The CEO of billion-dollar startup Gusto has 75 angel investors and warns other startups: 'There are no shortcuts'

You couldn't find two startup competitors with more starkly different cultures than Zenefits and Gusto - both of which sell similar human resources software to small businesses.

And right now Gusto cofounder and CEO Josh Reeves is looking especially wise given that Zenefits was embroiled in major drama last month.

He has a warning for his competitor and others: "There are no shortcuts. You can't get somewhere faster by spending money," Reeves told Business Insider.Zenefits had touted itself as one of the fastest-growing tech startups ever, and, at two years old, raised $582 million investment which valued the young company at $4.5 billion. But it crashed last month amid an insurance-licensing scandal that caused its founder and CEO to suddenly resign, and its new CEO offered some harsh words about its culture.

Gusto (formerly known as Zenpayroll) has also raised a lot of venture investment, a total of $136 million at a $1 billion valuation as of December.

Gusto's flagship product is a payroll system, designed with what Reeves calls a "people-first mentality." It lets bosses write personalized notes with the weekly paycheck, sends new employees a welcome message with a list of their teammates on their first day, and gives each employee a personal dashboard that travels with them from job to job.

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It's geared for companies with 100 or fewer employees and currently counts 30,000 companies as customers. Or as Reeves likes to say, to indicate how big the market is: "One half of 1 percent of all small businesses" now use Gusto.

It used to be a partner with Zenefits, but Gusto recently started competing directly with Zenefit's flagship product, software that manages a company's insurance benefits. And Zenefits just recently launched payroll software that competes with Gusto.

Zenefits vs. Gusto

The similarities and contrasts between these two startups go on and on.

Reeves and his cofounders, Tomer London and Edward Kim, founded Gusto in 2011, two years before Zenefits. But they launched their product in 2013, the year Zenefits was founded.

Where Zenefits quickly grew to over 1,500 employees, hiring 1,000 in a matter of months (and just had its first layoff), Gusto has slowly grown to 300 employees. Reeves calls the hiring process slow and "deliberate."

Both companies were founded in San Francisco with Zenefits opening additional offices in Arizona, and Gusto opening more offices in Denver.

Where Zenefits' founding CEO, Parker Conrad is short and stocky, gregarious and combative, Reeves is tall, thin, contemplative, and soft-spoken.

Where Zenefits had a hard-driving dawn-til-midnight culture, Gusto employees work in shoeless, warm, carpeted quiet offices and are encouraged to stop work and eat their free catered lunch together daily so they can mingle and socialize like family.

Gusto employees also get a round-trip ticket anywhere in the world on their first and fifth anniversaries, a month-long, paid sabbatical on the fifth year, and all kinds of benefits, including infant sleep training, grocery delivery, and house cleaning.Even their names used to be alike: Gusto was originally called Zenpayroll. While Reeves insists that he didn't change his company's name because it sounded too much like Zenefits, there's that, too.

The problem with Valley startup culture

Reeves says he's focused on his own customers and products, and not the missteps of his competitors. He explains, "A bakery owner in Oklahoma City doesn't care about a Valley company's flame-war....That's what we're obsessed with, how do we serve that bakery owner well?"

But he does have a lot of thoughts about the whole Silicon Valley culture that contributed to the problems at Zenefits and other troubled, formerly high-flying billion-dollar startups.

In fact he's thought so deeply about it, he's given a TED Talk on the topic, called The Startup Journey: A Marathon, Not a Sprint.

He's been elbows-deep in the startup world practically his whole life. He grew up in Marin County, just north of San Francisco across the Golden Gate Bridge.He earned two degrees in electrical engineering atStanford, and he's collected a who's who of Valley stars as angel investors in Gusto.

Plus, this is his second startup. His first was Unwrap, which made a Facebook creation app called Buzzeo, sold to a company called Context Optional in 2010 for an undisclosed sum. (Enough money for him to "pay for his brother's college tuition," he says.)

So his general take about his competitor Zenefits' troubles is: "I am not surprised one iota about what happened."

He says, "As a student of Silicon Valley, I call it the 'hype ladder.' You can get caught up in these cycles, in things that should not be the focus and it creates a very short-term mind set. There are no shortcuts. You can't get somewhere faster by spending money. It's like pouring water into a leaky bucket."

He adds, "I really think one of the biggest pitfalls in Silicon Valley is hiring for the sake of hiring. Another is financing for the sake of financing. A third one is getting caught up in comparison. I love to compete, but I am not building ADP or Zenefits."

"You can't keep spending $5 to make $1"

Valley startups in particular, "get focused on top line growth," Reeves says.

"Call me old school, but all that matters is, can we build a sustainable business? You can't keep spending $5 to make $1."Instead they should be focused on "the metrics that matter" including customer acquisition costs, gross margins, and customer satisfaction. "Otherwise you can get tons of customers and they leave you quickly."

Startups with the growth-at-all-costs mindset then have to "continuously raise money to maintain the optics" of success.

When a company tries to "take shortcuts" to growth and things go south, "the impact is not only on quality of experience, it's also on employee morale, your team dynamic and, potentially compliance," he says.

"That's what really shocked me," he says of Zenefits. "If there's one space where you should not be cutting corners, it's where we're literally helping people get paid or enabling them to have health insurance for their children."

75 angel investors

As part of his deliberate style, he says he interviews potential VCs and angel investors by taking them on walks or hikes, sometimes talking to them for years before they become investors."I think of fundraising as hiring. It should be the exact same match in motivation, values and skill."

This has resulted in Gusto having over 75 angel investors, he says, as well as a few traditional VCs.

His roster of angels reads like a who's who and includes actor Ashton Kutcher, Max Levchin, (CEO of Affirm and co-founder of PayPal), Aaron Levie (founder CEO of Box, who also invested in Zenefits), famous angel David Sacks (who is an investor and the new CEO of Zenefits), Drew Houston (cofounder and CEO of Dropbox), Elad Gil (another major angel, a former Twitter exec who also invested in Zenefits), and so on.

And even with that roster of investors, he's confident that he and his cofounders can never be forced out. They've structured their stock in classes, following Google as a role model.

"We will forever have control of Gusto from a stock and ownership standpoint," he says.

A promise to end the women-in-tech problem at Gusto

Reeves is also tackling the lack of women in tech problem head-on.

He's committed to hiring one female engineer for every male engineer hired and to have a 50/50 gender balance on the executive team.While that's an admirable goal, such a promise can be tough to execute because many more men graduate with tech degrees these days, and men still make up the majority of the existing engineering employee base.

Since a higher percentage of men will likely be the applicants, a 50/50 goal can hamstring managers - forcing them to consider a person's gender more than they do other qualifications when hiring.

But Reeves says it doesn't have to be that way. The trick is to stuff the "pipeline" with diverse candidates.

"We get a lot of applicants today," he says, which isn't surprising, with the kind of benefits it offers employees. Gusto has a good reputation as a place to work, according to job-hunting site Glassdoor.

So his recruiters are charged with getting more women and more people from diverse backgrounds into the applicant the funnel, by going to events, conferences and encouraging them to apply.That way, diversity is solved at the application process, and managers can focus on a person's qualifications. Is this harder than the typical way to recruit?

Yes, he says, but "hiring is hard and hiring should always be hard. It's the most important topic."