Gusto COO Lexi Reese is an interesting figure with a challenging job right now. Lexi is a former documentary filmmaker who, after getting a Harvard MBA, went on to hold senior roles at American Express, Google (twice), and, briefly, Facebook. She ran digital advertising platforms for much of her career. She joined Gusto as COO in 2015.
Gusto is one of those Bay Area startups with a cool veneer. The company is headquartered in a renovated shipbuilding facility in San Francisco’s Dogpatch. And the company became famous for its shoeless-office policy and its trademark socks. We suspect the shoeless policy has survived during the WFH era. Ashton Kutcher and Jaren Leto are among the investors listed on Gusto’s website, along with a who’s who of Bay Area tech entrepreneurs.
But at its heart, Gusto provides a meat and potatoes service to small businesses. Even if the “meat” is likely vegan. As a payroll/HR SaaS platform, Gusto sits at the eye of this never-ending storm for small business operators. It has seen with its own eyes, and more to the point, through its platform data, how SMBs have struggled to make ends meet during the pandemic.
Is Small Business ‘too Big to Fail’?
So we listened with interest as Lexi joined the CBS Facing Forward podcast this week to talk about the state of small business and to advocate for more relief for battered business owners. Lexi points out that 95% of total U.S. employment is at companies with fewer than 50 employees. So she argues that propping these businesses up is existential for the U.S. economy.
“Really small business, as a sector of the economy, is way too big to fail,” Lexi said.
Lexi’s core argument involved the federal Payroll Protection Program (PPP), which supplies low-interest loans to small businesses designed to keep paychecks and health insurance premiums flowing during the pandemic. Lexi (and presumably Gusto) is a big supporter of PPP. But she argues some flaws in its administration have made it less effective than it could have been.
“Congress intended PPP to accomplish two goals. To help small businesses cover their near-term operating expenses,” Lexi explained. “And two, to provide an incentive for employers to retain their employees and keep them on the payroll. The intent was right. The impact has not been felt.”
PPP’s Two Key Flaws
Lexi said Gusto talked to 1,100 of its customers to find out the causes of friction in the PPP program. She points out two flaws with PPP that came out of these conversations, both of which she argues are fixable.
One flaw involves that the requirement for a second draw that businesses show a 25% revenue decline. She said the emphasis on gross revenue fails to reflect the spike in costs many small businesses have incurred.
“Gross revenue can make things seem really rosy because it doesn’t account for all the costs that you’ve incurred as you have shifted your business model,” Lexi said.
She cites the example of a brewpub that pivoted to canning its beer in order to survive. It maintained its revenue, but its costs skyrocketing while setting up the canning operations. Nonetheless, it failed to qualify for a second draw because it couldn’t show a sufficient decline in revenue.
The other flaw is that PPP loan forgiveness has failed to keep pace as expected. As a result, many small businesses haven’t taken their second draws because their first draws haven’t yet been forgiven.
“Nearly one in four business owners who have not applied for round two, it’s because they haven’t had their first loans forgiven,” Lexi said. She argued that the banks processing the loans are incentivized to process more loans rather than undergoing the process for forgiving loans already issued.
Reese said addressing these two factors — eligibility requirements and loan forgiveness — will bring help to more SMBs.
