IPO Prospect: Gusto Expands Beyond Payroll Processing

According to an IBIS World report, the payroll and book-keeping services market in the US is estimated to have grown 7.8% annually over the five year period from 2011 through 2016. The researcher estimates the market to be worth $81 billion this year. While ADP is the largest player in the industry with more than 10% of market share, other smaller players are also making their presence felt.

Gusto’s Offerings

San Francisco-based Gusto was founded in 2011 by serial entrepreneurs and Stanford alumni Joshua Reeves, Edward Kim, and Tomer London. Prior to setting up Gusto, Joshua was the CEO and co-founder of Unwrap, a SaaS startup that was acquired in 2010 by SaaS social marketing firm Context Optional. Edward was the CEO and co-founder of Picwing.com, a Y Combinator-funded startup and photo-printing platform that was acquired by Picplum in 2011. Tomer was the CEO and co-founder of Vizmo, a provider of self-service customer support technology for enterprise call centers. In November 2011, the three friends got together to create a new company called ZenPayroll that later became Gusto.

ZenPayroll’s mission was to “help every business in the world put people first”. To cater to this, the company released its payroll tool that would help simplify the process, especially for small organizations. Using its tool, organizations are able to process payroll through a mobile friendly and intuitive application, automatically file taxes, leverage employee self-help capabilities, and integrate with financial software including Quickbooks, Xero, and Freshbooks. By 2015, it had expanded to all the 50 states in the country and renamed itself Gusto as it also diversified into additional services. Today, the company caters to more than 30,000 clients whose sizes range from bike shops to manufacturing companies. It has diversified beyond payroll and now provides services for employee benefits and workers’ compensation insurance for small organizations as well. It focuses on organizations with 1-100 employees and plans to expand into bigger companies to support organizations with as many as 500 employees.

Gusto’s Financials

Gusto operates on a subscription-based model. New customers can sign up for its service for free for the first two months. After the trial period, Gusto charges a base price of $39 per month and an additional fee of $6 per employee per month. The pricing includes features such as automated new hire reporting to the government, Self-Enrollment for employees, preparation and filing of 1099 forms for contractors, adherence to vacation & sick day policies as defined by the organization and per state laws, ability to administer medical insurance, HSA, FSA, IRA, 401(k) and other pre-tax benefits, ability to process direct deposit & checks for payroll and reimbursements, unlimited payroll and multiple pay schedules that can process multiple pay rates for employees.

The solution is competitively priced compared with its competitors. Quickbooks, for instance, appears to be relatively cheaper at $39 per month basic fee and an additional $2 per employee per month, but organizations need to pay extra for services like additional state support, workers comp services, and even to process 1099s for contractors. Similarly, the other unicorn player Zenefits operates at a lower base fee at $25 per month and $6 per employee per month, but it too charges additional fee for services such as tracking paid and sick time, tax form amendments, and expedited payroll processing.

Gusto does not disclose its financials. It is venture funded so far with $161.1 million raised from investors including Aaron Levie, AFSquare, Altimeter Capital, Benjamin Ling, Bobby Yazdani, Dan Rose, Data Collective, David Sacks, Designer Fund, Drew Houston, Elad Gil, Emergence Capital Partners, General Catalyst Partners, Glynn Capital Management, and Google Capital. Its last round of funding was held in December last year when it raised $75 million in a round led by Google Capital. The round is estimated to have valued Gusto at $1 billion. An earlier round held in April last year had valued Gusto at $560 million.

I would like to see more detailed financials from Gusto before commenting on its valuation. Recently the valuation of its prime competitor Zenefits has taken quite a beating. Zenefiits which earns less than $100 million in revenue saw its valuation fall from $4.5 billion in May 2015 to $2.34 billion in November 2015. Gusto is hoping to stay independent till it finally lists.

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