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War Is Declared Between Two Silicon Valley Unicorns

As his rival Zenefits prepares to launch a revamped version of its HR software, the Gusto CEO says "ideally the first movie is good enough on its own."

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Josh Reeves, the 33-year-old CEO of the payroll and benefits startup Gusto, is an Eagle Scout with a sweet smile and a sensible haircut. He speaks softly, blushes easily, and gently reminds guests to remove their shoes before entering the office.

But last week, at a press briefing in a private dining room of an upscale San Francisco lunch spot, Reeves slung mud at Zenefits, his most prominent — and most prominently troubled — rival. He had just been telling the reporters about Gusto's new product, a Zenefits-like human resources software system. With Zenefits expected to unveil its own product upgrade next month — dubbed Z2 — Reeves seemed keen to ensure his rival's past missteps wouldn't be forgotten.

"Z2 sounds like a sequel," Reeves said. "Ideally the first movie is good enough on its own."

"There are no shortcuts. There's always a poster child for that," he added, in a not-so-subtle dig at Zenefits' past failures to comply with insurance broker licensing rules. "Things like compliance have to be there from the beginning."

"We've been thrilled by the customers moving to us from Zenefits," Reeves continued. The burger he had ordered remained untouched.

The beef between Gusto and Zenefits — which fired its founding CEO and lost hundreds of employees earlier this year in the wake of its broker licensing scandal — stretches back about a year. That's when BuzzFeed News reported that Zenefits, known for making human resources software and selling health insurance, was secretly developing a payroll processing system, stepping directly onto the turf of its onetime partner Gusto, then known as Zenpayroll.

Zenefits' effort had the tongue-in-cheek nickname "Project Nutshot."

Gusto — which at that time was itself quietly moving onto Zenefits' turf by preparing to sell health insurance — has now fired back in force. On Tuesday it announced it has created an "all-in-one" human resources software system, including features to help small companies onboard new employees and manage 401(k)s. The effort is a direct challenge to Zenefits, which has long offered similar features but has lately been busy patching things up with regulators and customers.

Told of Reeves's comments, Zenefits spokesperson Jessica Hoffman picked up the gauntlet.

"It's great to hear that our competitors are already in a panic about Z2," Hoffman said in an email to BuzzFeed News. "They're still trying to copy version one of our product while we are about to launch version two, which will redefine this industry."

"The fact that they're talking so much about Zenefits indicates who the market leader is," Hoffman added.

Silicon Valley startups aren't often willing to spar like this in public (they're usually more comfortable criticizing giant incumbents in their industry, as Zenefits did last year in a legal fight with ADP). That Gusto and Zenefits would publicly trade blows underscores their yearning to capture potential riches in the business of HR and payroll management. Both startups are trying to bring technology to an antiquated, paperwork-heavy industry that can cause real headaches for small businesses. Zenefits moved early in offering a software-powered HR system, but it moved too quickly, and now Gusto is trying to seize an advantage.

At the media briefing last week — held at celebrity chef Tyler Florence's Wayfare Tavern, where spiced deviled eggs seem as plentiful as tap water — Gusto staff handed out embargoed press releases with details on the startup's progress and plans. Over 40,000 small businesses use Gusto's payroll software, according to the release and an email from a spokesperson. (Zenefits, by comparison, says it has more than 20,000 customers using its HR software.) The new Gusto HR product will include a "welcome wall" where coworkers can warmly greet a new employee, according to the release. An executive at a healthcare company was quoted saying he was "confident that everything is done right with Gusto."

Many details seemed intended to highlight how Gusto was different than Zenefits, though the release never mentioned its rival by name. Reeves, however, was less coy. After introducing the subject of Zenefits by saying he wanted to discuss the "ecosystem," Reeves said he had heard "horror stories" from companies that had used Zenefits and switched to Gusto.

Borrowing a line that Zenefits once used, Reeves said he was "excited to be the fastest-growing company in this space, as far as I can tell," by number of customers. (Still, Gusto has been in payroll processing for most its existence, while Zenefits has been in the slightly different business of insurance and HR management.)

Reeves also said he was "excited to be doubling our valuation in our last financing round, while others are halving their valuation."

Gusto, which launched in 2012, was valued by investors at $1 billion in a financing round in December, doubling its valuation in under a year. Zenefits, launched in 2013, agreed in June to cut its valuation in half — to $2 billion from $4.5 billion — in a deal with its investors.

Zenefits' new CEO, David Sacks, has undertaken a sweeping effort to remake the company, including by taking a contrite tone and forging a string of settlements with state regulators. In May Sacks announced he had changed the company's stated values: “Everyone’s shit stinks,” for example, became “Put the customer first.”

Reeves, as his burger got cold, had something to say about company values, too.

"You don't really change them," he said. "You have to know them from the beginning."

Sacks, as it happens, invested in Gusto in its seed round several years ago. Reeves said at the briefing that Sacks — an experienced entrepreneur who sold his software startup Yammer to Microsoft for just over $1 billion — currently has no access to Gusto's confidential information. The two spoke in 2012, when Reeves got advice from Sacks on building a business, and haven't spoken since, Reeves said.


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William Alden is a business reporter for BuzzFeed News and is based in San Francisco. Alden covers the technology industry.

Contact William Alden at will.alden@buzzfeed.com.

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