It's like go fix something, go make it better. I don't always do it. Sometimes I make something worse and I can learn from it. But I actually think people add a lot of language around this. To me, work is fundamentally about going and fixing or making something better for your teammate, for your customer, inside your company, for your business. Welcome to Divot, the community for people making their mark in the world, where each week I sit down with the greatest minds in business, tech, sports, and entertainment to uncover the moments, decisions, and lessons that shape their journey so you can shape yours. Go to divot.org to learn more. Subscribe on YouTube, Apple Podcast, or Spotify.
Divot. Today we're in San Francisco, the Gusto offices at Pier 70, the historic Union Iron Works machine shop where ships were built going back to the late 1800s. Now this space is home to Gusto, one of the most impactful tech companies serving over 400,000 small businesses in America. Josh is the co-founder and CEO of Gusto, the platform trusted by small businesses across the US to run payroll, benefits, HR, 401k, and everything else. Under his leadership, Gusto has grown from a startup to a multi-billion dollar company serving millions of workers while also earning recognition as a Forbes 30 Under 30 and a Fortune 40 Under 40. A Stanford trained engineer and recipient of the term engineering award, Josh has always believed in building for the long term. Before Gusto, he founded Unwrap. He worked in product at Zazzle and he developed a deep appreciation for the entrepreneurs who power local economies and communities every day. Hope you enjoy our conversation.
I mean, something that I've spent a lot of time on over the last 15 years with Startup Grind is trying to help people to start and run a good business. And I have had several of my own businesses fail spectacularly. I think it does boil down usually to what you said, like there's just there isn't a market or we don't have a great enough pain for what we're trying to get into the market.
Maybe distribution is hard, but it does seem like if we could figure out how to even if a small percentage of these small businesses, if we could help them actually get out of that sort of into orbit, it could has a chance to really change the whole country.
Yeah. And I think there's a framing of this compliance regulatory burden. There's a negative part to that and if we can abstract it, that negative goes away. I actually want to highlight some of these rules and requirements are actually very intended to help the small business.
So tax credit is a good example, right? Tax credit usually depends on the program, the goal, the objective. We can talk about R&D tax credit for example. It wants to encourage companies to think outside the box, try something new, different, create a new process, create a new technology, create a new product type. There's a set of definitions there. But if you think about it mechanically, what it means is you have to fill out forms and documents. You need to have certain types of data and reporting and then the way the credit comes to the business is often through a payroll impacted kind of offset process. So if you're a bigger company, this is what happened historically with something like an R&D tax credit. A lot of the intent behind those programs was to help small business. It was larger businesses that had the accountants on their team could pay the expensive fees to go set up and run those processes and they benefited. Well, surprise surprise, that wasn't who it was super intended for. The small business owner that's super time-strapped, doesn't have any time, might have heard about this, has no time to go explore it, definitely can't pay an expensive expert to go do it for them, didn't even try. And so, again, that's actually one of the products at Gusto. It happens to be an area we're really excited about. If we can take the data from payroll, what we have about you as a customer, assess your eligibility, and then automate some of that form filing process. This is actually like money coming back to you to spend and invest in your business. And even some of these programs, I'll give you another example, 401k, like retirement benefits. There's carrot and stick, right? These are pre-tax dollars. That's already an intentionally designed program to help someone have more money set aside for retirement. Even if whether the employer matches or doesn't, it's about how to go get that person to go plan for that future. A lot of states now, I think over 20 states have passed rules where if you don't as a small business set up a retirement benefit, you're going to start getting penalized and fined. So government will always think about carrot and stick and I'm not running government. I have no kind of say in this. They're just going to keep doing what they do there. Our job is to go minimize the stick pain but amplify the carrot kind of opportunity on any of these product lines.
If you were put in charge of the small business unit of the American government, what would you change on the first day?
I mean, let's see. We have an amazing policy advocacy.
Sure. I'm sure they're great.
Named Steve Abby. He does a great job. He'll have a very cogent answer. I mean a year ago when I was visiting to try to bring some data from small business to government we were really focused on tax credit and how it had been blocked due to some I think it was politics that's now been unblocked. So a year ago I would have said let's go get tax credit working for small business because it actually does put money back in their pocket in a very constructive way. Like how do you streamline the way and this is a maybe the pipe dream part of it but like federal, state and local do not coordinate whatsoever. It's like entirely part of how the country was formed, right? States rights are a big big thing and I have no statement on if that's good or bad, but that's just part of the fabric of America. But in many ways for a small business owner, especially if you're in multiple states, it's like the US is 50 countries, not 50 states. And so that complexity gets pushed into the small business owner especially.
Yes. I don't know again exactly how to solve that because of the history of how this country and this government functions but there's a lot of redundancy overlap mixed messages that creates confusion for a small business owner. Do most small businesses operate in a single state or are they operating in multi-state?
So with the pandemic, the trend grew. You have to also figure out is it full-time employees, W2, contractor. I don't have the stats up in mind on if it's majority or not, but definitely more companies now than ever before are multi-state.
Yeah, I've experienced this problem and I've dealt with paperwork in all of these states and it's and also things like the 401k. 401k is interesting because it's one of these benefits that has this outsized value in employees minds too. Like I can think of many times where we've done these what we thought were incredibly generous benefits on any sorts of different things stipend for this or stock grants or something and it's almost no response. You kind of as the business owner you sort of wait and hear like is this something people care about? Is this something they were going to talk about? There's a couple of things over the years that have really had a huge impact. One was like this discount we did for cell phone bills. It was like overwhelming. I probably got like 50 Slack DMs about it. This is amazing. And it cost us almost nothing. 401k is another one. We're just like overwhelmingly people are excited about it.
Well, and I would say especially again small business and a lot of small businesses they don't even think they can do things like a 401k, right?
And why not? Well, because it seems like a big company thing. There's paperwork process. There's an administration cost or there's a assumption of the amount of cost it'll be to set it up and run it. And so part of that is just like bursting that bubble.
Maybe it was historically, but like it doesn't have to be that way if software is a big part of how we deliver. And so we can help a very small two three person business with a 401k today. Gusto 401k officially launched last Thursday. And it has a big impact on the employees because like you know it's different in a tech startup. We give equity to every one of people that join Gusto. Their retirement is going to be most affected by the appreciation of Gusto stock they own. But for most small business owners, they're not giving equity. They're not giving stock. They're not in a company that's going to have the value growth 10x, 100x, a thousandx, and they benefit. And so setting aside money actually is really really important whether it's for retirement or for their kids college tuition in the future or even just for a rainy day. Like that's one of the products at Gusto I love the most is you can just set aside some money from your paycheck for having a savings account, right? And if you already have one, fantastic. But if you've never done one, it can be dead simple within a couple clicks, 10 bucks, 50 bucks, whatever from your paycheck set aside. And then if something happens, you know, have that money to tap into versus having to go to overdraft fees or credit card debt or payday loans.
From the outside, watching Gusto as a customer and as a fan of yours and the things you build, I kind of have seen it as like this very just sort of steady growth. I mean look at this incredible space where we are and you have other offices and other spaces for your team but I sort of contrast that with some of these companies that we see just like and maybe maybe you can correct me maybe your growth has been just as steep. I don't know if that like could you talk about the intentionality of how you grew and in what way you grew especially because you could just try to boil the ocean and take on compliance and the sort of payroll and all these things across the whole world. You didn't do it that way. How did you think about managing your growth?
Compliance is a piece of it. What we do has to work right from day one. But I'll be really clear. Our goal and here's my mental model is to grow as fast as we can with three checks and balances, right? So like there are millions of companies out there we want to help. There are hundreds of millions of people that work at those small businesses we want to help. Like every day that someone who I know could help, we could help could benefit from using Gusto is not on Gusto like partially pains me, right? So what are those three checks and balances? One, the quality of our product, right? Like if our product quality were to degrade, right? That is a good reason to slow down and make sure that we're maintaining that accuracy, reliability, compliance because of what we do for our customer. Two would be unit economics. You know, we're here to build a multi-decade business, right? How much we pay to acquire a customer, how much we pay to service a customer. There's a lot of tech startups that have bad business models and somehow think make it up at scale. That can work, but that to me is gambling, right? So, if we're going to build for decades, like when you're early on in learning, great. You know, experiment a lot. But if you're going to be in scaling mode, have really good gross margin, have really good CAC payback. So if those were to degrade, that's a good again check and balance on how to grow more effectively. And then the third would be Gusty experience, right? If I don't think this is that complicated. Hopefully any company can relate to this. If you start having a lot of your team quit or be unhappy, right? That's a negative feedback loop that something is wrong. Go fix that. Right? So we want to maintain, we have goals against each of these areas. Retention, product quality, unit economics. If we're within those bounds, we want to grow as fast as we possibly can. But it's not at all cost and it's not with the goal of highly volatile outcomes. It's with the goal of we're going to build for decades. And if we can compound at a fast clip and maintain that quality, then we'll actually build a business we're proud of, too, not just a big business for the sake of it.
What are the checks and balances you put around product quality?
There's a bunch that are pretty clear. I mean from a leading indicator lens we can track things like tickets coming in, customer complaints, any issues that might have arrived through an action that we took. It could be a tax filing, a tax payment. There's also the aggregate stats like NPS and if you would promote us to someone else. The biggest way Gusto grows is through customers recommending us, right? So NPS isn't just like a vanity metric at Gusto, it's the primary driver of how we get new customers. So there's metrics by every product line. There's also the kind of broader NPS type metric. The end of the day simplest outcome is does the customer stay with you? Right? So do they churn or not? And if they're churning because something went wrong that's a really valuable feedback loop of fixing that thing, making sure that thing doesn't happen again so other companies don't face that challenge.
On the profit metrics, how have those changed over the last two or three years coming out of COVID versus what they were before or have they always been the same?
So, if gross margin and CAC payback, how we acquire, how much we cost to serve are strong and they've been strong at Gusto since 2014. By definition, the company should be able to be free cash flow positive. Now when you're subscale which we were in 2014, 15, 16 we have raised venture capital money and we use that money primarily to fund R&D not to fund the business model but to fund R&D to build more product faster. So we launched small group health insurance in 2015, right? We would not have been able to build that team, build that product purely off of the cash flow from payroll because we were still too small.
Yeah, but once you get to bigger scale and you know we're at much bigger scale today like the company has been free cash flow positive for 3 years in that range and we reinvest that money back into building more product, improving our product, growing our market. But you know that to me feels logical if you're going to be at the scale we're at like you should be generating free cash flow and then reinvesting that back into your opportunities. You shouldn't be dependent on outside capital again. Maybe a different ballgame if you have huge capex or AI companies that have huge infrastructure cost. For us, the cost is paying our team and we pay them the bulk of what we bring in to go build and deliver these products to our customers. When you see the way some of these AI companies are growing right now. I mean, there's a company that went from zero to 250 million in ARR in a year and you have others that this concept probably when you started this business and I started mine where it's like, hey, if you can triple triple double double, you know, you're killing it. You're one of the best companies in the world. Now that's like completely thrown out the window. Do you get a feeling ever that like shoot we need to grow faster or how do we speed this up or you see what someone else is doing and you're like that the goalposts have changed now how do we adjust or can you just kind of stay with the sort of long-term vision and mission that you're talking about?
So I think first off we are going through a massive paradigm shift from how people use and build software and technologies. So I mean my question when I meet a founder is like have you created something useful? The metrics for that are pretty straightforward: create something useful, the customer pays you for it. So sometimes I'll talk to people and they want to spend a lot of time on pricing and I'm like, well, if you haven't created enough value, then someone's not going to pay you what you want to get paid. But a lot of these newer companies are creating real value. They should get monetized. They should get paid for. I would just really look at the unit economics. How much are you spending to acquire? How much are you spending to serve? Those are great. Fantastic. Look at the retention characteristics, the net dollar retention. Look at if it's really truly recurring versus transactional or one-off. And it's an amazing time. There is a paradigm shift underway. Like we are excited, you know, in the next yearish we'll pass 10 percent of employers in America being on Gusto. Our goal is to get to 20, 30, 40, 50% of all employers in America on Gusto. Like, well, we're going to do that in a compounding way because I'll be doing this for the next 40, 50 years probably. So, you know, it's grow, but then grow in a way that's going to be repeatable, repeatable, repeatable, not just a one-off growth rate.
You expect this to be the last company that you found?
I mean I absolutely do not plan to start another business. This is what I hope to spend all of my working life doing.
The cool part is if you are in a market and it created enough value for your customer, there are so many related pain points like we talk about today wanting to help grow the small business economy like literally to change the growth rate and the number of small businesses in America and the world. If you look at the pain points that get in the way of that today, we have so many new products to launch, so many different product areas to build. We work with businesses directly. We work with accountants and bookkeepers. Like the fun part, if you're going to do something for decades, it's not the same product only in the same business. We have people joining the company. We have leaders that I have a chance to work with who three years ago I never would have had a chance to work with, but now they're joining because they're excited to be at this stage in this platform. So sometimes people wonder how do you do the same thing for 30, 40 years? I mean, you know this very well, like if you're a fast growth, high potential business, it's different every single day.
And I think of it, if you want to use a metaphor, as like a set of mountains, like there's infinite sets of mountains in front of us that just gets steeper and steeper and steeper. I don't want to go back to the beginning. I like that we've climbed a bunch of mountains so far to get where we are today. They gave me a chance to look at the next set of mountains ahead of us and tackle them, but you only kind of climb one mountain at a time, right? Like for us to get to 10 billion of revenue or 100 billion of revenue, we have to pass the milestones before that.
I love the idea that spending decades on anything. And this is something that I have tried to do and think a lot about and the compounding nature of learning something so deeply and being with a pain point for so long, it can blind you to some new innovative things that come. But also you start to learn things that and I find myself sometimes in the things that I may be an expert on sometimes getting frustrated with people who are just looking at it for the first time and not seeing what I see very obviously and then I have to kind of catch myself and say look dude like you've been working on this for so long like it may be obvious to you and also maybe maybe you're scarred in a way that is not the way the problem needs to be solved today. Maybe different from how it was solved years ago, but there is something really incredible about just and in an era where people are switching jobs and switching opportunities and switching problems as soon as the first recruiter hits their inbox.
I think both concepts we kind of codify them in our values if I'm following like productive discontent like we want to get better every day, right? That's about growth mindset, curiosity, but like every single thing we do we know we can get dramatically better at. So we want to be curious. We want to experiment. We want to learn. We want to never accept the status quo. We want to think about what's changed, whether it's external, internal. We want to talk to the customer obsessively and figure out what is still difficult and painful for them and how do we go solve that pain. So there's a piece there that is all about kind of I say a lot like I'd rather be busy than bored. I'd rather be impatient than complacent. Like that's a really important energy at Gusto for how we improve. And I mean for me as an individual like everything is brand new right like I don't have the historical knowledge on anything I do everything is about first principles approach it sometimes naively without the historical context that's led to a lot of our best ideas but then we also want to complement it by bringing in folks that do have expertise and I think companies that skew too much one way or the other is a problem like we have folks here with decades of work in healthcare decades of work in tax credits decades of work in 401k or retirement benefits. That is important. But we also have a lot of Gusties who have never worked in any of these industries, founders included, and like approach every single product area feedback as a kind of well, let's learn, let's understand not what was done before, but like what's the real root cause issue we're trying to solve here and how do we take away a lot of the BS and baggage that has got in the way in the past.
I only want to work with growth mindset people. I'm too old, too tired to work with people that aren't willing to just move to a new place personally constantly. It sounds like this is a hallmark of people you try to hire here. How do you filter for finding people or discovering if somebody is a growth mindset kind of person before they get inside the company?
So we try to go through like case studies, examples and their work history. So obviously these days a lot of the discussion on every job function ties to AI but you know the key is not someone coming in and saying I have the answer it's how they've approached it right so you can ask literally anyone today how do you use AI in your work and there's a broad spectrum of answers right but like an answer that's in the vein of I went and experimented I saw something and I wanted to figure out how it worked and when it became challenging because every single story I've heard from people working with AI including at Gusto is initially it's difficult. It doesn't always work. It's not what you totally expect.
But then you persist. You iterate. You experiment. You try a different prompt. You try a different tech stack. You try a different set of different components. And then you get to some big step change improvement. Again, if it's someone that's in a nontechnical area, it could just be literally using a tool, but you're looking for that mindset of someone saying, 'I did it this way. It might have even been working, frankly, but I wanted to figure out a way to do it better.'
And then, you know, back it up with examples, back it up with tactics, back it up with if it didn't work, what you learned. And did they give up when it was hard, right? If they gave up when it was hard, that's a big flag. Because growth mindset is all about relentless, just constant trying, trying, trying. And that's the point. That shouldn't be tiring. That should be fun. It's really fun to try things in new ways. And I want to iterate, tweak my schedule, how I think about productivity, where I spend time, how we make decisions. Like those are all things you want to just constantly get better at forever.
We see this with non-engineers. Whenever a non-engineer says that they've been experimenting with the vibe coding tools, even if they've had no experience with it whatsoever, I always kind of perk up and I'm kind of like this person's I mean they're being used by a lot of people now, but even still there it's still this barrier of like ah it's maybe not for me.
Yeah. And you see that and then with engineers we find it's been really interesting to see the evolution of engineers. Some who really bitterly fought against the AI in the beginning and now some of those same people are the most strongest users the most productive in AI engineering users that we have. I don't know. Some of it feels organizational where we're having to really really make clear that this is important to us as leaders and some of it is people that are just naturally curious and figuring out themselves. How is it here? Do you find that it's people driving it? Is it leadership? I think it's all the above. Like high level we think about encouraging and then hiring for and rewarding a mindset of experimentation, curiosity, experimental thinking, but like it's not for the sake of it. Maybe that's another chat that we have at least maybe you do too. Like these are tools. Like you don't use tools for the sake of using a tool. It's to go make something easier, faster, simpler, improve the customer experience. Like we have a chance to use a lot of these technologies to make Gusto 24/7 in all surface areas solving any and all pain tied to you as a small business owner. Like that's ambitious and if we can deliver on it, that's a lot of value for the customer. So I'd say the biggest advice I have for anyone maybe struggling with some of this transition as a founder is when you talk to your team ground it in how the customer is going to be better right and like if the customer can be better off if that individual now can prototype faster and talk to the customer quicker and show them something useful you know 10 times faster than before you're actually going to deliver a better product experience and then sure there might be a process to go validate that make sure that it's fully you know if it's in the compliance face following the rules that you have inside your system, but speeding up that iteration speed is only going to lead to a better product experience.
What's bringing you the most joy right now?
