acceleration and, you know, we look into this and we're like, oh, this is a really great product. They built it right. The code base is fantastic. The team is great. this feels like it would be a really great match to Gusto.

1:20:10

You measure the, you say, okay, you know, it's probably going to accelerate us for 18 months, let's say, and then you come in with numbers like that's worth for Gusto, let's call it whatever, like $50 million, let's say. Okay, cool. So it adds enterprise value for Gusto, let's say $50 million. Okay, cool. Well, the problem is that these companies right now, you know, let's say they're, they're making $50 million as, as the revenue.

1:20:32

Right. So now all of a sudden you put a multiple on that, like, you know, whatever, wherever the market is, but like, it's not going to be one X, right. The company's growing. It's an AI company that might be worth like a trillion dollars. Exactly. Exactly. So it's interesting because if you're that founder of the acquired company, there's a very interesting dilemma.

1:20:50

Because listen to what I said. What I said is like, hey, it's the value of the company, right? And the code base for us is $50 million. The problem is that they make so much money. That's a problem, actually, right? In a way, it would have been so much better for us, like if it was gusto to acquire them if they only made, $5 million, let's say.

1:21:12

Because then it would be like a 10x multiple to get to the 50 and everyone's really, really happy from that. So that's just like an example of an interesting dynamic that we've seen multiple times where it's like the

1:21:24

business value itself, like the revenue, the value of the revenue to the acquired exceeds the value of the acceleration by us, which is the acquirer. Yeah. Cause then you'd basically have to be justifying like what's the valuation of the, like the cash flows and like modeling all that into gusto and like making sure that we don't want those that's revenue either.

1:21:48

Like we are excited about the product they build and like the code base and the team. And we want to bring that into gusto and we're good quickly using AI, make it available to all of our customers. Actually, I don't care at all about their $50 million of revenue because I'm not buying them for revenue. I'm buying them for the team and the product.

1:22:03

So that's something that's quite interesting. I think the lesson, there's no lesson learned. If I'm a founder, right, and I'm

1:22:13

kind of like listening to this and I'm like in this kind of series A, series B sort of stage, the lesson learned is still go as fast as humanly possible, build a great business. You don't want to slow down in order to get acquired. But it is just true that if you do want to get acquired before your next round, you should actually start these conversations quite early.

1:22:29

So the acquirer has a chance to look at you before your revenue basically increases to a place where you're no longer a potential target. Yeah, it's almost like the opposite, where VCs want you to grow as fast as possible, and you're just like, don't actually get that big yet, because it's not as interesting. Because the value to us is the technology, again.

1:22:47

We're not here to buy the business and the customers. Interesting. One last final question. Do you have a favorite founder or historical person from history that you just get a lot of inspiration from or have learned a lot from? Shimon Peres is one of the founding fathers of Israel. And he has this book called No Room for Small Dreams. And what's interesting about that person is that if you just understand his history, his biography, he went through lots of ups and downs of changes in kind of his politics.

1:23:18

But the thing that's inspiring the most to me is I think that in every single chapter, he always just like was a symbol and was a leader who promoted thinking bigger. Think bigger, think more ambitious. Again, no room for small dreams. His point is a lot of like, you know, it's as hard to make your small dream come true as it is to make a large dream come true.

1:23:41

So you might as well just like try to go bigger. And I think that is such a simple idea, but it's very, very powerful, actually. Very powerful. Yeah, I feel like it's one of those things like anyone can incorporate that in whatever they're doing, whether they're running a business, they're an athlete, like they're a parent, like anything.

1:24:03

Exactly, yeah. Well, this has been a lot of fun. I feel like I've probably learned way more about small businesses than I actually, I would say more than I would want to, but I actually like learning about small businesses. I mean, it's like an interesting part of the economy that not enough people talk about, so. They're the best. Yeah, this has been a lot of fun.

1:24:18

Thanks for doing it. Yeah, absolutely. Thank you. And thank you to this episode's sponsors, Numeral, Flex, Amplitude, and Monaco. If you enjoyed this, please like, comment, subscribe, and share this with a friend who's building for small businesses. Make sure to check out the back catalog of over 150 episodes with investors like Gary Tan from YC and Alad Gil, and the founders of companies like Robinhood, Sweetgreen, and Mercury.

1:24:42

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1:25:00

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