Y Combinator Startup Podcast - YC Founder Firesides: Gusto on building for new verticals

Episode Date: August 15, 2022

Gusto (YC W12) provides growing businesses with everything to take care of their team. Today, more than 200,000 businesses use Gusto for payroll, employee benefits, talent management, and more. And with the recent addition of Gusto Embedded, developers now use Gusto’s APIs and pre-build UI  flows to embed payroll, tax filing, and payments infrastructure into products.   YC’s Anu Hariharan sat down with Gusto co-founder and CPO Tomer London to talk about building for new customer segments and the future of embedded finance — sharing advice for startup founders and CEOs along the way.   Learn more about YC and apply for funding here: https://www.ycombinator.com/apply/

Great. So welcome everyone to YC's founder Firesight. My name is Anu Hariharan and I'm a managing director at Y Combinator where I work with our growth stage companies. I'm here today with Tomer London, the co-founder and CPO of Gusto. I've known Gusto for I think close to now seven years and work very closely with Tomar on the board. Gusto provides growing businesses with everything to take care of their team and was part of WIC's Winter 2012 batch. Welcome, Tomar. Hello, thank you.

Thanks for having me. Thank you for joining us. And today, Gustor has a special announcement to make where you just released a blog post about it, which is you're making it easier for software providers to make compliance into embedded payroll. as well as new vertical SaaS partners, which is really exciting because now SaaS partners that sell laundromats, fast, construction, restaurants, they can all offer payroll more seamlessly through gusto.

Yeah. So congrats to you and your team. It would be good, Tomer, just to kick it off. If you can just explain what embedded payroll is and what the announcement is today. Yeah, thanks, Anu. Well, again, just excited to have this chat with you. Yeah, today is really, really exciting for me. I feel this has been, in a way, more than 10 years in the making.

Basically, what we're doing with Gusto Embedded is to help basically take over 10 years of our experience building payroll software and compliance built into it and making it available to any software platform, any software company wants to shift their own payroll product to the market. And it's not just the software side, it's also the service size and the operation side. It's everything that's happening behind the scenes. You know, payroll is quite a complex thing. It's not just like a quick U.X flow of, you know, you put people's names and you say how much you want to pay them and you click and you're done. There's a lot happening behind the scenes with filings and tax calculations and, you know, multi-year-long conversations basically through note, through this compliance flows with different state agencies.

There's 50,000 plus tax codes out there in the U.S. So anyway, there's a lot going on behind the scene. It's not just the software. So anyway, today we're announcing this really just a lot of great progress that's happening, both in signing up a lot of new platforms across all these vertical SaaS players that you mentioned, whether it's construction, vertical SaaS. or dental offices, vertical SaaS or accountant and more and more and more, but also a bunch of new features and functionality.

But we can talk about it later. They want to take all the time right now. Yeah. And, you know, Toma, you bring up a very good point about payroll. I didn't realize this when I first met you all maybe like seven years ago. But, you know, for most YC companies, we always say, ship fast, get feedback, iterate. And I remember very vividly you pointing this out to me, which is, I think in the first year of Guster,

you all had less than 100 customers. And I asked you, wow, that's slow. Because usually in Demodhavi often or before Damadovi offer, hey, if you signed up 100 in two weeks, can you sign up 1,000? And I remember this point you made. Well, if payroll doesn't work, there is no coming back. The customer will be displaced because they didn't. get their paycheck. So it was one of those unique products where you had to make it work perfectly.

There was no room for error. And that's why you all took a lot of time to scale it. Yeah, yeah, exactly. When you get payroll wrong, someone is not getting paid or even worse than that, in my opinion, you know, years later you may get a notice from the IRS saying that you did your taxes wrong and now you need to go back if you're an employee and fix your W-2, like, you know, get new W-2s and work with IRS, or if you're an employer, go back to employees who left you and are not a part of the company years now and go and work with their taxes. So the cost of being wrong is extremely high. So I really think that there's a set of product and technology software out there that you

really have to get it right in order for you to deliver the promise for your customers. And the cost of not doing that is terrible for your customers and then terrible for your business. Great. So I expect so many people today, I see it on the Twitter space, are actually founders and CEOs. So before we dive into your launch today, I'd actually like to take this opportunity to discuss how to build for new verticals and how to think about this as a founder and CEO, since quite a few of them are actually probably in the very early stages in the audience. So some background for the audience, over the last 10 years, Gusto has scaled to build for customer segments, many customer segments. I don't know how many of you know this,

but Gusto first started servicing startups, then they started servicing SMB, starting with Flores, then accountants, and now with Gusto embedded payroll, developers of their customers who are embedding payroll directly into software. So, Tola, can you go back

and tell us your journey of starting with startups? Why did you start, and if I remember right, Gusto was a pivot in the badge, It wasn't your application. But we'll say that for another time. But when you decided that payroll software is what you're going to build. Why did you start with startups?

And how did you sort of think about customer segments, especially in that first year? Yeah, totally. So I would say we started with this realization that, you know, Josh Eddy and I all come from small business families. My dad has a clothing store for 35 years now. And growing up in that environment, seeing how it feels like to be a part of a business and running a business, I learned that, you know, business owners and managers have all those different hats they need to wear. And it's just incredibly busy.

They need to be the salesperson and then the marketer and then the cleaner and then the janitor and the accountant. Like it's all in one, all these different hats. So we knew that businesses, specifically small businesses were very, you know, they really had this need of helping, of getting more leverage. And software can be really, really, really great at that. We also knew that we also really believe in this idea by building our own startup companies before Gusto, that the most important thing in any business is their people. And that's what makes or breaks the business. So if you kind of do this plus this together, we ended up with this really grand vision of our goal is to help any business, small, large growing,

to help basically build a great place to work and really serve the entire life, of the employee lifecycle so people can build great places to work. So that's kind of the big grand vision. So the question is the founder is like, okay, that's cool, but where do you start? And that's where kind of your story, Anu comes in, which is starting not just with, I would say, startups, but also it was even much, much more narrow than that. Those first 100 customers were technology companies who are based in California, who have no health insurance or any other benefits because we're not able to support it, you know,

and were agreed to be paid, you know, nine days after running payroll. So it's an extremely, extremely small group of target customer to start. And that's really where we started. And I think when you think about your own company and how to choose your customer segment, there's three important things that have to happen. First, you need to make sure that you're choosing a segment where they have an important customer problem that they're trying to solve. It's kind of this, you know, painkiller versus vitamin analogy.

The second thing is that you need to make sure that the product that you're building and you're starting small has to solve it and customer have to love it. The third thing is that you need to be able to reach this customer, right? So important customer problem, your product actually solves it, and then finally you can reach this customer. And startups, or at least this really, really tiny group of startups was a good place for us to start because we could reach them. We were at a part of YC batch, a bunch of companies were around us, a lot of our network and people that were. we know was really, really easy to get to. And more importantly, technology companies are very viral. So when you start selling, and if you do a good job, solving problems for them,

you actually get really nice word of mouth. We knew that we can solve the problem for them because we really scoped it down to a problem we can solve with this initial product. And then finally, we knew it was an important problem because payroll is such a pain for businesses today, as I mentioned earlier. Well, that's fascinating. I didn't know that in the first year you gave payroll nine days after the payroll was done. So what was your competition like? I mean, before Gusto, how did startups pay employees?

Yeah, that's a great question. So, you know, 10 years ago, I think if you kind of paid the picture back then, the majority of the payroll industry was companies like ADP and paychecks and kind of really large. more traditional companies. And for you to run payroll, what you had to do is you had to pick up the phone and talk with someone and tell them to run payroll. You had to use fax machines in order to send the hours back and forth. You have to meet someone in person or rap in person in order to sign you up so they believe you're a real business and underwrite you for payment.

So it was the old kind of traditional world. And I think what we came in, one of the insights was. was, you know, to this idea of, hey, all of this process can be made so much easier to use and simple. So that you don't need to be a professional to run payroll. And you should be able to do it, you know, on your computer on the weekend in the evening without talking with anyone. And that's kind of the, I would say, the first insight. The second insight was that employees are a critical part of the system. And if we build a really great experience for employees, it's going to make the employer's lives easier.

So, for example, employees enter their own information when they log in. or when they sign up and to the company as opposed to the employers need to, you know, kind of go back and forth with them. And that was kind of the very, very, very initial thing. And to your point, like, ask those customers who agreed to take on this product, despite the fact that we were 10, they took like, you know, like eight days to get paid. They did it because we solved the payment that was much more important. for them, which is just the complexity around payroll.

And for them, this was important enough. That's, yeah, I was going to say, I mean, talk about product market fit. After all that friction, they love the product and they're using. That's the sign that you truly are solving a pain point. Now, so you were working with startups, the majority of the first 100 startups, as you said, were tech startups based in California, where you were taking more than 90s to process payroll. But things were going really well. I remember NPS for Gusto from the very early days was very strong.

So then why did you decide to build for SMBs? You could have pretty much just focused on startups. Why SMBs? Right. So as I mentioned earlier, we started with this really big vision of we want to go and we want to serve the larger market, not just startup, but even not just SMBs. But we had to start somewhere. So we started with startups and specifically this narrower version of startups because

that's where we felt we can get really great customer love with the product we were able to build. But then as we spend more time and obviously started expanding not just California but multiple states, not just, you know, eight days to get paid, but same day, like next, like two days, then one day and then same day payments. And then obviously supported health insurance and other things. We felt that we were ready to support, you know, take the next steps to our, towards our product vision, go to small businesses. The really important thing, in my opinion, when you move from one vertical and kind of start expanding towards your vision is you have to make sure that you maintain that early customer love.

I know you mentioned, like we had the initial, our NPSs were always in the high 80s. And that's just one measure, not that NPS is perfect in any way, but it's a measure to show customer love was extremely high. And that creates high word of mouth and trust and really creates a really great kind of backwind for your growth. And the risk of expanding too early is that your product is just not ready and then you're going to lose that. So one of the ways that I think to know whether you're ready is to just look at your current customer base and look at the people who want to use your product, the people who are using your product that perhaps are a little bit adjacent to what you thought you were supposed to serve and learn from them, talk with them. talk with them. What do you like about the product? And ask yourself whether you can take a few steps with your product to really double down on that

and get a lot of customer love from this new segment. So the answer is already under your nose usually. If you don't get traction and from, like, let's say, you know, you built, you have software for hairdressers today and you believe that, you know, the same software can be used by spas. But you don't have a single spa customer and you just really hope it's going to work. I don't think that's a good strategy. I think you have to listen to your current audience.

That's a very good point you make, which is, I think that's one of the common mistakes I've seen founders make when they expand to a new vertical is not deliberately, but accidentally losing focus of the existing customer segment. So how, I mean, tech startups are just very different from stars and flores. So how did you maintain the customer love of the existing segment? then? Like, what did you do to continuously measure that? So when we launched the initial product, although we started with a very small-scoped audience,

we never used language whether, or we never built a product or used language to say that this product is just for startups. We've never done that. It was always like this is for, you know, businesses at different sizes. We did talk about sizes a little bit, but it was never like just specifically startups. Because we knew this, it would, coming. It was coming. So we didn't know perhaps if it would take one, two or three years, but we know that we knew that this is the next thing to do. And perhaps like the generalizable advice here is really think about your vision and make sure that you don't put yourself in a corner when you do want to kind of move to the next thing. We had that, by the way,

with our brand, which is kind of another thing. There's, you know, with just two types of expansions, right? You can expand customer audience. You can expand the product set that you're doing. And one thing that we did have in the beginning that we put ourselves in the corner is we started the company with the name Zen payroll. For folks who don't know, for the first couple of years for the company, it was Zen payroll and then we rebranded to Gusto. And the reason what we quickly moved as fast as we could basically was because we saw that that initial name is not very forward-looking if we're thinking about our wider strategy around creating this people platform for every single activity. in your workforce for all these different sort of companies. So it's not just payroll, it's also benefits, and employee onboarding and software and hardware provisioning,

and IT and everything else that happens in the employee lifecycle. Yeah, I remember, and it was not an easy transition, but I think you all did it at the right time. Well, I have three kids, and I can tell you that naming the company, renaming the company was a much harder exercise. than finding the right name for my kids. I'm sure so. And I know because acquiring SMBs is not easy,

and so you're changing the brand name, you know, you have to put it pretty much, you're starting from scratch. That was going to be my next question, which is, you know, if you look at startups in general, they find most startups find it very hard and have struggled to attack. the SMB market.

Why do you think that it's, you had, I mean, Gusto is an amazing success. I mean, you served close to 200,000 SMBs, you're a beloved product in the SMB segment. But why do you think that is? Why have people historically struggled? Yeah, today we serve, you know, lots more, like much more than 200,000 businesses

across all different sizes, whether it's customers, you know, whether it's small business we just started or companies over, you know, they're on 500 employees. So, yeah, we reached a really nice scale across small businesses and scale companies. I think the reason why it has historically been so tough is because SMBs are so hard to reach, right? So it's these three points that I mentioned earlier. This is point number three, which is, you know, you can have a great product that people love,

but you can't reach the audience. So small businesses were extremely hard to reach. And I think something happened around that time when Gusto started. where small businesses, there was a generational shift where people started trusting the internet more. And I believe that, for example, internet banking was a really big part of it. You know, if you remember back in these days, around 2010 and in the, there's a couple years around that area, you got just commercial banks pushing really strongly for people to use their online system and not come to their branch because it's just much better for their economics,

better user experience. And they basically educated an entire general general. generation of SMBs and that they can trust the internet with things like money. And then payroll was, it was the right time for people to say, hey, can I do my payroll online? So you started looking at Google search results and things like that. And it was like, hey, interesting. Actually, you know, online payroll is becoming a thing. People are actually looking like they actually looking for something like this.

So this is my intuition around like what happened back then and, you know, why that was the right time for Gus to start. I think if we were to start the company four years earlier, it wouldn't have worked so well because people were not ready yet and educated. But back to today. So what's happening today? And how do you do SMBs? I think so two things. I think one, SMBs are online, small businesses are online. They're looking for solutions. They want to have their problem solved. They have a lot of pain points, as I mentioned earlier. And there's a lot of great companies who are already serving them. But then that is already known for the past several years. So what's coming next?

I think the next wave of this, and if I am now to build a new small business focused company, I would focus on a vertical. I think that when you truly understand a specific customer segment, understand how they start their day, how they speak with their customers, how their business model looks like, you know, what's their common difficulties in competition looks like,

you can build a great product for them that's much, that's really tailored to their needs. And small businesses, especially now with the recession potentially coming, you know, there's different points of view there. But in moments like this, people want to consolidate and have everything in one place. So if I were to start a new company today focused on SMB, it would probably be picking a vertical, a specific small business segment that I understand really, really well, and going all in and building a great product for them. That's what I would do.

And I think you can reach people really well this way because, you know, if you really understand, like, you know, my dad's store, clothing store, right? If you really understand clothing store, you know where they hang out. You know their language. You know what speaks to them. And you should be able to find a great scalable way of finding them online. That's a very nuanced, well-tailored advice, which is you're essentially saying vertical SaaS is going to be the new trend in SMBs and catering end-to-end for each vertical. Are there, I mean, I'm sure in Gusto you interact with all sorts of verticals, are there some verticals you are more familiar with or more excited by the problem set that you see? Ah, so there's so many. And, you know, it's so fun. So I get to work with, through this embedded payroll business, I get to speak in the morning with, you know,

vertical SaaS for spas and salons and then go to someone who's focusing on construction, vertical SaaS, and then moving to, like, dental offices. and then, you know, lawyers and, like, laundromats. Like, it's kind of really, really fun to learn about all these restaurants, like all these different small businesses. I would say, you know, if there's any, I think there's some spaces that are just more competitive today. So, you know, if you kind of take a step back and you ask yourself,

there's already probably companies that are vertical SaaS, right? If you look at companies like Square and Toast, for example. And so some companies, some verticals are much more developed. than others and probably the more exciting things are things that are earlier in the in this face so verticals that we're not they're not yet like kind of fully like modernized yeah yeah some of the ones you're pointing out like dental services of spine salons still have a lot of room to grow that's true let me ask you this i want to jump to the third segment which is developers but before that you've served a lot of startups you've served a lot of SMB

what's different about serving SMBs from a customer lens, whatever you notice they want, versus that's different from what startups want. Is that any? Yeah, yeah. Okay, so different, multiple things come to mind. When you build a business focus on startups, there is actually a risk there.

Here's a note of caution is that startups, the economics, their work, if you can scale with them. Because, you know, there's a high turnover, a company, if you literally think about a startup as a venture funded or a hopefully venture funded company, they come and go, they die a lot when the funding stops. And the real economics, similar to VC, how VC's work, the real economics come from the big winners. So if you're focused on startups, I would say that probably startups is a good place to start your journey, but you have to think about how do you scale up and keep those businesses with you

when they reach thousands of employees or much, much larger scale. That's not the same dynamic with small businesses. So small businesses, the difference is that the scale is just much larger. There's a lot more of them. There's 6 million employers in the U.S. There's around 25 million, if I remember correctly, businesses that are not even employers. And some of them stay along for a long, long time.

Again, companies that stay for decades, family businesses, and they actually don't grow. Some of them do, but it's quite rare that they grow to 1,000 of employees. So you need to build a business model that supports that situation. So churn, like, you know, this business closure is still a big thing. Obviously, enterprise companies, large companies, disappear much less. So you still have this high turnover of small businesses. But some of them stick.

And then the market is much larger. So you need to build a business model that really works well for that dynamic. And often it means thinking about things like share of wallet, and increasing ACV overtime and things like that. There is a bunch of other things to talk through around like the type of customer to and how they think about their business and what's their priorities are. I would say with startups, it's obviously growth really, really matters. The underlying premise of a startup is that they can grow to not basically to grow out of being

a startup and being a big tech company where small businesses, that's perhaps not the case. And the needs that they have are as well as their. the way they think about pricing and their sensitivity to price is more focused to other needs. Perhaps not about growth and more about maintenance and improve profitability and saving time

so I can spend more time with my family as opposed to grow, grow, and try to get to the next milestone. Yeah, that's very good points you made. And I think what you all did very well at customers, like truly understanding your different customer segment and their needs and even building your, you know,

support team to scale with that, keeping the lens of what the customer truly requires. Yeah, maybe I'll say one thing about that support piece. I mentioned in the beginning that payroll is not just technology. It's also operations and service. And I think that idea, that concept actually applies to other places too. And if you're building a company right now and you think about the solution that you're providing, Put yourself in the streets of the customer and don't think just about their online experience because you're a developer and that's kind of, or your designer, you know, you just love technology and you just want to have everything online. Think about the entire experience, including the people, the service side, the operation side, the end-to-end experience.

Of course, the customer doesn't care about the fact that these are different departments or something like that. They just have one brand. For us, it's gusto. And Gusto needs to be absolutely freaking delightful and awesome and fun to you. So you talk about it to your fellow business owners, whether you talk with someone on the phone or email or whether you just use our new app that we just launched within our platform. Yeah, that's such good advice, especially as you scale, because I think people forget it's not just one feature. It's like, how much friction are you removing from the customer in and how truly is it delightful? let's talk about your next customer segment.

So recently, Gusto's added developers as a new segment. I'll be honest, I never predicted this in Gusto's journey. So why did you push your developers and how did you decide to service that? Yeah, so we've been working with development. Our API was, we have had a public API since 2013 and I have a lot of tech partners using this API, making, just expanding the product functionality for Gusto and for our customers. but what this push with Gusto Embedded is really taking it to the next level. So the idea here is, again, I have a really big belief in GUSO is a big belief in VerticalSAS.

I think that in the end of the day, what's best for the customer ends up in the long term being the reality. So I believe that for many segments, for many verticals, it's actually much better to have an all-in-one platform to run your business or your small business. And if that's the case, then we want payroll and HR and benefits and the entire thing around employee management should be a part of that platform. So for us, for Gusto, it's like, okay, great. Well, we know how to do this thing. We've been doing this for 10 years, hundreds of thousands of companies. And we can take and basically everything that we've built, not just the technology, but again, the compliance side as well, which is extremely tricky and bake it in. And just basically bake it in as a product that's really easy to implement.

So if you're a new, a vertical SaaS player or someone who wants to expand their footprint to solve more problems for their customers, you should be able to build a payroll product and ship it in 30 days, 60 days, instead of spending 10 years like we did. Yeah, that's really like, I know payroll products takes a long time. But I know it wasn't, it wouldn't have been an easy decision. because if you think about it, you were directly acquiring these SMBs as your customers and offering payroll and then HR. And, you know, if you had to use the counterview to this,

which is embedded finance feels a little bit like you're giving up the customer relationship through the partner. Is that true? How did you all think about it? Yeah, totally. Well, I think, you know, it's, there's kind of two things. there is what there is there there is the how do you operation like first like what do you believe the future of the industry is and then you just you have you can't ignore reality if that's the truth

that that's the truth you have to go and do that like the Netflix exam the famous Netflix example of moving to killing the DVD business moving to streaming because that's that's where they saw the future and what blockbuster stayed behind and all that that great story um you know I'm sure it wasn't an easy thing to do at the time but they had to go through it um and then for For us, when I think here, you know, I don't know if it's going to be as big as in that kind of video streaming example. But I do feel like there's a really big change here. That's really great for customers. So Gusto is, you know, we can't, we shouldn't be fighting it.

We should the other way around. We should make it happen. We should be the one to create that change. So that's like the optimistic side. Now that, okay, now here's the hard part, right? Which is like, oh, gosh, like we have, we have this great business. It's going really, really well. People are really, really happy.

How are we going to, why would we move resources or how are you going to remove resources? from this business and start building something new. And I think that's one of these hard business decisions that make a difference in the long run. And to do that, you know that you're probably sacrificing growth in your core business because you're taking away resources from it. But that's in order to make the long term much more sustainable and really aligned with what's best for the customer.

So that's why I feel for us, since we, and this is something that, you know, I knew we definitely talked about in the board a lot. like this is a type of a decision that it's not it couldn't be a small product team that that wants to do this this is like all the way CEO executive staff board everyone needs to understand that hey we believe in this thing and we're going to go all in there and that's the future um so that's why we we did it and it wasn't an easy decision but i think it's the right one you made some two very important points there which is one you know how important it is to be see what's right for the customer and at the customer

once and all in one product, you know, you have to make this decision which we don't know time will show, but make, as you said, may or may not cannibalize the current core business, but it's it's like you have to, if you use the lens of make something people want, you know, you see that your customer has been around now for 10 years and you see how the trend is changing and you respond to it, right? So, I mean, I think kudos to you all to have made that decision. And I know it was something that Gusto proactively pushed by. You know, and sorry, I knew, so you keep going. Go ahead, go ahead.

Oh, it's about to say, you know, and the example of like why I think it's better for customers, just to make it real. It's, so one obvious benefit is bringing it all into a single system, right? Data is integrated. It's all going in the same place. You trust a single vendor for you to build your barbershop or your dentist shop, and then you just run the entire thing from it, and it's all connected. But there's another thing, which is you can actually build a better payroll product this way. So, for example, if you are, you know, one of our partners is called Archie, and they basically focus on this dentist space. And they, people there get paid as a percent of production, like a percent basically of, you know, the revenue that they, that they create.

And if that's the case, then you can get, you could basically build a cost and payroll system that just to focus on these type of workers, which a horizontal, you know, solution like ADP paychecks will not be able to, Augusta, would not be able to do it because they're not. customized just for your your situation. Like we have the same thing with a company called, you know, companies that called Sents that does the kind of the laundromat's dry cleaning space and people there get paid by folds, like number of, some of them get paid by number of, basically again, like the activity that they create and the customer value they create and they can integrate that into the payroll system itself, all connected. So that's the, some of the cool stuff you can build when you really understand the vertical

you're in. Yeah. Well, many in the audience and seeing are developers and some are founders. So how should they think about who to partner with? You know, this is another thing which comes up as the number one question in why C officers. Build versus buy, right? Or build versus partner. So when should a founder go directly to the industry and just build everything and then when should they follow the embedded out? Right. Yeah. So I think that the, the, the, the kind of the, the, I was the first step advice, the most basic advice is you need to own what is core. And then the next question, okay, that sounds cool, but what is core? What does that mean? How do you know what's core? And I think the answer there is to think about what is the unique insight that you have in the software, in the business that you're creating. And you want to make sure you own your destiny around that insight. And that could be, hey, we have like, a system of record where we have all the data in one place and that's where everything's coming

from. So we really need to own the system of record. That's really the innovation. Or it could be that the innovation is a sort of one of the user experiences or is a payment flow, it's a technology, backend, like a security thing, whatever it is that you're doing really uniquely and you think is the kind of the driver of your business, you really need to make sure that you own. So that's core. And then I would say partner or buy, it depends how you define it, but you know, use like an external vendor for things that you want to, first that you want to try out. So, you know, you may think, hey, that could become a core one day, but let's try this thing out. And it's much cheaper to try it out with a partner instead to kind of get to market quickly.

Or things that you just don't want to actually like reinvent the wheel in and you just need to make it work. So, you know, if I'm building a product that needs to send SMS and it's just like one neat part of what I do, but it's not a huge deal. and definitely I'm going to use Twilio for that. I'm not going to rebuild the SMS delivery or payments with Stripe and so for many examples like that. So the first question to ask, and I think it's really important for founders and product executives to be aligned on, is what is our core? What do we have to? Where do we innovate and everything else? Let's not spend our resources there because we are so a resource constraint.

And then in terms of how to choose a partner, what I would advise is, is look at this from the customer lens. So ask yourself, like, for my customer, what would be a successful product here? And make sure that the company that you're, the company that you're partnering with fulfills those needs. So for the example of payroll, just to use that as an example, if I am, if I am, you know, a vertical SaaS like a vagaro that has stylists,

you know, and they kind of in that space. And I want to go and add be able to pay them because they've managed an entire business through Vagara today other than payroll. Then I need to tell us what is a good payroll system for them. And the answer is not just like a place where I can plug in data and click a button and end up having a payment on the other side the next day. But rather something that does not cause like that I won't get fined in the end of the year because I miscalculated taxes or I misfiled payroll

or something that will not get my employees to quit because I screwed up their taxes. So you really got to think the end-to-end side of things. That could include support, for example. You get to make sure that whoever you partner with, you really understand what happens when there's an issue and the customer is having a problem. So customer point of view, that's my one-liner there.

Yeah, and in addition to what you said, you know, about the resource constraint point, which is very real for startups, right? They never have the scale of resources that they need. And therefore, to try and do everything, then you kind of drop the ball on a few things. So in addition to the resource constraint point, I think that's one that's real.

The other thing that you're highlighting here is what's not core, Right, which is something like fatal, having worked with Gustoacadal, like it is so complex and so nuanced that I don't understand why everyone will try to bury payroll. But sometimes it's like you need to know that to be able to figure out, is it cool or not? And is it worth putting your resources against that? Yeah, yeah. There's been, I think that's a great great way of really clarifying it. I think maybe what we're talking about behind kind of to connect these dots is quality.

You've got to make sure, in the end of the day, you want to ship a high quality product for your customers. So whatever you own, you have to put enough resources on. So it's successful and really high quality. Whatever, everything else, you make sure that it's high quality by bringing in the right partner. So it's all about the end-to-end user experience in the end. You've got to make sure that you don't put that aside. You know, one mistake that really often software companies do is they just quickly want to bring a partner up, set up, and just get something out quickly.

And they end up actually losing customer fate because of it and kind of screwing themselves because it's not just that they don't get the right attach rate. They also kind of lost customer confidence in their product. Absolutely. And for the audience, I highly recommend you read this book by Jeff Lawson, ask your developer. He actually has a very good framework for Build versus partner,

which a lot of the stuff over you actually touched on. But he actually talks about how everything, like most software, is going to move towards embedded and why developer becomes the primary customer and then through the lens of the developer, how you think about the end customer. So it resonates a lot today in terms of what you're saying. So switching gears a little bit, I want to talk about embedded finance. Your announcement today is essentially saying that you're going to make it easier for software providers to make compliance into embedded payroll. You also mentioned that many of your developers have been using the payroll API since 2013.

I would assume that they would have assumed that compliance is baked in. Is that not true or what additional compliance work is going on to this? Yeah. Yeah. It's a great question. So there's a bunch that we count we counted in like just in the first three months. There's over 16. There's around 16. That's the number I saw new features and functionality that were added. specifically around this stuff. So there's a long list, but I'll give you the kind of an example of what I mean. So one of the things that we launched, and I'm really excited about, is this idea of embeddable workflows.

So the way you use embedded, so how does it actually look like to build your own payroll product with embedded, right? There's kind of two paths. Paths number one is you have just everything is APIs. So you come in and you custom build every single thing exactly the way the user experience, the way you want it. So it's really like every single thing, adding an image. a new employee doing a tax setup, running reports, running payroll. All these things are just completely customized.

There's another way, which is you, and that's kind of one of the new things we're talking about here, is you actually use pre-built flows that we already built for you, and you just integrate them into your app. And then you can pick and choose, hey, to that conversation earlier with what's core and what's not. Here's the area that I want to innovate. It could be, for example, run payroll. But here's the area that I don't care much about and that's like state tax setup. And why that is important is because where compliance comes in is that when you use these pre-built flows,

we bring in a lot of our knowledge and experience in the past 10 years to make sure that these flows are right for the customer, not just in the way we ask for data inputs, but also the way we do validations and the way we keep updating things. Because regulation changes every year for sure, but sometimes every quarter, and every month depends on the state and the local government. So these components just update with the latest regulations. You don't need to kind of keep track of that. So this is an example of what I mean by, you know, built-in compliance. Obviously, you know, everything that we do in gus.com, like just since day one is all

about making sure that we protect the customer, that's our job. But here, we make it really easy for developers to both ship something quickly out to the market and make sure that it's compliant for the long. term and no one comes back a few years later with an issue. Yeah, did I read this right on your blog post? Did you say like one third of the companies in the U.S. get fined for some kind of mistake on payroll? Yeah, yeah.

That's really painful because, again, like bad payroll means fine. And a third of companies in the U.S. today get fined every year for not doing payroll correctly. And that's pretty bad for folks. and pretty bad experience. So the goal is to make sure that as this industry goes through this transition and you have all these vertical SaaS companies integrate payroll, they make sure that they protect their customers. So they're not a part of that statistic.

Got it. And in general, compliance is really hard, right? It's just not just for payroll. It's definitely the hardest part of payroll. But if you think about fintech companies that are building for various customers, lending, health care, they all have compliance. What advice do you have for founders who are essentially building in complicated industries focused on compliance?

What did Guster do right in the early days that has served you well today? Right. I think my first advice there is to understand which part of your product is highly regulated and you really got to get it right and accurate. And then which parts of your product are not. that is important because of the way you set up your your culture and how you build software. You know, there's like this old kind of Facebook tagline around move fast and break things. And I think that, you know, I know that they've changed its sense, but it does give like a sense

of like this idea of like, hey, some things can be fixed later. And but but the truth is there is the complimentary is that some things can't. So you really need to make sure. where you spend a lot of your time and you put quality first. You never ship anything to customer that's not absolutely perfect, but also enabling your culture to have parts of the company that's much more iterative and fast and can quickly learn and adjust with new inputs. It cannot be a monolithic culture.

That will be my first kind of advice around building engineering product design teams in this kind of compliance focused, in a compliance-focused area. The second thing is to really embrace cross-examination. functional work. And what that means is early on in your startup journey, bring in like amazing, like top, top class regulatory compliance legal folks. I always say that in Gustavs our secret sauce is actually our compliance and legal team. Because they're not just extremely knowledgeable, but we choose folks who are also creative

and they're builders. So they come in and they work with our product teams to make sure not just how we, how we, you know, protect the customer, but also how do we implement. innovate and make something better for them. So bring that early on, make sure they're a part of the brainstorms and OVMite makes the product great. And we've done that. One of our very, very first hires, and you and I talked about it in another conversation, was, you know, a compliance person from paychecks.

And then another person was someone who built the compliance, was really in charge of the compliance for two major other payroll providers. So really, really important to bring that early on. to the culture. Yes, I want to double click on both for this group. So number one, you said, you have to be clear on what can't be broken versus what can be with your EPD engineering product design and data team. So go back to the first year of Gus.

First or second year, first two years. What was your framework or guidance to your engineering team at the time? Like what aspects of payroll did you say was okay to like ship? And it today was what aspects was not okay. Yeah, yeah. Yeah, I love that. Okay, so I'm going to bring myself back to that world in the very, very early days. And the first thing that comes to mind is that the core of the tax calculations and compliance,

and in the end of the day, making sure that the outcome of the actual payroll system in the physical world, not the software, the physical world, right? money moving and IRS filings and things like that, that has to be right. And there's no cutting corners there, zero, right? So that's one. On the other hand, here's an area where it's totally fine. It took us, I want to say a year and a half maybe or something like that to actually start charging customers. And what we did is we basically never got around to build or it took us a while.

to get around to build a billing system for our customers. Now, our customers chose to pay. So they're already, at that point of time, everyone, you know, they were part of a paid package and they knew that they were paying. But they probably noticed and didn't complain, by the way, perhaps, that they were not getting actually charged. In the end, we didn't start charging them, obviously. So that's an example of something that can totally broken does not have like a customer impact.

If anything, it has, you know, more impact on you. but totally the right way to prioritize looking backwards too. Here's another place to kind of make it a little bit more nuance, which is user experience, right? So you could actually say another viewpoint is like, hey, what's important is the physical world, then maybe it's okay to have a lower-end UI in some areas. And my answer there is actually that's a really tricky proposition

because for us, one of our core innovations was user experience innovation. It had to look and feel and really like 10x better than everything else out there in terms of the user experience. So we were, so we didn't cut corners there in terms of where we wanted to get kind of our goal. But what we did do there is iterate really quickly. And it was okay to ship something and then, you know, next day, shoot improvements and so forth. So you could move faster there without, you know, kind of waiting for long launch times. Yeah, and looking back, would you have done anything different now knowing everything? Yeah, a lot of things, a lot of things.

You know, you learn so much to any journey. Here's just one thing that comes to mind. I'm happy to talk about other things too, but the first thing that comes to mind to me is actually pricing. I think we completely undersold ourselves in the early days in terms of the value we provide to customers. You know, you go to market, you have a confidence. problem. You have a, you're like, oh, gosh, I really hope people want this. And you start charging really, really low. We charge extremely low. And that was, you know, and then you start getting distraction. And then you ask, well, is it because of the prices or not? And then you get, you know,

you're really worried about increasing prices. So looking backwards, I would really try to charge, you know, my advice to funders is try to go the opposite way. Start charging what you feel is, you know, is the value that you provide and then perhaps fix downwards versus fixing upwards. Because here's the issue it creates. I'm not talking about revenue or like cash flow, although it is extremely important in these days. There's another thing that's even bigger, which is just business model. Because if you end up underselling your core business, the business may just not work in terms of the cost of acquisition and things like that. So you have to make sure that you walk towards a sustainable business model that can scale for many, many, many years in customers.

Yeah, and Toma, I don't know if this makes you feel better or worse, but 10 on 10 YC companies, I always say they're all under charge, especially. It's the most common thing. I think every startup goes in and says, oh, should I up it by 30%? And then no one blinks. If you're truly adding value, no one blink. Totally. That's totally true. It's totally true.

Well, it's a confidence thing. I feel, you know, you're stepping in the unknown, building a company is a lot. a lot of like, you know, you kind of, you have this really, really big vision. You see this really big mountain or hill ahead and you want to climb it, but you know that you've never walked through this path before. And, you know, in every corner of the road, there's going to be a surprise and you just want to be ready for it. So I think, you know, obviously you build confidence as you go through that path.

And I mean, oh, great. I'm kind of, you know, I'm 5% in, 10% in. I feel a little bit more confident in my abilities. But I think confidence still is something that people build over their journey. And it's good because it needs to come with humility too, because here's the issue as well. The market and the customers are always changing. If you feel as a leader or a founder that, oh, I know this already, I know everything. I know exactly how things are going to go.

You're full shit because, you know, everything changes. So you have to have the humility of learning from the customer and from how the market changes around you. So well said. So well, well, on my last question, it's going to be a meeting. question, but we have seven minutes, so I'm going to turn it over to you, which is, what does embedded finance mean to you? Like, what is the market? And I know you're very bullish on embedded finance, but how should the founders, he listening to us here, be thinking about

embedded finance, and how do you think this market evolves over the next five, ten years? Yeah. Yeah, I think it's correct to what we said earlier around the basically what's good for the customer ends up winning. And the idea with embedded finance, the premise is pretty simple. It's basically that create as you, when you build a new software system for the customer, the more end-to-end,

the more inclusive, the more connected the system is for your customer, the better it is. An embedded products, whether it's embedded finance or other type of APIs you can bring into your system, enable you to do that fast and in high quality. And I think that's the key.

So I am extremely bullish on this idea of bringing in multiple components into your product, driven by what your customer needs are. So my advice there for founders is maybe focus again on like, look at your customer, understand how the day-to-day look like, connect the dots and see how might I build something that not just solves a paint, like a specific, you know, a standalone point of their flow, but rather the entire flow on its own. And that's, they can look at the customer side of things.

It includes, you know, finding a customer, like being out there as well as, you know, figuring out the offer that you're going to create for them. How do you price and package and how do you charge for it and finally also get paid through it? And then how do you take it to accounting? And then how do you reconcile that across everything else that happens to your business? It's all connected in the mind of the business manager. It's not seven different departments like enterprise, enterprise often are. So connecting the dots, I think, is something that this new space is embedded finance really enables.

I'll say one more thing about fintech and embedded finance also as a part of it as a whole, which is especially now giving everything that's happening in the markets. People are starting to be more realistic about what are good businesses and what are bad businesses. And one of the things that make a good business, and that's going to sound pretty obvious for people, is you need to make more money than you, then it costs you, right? Then the goods cost you per unit. And it's really, really important.

And you also need the cash flow to work out. So it's not like money in the future one day versus money coming in the future today versus money coming out of your pocket today. So in fintech, there's specifically a potential place where founders can or product folks can get distracted, which is you think you found product market fit because you gave away money. for people, or for businesses, you get basically fun financing to users. And you feel like, oh, my God, there's all these people who want this product.

That's amazing. But make sure that you can remember that that's a cheap way of getting to product market fit. People always, you know, if you're walking down the street, someone offers you 10 bucks and tells you, you know, pay me someday maybe $2 later, of course you're going to take that offer. And it's not product market fit, it's just free money. So make sure when you build your fintech, when you build your financial-based product, you really think about the unit economics and don't get too distracted by what could look like a product market fit.

It's not product market fit if your product is not sustainable. Yeah, that's a great example. What you're essentially saying is if you are not making money on that lending product and you're essentially only subsidizing and kind of giving free money, then you don't know if there's real product market fit. If you can charge enough to lend and make money, and if you can still retain the customer, then there's some product market fit.

Is that right? Yeah, like what if you and I come out of this chat today and we build a new subscription startup, we call it $1 a month.com, and we basically you subscribe and we give the user $1 per month and they just get it to their bank account. I'm sure you and I are going to get millions of users really quickly. But probably it will be hard to build a business out of that.

Yeah, that's very true in general. But I can see how you're saying need to pay more attention in the embedded finance world. Like, that's not happening. Let me ask you, what are the kinds of outside of payroll in embedded finance? Are you seeing as products being offered via APIs? Yeah, totally. So, you know, I think financing, just to make it clear, is an extremely valuable tool.

You can really help people make their cash flow work. Again, if you look at B2B companies, sometimes you get paid for services you provide in the future. So if you can align the cash flow coming in with the cash flow going out to providing additional services for new customers, it can really be a win-win situation. So I feel like there is a lot of greatness happening there. You just need to be careful and make sure that it makes sense

from a business standpoint, but that's kind of my higher level point. I think insurance is another great example. You know, you go through different flows and different, you know, products you build online, whether it's a service or whether it's a physical product. Like insurance is a good financial product. It enables people like the customer to mitigate risk. And it's something that it's quite hard to build on your own, because you've got to really develop your underwriting knowledge.

And it's a good place to start to use like embedded insurance. There's a bunch of interesting companies there, I think. And there's, again, this space is brand new, so there's tons of opportunity. So I think there's a lot of, there's lots of interesting opportunities in that space today. And the pattern is a product that helps your customer build the, like go through the end-to-end journey successfully and really solve multiple. painful pain points for them, but it's something that would take you 10 years to really figure it out to do it in high quality. And that's where you go and you outsource really to that partner. Absolutely. Well, we are at a time. Thank you so much, Toma, for sharing all of the perspectives

right from the early founding days of Guster to expanding to new sectors and embedded finance. And congrats again to the entire team. I know you all worked incredibly hard to launch the new partnerships and the vision for a bidet finance. For anyone looking to learn more, please visit custer.com. Thanks, Anu. Hi, everyone. I hope you all can hear me. I'm waiting for the cue from the YC team. Great. So welcome everyone to YC's founder Firesign. My name is Anu Hariharan and I'm a managing director at Y Combinator where I work with our growth stage companies. I'm here today with Tomer London, the co-founder and C.O. of Gusto.

I've known Gusto for, I think, close to now seven years and worked very closely with Tover on the board. Gusto provides growing businesses with everything to take care of their team and was part of WIC's Winter 2012 batch. Welcome, Tomar. Hello, thank you. Thanks for having me. Thank you for joining us. Thank you for joining us. And today, Guster has a special announcement to make where you just

released a blog post about it, which is you're making it easier for software providers to make compliance into embedded payroll, as well as new vertical SaaS partners, which is really exciting because now SaaS partners that sell laundromats, fass, construction, restaurants, they can all offer payroll more seamlessly through Guster. Yeah. So congrats to you and your team. It would be good, Tomor, just to kick it off. If you can just explain what embedded payroll is and what the announcement is today. Yeah, thanks, Anu. Well, again, just excited to have this chat with you. Yeah, today is really, really exciting for me. I feel this has been, in a way, more than 10 years in the making. Basically, what we're doing with Gusto embedded is to help basically take over 10 years of our experience building payroll software and compliance built into it and making it available to any software platform, any software company wants to ship their own payroll product to the market. And it's not just the software side. It's also the service size and the operation side. It's everything that's happening behind the scenes.

You know, payroll is quite a complex thing. It's not just like a quick U.S. flow of, you know, you put people's names and you say how much you want to pay them and you click and you're done. There's a lot happening behind the scenes with filings and tax calculations and, you know, multi-year-long conversations basically through this compliance flows with different state agencies. There's 50,000 plus tax codes out there in the US. So anyway, there's a lot going on behind the scene. It's not just the software. So anyway, today we're announcing that we're announcing this really just a lot of great progress that's happening, both in signing up a lot of new platforms across all these vertical

SaaS players that you mentioned, whether it's construction, vertical SaaS or dental offices, vertical SaaS or accountant and more and more and more. but also a bunch of new features and inflectionality. But we can talk about it later. They don't want to take all the time right now. Yeah. And, you know, Toma, you bring up a very good point about payroll. I didn't realize this when I first met you all maybe like seven years ago.

But, you know, for most YC companies, we always say ship fast, get feedback, iterate. And I remember very vividly you pointing this out to me, which is, I think, in the first year of Gusto, you all had less than, hundred customers and I asked you wow that's slow because usually then what if you often ask hey if you signed up 100 in two weeks can you sign up thousand and i remember this point you made well if payroll doesn't work there is no coming back the customer will be displaced because they didn't get their paycheck so it's one of those unique products where you had to make it work perfectly there was no room for error. And that's why you all took a lot of time to scale it. Yeah, yeah, exactly.

When you get payroll wrong, someone is not getting paid or even worse than that, in my opinion, you know, years later you may get a notice from the IRS saying that you did your taxes wrong. And now you need to go back if you're an employee and fix your W-2, like, you know, get new W-2s and work with IRS. Or if you're an employer, go back to employees who left you and are not a part of the company years now and go and work with their taxes. So the cost of being wrong is extremely high. So I really think that there's a set of product and technology software out there that you really have to get it right in order for you to deliver the promise for your customers.

And the cost of not doing that is terrible for your customers and then terrible for your business. Great. So I expect so many people today, I see it on the Twitter space, are actually founders and CEOs. So before we dive into your launch today, I'd actually like to take this opportunity to discuss how to build for new verticals and how to think about this as a founder and CEO, since quite a few of them are actually probably in the very early stages in the audience. So some background for the audience, over the last 10 years, Gusto has scaled to build for customer segments, many customer segments. I don't know how many of you know this, but Gusto first started servicing startups, then they started servicing S&B,

starting with Flores, then accountants, and now with Gusto embedded payroll, developers of their customers who are embedding payroll directly into software. So, Jodagh, can you go back and tell us your journey of starting with startups? Why did you start? And if I remember right, Gusto was a pivot in the badge.

It wasn't your application. But when you, but we'll say that for another time, but when you decided that payrolls of this, what are you going to build? Why did you start with startups and how did you sort of think about customer segments, especially in that first year? Yeah, totally. So I would say we started with this realization that, you know, Josh Eddy and I all come from small business families. My dad has a clothing store for 35 years now. and growing up in that environment, seeing how it feels like to be a part of a business

and running a business, I learned that business owners and managers have all those different hats they need to wear. It's just incredibly busy. They need to be the salesperson and then the marketer and then the cleaner and then the janitor and the accountant. Like it's all in one, all these different hats. So we knew that businesses,

specifically small businesses were very, you know, they really had this need of helping, of getting more, leverage and software can be really, really, really great at that. We also knew that we also really believe in this idea by building our own startup companies before Gusto that the most important thing in any business is their people. And that's what makes or breaks the business. So if you kind of do this plus this together, we ended up with this really grand vision

of our goal is to help any business, small, large growing, to help basically build a great place to work and really serve the entire life of the employee life cycle so people can build great places to work. So that's kind of the big grand vision. So the question is the founder is like, okay, that's cool, but where do you start? That's where kind of your story, Anu comes in, which is starting not just with, I would say, startups, but also it was even much more narrow than that. Those first hundred customers were technology companies who are based in California, who have no

health insurance or any other benefits because we were not able to support it, you know, and were agreed to be paid, you know, nine days after running payroll. So it's an extremely, extremely small group of target customer to start. And that's really where we started. And I think when you think about your own company and how to choose your customer segment, there's three important things that have to happen. First, you need to make sure that you're choosing a segment where they have an important customer problem that they're trying to solve. It's, kind of this, you know, painkiller versus vitamin analogy. The second thing is that you need to make sure that the product that you're building

and you're starting small has to solve it and customer have to love it. The third thing is that you need to be able to reach this customer, right? So important customer problem, your product actually solves it, and then finally you can reach this customer. And startups was a, or at least this really, really tiny group of startups was a good place for us to start because we could reach them. we were at a part of YC batch, a bunch of companies were around us, a lot of our network and people that we know was really, really easy to get to. And more importantly, technology companies are very viral.

So when you start selling, and if you do a good job solving problems for them, you can actually get really nice word of mouth. We knew that we can solve the problem for them because we really scoped it down to a problem we can solve with this initial product. And then finally, we knew it was an important problem because payroll is such a pain for, for businesses today, as I mentioned earlier. Well, that's fascinating. I didn't know that in the first year, you gave payroll nine days after the payroll was done. So what was your competition like?

Before Gusto, how did startups pay employees? Yeah, that's a great question. So, you know, 10 years ago, I think if you're kind of paint the picture of back then, the majority of the payroll industry was, companies like ADP and paychecks and kind of really large more traditional companies. And for you to run payroll, what you had to do is you had to pick up the phone and talk with someone and tell them to run payroll. You had to take, you know, use fax machines in

order to send the hours back and forth. You have to meet someone in person or rap in person in order to sign you up so they believe you're a real business and underwrite you for payment. So it was the old kind of traditional world. And I think what, what we came in, one of the insights was, you know, to this idea of, hey, all of this process can be made so much easier to use and simple. So that you don't need to be a professional to run payroll. And you should be able to do it, you know, on your computer on the weekend in the evening without talking with anyone. And that's kind of the, I would say, the first insight. The second insight was that employees are a critical part of the system.

And if we build a really great experience for employees, it's going to make. the employer's lives these years. For example, employees enter their own information when they log in, or when they sign up and to the company as opposed to the employers need to, you know, kind of go back and forth with them. And that was kind of the very, very, very initial thing. And to your point, like, ask those customers who agreed to take on this product, despite the fact that they took like, you know, like eight days to get paid. They did. They did. it because we solved the payment that was much more important for them, which is just the complexity around payroll. And for them, this was important enough.

That's, yeah, I was going to say, I mean, talk about product market fit. After all that friction, they love the product and they're using. That's the sign that you truly are solving a pain point. Now, let's, so you were working with startups. The majority of the first 100 startups, as you said, were tech startups based in California, where we were taking more than nine days to process payroll. But things were going really well. I remember NPS for Gistel from the very early days was very strong. So then why did you decide to build for SMBs?

You could have pretty much just focused on startups. Why SMBs? Right. So as I mentioned earlier, we started with this really big vision of we want to go and we want to serve the larger market, not just startup and even not just SMBs, but we had to start somewhere. So we started with startups and specifically start. this narrower version of startups,

because that's where we felt we can get really great customer love with the product that we were able to build. But then as we spend more time and obviously started expanding, not just California, but multiple states, not just eight days to get paid, but same day, like next, like two days, then one day and then same day payments. And then obviously supported health insurance and other things.

We felt that we were ready to support, you know, we kind of take the next steps towards our product, vision go to small businesses. The really important thing when you, in my opinion, when you move from one vertical and kind of start expanding towards your vision is you have to make sure that you maintain that early customer love. You know, I knew you mentioned, like we had the initial, our NPSs were always in the high 80s.

And that's just one measure, not that NPS is perfect in any way, but it's a measure to show customer level was extremely high. And that creates high word of mouth and trust and really creates a really great kind of backwind for your growth. And the risk of expanding too early is that your product is just not ready and then you're going to lose that. So one of the ways that I think to know whether you're ready is to just look at your current customer base and look at the people who want to use your product, the people who are using your product that perhaps are a little bit adjacent to what you thought you were supposed to serve. And learn from them, talk with them. you like about the product and ask yourself whether you can take a few steps with your product

to really double down on that and get a lot of customer love from this new segment. So the answer is already under your nose usually. If you don't get traction and from like, let's say, you know, you built, you have software for hairdressers today and you believe that, you know, the same software can be used by spas. But you don't have a single spa customer and you just really hope it's going to work. I don't think that's a good strategy. I think you have to listen to your current audience. That's a very good point you make, which is,

I think that's one of the common mistakes I've seen founders make when they expand to a new vertical is not deliberately, but accidentally losing focus of the existing customer segment. So how, I mean, tech startups are just very different from stars and flores. So how did you maintain the customer love of the existing segment? then. Like, what did you do to continuously measure that? So when we launched the initial product, although we started with a very small-scoped audience, we never used language whether or we never built a product or used language to say that

this product is just for startups. We've never done that. It was always like this is for, you know, businesses at different sizes. We did talk about sizes a little bit, but it was never like just specifically startups. Because we knew this, it would cost. It was coming. It was coming. So we didn't know perhaps if it would take one, two or three years, but we know that we knew that this is the next thing to do. And perhaps like the generalizable advice here is really think about your vision and make

sure that you don't put yourself in a corner when you do want to kind of move to the next to the next thing. We had that, by the way, with our brand, which is kind of another thing. There's, you know, with just two types of expansions, right? You can expand customer audience. You can expand the product set that you're doing. And one thing that we, what we did have in the beginning, that we put ourselves in the corner is we started the company with the name Zen payroll.

For folks who don't know, for the first couple of years for the company, it was Zen payroll, and then we rebranded to Gusto. And the reason what we quickly moved as fast as we could, basically, was because we saw that that initial name is not very forward-looking if we're thinking about our wider strategy around creating this people platform for every single activity in your workforce for all these different, sort of company. So it's not just payroll, it's also benefits and employee onboarding and software and hardware provisioning and IT and everything else that happens in the employee life cycle.

Yeah, I remember, and it was not an easy transition, but I think you all did it at the right time. Well, I have three kids, and I can tell you that naming the company, renaming the company was a much harder exercise than finding the right name for my kids. I'm sure so. And I know because acquiring SMBs is not easy and so when you're changing the brand name, you know, you have to put it pretty much you're starting from scratch. That was going to be my next question, which is, you know, if you look at startups in general, they find most startups find it very hard and have struggled to tackle the SMB market. Why do you think that it's, you had, I mean, Gusto is an amazing success. I mean, you serve close to 200,000 SMBs, your beloved product in the SMB segment. But why do you think that is?

Why have people historically struggled? Yeah, today we serve, you know, lots more, like much more than 200,000 businesses across all different sizes, whether it's customers, you know, whether it's small business we just started or companies over, you know, around 500 employees. So, yeah, we reached a really nice scale across small businesses and scale companies. I think the reason why it has historically been so tough is because SMBs are so hard to reach, right? So it's these three points that I mentioned earlier. This is point number three, which is, you know, you can have a great product that people love,

but you can't reach the audience. So small businesses were extremely hard to reach. And I think something happened around that time when Castro started where small businesses, there was a generational shift where people started trusting the internet more. And I believe that, for example, internet banking was a really big part of it. You know, if you remember back in these days, around 2010 and in a couple years around that area, you got just commercial banks pushing really strongly for people to use their online system and not come to the branch because it's just much better for their economics, better user experience.

And they basically educated an entire generation of SMBs and that they can trust the internet with things like money. And then payroll was, it was the right time for people to say, hey, can I do my payroll online? So you started looking at Google search results and things like that. And you know, it's like, hey, interesting. Actually, you know, online payroll is becoming a thing. People are actually looking like they actually looking for something like this. So this is my intuition around what happened back then and why that was the right time for Gus to start.

I think if we were to start the company four years earlier, it wouldn't have worked so well because people were not ready yet and educated. But back to today. So what's happening today? And how do you do SMBs? I think so two things. I think one, SMBs are online, small businesses are online. They're looking for solutions. They want to have their problem solved.

They have a lot of pain points, as I mentioned earlier. and there's a lot of great companies who are already serving them. But then that is already known for the past several years. So what's coming next? I think the next wave of this, and if I am now to build a new small business focused company, I would focus on a vertical. I think that when you truly understand a specific customer segment,

understand how they start their day, how they speak with their customers, how their business model looks like, what's their common difficulties and competition looks like, you can build a great product for them that's really tailored to their needs. And small businesses, especially now with the recession, potentially coming, you know, there's different points of view there. But in moments like this, people want to consolidate and have everything in one place.

So if I were to start a new company today focused on SMB, it would probably be picking a vertical, a specific small business segment that I understand really, really well. and going all in and building a great product for them. That's what I would do. And I think you can reach people really well this way because if you really understand, my dad's store, clothing store, right? If you really understand clothing store,

you know where they hang out, you know their language, you know what speaks to them, and you should be able to find a great, scalable way of finding them online. That's a very nuanced, well-tailored advice, which is you're essentially saying vertical SaaS is going to be the new trend in SMBs.

and catering end-to-end for each vertical. Are there, I mean, I'm sure in Guster you interact with all sorts of verticals. Are there some verticals you are more familiar with or more excited by the problem set that you see? Ah, so there's so many. And, you know, it's so fun. So I get to work with, through this embedded payroll business, I get to speak in the morning with, you know, vertical sass for spas and salons and then go to someone who's focusing on construction

vertical SaaS and then moving to like dental offices and then you know uh lawyers and like laundromats like it's it's kind of really really fun to learn about all these restaurants like all these different small businesses um i would say you know if there's any i think there's some spaces that are just more competitive today so you know if you kind of take a step back and you ask yourself there's already probably companies that are vertical sass right if you look at companies like square and toast uh for example and um So some companies, some verticals are much more developed than others and probably the more exciting things I think that are earlier in the in this space. So verticals that we're not, they're not yet like kind of fully like modernized.

Yeah. Yeah. Some of the ones you're pointing out like dental services of spine salons still have a lot of room to grow. That's true. Let me ask you this. I want to jump to the third segment, which is developers, but before that. you've served a lot of startups, you've served a lot of SMBs.

What's different about serving SMBs from a customer lens? Whatever you notice they want versus that's different from what startups want. Is that any? Yeah, yeah. Okay, so different, multiple things come to mind. The thing, when you build a business focus on startups,

there is actually a risk there. Here's a note of caution is that startups, the economics, their work, if you can scale with them. Because, you know, there's a high turnover company. If you, you know, literally think about a startup as a venture funded or a hopefully venture-funded company, they come and go. They die a lot when the funding stops. And the real economics, similar to VC, how VC's work, the real economics come from the big winners.

So if you're focused on startups, I would say that probably startups is a good place to start your journey. but you have to think about how do you scale up and keep those businesses with you when they reach thousands of employees or much, much larger scale. That's not the same dynamic with small businesses. So small businesses, the difference is that the scale is just much larger. There's a lot more of them. There's 6 million employers in the U.S. There's around 25 million, if I remember correctly, businesses that are not even employers.

And some of them stay along for a long, long time. again, companies that stay for decades, family businesses, and they never, they actually don't grow. Some of them do, but it's quite rare that they grow to 1,000 of employees. So you need to build a business model that supports that situation. So churn, like, you know, this business closure is still a big thing. Obviously, enterprise companies, large companies disappear much less. So you still have this high turnover of small businesses. But some of them stick.

And then the market is much larger. So you need to build a business model that really work. as well for that dynamic. And often it means thinking about things like share of wallet and increasing ACV overtime and things like that. There is a bunch of other things to talk through around like the type of customer to and how they think about their business and what's their priorities are. I would say with startups, it's obviously growth really, really matters.

The underlying premise of a startup is that they can grow to not basically to grow out of being a starting being a big tech company, where small businesses, that's perhaps not the case. And the needs that they have are, as well as their way they think about pricing and their sensitivity to price is more focused to other needs, perhaps not about growth and more about maintenance and improve profitability and saving time so I can spend more time with my family, as opposed to grow, go, grow, and try to get to the next milestone. Yeah, that's very good points you made. And I think what you all did very valid customers, like,

truly understanding your different customer segment and their needs, and even building your support team to scale with that, keeping the lens of what the customer truly requires. Yeah, maybe I'll say one thing about that support piece. I mentioned in the beginning that payroll is not just technology. It's also operations and service. And I think that idea, that concept actually applies to other places too. And if you're building a company right now and you think about the solution that you're providing, put yourself in the shoes of the customer.

And don't think just about their online experience because you're a developer and that's kind of, or your designer or, you know, you just love technology and you just want to have everything online. Think about the entire experience, including the people, the service side, the operation side, the end-to-end experience. Because the customer doesn't care about the fact that these are different departments. or something like that. They just have one brand. For us, it's Gusto. And Gusto needs to be absolutely freaking delightful and awesome and fun to you. So you talk about it to your fellow business owners,

whether you talk with someone on the phone or email or whether you just use our new app that we just launched within our platform. Yeah, that's such good advice, especially as you scale, because I think people forget it's not just one feature. It's like what's that? How much friction are you? moving from the customer end and how truly is it delightful. Now, let's talk about your next customer segment.

So recently, Gusto's added developers as a new segment. I'll be honest, I never predicted this in Gusto's journey. So why did you pursue developers and how did you decide to service that? Yeah, so we've been working with development. Our API was, we have had a public API since 2013 and I'll have a lot of tech partners using this API, just expanding the product functionality for Gusto and for our customers. But what this push with Gusto embedded is really taking it to the next level. So the idea here is, again, I have a really big belief in Gusto is a big belief in vertical SaaS.

I think that in the end of the day, what's best for the customer ends up in the long term being the reality. So I believe that for many segments, for many verticals, it's actually much better. to have an all-in-one platform to run your business, and your small business. And if that's the case, then we want payroll and HR and benefits and the entire thing around employee management should be a part of that platform.

So for us, for Gusto, it's like, okay, great. Well, we know how to do this thing. We've been doing this for 10 years, hundreds of thousands of companies, and we can take and basically everything that we've built, not just the technology, but again, the compliance side as well, which is extremely tricky and bake it in.

And just basically bake it in as a product that's really easy to implement. So if you're a new vertical SaaS player or someone who wants to expand their footprint to solve more problems for their customers, you should be able to build a payroll product and ship it in 30 days, 60 days instead of spending 10 years like we did. Yeah, that's really like, I know payroll products takes a long time. but I know it wouldn't have been an easy decision because if you think about it, you were directly acquiring these SMBs as your customers

and offering payroll and then HR. And, you know, if you had to use the counterview to this, which is embedded finance feels a little bit like you're giving up the customer relationship through the partner. Is that true? How did you all think about it? Yeah, totally. Well, I think, you know, it's, it's,

there's kind of two things. There is the, there is the, how do you operation, like, first, like, what do you believe the future of the industry is? And then you just, you can't ignore reality. If that's the truth, that's the truth, you have to go and do that, like the Netflix exam, the famous Netflix example of moving to killing the DVD business, moving to streaming, because that's, that's where they saw the future and what blockbuster stayed behind and all that, that's great story.

You know, I'm sure it wasn't an easy thing to do at the time, but they had to go through it. And then for us, when I think here, you know, I don't know if it's going to be as big as in that kind of video streaming example. But I do feel like there's a really big change here. That's really great for customers. So Gusto is, you know, we can't, we shouldn't be fighting it. We should the other way around. We should make it happen.

We should be the one to create that change. So that's like the optimistic side. Now that, okay, now here's the hard part, right? Which is like, oh, gosh, like we have, we have this great business. It's going really, really well. People are really, really happy. How are we going to, why would we move resources or how? How are you going to remove resources from this business and start building something new?

And I think that's one of these hard business decisions that make a difference in the long run. And to do that, you know that you're probably sacrificing growth in your core business because you're taking away resources from it. But that's in order to make the long term much more sustainable and really aligned with what's best for the customer. So that's why I feel for us, since we, and this is something that, you know, I knew we definitely talked about in the board. a lot. This is a type of a decision that it's not, it couldn't be a small product team that wants to do this. This is like all the way CEO, executive staff, board, everyone needs to understand that, hey, we believe in this thing and we're going to go all in there and that's the future. So that's why we did it. And it wasn't an easy decision, but I think it's the right one.

You made some two very important points there which is one, you know, how important it is to be, see what's right for the customer. And if the customer wants an all-in-one product, you know, you have to make this decision which we don't know time will show, but make, as you said, may or may not cannibalize the current core business. But it's like you have to, if you use the lens of make something people want, you know, you see that your customer has been around now for 10 years and you see how the trend is changing and you respond to it.

Right. So, I mean, I think kudos to you all to have made that decision. and I know it was something that Gusto proactively pushed. You know, sorry, I knew. You keep going. Go ahead, go ahead. Oh, it's about to say, you know, and the example of like why I think it's better for customers

just to make it real. So one obvious benefit is bringing it all into a single system, right? Data is integrated. It's all going in the same place. You trust a single vendor for you to build your barbershop or your dentist shop, and then you just run the entire thing from it, and it's all connected. But there's another thing which is you can actually build a better payroll product this way. So, for example, if you are, you know, one of our partners is called Archie and they basically focus on this dentist space.

And they, people there get paid as a percent of production, a percent basically of, you know, the revenue that they create. And if that's the case, then you can get, you could basically build a cost and payroll system just to focus on these type of workers, which are horizontal, you know, solution like ADP paychecks will not be able to, Augusta will not be able to do because they're not customized just for your, your situation. Like we have the same thing with a company called, you know, companies that called Cents that does the, kind of the laundromats, dry cleaning space and people there get paid by folds,

like number of, some of them get paid by number of, basically again, like the activity that they create and the customer value they create, and they can integrate that into the payroll system itself, all connected. So that's, some of the cool stuff you can build when you really understand the vertical you're in. Yeah. Well, many in the audience and seeing our developers and some are founders. So how should they think about who to partner with? You know, this is another thing which comes up as the number one question in YC officers. Build versus buy, right? Or build versus partner. So when should

have founder go directly to the industry and just build everything? And then when should they follow the embedded out. Right. Yeah. So I think that the kind of the, the, I was the first step advice, the most basic advice is you need to own what is core. And then the next question, okay, that sounds cool, but what is core? What does that mean? How do you know what's core? And I think the answer there is to think about what is the unique insight that you have in the software, in the business that you're creating. And you want to make sure you own your destination. around that insight. And that could be, hey, we have like a, you know, the system of record where we have all

the data in one place and that's where everything's coming from. So we really need to own the system of record. That's really the innovation. Or it could be that the innovation is a sort of one of the user experiences or is a payment flow or is a technology backend, like a security thing, whatever it is that you're doing really uniquely and you think is the kind of the driver of your business, you really need to make sure that you own. So that's core.

And then I would say, partner or buy, it depends how you define it, but use like an external vendor for things that you want to, first that you want to try out. So you may think, hey, that could become a core one day, but let's try this thing out. And it's much cheaper to try it out with a partner instead to kind of get to market quickly. Or things that you just don't want to actually reinvent the wheel in and you just need to make it work. So, you know, if I'm building a product that needs to send SMS, and that's just like one neat part of what I do, but it's not a huge deal. And definitely I'm going to use Twilio for that.

I'm not going to rebuild the SMS delivery or payments with Stripe and so for many examples like that. So the first question to ask, and I think it's really important for founders and product executives to be aligned on is what is our core? What do we have to? Where do we innovate? And everything else, let's not spend our resources there. because we are so a resource constraint.

And then in terms of how to choose a partner, what I would advise is look at this from the customer lens. So ask yourself, like, for my customer, what would be a successful product here? And make sure that the company that you're partnering with fulfills those needs. So for the example of payroll, just to use that as an example, a if I am a if I am you know a vertical SaaS like a Vagaro that has a stylists you know and they kind of in that space

and I want to go and and add be able to pay them because they've managed their entire business through through Vagaro today other than payroll then I need to us to what what is a good payroll system for them and the answer is not just like a place where I can plug in data and click a button and end up having a payment on the other side the next day, but rather something that does not cause, like that I won't get fined in the end of the year because I miscalculated taxes or I misfiled payroll or something that will not, you know,

get my employees to quit because I screwed up their taxes. So you really got to think the end-to-end side of things. Like that could include support, for example. You get to make sure that whoever you partner with, you really understand what happens when there's an issue and the customer is having a problem. So customer point of view, that's my one liner there. Yeah, and in addition to what you said, you know,

about the resource constraint point, which is very real for startups, right? They never have the scale of resources that they need. And therefore, to like try and do everything, then you kind of drop the ball on a few things. So in addition to the resource constraint point, I think that's one that, real. The other thing that you're highlighting here is what's not core, right, which is something

like fatal, having worked with Gustoacadal, like it is so complex and so nuanced that I don't understand why everyone will try to build payroll. But sometimes it's like you need to know that to be able to figure out is it core or not and is it worth putting your resources against that. Yeah, yeah. There's been, I think that's a great, great way of really clarifying it. I think maybe what we're talking about behind kind of to connect these dots is quality. You've got to make sure, in the end of the day, you want to ship a high quality product for

your customers. So whatever you own, you have to put enough resources on. So it's successful and really high quality. Whatever, everything else, you make sure that it's high quality by bringing in the right partner. So it's all about the end-to-end. user experience in the end. You got to make sure that you don't put that aside. You know, one mistake that really often software companies do is they just quickly want to bring a partner

up, set up, and just get something out quickly. And they end up actually losing customer fate because of it and kind of screwing themselves because it's not just that they don't get the right attach rate. They also kind of lost customer confidence in their product. Absolutely. And for the audience, I highly recommend you read this book by Jeff Lawson, ask your developer. He actually has a very good framework for Build was his partner, which a lot of the stuff, Jova, you actually touched on. But he actually talks about how everything, like most software,

is going to move towards embedded and why developer becomes the primary customer, and then through the lens of the developer, how you think about the end customer. So it resonates a lot today in terms of what you're saying. So switching gears a little bit. I want to talk about embedded finance. Your announcement today is essentially saying that you're going to make it easier for software providers to bake compliance into embedded payroll. You also mentioned that many of your developers have been using the payroll API since 2013.

I would assume that they would have assumed that compliance is baked in. Is that not true or what additional compliance work is going on to this? Yeah, yeah, that's a great question. So there's a bunch, we count it in, like, just in the first three months, there's over 16. There's around 16. That's the number I saw new features and functionality that were added specifically around this stuff. So there's a long list, but I'll give you the kind of an example of what I mean. So one of the things that we launched, and I'm really excited about, is this idea of embeddable workflows.

So you, so the way you use embedded, so how does it actually look like to build your own payroll product with embedded, right? there's kind of two paths. Paths number one is you have just everything is APIs. So you come in and you custom build every single thing exactly the way the user experience the way you want it. So it's really like every single thing, adding a new employee doing a tax setup, running reports, running payroll. All these things are just completely customized.

There's another way, which is you, and that's kind of one of the new things we're talking about here, is you actually use pre-built flows that we already built for you and you just integrate them into your app. Then you can pick and choose, hey, to that conversation earlier with what's core and what's not, here's the area that I want to innovate. It could be, for example, run payroll. But here's the area that I don't care much about and that state tax setup.

And why that is important is because where compliance comes in is that when you use these pre-built flows, we bring in a lot of our knowledge and experience in the past 10 years to make sure that these flows are right for the customer, and not just in the way we ask for data inputs, but also the way we do validations and the way we keep updating things because regulation changes every year for sure, but sometimes every quarter and every month depends on the state and the local government.

So these components just update with the latest regulations. You don't need to kind of keep track of that. So this is an example of what I mean by built-in compliance. Obviously, you know, everything that we do in gus.com, like just since day one is all about making sure we protect the customer. That's our job. But here, we make it really easy for developers to both ship something quickly out to the market and make sure that it's compliant for the long term.

And no one comes back a few years later with an issue. Yeah, did I even read this right on your blog post? Did you say like one third of the companies in the U.S. get fined for some kind of mistake on payroll? Yeah, yeah. That's really painful because, again, Like, bad payroll means fines, and a third of companies in the U.S. today get fined every year for not doing payroll correctly. And that's pretty bad for folks and pretty bad experience.

So the goal is to make sure that as this industry goes through this transition and you have all these vertical SaaS companies integrate payroll, they make sure that they protect their customers. So they're not a part of that statistic. Got it. And in general, compliance is really hard, right? It's just not just for payroll. It's definitely the hardest part of payroll.

But if you think about fintech companies that are building for various customers, lending, healthcare, they all have compliance. What advice do you have for founders who are essentially building in complicated industries focused on compliance? What did Guster do right in the early days that has served you well today? Right. I think my first advice there is to understand which part of your product is highly regulated and you really got to get it right and accurate. And then which parts of your product are not. And that is important because of the way you set up your culture and how you build software.

You know, there's like this old kind of Facebook tagline around move fast and break things. and I think that, you know, I know that they've changed its sense, but it does give like a sense of like this idea of like, hey, some things can be fixed later. And but the truth is there is the complimentary is that some things can't. So you really need to make sure where you spend a lot of your time and you put quality first. You never ship anything to customer that's not absolutely perfect.

Whereas on the other, but also letting, enabling your culture to have parts of, the company that's much more iterative and fast and can quickly learn and adjust with new inputs. It cannot be a monolithic culture. So that will be my first kind of advisor on building engineering product design teams in this kind of compliance focused, in a compliance focused area. The second thing is to really embrace cross-functional work. And what that means is early on your startup journey, bring in like amazing, like top,

class regulatory compliance legal folks. always say that in Gustav, our secret sauce is actually our compliance and legal team. Because they are not just extremely knowledgeable, but we choose folks who are also creative and they're builders. So they come in and they work with our product teams to make sure not just how we protect the customer, but also how do we innovate and make something better for them. So bring that early on, make sure they're a part of the brainstorms that might make the product great.

And we've done that one of our very, very first hires. And you and I talked about it in another. conversation was, you know, a compliance person from paychecks. And then another person was someone who built the compliance, was really in charge of the compliance for two major other payroll providers. So really, really important to bring that early on to the culture. Yes, I want to double click on both for this group. So number one, you said, you have to be clear on what can't be broken versus what can be.

with your EPD engineering product design and data team. So go back to the first year of Gusra, first or second year, first two years. What was your framework or guidance to your engineering team at the time? Like what aspects of payroll did you say was okay to like ship and iterate versus what aspects was not okay? Yeah, yeah. Yeah, I love that.

Okay, so I'm going to bring myself back to that world in the very, very early days. And the first thing that comes to mind is that the core of the tax calculations and compliance, and in the end of the day, making sure that the outcome of the actual payroll system in the physical world, not the software, the physical world, right, money moving and IRS filings and things like that, that has to be right. And there's no cutting corners there, zero, right? So that's one. On the other hand, here's an area where it's totally fine.

It took us, I want to say a year and a half maybe or something like that, to actually start charging customers. And what we did is we basically never got around to build, or it took us a while to get around to build a billing system for our customers. Now, our customers chose to pay. So they're already at that point of time, everyone said, you know, they were. part of a paid package and they knew that they were paying, but they probably noticed and didn't complain, by the way, perhaps that they were not getting actually charged. In the end, we did start charging them, obviously. So that's an example of something that can totally broken, does not have like a customer impact. If anything, it has, you know, more impact on you. But

totally the right way to prioritize looking backwards too. Here's another place to kind of make it a little bit more nuanced, which is user experience, right? So you could actually say another viewpoint is like, hey, what's important is the physical world, then maybe it's okay to have a lower end UI in some areas. And my answer there was actually, is actually that's a really tricky proposition because for us, one of our core innovations was user experience innovation. It had to look and feel and really like 10x better than everything else out there in terms of the user experience. So we were, so we didn't cut corners there in terms of, where we wanted to get kind of our goal.

But what we did do there is iterate really quickly. And it was okay to ship something and then, you know, next day, shoot improvements and so forth. So you could move faster there without, you know, kind of waiting for long launch times. Yeah, and looking back, would you have done anything different now? Oh, my. Yeah, a lot of things.

A lot of things. You know, you learn so much to the, to any journey. Here's this one thing that comes to mind. I'm happy to talk about other things too, but the first thing comes to mind to me is actually pricing. I think we completely undersold ourselves in the early days in terms of the value we provide to customers. You go to market, you have a confidence problem.

You're like, oh, gosh, I really hope people want this. And you start charging really, really low. We charge extremely low. And that was, you know, and then you start getting distractions. and then you ask, well, is it because of the prices or not? And then you get, you know, you're really worried about increasing prices. So looking backwards, I would really try to charge, you know, my advice to founders is try to go the opposite way. Start charging what you feel like is, you know, is the value that you provide.

And then perhaps fix downwards versus fixing upwards. Because here's the issue it creates. This is, we're not talking about revenue or like, you know, cash flow, although it is extremely important in these days. There's another thing that's even bigger, which is just business model. because if you end up underselling your core business, the business may just not work in terms of the cost of acquisition and things like that. So you have to make sure that you walk towards a sustainable business model that can scale for many, many, many years in customers.

Yeah, and Toma, I don't know if this makes you feel better or worse, but 10 on 10 YC companies, I always say they're all under charge, especially because it's the common thing. I think every startup goes in and says, oh, should I up it by 30%? And then no one blinks. If you truly adding value, no one blink. Totally. That's totally true.

That's totally true. Well, it's a confidence thing. I feel, you know, you're stepping in the unknown. Building a company is a lot of like, you know, you kind of, you have this really, really big vision. You see this really big mountain or hill ahead and you want to climb it. But, you know, that you've never walked through this path before. And, you know, in every corner of the road, there's going.

going to be a surprise and you just want to be ready for it. So I think, you know, obviously you build confidence as you go through that path. And I'm, oh, great. I'm kind of, you know, I'm 5% in, 10% in. I feel a little bit more confident in my abilities. But I think confidence still is something that people build over their journeys. And it's good because it needs to come with humility too, because here's the issue as well. The market and the customers are always changing.

If you feel as a leader or a founder that, oh, I know this already. I know everything. I know exactly how things are going to go. you're full shit because you know everything changes so you have to have the humility of learning from from from the customer and from how the market changes around you so well said so well said well on my last question it's going to be a meaty question but we have seven minutes so i'm going to turn it over to you which is what what does embedded finance mean to you like what is the market and I know you're very bullish in embedded finance,

but how should the founders, here listening to us here, be thinking about embedded finance, and how do you think this market evolves over the next five, 10 years? Yeah, I think it's correct to what we said earlier around that basically what's good for the customer ends up winning. And the idea with embedded finance,

the premise is pretty simple. It's basically that create, as you've, when you build a new software system for the customer, the more end-to-end, the more inclusive, the more connected the system is for your customer, the better it is. And embedded products, whether it's embedded finance or other type of APIs you can bring into your system, enable you to do that fast and in high quality. And I think that's the key. So I am extremely bullish on this idea of bringing in multiple components into your product,

driven by what your customer needs are. So my advice there for founders is, you know, maybe focus again on like, look at your customer, understand how the day-to-day look like, connect the dots and see how might I build something that not just solves a paint, like a specific, you know, a standalone point of their flow, but rather the entire flow on its own. And that's, they can look at the customer side of things. It includes, you know, finding a customer, like being out there as well as, you know, figuring out the offer that you're going to create for them.

How do you price and package and how do you charge for it and finally also get paid through it? And then how do you take it to accounting? And then how do you reconcile that across everything else that happens to your business? It's all connected in the mind of the business manager. It's not seven different departments like enterprise often are. So connecting the dots, I think, is something that this new space is embedded, finance really, really enables. I'll say one more thing about fintech and embedded finance also as a part of it as a whole

which is especially now giving everything that's happening in the markets. People are starting to be more realistic about what are good businesses and what are bad businesses. And one of the things that make a good business and that's going to sound pretty obvious for people is you need to make more money than you than it costs you, right? Then the goods cost you per unit and it's really, really important. And you also need to the cash flow to work out. So it's not like money in the future one day versus money out,

you know, money coming in the future today versus money coming out of your pocket today. So, so in fintech, there's specifically a potential place where founders can or product folks can get distracted, which is you think you found product market fit because you gave away money for people or for businesses. You give basically fund financing to users. And you feel like, oh my God, there's all these people who want this product. That's amazing. But make sure that you can remember that that's a cheap way of getting the product market fit. People always, you know, if you're walking down the street, someone offers you $10 and tells you, you know, pay me someday maybe $2 later.

Of course you're going to take that offer. And it's not product market fit. It's just free money. So make sure when you build your fintech, when you build your financial-based product, you really, think about the unit economics and don't get too distracted by what could look like a product market fit. It's not product market fit if your product is not sustainable. Yeah, that's a great example.

What you're essentially saying is if you are not making money on that lending product and you're essentially only subsidizing and kind of giving free money, then you don't know this real product market fit. If you can charge enough to lend and make money and if you can still retain the customer, then there's some product market fit. Is that right? Yeah, like what if you and I come out of this chat today and we build a new subscription startup?

We call it $1 a month.com, and we basically use subscribe and we give the user $1 per month and they just get it to their bank account. I'm sure you and I are going to get millions of users really quickly. But probably it will be hard to build a business out of that. Yeah, that's very true in general. But I can see how you're saying need to pay more attention in the embedded finance world.

That's not happening. Let me ask you, what are the kinds of outside of payroll in embedded finance? Are you seeing as products being offered by APIs? Yeah, totally. So, you know, I think financing, just to make it clear, is an extremely valuable tool. You can really help people make their cash flow work. You know, again, if you look at B2B companies, sometimes you get paid for. for services you provide in the future.

So if you can align the cash flow coming in with the cash flow going out to providing additional services for new customers, it can really be a win-win situation. So I feel like there is a lot of greatness happening there. You just need to be careful and make sure that it makes sense from a business standpoint. But that's kind of my higher level point. I think insurance is another great example. You know, you go through different flows and different, product that you build online, whether it's a service or whether it's a physical product.

Like insurance is a good financial product. It enables people like the customer to mitigate risk. And it's something that it's quite hard to build on your own, because you've got to really develop your underwriting knowledge. And it's a good place to start to use like embedded insurance. There's a bunch of interesting companies there, I think. And there's, again, this space is brand new. So there's tons of opportunity.

So I think there's a lot of, there's lots of interesting opportunities in that space today. And the pattern is a product that helps your customer build the, like go through the end-to-end journey successfully and really solve multiple pain points for them. But it's something that would take you 10 years to really figure it out to do it in high quality. And that's where you go and you outsource really to that partner. Absolutely. Well, we are at time. Thank you so much, Toma, for sharing all of the perspectives right from the early founding days of Gusto to expanding to new sectors and embedded finance.

And congrats again to the entire team. I know you all worked incredibly hard to launch the new partnerships and the vision for embedded finance. For anyone looking to learn more, please visit Gusto.com. Thanks, Anu.