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Gusto (fka ZenPayroll)

Among the startups in the Winter 2012 flight at Y Combinator, Gusto (fka ZenPayroll) stood out for three reasons. Co-founders Josh Reeves, Edward Kim and Tomer London were all on their second start-up while still under 30. They had a brilliant idea, to make top-flight payroll services affordable for millions of small businesses using the cloud. And despite keen interest from venture capital firms, they made a firm decision to exclude VCs from their initial funding pool. It was one of the highlights of YC W12.

A lead funder like a co-founder

“We wanted to know our investors as people first,” explains Reeves, Gusto’s CEO, “and we knew that our lead investor – when we chose one – would be like another co-founder. So we were not going to rush into that decision.”

Instead they invited angel investors they knew from their previous start-ups and as students at Stanford University. Yet in the background Reeves was getting better acquainted with a VC who had coached entrepreneurs at YC W12, Hemant Taneja of General Catalyst. “When I met Josh and his co-founders I instantly resonated with their core philosophy and long-term approach,” Taneja recalls.

When Gusto’s founders were ready for a lead investor, they talked with other founders who had worked with General Catalyst. True to form, they turned the telescope around and looked at the firm as if they were ones making an investment. “If I could buy stock in a VC firm,” Reeves said at the time, “it would be General Catalyst.”

In fact General Catalyst became Gusto’s lead Series A investor, and Taneja is the only venture capitalist on the company’s board of directors. He’s playing the “co-founder” role that Gusto envisioned, and General Catalyst has continued to support the company in subsequent funding rounds.

Level the playing field for small businesses

One of the bonds between Gusto and General Catalyst is the VC firm’s success with software companies that remove barriers to entry for entrepreneurs who want to make life better for others. Notable examples include HubSpot (for marketing) and Stripe (for payments).

Taneja captures the essence of this approach with an investment thesis known as “economies of unscale.” He seeks out elegant technology tools that enable companies of very small scale to provide a similar customer experience as companies with very large scale, and therefore compete for millions of customers everywhere.

Gusto exemplifies the trend. It’s leveling the playing field for small businesses by automating time-consuming payroll tasks, while making the compensation process more human and personalized for employers and employees.

Mission without end

The company also embodies another investment focus at General Catalyst: long-term thinking that helps mission-driven startups become enduring successes.

One of the biggest challenges of making payroll for small business owners is the patchwork of 15,000 tax codes in the U.S. This forces artisans, builders, and service providers to become experts in the minutiae of government regulation – or become one of the millions of small businesses each year that get fined for payroll mistakes.

Gusto has done the hard work of making compliance automatic, so entrepreneurs can focus on the core business of making customers happier – and creating teams of satisfied, motivated employees.

“Our mission at Gusto is to transform payroll and other business processes from bureaucratic chores into bonding experiences that create winning cultures,” Reeves says. “We fully expect to keep doing that for decades to come.”


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