How Gusto built a $9.5 billion company by identifying a burning problem

Brett: What were things like for you growing up?

Tomer: Yeah, so I grew up in Israel in Haifa. My dad has a small clothing store. He's been running it now for over 40 years. So so much of my upbringing has been after school going and helping in the store, whether it's cleaning or answering phone calls or organizing or selling, and I think that's many small business families are this way. It's a family affair. Everyone's involved. When you are sitting around the dinner table you talk about the day, my dad comes back home at the end of the day, you see in the first 500 milliseconds to see if the look in this face was a good day or a bad day. At the end of the week, it's about closing the books and looking at all the receipts and all that stuff. So I think the multiple hats of a small business and was just a huge part of my upbringing. I saw it in my dad, I saw it also, I have my father's dad, he also has a business and his sister also has a business down the same street, all clothing stores.

Brett: Do you think it shaped your desire to start a business?

Tomer: Yeah. Well, funny enough, my dad didn't give me much advice, career advice, but the one thing he did tell me is, "No matter what, don't start your own business because it's really, really hard." And in a way, I grew up with a lot of that I guess noticing how emotionally difficult it is. I had my 386 computer and it was early days, Windows 3.11, then Windows 95, Office 95 and you start seeing like, "Hey, for consumers, for kids at home, I can make PowerPoint. There's so many tools." Around when I was, I want to say 12, picking up a Visual Basic book and building an inventory management software. So I built it and it worked, it worked really well, saved a bunch of time for him. He ended up buying a computer for the store just to run it. So definitely that upbringing, that kind of connection with small businesses then gave me a lot of that push towards doing something useful when I started touching software.

Brett: What about if you just sort of reflect back on those childhood experiences? If you didn't do that, maybe you were more of a conventional kid and you were just playing sports and not doing-

Tomer: Right, yeah, yeah.

Brett: Do you think it would've made you less successful as a founder?

Tomer: I think the nice thing of trying things out as a kid or early or you're young is you kind of have very little to lose. I just had more at bat, so it helped me build confidence that I can start with a big idea without, I don't know exactly how I'm going to build this. I don't know exactly how I'm going to solve this, but I have a belief in myself that if I put a lot of time and energy and something can come out of it. I think you also learn about a bunch about your own limitation on the other side. One funny story is one of these projects, I was determined to finish some sort of piece of software by the next day and I was like... For some reason I was like, "I'm going to finish it by tomorrow." And I ended up that night drinking seven cups of coffee. I think I was, I want to say 17 or something and I got... I ended up almost going to the hospital, it was actually quite bad for me. So I learned, okay, seven cups of coffee, that's way too much.

Brett: Six is the number.

Tomer: Exactly, six is the number. And then I think it's the confidence, that's the thing that it gets you.

Brett: What was your path from there to coming to Silicon Valley?

Tomer: Yeah, so I came here originally 14 years ago now for a PhD at Stanford in electrical engineering. I'm Israeli so I can't just show up in the US, there needs to be a path and for me it was that student path, a graduate student. The reason I ended up, I came here was, there's three things that happened at the same time. They're all just inspiration. So the first one was the Steve Jobs commencement speech of 2015. I remember seeing that. That's definitely the YouTube video that affected my life the most. I didn't know where Stanford even is. I thought that Stanford from the name is actually in Britain when I saw it, but that speech is just incredible. He has that line around, "There's this moment that you understand that reality around you is built by people similar to you and you can change reality. You can kind of poke at it and make changes in it." That was just incredibly inspiring to me. The other inspiring story, [inaudible 00:04:23] Stanford for me was the story of Google, and Google founders and coming into PhD and ending up with a really great idea that ended up being really, really helpful for a lot of people in a building great business. And the third thing is actually I have, one of my best friends ended up doing a PhD here and landing here a few years earlier and he said, "Hey Tomer, you have to come here. It's really fun." I came in to visit and my first time in the US and so he was determined to convinced me to move here and I had a startup company back in Israel when I was doing my bachelor's in the [inaudible 00:04:55] and before that, as I mentioned a bunch of stuff in high schools and before, so I kind of knew that for me success and where I want to go is going to be something around building products that make people happy. I didn't know exactly what's the shape of it and I actually thought I'll finish my PhD and take some of those learning and maybe build a company off of that. But ended up being just really, really lucky meeting Josh and Eddie in my first few months at Stanford and then from there we started the company.

Brett: When you think about all of you being second time founders or certainly building multiple products in multiple companies and obviously the one that you spent the last 14 years plus building is an extraordinary business, a very, very big business. The other companies and products that you worked on did not turn into great businesses. Do you think those experiences helped you grow into the founding team that allowed you to build this extraordinary business? Or do you think there's a little bit of a luck element that you had the same abilities, but it's almost like you were drilling for oil and you were really good at drilling, but you randomly in your first attempts set up a rig in Connecticut and then in this what ended up being Gusto, you just happen to set the rig down in Texas and struck oil and that gave you the ability to sort of express yourself as founders.

Tomer: Yeah, I think to be successful you need to do a lot of things right and you need to avoid making a lot of mistakes. And then sure, there's absolutely, there's a lot of luck involved as well, being in the right place at the right time. I think having multiple founding journeys for me, having Josh and Eddie having previous startups, it helps you by one knowing how to avoid some mistakes so you don't repeat the same mistakes. So for me, I can give you a bunch of mistakes, we can talk about it, but helping avoid some of these mistakes is one. Two, is it kind of gives you some shortcuts to doing things correctly, doing things right so you don't need to do so much searching about how to do something because done this before. The last thing is absolutely, I think you can move faster in validating or invalidating ideas, but in the end of the day to strike gold, to get to that product market fit, to be the right team at the right time, there's an incredible amount of luck involved as well. So it's all these three things.

Brett: Share a little bit more about that, both some of the things that you and the team learned in your previous companies and then some of the ideas around some of the shortcuts that ended up being a part of your journey that you couldn't have figured out if you hadn't worked on other businesses before.

Tomer: So the first thing is around talent. I really think that, again, startups is this search for product market fit and for that you need a team that can stick together through ups and downs, have confidence in their way, and be very humble around admitting when things are not working. And I think that in my previous company at Vizmo, I wasn't smart enough to hire for that. I wasn't hiring for humility, I was hiring for raw intelligence and skillset. Like, "Hey, let's get the best software engineer we can find, get the best salesperson we can find," and so forth. As opposed to thinking about like, "Hey, no, we are actually a team together. We're going to go through ups and downs." And we should be able to sit together every Friday and say, "Are we on track or not?" And if we're not on track, we just move on and we give each other direct feedback and we're honest with to each other and we can stomach it. And that's the thing that I think the biggest lesson that then at Gusto first it's just knowing when I met Josh, when I met Eddie, knowing that they are the people. Hey, I was in the middle of a PhD journey that I loved and I loved my advisor, I loved Stanford, I had such a great time there, but I know it's so hard to find these sort of people, I just got to stop what I'm doing and work with them. And then similarly, when we started hiring people it was not about, I was really trying to avoid people who are toxic geniuses, and there's a lot of them. So trying to focus on people who are instead humble. What I mean by humble is self-critical in a constructive way. It's kind of a growth mindset. Knowing that you are a work in progress, every day you're supposed to be better, which means that if when you look at yourself a month ago or it's a year ago, five years ago, you should be embarrassed like, "Oh my gosh, that guy. I know so much more today." And then similarly, when you look a year from now, five years from now, you should look at that guy and say, "Oh my, this is going to be a huge difference for me and where I'm going to be," so we're always trying to learn. So that's the sort of stuff that we've been trying to hire for since the beginning.

Brett: What about getting the company into product market fit in the previous startup, was there any important things you learned about building and selling software?

Tomer: Yeah, so there is this analogy of it should feel like there should be some sort of a positive tension when you are pulling a rope, not when you're pushing a rope. And in the previous company there was a lot of rope pushing. So you're working with these enterprises, so I remember going to one of the biggest companies in Israel, a huge airliner and trying to convince them, "Hey look, here's how it's going to make your life better, the customer's life better, your metrics better." And you kind of see that there was interest in the product but it just was not a priority for them. So it was a priority enough to keep getting us more meetings but not priority enough to actually get to a contract. And so the big lesson learned for me is when you look for product market fit, first obviously, but very important is spend a lot of time with customers, speak with customers so much in fact that you can just start predicting what they're going to say next because you've heard it so many times before. That when you start knowing that, it's like, "Oh, I've heard this before, I've heard this before," then you know that okay, you started having good intuition. That's number one. Number two is it's about the emotional reaction to what you're trying to sell. So a lot of people, especially in the US are just very polite and nice, so when you go and tell them about your idea or show them the product, they're like, "Oh yeah, that's cool." "Oh yeah, would you want to use it?" "Yeah, sure, sure, that's great." But the problem is that this politeness and nice, that's not actually how you can build a business. You need to build a business that's built on either, I want it right now, can I get it? And then you put a price tag and they're saying, "I will pay for it." So a strong positive emotion or a strong negative emotion. It's like, "This is absolute shit. I would never use something like this." This is gold, because that's where you can learn. When someone says that your stuff is absolute shit, it means that you can learn a lot from it. There's something in your mental model that was absolutely wrong here, either it's the wrong customer or something about your service or the way you pitched it. When someone is emotionally reacting with engagement and excitement, "Where can I sign up," you know on the other side that you hit gold with that particular customer and you should probably ask and learn what makes it so exciting for them. But 90% of the conversation in the middle, there's not a lot of data in there and you should be very careful reading too much into people in that category.

Brett: Why do you think the first thing that you shared, which is spend a tremendous amount of time with customers such that you can model the customer in your brain, why in 2025 when you talk to many good founders, they're not doing this? I talked to one customer last week, I can't for the life of me understand, it's been drilled into everyone's head, why is that not happening-

Tomer: Its hard.

Brett: Even our product people, you talk to the average product manager at a great company, how much time are you spending with customers last week?

Tomer: I think it's hard. Listen, it's hard to speak with strangers. I think it's your job to speak with strangers, so you do a lot of it, but it's kind of hard. This fear of rejection is something that is very human and when you speak with a customer you kind of need to be in the mindset of seeking rejection. You go out there to learn and again, the learning comes so much from a rejection, so you got to go out there and seek that rejection and it's hard. It's a lot of hard work and you got to slowly develop that thick skin. Usually when people are spending time building a product, they love the product, they love the technology, they love what they're doing, they're in love with it. So having someone step over it is really difficult. I think that's why. It's coming from, it's definitely not coming from laziness because these people sometimes work extremely, extremely hard. So I think in that repetition of whatever you're doing right now and definitely if you're a kid or if you're early, young taking on these opportunities to experience a lot of rejection, whether it's customer facing, selling or pitching your ideas or stuff like that, that's the sort of stuff that kind of build that thicker skin, I think is really important.

Brett: The other point that you made that is important is this sort of general idea that you're looking for emotional resonance and you're looking for urgency. You want the sense... The dream is that they're emailing you the next day, when can I try this versus you chasing them. And again, most founders are in that middle spot of apathy. "Yeah, sure, it's interesting. That's cool." You email them, they don't email you back, sort of. Maybe you could share more about maybe why you think that is, why that urgency element, that sense of trying to find something that they are asking you, when can I use this is such an important thing?

Tomer: The world is full of distractions and long to-do lists and things that people care about. If you are trying to create something new and you need the world to act on it, you need your customers to act on it, you have to be an important place in their brain and that's kind of signified by this kind of sense of urgency. It is quite rare to get to that place where you get this sort of excitement and energy from a potential customer. So be patient, keep trying, change your ideas, get the hints, get the clues from the world from all these interactions, adjust what you're doing, and when you get to that place you've got to stop everything and double down on that. When we started the company, one of the insights that we had was, I closed myself in a room in a walk-in closet where we were living and every day I was like, "I'm going for a whole hour, I'm going to call up every single..." Or at least for a whole hour, I'm going to call up a bunch of businesses using a Yelp page. So every day you just kind of start calling one by one and you try to understand and you pitch stuff. So every day you pitch something a little bit different, you learn a bunch of stuff from yesterday and you're working on stuff, so you were using that as an opportunity-

Brett: So what did it sound like, "Hey, it's Barbara's salon. Hello."

Tomer: "Hey, this is Tomer, nice to meet you. Do you have five minutes? I have a product I have to tell you about." And sometimes it works and you'd be surprised how many people actually are excited to speak with technologists. Most people, outside of Silicon Valley, like small businesses and real industry and people don't get to speak with technologists often that can build products.

Brett: Why did you decide to focus on SMBs versus the payroll API idea?

Tomer: I would say the big one is the rope pushing and pulling. I remember going to some of these big platforms and we were sure that they're going to eat this up, they're going to love this. We are solving a problem, they don't need to build all this payroll shit. It's really complicated. It's hundreds of thousands of rules and regulation and we're a good technology team, we can build this for you, you can focus on building your platform. And we just saw that they were like, "Yeah, this could be cool, but it's just not a priority." The priority was to grow it, so the priority was to add more products and all that stuff. All the regulation of kind of situation with the states with 1099 versus W2 didn't start yet because it was early enough in that industry, so again, it felt more like rope pushing. Whereas when we talk with a small business, it was very clear that they were craving something better. Now, not everyone, to be clear, product market fit for me is that when you talk with 10 customers, two people are loving this and want this, that's great product market fit. Now you need to figure out who's that two, what makes it special, who are those segments and then you can pick 10 of those and then it's going to be 10 out of 10, but not every small business we talked with loved this. A lot of people we're like, "Hey, it's really hard to switch payroll providers. It kind of works, whatever." But there was people, and specifically people who knew enough about using technology in their personal lives, again, the Gmail and Dropbox. That was actually one of the big thing to know if somebody would be a good customer, it's like, "What's your email address?" If you are a Gmail user, you're going to use Gusto, [inaudible 00:17:39].

Brett: For Hotmail, it's not [inaudible 00:17:41]-

Tomer: Hotmail, I don't know. Hotmail actually is fine because it's the AOL and the other kind of things. Yeah.

Brett: When you were thinking about, okay, we're going to build this product for small businesses, did you think about how do we go from solving this problem to building a very large enduring business or did you not overthink it? You spent a lot of time with customers, there was a clear problem, let's go build something and let's see what happens.

Tomer: I think that's where my co-founder, Josh has had this incredible foresight. I think he was thinking in this narrative of building a multi-decade company, and it's not that every single day, every single decision you do is this... When you choose, for example, the logo for your business and when you just start, you can change that later. You can make it better. It's not the end of the world. When you write this one line of code, it's not about is this a multi-decade line of code or not, but there's moments, there's the specific decisions that you do need to think about that. So for example, putting down the values of the company early on and then make sure when you hire people that here's the five values for the company, here's how we're going to hire people and that's really important. There's so many companies that mess that up. So this is an example where when you think more multi-decade it makes sense for you to codify your values, put them down, make sure that you hire according to them and you reward people according to them starting very, very early, like your first, second, third hire. When we were then a part of YC and we were like, "Okay, payroll for small businesses, that's where we're going to start," and we started building it. It was very clear after a while that payroll data is very, very powerful because onboarding is so complex, there's so much that we need to know about you as a company in terms of your employees and where they work and how much they get paid and your company address and your onboarding process, everything about your employees, that it would be really easy to actually add additional products to it and solve more problems. So once you did payroll onboarding, onboarding you to benefits for example is just a click. It's really easy. Getting your insurance is really easy. Time tracking is really easy. Basically almost every internal function that's around back office and HR and people and all that becomes really, really easy. So for us, easy in terms of onboarding. So then it was clear that well we have an opportunity if we do payroll extremely well and people really love this product, we're going to have an opportunity to expand and offer more services. So when we did our pitch in YC and on demo day, over there, it was whatever the three minutes pitch back then, today it's like one minute.

Brett: Exactly.

Tomer: It's one minute.

Brett: The good old days.

Tomer: We had three minutes to tell the whole story.

Brett: Exactly.

Tomer: The last slide was all about that. It was about, "Hey, we're starting from payroll, the next step is benefits and HR and from there it's going to be a full," what we called are people platform. So everything to help you start build and grow your business. That was very much the vision since that day one we were just three people.

Brett: Once you figured out we're going to go in this direction, what's the very first thing you built?

Tomer: So payroll was the first thing and to do that, we... The biggest pushback we got from investors and why people did not believe the story in what we're trying to build is because it's really, really, really hard to acquire small businesses. So there's a reason why back then there was tons of companies focusing on software for enterprise and there's tons of companies focused on software for consumers or technology for consumers. There's not enough small business software, it was really three or four companies. And the reason it was just so hard to acquire them. You don't have enough ACV, enough pricing.

Brett: To have a traditional force.

Tomer: Exactly, you can't afford sales but you're also on the other side, there's less of them of consumer so you can't just mass put it on billboards. So that was the biggest pushback from investors. And for us our hypothesis was, hey, we're going to build a product people love so much and as service people love so much, that small businesses are going to talk about it all the time. And small business often have friends who are also small business owners. And that was the hypothesis, and again, a bunch of people did disagree and that was hard and a some people were believers and joined us. That proved up to be correct that if you built something that people really, really love for small businesses, you can get word of mouth and get the economics to really work. So it was all about like NPS of 85 and above, only serve customers if you can do it really, really well. Start really small, so say, hey, we're only going to do payroll for companies in California with just salaried employees in the particular segments. We're not going to serve anyone else. Because every person we do serve, we want to make sure they love the product. And then that word of mouth continues and then [inaudible 00:22:34] that work you start expanding.

Brett: So who was the first customer?

Tomer: Yeah, so the first set of customers there... We were just hustling and crazy trying to find who would trust the three of us to run their payroll. And there's kind of two groups. One, we were part of the YC batch. Luckily we just could just go to our batch and say, "Hey, do you have payroll?" "No." "Great, do you want to use us for it? And here's how it looks like. And the cool thing is that you can do it on your own using software. You don't need to call anyone or fax anyone and I can just onboard you right now. Can I actually do it? What's your name?" And that was one set of customers. The other set of customers are just small businesses we knew through all these customer conversations and just being out there in the streets and talking with people. So we had a swimming class for kids for example, that we knew. We had a flower shop actually that Eddie was buying flowers from this local vendor and he asked her, "Hey, who do you use for payroll?" And, "I don't have that actually." "You need to set that up." And we had that. So we kind of had both of these groups of customers. And for these first set of customers, they all had my phone number. I actually went, personally onboarded every single employee, every single one of these, the first, I want to say 50 companies. It was an incredible experience to learn what works, what doesn't work. You see them use the product, you see what's confusing, you write it down, then you go and you build something to make it better and you get a bunch of insights from that that can really help build a better product. A bunch of them, a lot of customers have my phone number, but back then that was the thing. You wouldn't run payroll without calling me and we would do it together.

Brett: Was there a tension in terms of do we want to serve startups or do we want to serve small businesses in that first year?

Tomer: Yeah, totally. I actually thought, and this was purely from a theoretical kind of place, my belief was that we should be the payroll for startups when we started. And the reason not because we're going to do this forever, we're more like, "Hey, we have an in here, we know a bunch of companies, we can speak their language. The more tailored you are, the easier it is." But Josh had the other opinion, so, "Hey, we're actually seeing a lot of love from these small businesses and we can always tailor it back down. Let's just start with our full vision, small businesses and put it out there and see what we get." And that was a really good decision. Since day one, basically the moment we launched, we got really good traction across verticals and industries and all of that stuff. It ended up being that the insight is that the pain from payroll was across industries, it was not just startups and the pain was strong enough that even if we did not have a personal network with dentists, dentists love Gusto and it's because of the product, the service speaks for itself.

Brett: You had a bunch of startups in the early days, but they were secondary, the core focus was SMBs? Or what was the balance there?

Tomer: We had both. It was 50/50 and... Again, so that was [inaudible 00:25:33] YC and we had, I want to say around 50 or 80 customers, or something like that. And then we took a whole, I want to say almost a year, maybe eight months until we did an actual launch and we told the world about our seed round and we did a big tech crunch thing and then we put out a website and put a waiting list. And then that was that decision moment of, what do we put on a website, what do you tell, how do you present yourself? We had, half of the customers were small businesses and half were like tech startups, what are you going to do? And so we ended up with the broader small business and again, that was the right call in retrospect. Then you started seeing the wait list and it was mostly small businesses actually and yeah, definitely more and more startups. The pain from small business was enormous.

Brett: How long did it take you to build the first version of the product that the flower store owner could actually use to run payroll?

Tomer: So for a full self-service products, so full meaning you could onboard, run payroll, it probably took a year until that and then the folks that used it before that year, that full year kind of used me as an interface in a bunch of places, so whether it's running reports or stuff like that. And again it was great, that was a really good way of learning from customers.

Brett: Were there other, you sort of explained that you got really close to customers, they had your cell phone number, you were effectively their customer success manager, are there other things like that that you did in the first three or six months that really had an enormous impact, or if other people are getting going, I would definitely consider doing this type of thing that we did.

Tomer: So closing yourself in a room for an hour and calling people and making yourself, having these conversations with existing customers or with new customers and prospects, just making yourself having those conversations is I would say golden. I would highly recommend it with people to people. You prove how you pitch, you learn a bunch, you learn about different segments and if you keep doing it every single day over a year, you get a lot of repetition. That's really great. The other thing around this is the way we built the first product was around releases, so we had a monthly release basically and we're all working together in this small room and it's... It's not that we start working and we see each other at the end of the month, but having a monthly release means that you're building backwards and so building forward. So you have like, "Hey, by the end of this month, here's the stuff we need to ship." And those things, you could talk later about how and what to ship but, "Here's the stuff we need to ship for sure." And now we just got to figure out how to do it and this is the time we have, there's no other way. And that helps you be very decisive about scoping, about what to build first and how to build it and I think you can get to progress really fast this way. So this was post YC, but in the first stretch of call it like a year, every single month was about, here's the thing that we need to ship and this is in order for us to get to our goals. That was really helpful.

Brett: A lot of the advice around finding co-founders is, start a company with somebody you've known for 20 years and you went to college with and you were coworkers and don't meet somebody over the course of a month or two and start a business, that's sort of what I would say is conventional advice. You obviously didn't meet on Monday and started a 14-year journey on Tuesday, but it was a very compressed time and you've had this incredible partnership. Maybe you could reflect back, again, were you just beneficiaries of good luck? Is there anything that can be learned from those few months that other people that are thinking about starting a business with somebody else might learn something from?

Tomer: Yeah, I think the reason that we ended up doing so well, I believe together as a team, one of the reasons is not just that we had a good fit, but we knew it was a good fit early and for you to know to understand that this is a good fit, you've got to go through multiple other options, other situations. So I would say that the advice here for every founder is to try to build stuff with a bunch of different teams and a bunch of different people and kind of go through these iterations because then when you get someone that's a fit for you, it's obvious and it's, "You're everything I ever wanted in a partner, let's go build this." But you got to go through some bad apples, or not a fit, it's not even good or bad, it's just, is this person a good fit for you and how you work?

Brett: What did it feel like in that first month or two as you were prototyping and exploring ideas? What was the feeling that you all had together?

Tomer: I think one, we were excited, we were having fun, we were enjoying building stuff. I think two is that we really enjoyed the... I remember brainstorming moments where every person brings their opinion, it was clear that no one is trying to, in terms of ego, it was clear that there was no one... It was clear that everybody were aware, the three of us were aware of how to control our ego or in other words know that we need to create space for the three of us equally in the room because for this to work we need to really respect one another, enable each other to be successful. So there was a lot of that. And I think that's kind of the sort of... So it felt like a very mature kind of like, "Hey, we're going to make this work."

Brett: Was there conflict in the first three or six months of building the company or was there sort of the sense of intuitive alignment and everything was hunky-dory?

Tomer: You've got to have conflict. So the startup journey has a lot of ups and downs and the downs are difficult because you believe in it so much that when things don't work out you get-

Brett: It's personal.

Tomer: ... you get annoyed. It's very personal, exactly. And then also again that you're dependent on other people. So all you need to pull and do your part and we're not perfect. So I make mistakes and my co-founders make mistakes and then how do you handle those situations? So the thing that really helped us is this idea of having a weekly founder one-on-one. So what we did is every Friday we had three one-on-ones, Josh and Eddie, Tomer and Josh, Tomer and Eddie. And in those conversations, and this was from the very, very early days, and in these conversations it was kind of a feedback session for how was the week. So we give each other, "Here's what I really liked, here's what worked really well and here's what I actually didn't like and here's what didn't work for me. Let's open up, let's talk about it." You did both sides. And it gave us a lot of repetition on having difficult conversations, which then builds trust. If you can talk about the hard things, then you don't just keep things in and then things explode later on. We were just very open on things. So I knew what Eddie for example didn't like about my work and where I needed to improve in Eddie's eye and in Josh's eye, and they knew exactly on the other side as well and I think that's really, really good and we thought of ourselves as a work in progress. And then that continues, honestly, to this day, we... Just on the way here in the car, I talked with Josh and we talked about these sort of things and give each other feedback. That is I think how we can help each other grow and kind of again, keep that high trust situation.

Brett: You talked in many different ways about how you love spending time with customers and that was a big part of the early journey and continues to be a big part of the journey at Gusto. If I were to listen to you talking to customers in that first year or two, how did you actually spend the time? How organic and improvisational was it? How scientific and precise was it?

Tomer: There was no... I didn't read a blog post. I don't know if there was a lot out there written about customer startup, customer discovery and all that. So I learned while doing it and I learned that hey, if I ask a question in a leading way, I get the answer that I was leading to, but that's not right. And I used a lot of two things. So if you listen to me in these early conversations, you would hear me say a couple of things often. The first one is, "Hey, I'm a PhD student from Stanford and I have a few questions. Do you mind helping?" So that again really opens the other person to being open, they feel like they're not being sold to or something like that. Then the other one is using the fact that I'm a foreigner, my Israeli card. It's like, "Hey, I'm actually not from here, can you just explain to me again what does this mean? I'm not from here, tell me more." So those two things allowed me to ask questions that are maybe more uncomfortable and the other person kind of not feeling awkward about it. So finding ways of disarming the other person again with the most positive intents possible, I was really not trying to sell, I was trying to learn. And then that was two of the tricks I guess that I used in these conversations, yeah. But it's so important to do these conversations right, but it's a hundred times more important to do the conversations at all. So don't let that to be any deterrent to you to start speaking and getting a sense of who these people are, what they care about, what is the role that your product could play in their lives today.

Brett: One of the interesting things about you all as founders is you didn't have domain experience in the sense of yes, you had a connection to the core customer, you told the story that sort of went back to you helping your dad out in his small business, but you were not payments geeks, you didn't work at payments companies, you didn't work at Intuit or someone selling to small businesses. Share your reflections on the fact that you didn't have domain experience and what does it ultimately teach you about founding teams and that specific topic.

Tomer: Yeah, I think for us the experience we had that was relevant and we relied a lot on is just understanding of small businesses as people and the challenges that they have in the day-to-day. But yeah, in terms of the payroll and taxes and calculations and all that stuff, we came into this understanding that there's a big customer pain, but we didn't know all of what it takes to actually build a payroll system. It ended up, to be honest, to be far more complex than we thought it would be. So in a way maybe that was actually good that we didn't know everything that it entailed. It took us a decade, there's tens and hundreds of thousands of different tax rules, regulations. The tax world in America is very complex, which is good for you I guess, it means you can do a lot for your customers. It's a big problem for customers, so it's really important for us to go and help them. The fact that it's so complex for people who are focused full time on that is kind of insane because that's what people expect of small businesses to figure out on their own, so it's just completely unreasonable. But again, that's where technology can really, really help. So proud of that. But higher level of reflection of the... I think coming in with ignorance could actually help because you can think about things from first principles. Here's an example, when we started, it was clear when you think about payroll from a small business lens that the job to do is to pay your employees. So you want to think about it as a computer game. You go in, here's the person, here's their salary or here's how much they worked, and you click a button and they get paid. That's what you want. But if you're thinking about from the payroll industry lens, the job is very different. The job is to withhold the right taxes. The job is to pay the right taxes at the right time. The job is to pay them in the right frequency. Oh yeah, sure, some money needs to go to the employees like a check with direct deposit maybe or something like that. But that's not the job of payroll. Payroll is about taxes, it's not about paying the employees actually as the primary thing. So as a result of that, when we design the product from the first place, we design that button that you click and you pay your employees and all the taxes just get done automatically for you, you don't need to think about it. Little did we know that was a very controversial thing to do and most payroll services back then actually split that job to two different things. There's one which is paying your employees and two is paying your taxes. There was two different workflows, two different situations. Some companies just did one and not the other and you had to figure out how to bring those two things together. You have to remember actually what taxes are due by when and what filings are due by when so you need to do it on your own. And sure, maybe some of the software helped autopopulate a form, but they didn't actually do the work, do the actual job end to end. So when we built this thing, from day one, the V one was back in the industry. Now I know it's called full service payroll, which means we do the whole thing end to end. But that was controversial and when we talked with accountants for example, who knew more about payroll than we did in the early days, they're like, "Oh, why are you doing it this way? Other companies do it that way. Here's all the advantages of the other way." So for us not knowing actually what is the way the industry has done it, helped us be more customer focused because instead of focusing on how it's done today, we could focused on the pain point and focused on the pain point for the customer.

Brett: How did you think about building your first handful of products? So not just everything you had to do, which is an immensely complicated, very deep product to actually do payroll and tax, but once you got the early version of the product, how did you navigate, we're going to do this next and then this next and this next?

Tomer: Okay, so kind of broad strokes, we started with payroll just in California, just for salaried employees, so to do a really, really great job for them and then we started expanding states as well as type of employees and employment, once we saw we had a product, or we had a very high NPS, over 85, that was kind of what we knew that would be the customer love we need in expanding. So that was called chapter one in the company. Chapter two was to start becoming multi-product and expanding towards the platform. That's also when we changed our name from ZenPayroll to Gusto. The second product, I guess, after payroll, was benefits. And why benefits for us, for me was we had that list of, here's the potential of what we can build and benefits presented this really, really interesting thing which is one, this huge problem for customers. Very much when you talked about health insurance back then with small businesses, it just felt exactly like payroll felt, like people hated the experience. It felt janky. It felt like you got to call people, you got to fax, you got to do a bunch of manual work, why can't they just do a few clicks and get health insurance? It's just so annoying. Can you just fix that for me? And I remember sitting in a room and calling 20 of Gusto's customers that I thought could be a good fit for it and I was pitching them, "Hey, we're going to build this. Here's how much it's going to cost. Can I sign you up?" And I got 17 out of 20. It was crazy, way, way, way beyond... In fact, I little, I remember that I had a little disappointment actually after that because I felt like our health benefits product should take a different route, should be a different mode of benefits, instead of small group health insurance, which is what's very popular, I thought it should be more focused on the ACA, Obamacare, individual insurance and bringing money to an HRA or something like that. But when I pitched that to these customers, they were like, "This is way too complicated, just do the thing that I know that I need." So we ended up going with health insurance as this first product and it represented this combination of a really important pain point but also a great revenue stream, which is also important. So we were getting to that place where we were like, "Okay, [inaudible 00:41:24] is going well, I can see our team is executing, we're expanding state by state, where we're kind of halfway," but it felt like we know that worked. So now we're able to take some of the best people in the team, put them on a new team, literally put them on a different floor, have them all work together and create something from scratch and launch it in a couple of months. So that was that work.

Brett: And how long in the company's life did you do that?

Tomer: It's like three years.

Brett: Yeah. And you felt like it was the right time because you had a much more clear execution path on the core product?

Tomer: Exactly, the reason... The timing was a hundred percent based on how well the payroll product was doing. It felt quite linear, we knew what we needed to do. We need to expand states, we need to have the list of features of functionality and I know we can do it. So since our goal, our mission is to become this wider people platform to help with all these other things, now would be the best time to go and do it.

Brett: With the benefit of hindsight and you think about the important products that you've shipped over the last 10 or almost 15 years now, is there anything that you wish you had done sooner?

Tomer: Where my mind goes is funny. My mind is like, I feel like there's so many important features that we've launched the past 10 years and I kind of wish we had moved faster across everything. If I had to just really pick one, we really doubled down recently on the wider world of compliance and thinking about compliance and taxes is something that's not just about payroll compliance and benefits compliance and onboarding compliance, but just thinking about how do you keep your whole company on the right track with the government? And it's something that I think took us... We heard a lot over the years, but the thing really popped up in COVID, so people started working across multiple states. Multi-state used to be something that only large companies cared about. So it was kind of on our roadmap, but it wasn't that important for us. And then all of the sudden with COVID, a bunch of people working remotely and you start seeing a company with seven employees in five states. So then there's a lot of compliance work around managing the state entities, for example, the registrations, all the different tax compliance, regulation, every state is different. So the problem, all of a sudden, you're talking with customers, you start hearing about this over and over and over again, so that's completely changed our prioritization and we brought this up and I think we're spending a lot of energy on this now and I think we have a really good product there around compliance. So that's something that we, I think in retrospect is definitely a part of the holistic job to be done of what people hired Gusto to do and I wish we were more focused on that.

Brett: What do you think about the actual market setup for Gusto, now looking back in the rearview, ended up creating such great circumstances for a phenomenal business to be built?

Tomer: I think were we were very lucky is timing. The moment we started, this is 2012, there was this interesting thing that just a few years earlier, small businesses and people did not trust the internet with financials. They used the internet for a bunch other things, but actually the thing that changed it in my opinion is banking. So a lot of banks just went online with portals and people started using actually online banking for their personal lives. So they started thinking about, "Okay, I can actually... If these big banks tell me to use their online portal, I can start trusting it." So we came in at a time where people trusted the internet enough, so we didn't have that as a huge blocker for us to onboard these customers. That's the first thing. The second thing is, as I mentioned, the industry, payroll specifically was not technology first, so it was very much a services, human first moment for that industry. So those two things together ended up creating a product opportunity and a go-to-market opportunity.

Brett: What about the fact that you've developed a lot of power in the business, meaning yes, it's a very competitive space obviously, but it's not like there's 10 Gustos that are these incredible businesses. You have consolidated power to a certain degree for the segment that you focus on. Is there anything that you did or a property of that market that allowed you to have this more winner take most type of dynamic?

Tomer: So there's one thing that's interesting in our industry is switching is difficult. So switching payroll providers is quite difficult. So the moment you get a customer, they stick with you. So that again, it could be a good thing or a bad thing. If you're the newcomer, it could actually be really, really difficult. So we spent a lot of energy on acquiring brand new employers who are just starting out, so whether it's new small businesses or new startups. And then our thought process is that there's half a million new employers coming in to the US every year and if we do a really, really good job acquiring many of them, then over time the industry rolls over and we're actually going to have a lot of small businesses. Now we also do a lot of switchers, so a lot of switchers do move to Gusto, but we are very aware of that kind of market dynamic. I will say I don't think it's a market we win most. Our big competitors when we started are still around, are doing really well. Intuit, ADP Paychex, all have really large payroll businesses still today.

Brett: So why is that?

Tomer: Well, I think it's because of those switching-

Brett: That's the main reason.

Tomer: ... it's difficult to switch. It's a service that trust also is quite important. So sure there's a lot of value in user experience and that's our... Our main innovation starting out was user experience innovation, but there's also a lot of value in trust and trust of a brand that you've used for many years or decades even and you know they're doing their job, so that's also important. So Gusto is an interesting place today where we're we can have both. We are absolutely aspiring and are aiming to be the most modern, best user experience possible for small businesses anywhere they go, but we also have 14 years of doing this, so you know that you're not going to get, again, that IRS agent knocking on your door $going to do this correctly.

Brett: Did you think about the switching cost dynamic and financial services on the internet were just becoming a thing as Wells Fargo had their portal? Was that a part of thinking about this opportunity or it was just very customer, there's a real pain point we can go after?

Tomer: The intuition to work on this is absolutely the customer pain and we envisioned in our mind how a great online service, an online product that solves this end-to-end could look like. And we looked around and we saw that no one is built it and we could not understand why. So we decided to go for it and that's kind of where it went. We did not do a big market analysis. Actually, I didn't even know, I don't think we knew so much how hard it is to switch payroll providers. It took us a few months to, actually, while building the flow for it, we're like, "Wait a minute, this is a lot. It's a lot of data you need from customers." So I think we learned a lot along the way, but that's the sort of stuff that, again, the pros and cons I guess, of starting without the specific experience coming from the industry.

Brett: Why did it end up in the way that it did? Was it just non-obvious until COVID happened, or why did it end up taking so long?

Tomer: Yeah, I think because it wasn't totally clear what would be the business model around it because compliance is a set of hundreds of thousands of interactions. And the way we kind of did it was every time we built something, well, we made sure it was compliant and we brought in as much tools and tips and experiences to make sure that you're doing whatever, if it's onboarding, if it's firing somebody, if it's onboarding somebody, if it's doing time off, all these things, we try to bring in compliance into the flow. But I think the thing that I did not see is the need to take a step back and think about it as a, "Here's your compliance dashboard. Here's everything you need to know. Am I good? Am I okay? Just check yes or no and tell me what do I need to do to get to that?" And I think in retrospect, maybe I didn't see how it all comes together around that angle of compliance and it took a few years and then that big pain point that come from COVID I think made it really clear like, "Hey, there's something here that's quite important."

Brett: When did you think as a founding team you really had product market fit?

Tomer: I think we as a team and individuals are very self-critical and we see all the gaps all the time and we see all the stuff that needs to be done and less about the stuff that was done. So I think it took us years until we felt, I'm talking for myself, it took me years, maybe five years until I felt like, "Huh, okay, this is going well." So it may be post-series be, like I know the tens of millions of AR when I felt like, "Okay, this is going well." And it's because there is so much to do. Even this makes me feel a little uncomfortable to say it right now because I feel like looking forward, five years from now, when I'm going to look at Gusto today and I'm going to listen again to this podcast, I hope that I'm going to say, "Wow, they were just starting out. There's so much more that had to do and why was he sitting here on a podcast and talking about all their success because all the work is in the future." I really think about that. That's really how I think. So that means in terms of product market fit, I don't really think we knew in the moment. In fact, I have a bunch of emails, all the emails that I sent out to our team of showing how nervous I was about, "We're not growing fast enough, we're not doing well enough, we don't get enough of these sort of customers. Onboarding is taking too long. Here's what people are saying, we're not moving fast enough." So that performance anxiety, like we're not performing enough has been there the whole time.

Brett: Do you think that sense of being unsatisfied is a very important part of the success of the company or it's sort of off to the side?

Tomer: I think it's been really important and I think it's going to keep being important for us. We can't be complacent. Technology is just an amazing business, an amazing industry that keeps changing all the time. And if you're not on your toes and try to disrupt yourself, to innovate yourself and move fast, you're going to lose. There's no question about it. This is not the industry to sit back and hang out and think about the past. You got to keep going forward.

Brett: So just to wrap up, I wanted to end by asking you who's the person that's had the biggest impact on who you are as a founder and what's the thing that they imparted on you that is a big part of the way that you think about building products or teams or your company?

Tomer: My brain goes to my dad. I saw him have countless interactions with customers and partners and vendors and competitors in his street and stuff like that running a small business, and I think there is something around long-term orientation that I learned from him just looking at how he builds these experiences. So for the customer, it's not a transaction, it's a relationship. If you sell something or if the person comes in, returns the thing because they were not happy, it's doing the right thing for the customer. It's in the moment, it's giving the right advice to the person that you're serving, with a competitor it's building a relationship that you can be productively competitive and not destroy each other's business and both of you guys go down together. It's all the things that I think are around building something for the long-term in a respectful way that you feel proud of the how later, but without sacrificing performance, you still care a lot about performance because it pays for your kids' education and all that stuff, but you want to build in a that later on down the road you're part of the how. And many small businesses are multi-decade businesses too. Again, this example, my dad is for over 40 years. So I think that's one inspiration for me.

Brett: Good place to end.

Tomer: Yeah.

Brett: Thank you so much for the conversation.