How the cloud-software startup Gusto won over investors and small businesses by breaking away from t

• Gusto, a software firm known for its payroll product, has grown profits alongside its customer base.
• Insider spoke to a Gusto cofounder and three investors about its winning strategy.
• This article is part of Enterprise Tech Blueprint, a series exploring the strategies leading-edge companies use to innovate and grow.

Joshua Reeves, the contemplative CEO of the cloud-based payroll startup Gusto, couldn't have predicted the pandemic and the resulting ripple effects that nearly savaged his business and the public markets.

Shortly after the lockdowns, many of Gusto's customers, from coffee shops to florists, had to close or defer payments, and the company's revenue shrunk. "No one had a crystal ball," Reeves later told Forbes.

And while the events of the last three years have tested the payroll provider in countless ways, Gusto now seems to be in peak shape. A quick-thinking team has launched new products and added others through acquisitions, increasing revenue by more than 50% annually through the Covid-19 pandemic, according to a source familiar. Gusto executives declined to share total revenue.

"They have for many years demonstrated consistent high growth with a very strong business model," Laela Sturdy, a general partner at CapitalG and a board observer at Gusto, said. While she wouldn't comment on the timing of a possible IPO, she said that with Gusto's discipline around balancing growth and profitability, "they'll be well-positioned when the time is right."

But for Gusto to find a warm reception on the public markets, it has to prove to potential investors it can keep up with the competition.

Made for small businesses

Founded in 2011, Gusto makes software that small and medium businesses use to manage their employee-related needs, including onboarding, payroll, health benefits, and retirement accounts. It runs on the cloud, so customers can collaborate with their teams and access their accounts at any time on smartphones or tablet devices.

Gusto's flagship product is a payroll system geared for companies with 100 employees or fewer and counts more than 200,000 customers. That's a drop in the bucket compared to legacy payroll providers like ADP and Paychex, which, according to company statements, have 1.6 million clients between them.

Still, tools for small businesses is a huge market — one that a tech industry that has focused on the more lucrative enterprise market has largely ignored. According to the Small Business Administration, there are 32 million small businesses in the US employing about 61 million people, nearly half of the country's private workforce.

Gusto's hyperfocus on small businesses sets it apart from other payroll providers, Shalini Rao, a growth-equity partner at Generation, an investment-management firm and a Gusto investor, said. As companies grow and chase larger enterprises as customers, they lose sight of the discrete needs of small businesses, she said.

Gusto now offers a suite of products and services adjacent to payroll, which Rao likened to a Trojan horse because it's how Gusto gets most of its customers. The startup hopped on pandemic-era workplace trends, adding products for small businesses to apply for government loans and for employees to access their wages between paychecks. It also helps customers register employees across state lines and pay international contractors, with the number of clients paying international contractors up twentyfold since the start of this year.

"From a product perspective, we're here alongside businesses as they swerve with every curve that comes at them, helping them thrive and ultimately grow. And when they grow, so does Gusto," Eddie Kim, a Gusto cofounder and the company's chief technology officer, said.

Gusto has also expanded through strategic acquisitions. Last year, it bought three companies across the tax compliance and remote work spaces — Ardius, Symmetry, and Remote Team — and it's indicated that those firms will continue to run independently. And Noyo, a startup designed to automate employee benefits, recently raised $45 million in funding from investors like Norwest and Gusto, which uses Noyo.

In this way, Gusto aims to be the scaffolding of the HR-tech stack, with services bolted on through acquisition and investment.

"We spent a lot of time and energy on building out our own internal-development capabilities. That has to be the foundation," Jason Green, a founding partner of Emergence Capital and a board observer at Gusto, said. "But then there were some interesting opportunities that came up that were adjacent but not necessarily ones that we would have wanted to distract ourselves internally."

Gusto has ruthlessly prioritized areas like payroll and tax-filing that small businesses need to run. But from the beginning, Gusto has "thought carefully" about not just the employers buying its software, but about the employees using it, Sturdy said. It offers retirement accounts and budgeting tools to help employees "live a better life," she said. And it could still tap into more consumer-focused products for employees, a massive category on its own, she said.

Setting a course for an IPO

Gusto has deep coffers — and a new chief financial officer from GitHub and Tesla — to go after its growth ambitions. It has raised nearly $700 million in total funding, according to PitchBook data, and hit a valuation of $9.5 billion in 2021. For comparison, Gusto's closest competitor, Rippling, also has $700 million in funding but is valued at $11.25 billion. The startup — Parker Conrad's second act after his previous firm, Zenefits, blew up — booked over $100 million in annual recurring revenue, according to a Forbes report.

For years, Reeves has said that selling Gusto is out of the question. He intends to take the firm public. Now it's a matter of timing. The window for tech firms to go public slammed shut this year. For instance, another large payroll provider, Justworks, withdrew its IPO filing in July.

But Gusto has years of runway and can afford to wait for market conditions to improve, Green, an early Gusto investor, said.

"I don't see any cap to the upside in terms of the market potential for the business, and you've got a team that maybe by the time this company goes public has got 15 years of excellence," he said. "Public-market investors — when they move from fear to greed again — will find this to be a pretty unique asset and opportunity."

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