There are 5.2 million small businesses registered with the IRS who have 20 employees or fewer. This is obviously a tremendous market which has largely remained untapped and ignored.
SM: How would you define the portion of the small business market that Intuit was focusing on? Was it under 100 employees, or under 1,000 employees?
JH: Under 10 employees. That is where everybody is at in that business. There are something in the order of 22 to 25 million small businesses. It depends on how you count them, but the vast majority of them are Mom and Pop businesses. We used to figure there were several million potential Intuit customers out there. Today, when I think about PayCycle, we also target the very small businesses. We are targeting businesses with fewer than 20 employees. The difference between our business and the businesses we have been involved with before is that in the payroll space we are specifically targeting employers. That is a very well known number in the US because you can get it from the IRS.
SM: What is that number?
JH: There are 5 million small businesses employers, and that is our target market. If you go above small business employers, there are a total of 5.9 million business employers in the US; this is based on W2 filings. Of the 5.9 million, 5.2 million have fewer than 20 employees. The remaining 700,000 entities accounts for larger business employers. It is not a pyramid, it is a thumbtack; it is all at the bottom. That is where the action is because there are so many companies to deal with down there.
SM: We will come back to PayCycle in greater depth, but let’s take a quick detour and talk about Adobe. I remember we met at NEA when you were doing Fotiva, which was the end of 2000. Why did you take on Fotiva? The timing was pretty bad back then.
JH: Timing was terrible. It was in the middle of nuclear winter and we were trying to fund a digital photo startup that was consumer oriented, so I guess that was a bit of a joke. It was a very bad time to try to raise money, but a very good time for the idea. There were probably 150 digital photo startups which were on the ash heap of the Internet bust. What people came away with after all of those washups was that you still had to manage your digital content on your desktop; the cloud was not ready for this type of application.
Being able to own your media on top of your desktop was still pretty important. What I ended up doing, in parallel with trying to raise money, was hunt for strategic partners to distribute the product. I focused on Adobe and Microsoft in the US, and the Japanese camera manufacturers because they were putting software out with their cameras. I was in Japan in September of that year. I got there on Sept 10th, 2001, and got a call in my hotel room from Adobe saying they were interested in our product, but that they wanted to buy us. Of course, September 11th hit the next day.
When we came home, we talked with Adobe for several weeks and ended up selling later that year. For that time period it was a home run. The product came out of the door as Adobe Photoshop Album, and it was quite successful. The engineers felt good about getting the product out of the door and in the hands of consumers.