Over the holiday, I spent time reflecting on my time in the insurance brokerage industry. One interesting area that drew some of my attention was the sale of Zenefits to TriNet Group Inc. I was personally invested into the impacts of Zenefits on our legacy employee benefits brokerage as Zenefits experienced its meteoric rise; The lessons to be learned, from both its growth and collapse, touch on fundamental 21st century business matters:
- There is both opportunity and challenge in connecting old-economy categories (health insurance brokerage) to new-economy approaches (SaaS). These are obvious areas entrepreneurs and operators should be seeking.
- There is great opportunity to scale software (to drive economies of scale) but also challenge when confronted with hyper-growth (especially as complexity matches growth). Handwaving with visions of David and Goliath can invoke followers’ admiration to a point, but ultimately competence needs to reign supreme.
- Excitement and motivation can arise from the “disruptive-innovator”-style (rebel?) leader, but the risks native in that leader, when not matched with (boring?) operational expertise, can lead to important details being disregarded. “Know-how” matters.
- CAC needs to be proven out, in context, before huge amounts of cash are deployed into sales and marketing. Jim Collins, etc.
- There may be temptation to cut corners, or “innovate,” in matters of regulatory oversight and compliance. It shouldn’t be done. Full stop.
For those of you who did not follow this story over the past years, here is a quick synopsis. I can’t really overstate the extent to which I find this story compelling. The personalities include a Harvard drop-out come-graduate entrepreneur, Parker Conrad, larger-than-life Danish venture capitalist, Lars Dalgaard, and experienced operator from the PayPal mafia, David Sacks. The story includes hyper-growth, a fallen-angel, and a reincarnation of sorts. I won’t cover it all this morning, but if you are interested, I would encourage you to click through on some of the links I posted.
“If you are an insurance broker, we’re going to drink your milkshake.”
Zenefits was founded by Parker Conrad in 2012 after a “falling out” with a business partner at his previous venture, SigFig. This New York Times article from 2014 does a nice job summarizing the value proposition at Zenefits.
His vision was simple and elegant: What small businesses needed was a single online tool to track all employee records. This software would connect to every benefits provider, so that when your boss wanted to give you a raise, she would type your new salary into the software, and it would handle the changes in all your information with every other service provider online. Mr. Conrad sought to turn a company’s human resources busywork into the sort of one-step, paperless operation we’ve come to expect from most other parts of our app-driven, on-demand world.
Zenefits’ Leader Is Rattling an Industry, So Why Is He Stressed Out? by Farhad Manjoo on 9/20/2014
In exchange for providing this service to employers, Zenefits would seek to become the “broker-of-record” for its clients’ employee benefits, substituting subscription revenue for insurance commissions as its primary source of revenue. In other words, Zenefits solved an HR admin issue as a value proposition and accepted insurance commissions as its compensation. A client was quoted in the above mentioned NYT article as saying, “The traditional brokers came here and we had a face-to-face meeting, and they were knowledgeable and very nice. But we’re getting so many extra bonuses with Zenefits for the exact same price, we had to choose them.”
This led to a tremendous amount of venture capital funding, interesting and aggressive marketing tactics, and the eventual ouster of its founder as a result of compliance failures (and other stories of cultural issues.)
I remember, personally, finding my own team referenced on a Zenefits website. Apparently they webscraped data about competing local benefits firms and attempted to identify attributes, which they publicized, which were just factually incorrect. I remember my own sense of frustration when, upon hearing my concerns, I received an email from a Zenefits representative offering to update our firm’s details if I shared the corrections. (I imagine many of you can imagine how I responded to this!)
This article shares reporting on the connection between Lars Dalgaard and David Sacks. Sacks came in as COO at first.
Zenefits was everything Silicon Valley loved wrapped up in one company. It had a visionary founder. It tackled a stodgy industry ripe for disruption. The recurring commissions gave it a steady stream of revenue from the start. And Zenefits was the first in the health insurance software space, the Uber to its future competitors’ Lyft. The potential for greatness is what allowed Zenefits to expand from 15 employees to 1,600 in three years; raise $580 million in three fundraising rounds; and become one of Andreessen Horowitz’s biggest investments. Last year it was valued at $4.5 billion, which made it, in Valley parlance, a “unicorn” several times over.
“You’re looking for disruptive companies,” Conrad said in that same TechCrunch Disrupt speech. “We are going to mess stuff up.”
He was right, although not in the way he meant.
Zenefits Was the Perfect Startup. Then It Self-Disrupted by Claire Suddath and Eric Newcomer, Bloomberg, on 5/9/2016
What happened? Well, it was a number of things. The big one, though, was compliance. The Bloomberg article from 2016 shares an account where, “[i]n California, they found, some of the sales team used Conrad’s macro to systematically cheat on the state’s training course, which included a section on ethics. “As far as a company doing what Zenefits has done, I don’t know that we have seen this before,” says Nancy Kincaid, press secretary for the California Department of Insurance, which has also opened an investigation. In March, Massachusetts’ division of insurance opened a third.”
To this point about about compliance, this article from TechCrunch reported a bit about David Sacks’ response to the matter. I think his quote here is key: “I believe that Zenefits has a great future ahead, but only if we do the right things. We sell insurance in a highly regulated industry… In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die. The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned.” You can also read the full memo here on VentureBeat.
Burned cash, Competitive response
Well, according to this report by Forbes, Andreesen Horowitz and Founders Fund wrote their investments in Zenefits, who reportedly raised USD $618 million+, to zero. Large insurance technology firms grew as brokers considered “buy-build-or-partner” decisions; Other firms, like ours, decided to pursue strategies that included partnering with groups like Employee Navigator, Plan Source, and bSwift, while also building proprietary solutions, such as Insurance Skout.
In a story that is still unfolding, Parker Conrad’s new venture, Rippling, is reported by Amy Feldman of Forbes to be “worth $300 million and growing fast. Can Parker Conrad find redemption?” I think there is a huge market and need for innovation in SMB for insurance services, employee benefits, as well as HR solutions (including compliance support!) I continue to enjoy seeing from which firms (and people) innovations arise! And, I think it would be foolish to bet against Mr. Conrad. He was reported as saying, “For me, personally, one of the reasons I am [building this new firm] is that if I can build Rippling into a company that becomes a $100 million success that will force a reassessment of what happened at Zenefits… It was the only way for me to, in a way, talk about what happened, and try to tell my side of the story.”
I find this story as both cautionary and instructive, as well as motivating and inspiring. There are so many ways to add value to SMB, insurance brokers, insurers, payers, and health care providers… Old economy businesses enhanced by technology and “know-how”… I am enjoying working with some entrepreneurs, medium sized insurance agencies, and large organizations on these matters, while also keeping my own “hand” in the game! Its a blessing when your career is also your hobby.
Thank you for reading my blog! I hope you had a lovely holiday and look forward to connecting again soon! I hope you have a wonderful week!
