Seven years ago, Gusto Co-founder and CEO Josh Reeves wasn’t thinking about how he could disrupt the payroll industry. He wasn’t really thinking about payroll at all, he told Karen Webster in a recent conversation. He was thinking about the human brain.
“I was an electrical engineering student planning to get a PhD in neural prosthetics,” he said.
However, a funny thing happened on the way to that PhD, he noted: He founded a business. A lot of people he knew — and went on to found Gusto with — also started businesses. From that experience, they learned two things.
The first was that they’d all tried the existing solutions for managing payroll and found them both “frustrating” and not nearly as functional as they wanted them to be. The second was that they weren’t alone. In fact, as they dug in and did some research, they found that the vast majority of people running small businesses (SMBs) found payroll to be a rage-inducing, inefficient and expensive process — one that worked for almost no one.
“So, we saw there was just so much pain and friction — we started to wonder if we could fix this by just doing it a lot better. So, we came up with some technological principles around cloud-based, mobile accessible systems that are timed better, and developed a philosophy around the idea that we need to serve both businesses and employees, because everything starts with payroll,” he said.
Fixing The Fragmentation
Payroll already has two big-name players: ADP and Paychex. However, as big as they are, their market share is far less than most people think, Reeves noted, about 10 percent apiece. For about 6 million SMBs nationwide, the most advanced technology they are using to figure out payroll is a calculator — and it is not ending well for them.
“A lot of people — particularly in the one-to-100 market segment we serve — are doing this stuff using pen and paper,” he said, “and, as a result, racking up fines and penalties for calculating their payroll taxes wrong.”
Jumping in to serve that market is tough, Reeves said, but SMBs themselves, particularly in that small size, are highly fragmented. It’s well worth the service — since 98 percent of employers fit into that category, as does one-third of the workforce. It’s also a tricky segment to serve, he noted, because it operates much more like the consumer market than the enterprise market, and that means making inroads requires some doing.
“You can build the greatest product in the entire world,” he told Webster. “But then you still have to find a way to cost-effectively move it into customers’ hands or it doesn’t matter.”
For Gusto, it largely relies on organic channels. The company does dabble in some “performance-based search engine marketing,” he noted, and has started to dip a toe into radio ad, but all of that is a supplement to its word-of-mouth business, which Reeves described as the heart and soul of its promotion engine.
That word-of-mouth comes, he noted, because payroll is at the center of all the firm does — it has built some very big function around it. Health insurance is a big area as well, as it has licensed brokers able to both help firms set up their small group plans and employees manage those plans from their dashboard.
The next big bucket, he noted, is around onboarding and portability, making it easy for compensation plans to be set, and for workers who go from one Gusto-serviced company to another to port with them their “worker profile.”
But the third big bucket, Reeves said, is the one that pushes the biggest reaction, which is making it possible to optimize transactions around getting paid.
Customized Payroll
FlexPay, its product that allows customers to receive their payments before their bi-weekly payday, gives workers something they should have been able to access a long time ago: liquidity when they need it.
“I had someone recently comment to me that their child gets paid more rationally than they do, because when he is done mowing a lawn, he gets paid, while his dad has to wait for two weeks for his next paycheck,” Reeves said.
Being able to set their payment schedule to weekly, or to be able to pull out funds for every day that they’ve worked in a recent cycle, he noted, can make a huge difference to workers. It keeps them off expensive debt, like credit cards or worse, and they have data accessible to them that really no one else does.
Since Gusto is connected to the employee’s bank account, it knows when a worker was last paid and how much they earn. None of that is hypothetical to Gusto — it’s just data the firm contains. The customer who wants to be paid early, Reeves noted, is a very known commodity.
However, it’s not the liquidly of the employee with which Gusto is most concerned, but the liquidity of the employer. It’s the employer that Gusto is underwriting, to which the funds are being fronted so as to pay the employee.
The risk it is managing is that the employer won’t make payroll — which can happen. Unlike enterprise-level players, small businesses can disappear quickly, and firms can go bankrupt between pay periods. The employer that teams to suss out that risk, Reeves said, and Gusto’s rollout of FlexPay arrangements is still very much on a business-by-business basis.
That footprint is expanding, he noted, and is a core service that will eventually be part of supporting a larger constellation of financial management tools for workers.
“The early feedback on this has been amazing, because we are actually seeing customers shying away from expensive debt use and reporting much greater peace of mind because they have it,” Reeves said. “For us, what is really next is building out Gusto’s products so they are more active in giving recommendations on things, like saving and creating a 401(k) account.”
The goal, he added, is to help push customers toward greater “personal prosperity” and let them have better ability to individually navigate their financial future. Being directly connected to their payroll-income stream makes it that much easier to offer them advice that is customized and relevant.
What’s Next
Today, Reeves noted, Gusto serves about 1 percent of the payroll market — so the goal, unsurprisingly, is growth. To that end, the firm has just raised $140 million in a round led T. Rowe Price Associates, Y Combinator Continuity and General Catalyst. The biggest bucket for those funds will be R&D.
Gusto is also looking to both grow its geographic footprint and the size of firms it is able to serve. The one-to-100 range is big, Reeves noted, but Gusto is ready to service firms that are even larger and have more complex payroll challenges.
Other than that? Reeves noted that this funding round was unique in that Gusto looked for both private and public side investors, because it believes an initial public offering (IPO) is in its not-so-distant future, which means the time to start building those connections is now.
More than connections, he said, what Gusto is really looking to build is capacity — and to build an increasingly robust service that can be scaled to a wider range of consumers. It’s a lot to do, he told Webster, but for an engineer at heart, this is the fun part of the business.
“Fundraising is not the thing we celebrate. Having the ability via that capital raised, so that we can achieve our goals, is what’s worth celebrating,” said Reeves.