Gusto Secures A $10 Billion Valuation Tailwind As Its HR Software Sails Toward IPO
Updated: Last year, as the pandemic left offices empty throughout the country, Josh Reeves watched the small business customers of his HR software company, Gusto, fighting to survive. Coffee shops and florists shuttered while others took loans to offset plummeting business. Many asked Gusto to defer payments and as the bottom line shrunk, the future of Reeves’ 8-year-old company, fresh from a $200 million funding round, was uncertain. “No one had a crystal ball,” says Reeves, Gusto’s CEO and co-founder. But Gusto’s benefits, tax and payroll tools proved essential to businesses that did survive, and the company added a tool to help distribute more than $4 billion in Paycheck Protection Program loans. By the summer of 2020, 98% of Gusto’s customers had begun paying again, Reeves says. And while he won’t provide exact figures, he says the company’s revenue grew more than 50% from May of last year through this April.
Now Gusto is aiming to leverage its growth to prepare for an initial public offering. Reeves tells Forbes that Gusto closed on a $175 million funding round in recent weeks, minting the company with a new $9.5 billion valuation and making it one of the most valuable private companies in the HR and payroll software space. Led by T. Rowe Price, Gusto’s existing investors also joined the round, including Fidelity, Franklin Templeton, Generation and General Catalyst.
Gusto, which ranks 25th on the 2021 Forbes Cloud 100 list, also bought two companies this summer — tax compliance software firm Ardius and Symmetry, which provides tax calculation software — and is in talks for more acquisitions. To shore up leadership ahead of an anticipated 2022 IPO, the company added two new board members, former TIAA Financial Solutions CEO Lori Dickerson Fouché and Vicki Fuller, a former chief investment officer of the New York State Common Retirement Fund and Fidelity Investments board member.
Gusto now faces the challenge of proving to the market that its new valuation is justified — and not just another symptom of a frothy investment environment that has minted more unicorn companies than ever before. Comparably-sized enterprise software companies have varying scales of revenue: Project management software firm Asana, valued by the public markets at $11 billion, is expected to generate $300 million for the 2022 fiscal year, while Figma, which is privately valued at $10 billion, was expected to reach annual recurring revenue, or ARR, of more than $150 million this year, per sources. Reeves’ wouldn’t disclose Gusto’s revenue figures but offered that the company generated “several hundred million dollars” in annual revenue, which has been growing steadily at 50% year-over-year. He also pointed to the fact that Gusto’s customer base recently surpassed 200,000.
Reeves, who earned an electrical engineering degree at Stanford in 2008, met co-founders Edward Kim and Tomer London at the university. The three had a mutual axe to grind over the difficulty of managing HR and payroll services at small businesses, something London and Kim had experienced first-hand at their family-owned businesses growing up. While the company bootstrapped its operations — London would walk into Apple stores and change the computer home-pages to the Gusto logo for free marketing — they went through some growing pains (firing an early executive) but also had early votes of confidence in funding from the CEOs and founders of enterprise software companies like Instagram, Stripe, PayPal and Box. In 2018, the company invited more public investors in its $140 million series C funding round, including T. Rowe Price.
Among those who took interest was Ken Chenault, who had just left his role as CEO of American Express and was leading investments for General Catalyst. Looking around at other successful tech companies that target small business, Chenault is bullish that Gusto becomes a fixture in the industry. “From a marketplace standpoint and penetration, they’re in the early innings,” Chenault says. “They have to establish themselves as a critical infrastructure for the SMB economy, much like Shopify has done with its commerce platform.” Given its shared customer base with many of the big banks, something Chenault is acutely aware of, Gusto would appear an attractive addition to their portfolios and has been approached several times for acquisition talks, according to Reeves — a path its competitor, Zenefits, took in March when the previously valued $4.5 billion HR tech firm was bought by private equity firm Francisco Partners. But Reeves is adamant that his firm is bound for the public markets: Acquisition, he says, “is a conversation that I quickly decline.”
Part of Gusto’s success will rely on its ability to maintain its swim lane of catering to small and medium businesses, says Scott Berg, an analyst at Needham & Co. The market for small and medium businesses is enormous, with more than 30 million in the U.S. Shopify built an almost $200 billion company providing these businesses with the tools to launch online businesses. Still, the HR and payroll software space is saturated with other public companies like Paychex and ADP, and Gusto’s growth will require a gradual climb, Berg adds. Gusto can grow customers by alleviating the often nauseating experience of dealing with payroll, among other things, Berg says. “Historically, some of the legacy vendors in the space that have been around for 25 or 30 years often don’t score well on customer service,” he says. “If you do something right there, you’ll bring more customers on.”
Now with more than 1,400 employees in offices in Denver, San Francisco and New York and more than $300 million in runway, Reeves says Gusto’s new funding will be used for development of its benefits and payroll tools. “The last year and a half just made it very clear,” Reeves says, “what we do is very relevant.”