Gusto Refills the Tank, Likely Readying for IPO

One of the first company’s we wrote about when we began covering the SaaS space was Gusto. The company continues its aggressive drive forward this week with a fresh $175 million in funding at a valuation of nearly $10 billion. The Series E round pushes their total raise to just under $700 million since the company launched eight years ago. 

We understand that Gusto is on a course to go public sometime in the coming months.

CEO Josh Reeves indicated that the company now had some 200,000 customers. That’s nearly double the customer count we reported the last time we wrote about Gusto in June. To us, that speaks to the notion that the company remains on a customer growth path as well as likely an increase in ARPU.

Gusto Adds Tax Compliance via Ardius Acquisition

Valuation Upside

Today, as we write this the two major players that Gusto competes with collectively carry a $132 billion valuation. At a $10 billion valuation, that is less than 10% of the ADP/Paychex valuation. At 200,000 customers, the company has about one-eighth as many customers as the two leading players have. So if you’re looking for a disruptive play in the payroll and human capital space, Gusto may well be it. 

As the company gets down to dotting the “i”s and crossing the “t”s, it has added two board members. One is the former investment chief of the New York State Common Retirement Fund and Fidelity Investments. That pension fund would likely be a big holder in the company down the road. We assume many pension funds own shares in ADP/Paychex. So as Gusto moves into the public realm bringing on an ex-pension fund executive is a savvy move. 

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. Meanwhile, 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. He did offer that the company generated “several hundred million dollars” in annual revenue, which has been growing steadily at 50% year-over-year. 

The Gusto Origin Story

Reeves earned an electrical engineering degree at Stanford in 2008. That’s where he met his co-founders, Edward Kim and Tomer London. The three had a mutual ax to grind over the difficulty of managing HR and payroll services at small businesses. Both London and Kim had experienced first-hand at their family-owned businesses growing up.

Gusto Snags $200M Round, Tops 100K Customers

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. 

Early Innings

As Ken Chenault, ex of American Express and now at General Catalyst and an investor said, “from a marketplace standpoint and penetration, they’re in the early innings. They have to establish themselves as critical infrastructure for the SMB economy, much like Shopify has done with its commerce platform.” 

An analyst commenting on Gusto used the same 30 million SMBs in the U.S. as Gusto’s addressable market. We cringe when we read this sizing of the total addressable market (TAM) since we don’t believe the individual consultant (with no payroll) would turn to Gusto for a payroll solution. After all, ADP and Paychex have been around a long time and have only acquired an estimated 1.6 million customers. One would think if the TAM was 30 million, together they would have garnered more than 5 percent. 

Alternatively, Gusto could be the target of a large and well-capitalized fintech operator. That could make a lot of sense for the suitor and Gusto. But Reeves indicates that the notion of acquisition “is a conversation I quickly decline.” For the 1,400 employees now spread around the U.S., an IPO is probably the most desirable outcome. 

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