We all love to be paid, but anyone who has used payroll software has likely had a bad experience. This is true for employees and is definitely true for business owners and HR staff that run payroll.
Payroll software is not new. In the SMB segment, ADP and Paychex are the dominant vendors with approximately 20% market share between them. With a combined market cap of $89B, this suggests that there is a massive market opportunity to capture the 80% of small business owners that either don’t use payroll software or use a smaller provider today.
Founded in 2012, Gusto looks poised to be the next market leader in SMB payroll. I met the founder & CEO of Gusto in 2013 back when I was running finance & corp dev at FreshBooks. The company was known as Zenpayroll then. They were small & scrappy, but Josh impressed me from the beginning as being on a mission. This is particularly important if you’re trying to do something that matters in SMB because it’s a huge market and just takes time to win.
Since then, Gusto has been on a pretty wild ride as evidenced by their fundraising trajectory and the corresponding growth in their enterprise value.
From humble beginnings, Gusto has gone on to raise $ 316M and is now valued at over $2B. This is only 3% of ADP’s market cap, but then again ADP had a 63 year head start!
Early stage investors often struggle with SMB as market citing churn rates and growth rates. The beauty of a product like payroll is that, as a customer, as long as I’m still in business, I’m likely to stick with it. As a result, churn in this category is likely lower than you would see for less mission critical products. And while we don’t know Gusto’s growth rate, we can assume by this funding that it’s pretty darn fast.
One of the best proxies for assessing growth for private companies is to look at their headcount. As you can see, the Gusto team has grown significantly.
They went on a real hiring spree after the Summer 2015 funding round and have maintained a steady pace since then (with one small correction along the way).
Headcount gives us a way to estimate revenues. Applying a range of $100K — $200K / person suggests that revenue could be between $59M and $119M. These would be pretty amazing numbers for such a young company.
At a $2B valuation, these revenue numbers imply the last round was done somewhere between 17 and 35 times revenue.
The point of all this is that Gusto reveals many lessons for how to build a market-leading SMB software company. In no particular order:
- Solve a massive problem: As mentioned at the top, no one likes using HR software, yet everyone needs to get paid.
- Pick a sticky category: As a small business owner, you NEED payroll. Done right, churn should be low and customer lifetime should be high.
- Do things differently: Many new software products are just new interfaces for fundamentally the same experience. With innovations like Flexibly pay (where an employee can choose how often they get paid), Gusto is completely reimagining the payroll experience.
- Focus on culture: From day 1, the Gusto team have placed a huge emphasis on culture. Little things like asking all staff and visitors to take their shoes off (and giving you cool Gusto socks…).
4. Really, truly care about the customer: This is the first thing I see when I goto login to Gusto:
Many companies think they can’t afford to offer great support to SMB customers. The reverse is true. You can’t afford not to! It’s the only way to keep them.
Putting all of this together you get a company with a very high Net Promoter Score. NPS is key in SMB. You can’t rely on paid acquisition alone. Unit economics rely on lots of organic acquisition. To me high NPS correlates very highly with high organic traffic.
According to Customer Guru, Gusto’s NPS is 75.
I don’t know where they are getting that data. If it’s true this is Apple territory and almost unheard off for SMB software.
As you can tell, I’m a fan of Gusto. In addition to using their software to run your payroll, they offer many lessons to apply in building an enduring, marketing leading SMB SaaS business.