Tag Archives: Parker Conrad

Zenefits: Only the Start for Brokerages

As this election year unfolds, many are questioning what created Donald Trump. Why him? Why now? On the other end of the spectrum, the same could be said of Bernie Sanders. In the benefits world, I relate the political landscape to Zenefits and former CEO Parker Conrad. What is it that allowed Zenefits to come to be? As Zenefits now regroups to begin its post-Conrad journey, firms like Namely are getting press and stepping into the market in a similar way.

Some say Silicon Valley breeds arrogance and often enables young entrepreneurs to create companies and attack the market and competitors with a vengeance. These young guns want to disrupt the market and change the rules of the game to deliver something new and better.

See Also: How Likely Is Zenefits to Change?

Whether you agree with the Zenefits model or not, you can’t argue with its results. According to Bloomberg, the company’s revenue was close to $63 million annually as of the fourth quarter of 2015. This means:

• $63 million in customers fired their broker because Zenefits promised something their current broker was not delivering;
• $63 million in customers valued what I think is the equivalent of a $5 per-employee-per-month (PEPM) technology more than they valued the services delivered by their $25-$35 PEPM benefit broker; and
• $63 million in customers did not care that there was no local service.

While Conrad has left this stage, the conditions that allowed him to grow his business still exist. And I am sure the Zenefits executives and investors — including Andreessen Horowitz and Fidelity — are not going to let $63 million in revenue slip away without a fight.

What Zenefits accomplished is to let the world know there are many employers out there that value what Zenefits promised to deliver. In fact, according to industry analyst and marketing guru Mark Mitchell of the Starr Conspiracy, there was $2.1 billion invested in the human capital management technology and services space in 2015 and $600 million in the first quarter of 2016. As Mitchell said at a recent conference, “Those checks are being cashed.”

Soon, there will be a tsunami of new products, services and marketing in the human capital management (HCM) technology and service areas that are going to hit the market. Employers will be getting phone calls and webinar invites and attending conferences where these new solutions will be heavily promoted.

Case in point: Have you ever seen a TV commercial or heard a radio commercial about HR technology before Zenefits and Namely? This is a hot market, and as one venture capital firm representative said to me, “We are only interested in investing in firms that go after the benefits commissions.”

The commission is in play, and $2.1 billion in investment capital knows it. I have been in the benefit business since 1986, and many of the same problems still exist. Administration is still complex. Benefits are still confusing and are only getting more confusing. Costs are still going up. And now, in today’s world, cost shifting onto employees is creating financial stress on them. It is getting worse, not better. As long as the current market does not solve these problems, then there is an opportunity for someone else to do so.

In the political arena, whether Trump wins or loses, the conditions that allowed him to secure the nomination aren’t going away. Certainly, the millions who support him won’t disappear overnight. They are still Americans living in our society.

In the benefits world, whether Zenefits survives also doesn’t matter. The conditions that enabled it to enter the market and grow still exist. Employers still want what Zenefits promised. Managing benefits is still burdensome. Costs are still going up. People still don’t understand their health insurance. The market conditions have not changed. The opportunity for another company like Zenefits — or 10 of them or 100 of them — still exists. And while Parker Conrad is in the rear view mirror, others are coming. And it will be a tsunami.

This was originally written for Employee Benefit Advisor Magazine. The post can be seen here.

Zenefits’ Troubles Don’t Let Brokers Off

Zenefits is in trouble. Serious, existential trouble. Some community-based benefit brokers are watching the calamity at Zenefits unfold with a mixture of schadenfreude and relief. Given the scorn and ridicule Zenefits heaped on these brokers, taking pleasure from its misfortune is hard to resist. Feeling relief, however, misreads the situation and is dangerous to one’s career.

Zenefits’ Troubles 

Zenefits could go out of business, and several of its employees could be jailed as a result of the business practices reported by William Alden of BuzzFeed News and other journalists. While unlikely, this is a possibility because:

  • Zenefits created software enabling some California employees to lie to regulators concerning the time they spent on pre-licensing training. California law requires those applying for an insurance license to devote 52 hours to this curriculum. Zenefits employees signed a form, under penalty of perjury, that they had done so. Some may not have. Perjury is a felony in California, and conviction can result in as much as four years’ imprisonment. If Zenefits cheated in qualifying agents to sell in California, other regulators are no doubt looking into whether the company did this in their states, too.
  • If found guilty of violating consumer protection laws, state regulators could revoke Zenefits’ insurance licenses. Without the license, Zenefits could no longer sell new policies, and insurance companies would likely terminate, for cause, their Zenefits contracts. The insurers would then stop paying commissions to Zenefits even on previously sold policies. License revocation in one state could result in losing their licenses elsewhere. A cascade across the country of revoked licenses and terminated contracts could cost Zenefits tens of millions of dollars.
  • If Zenefits loses its licenses, commissions on current policies and ability to sell new ones, then some of its more recent investors may demand their money back. (Let me be clear: I am not accusing anyone at Zenefits of committing fraud or any other crimes. What follows is totally and only hypothetical and speculative.) In May 2015, Zenefits raised $500 million in a capital round led by Fidelity Investments and private equity firm TPG. If Zenefits management knowingly hid legal problems from them (and I’m not accusing anyone of doing so), then Fidelity and TPG could claim inducement by fraud, seek to rescind their contract and demand Zenefits return their investment. I’m not saying this happened or that investors were misled in any way. Nonetheless, I’d be surprised if Fidelity and TPG lawyers are not also speculating about this.

Zenefits’ worst case scenario, then, is that the company pays millions of dollars in fines, loses many millions more in revenue, sees employees jailed, can no longer sell insurance, irreparably damages its brand and must repay some investors.

Maintain Perspective

That’s a pretty scary worst-case scenario. Based on we know today, it is also highly unlikely to happen. No regulator has found Zenefits in violation of anything. Regulators are unlikely to impose the most severe penalties available to them if their investigations do not reveal consumer harm. The steps David Sacks, Zenefits’ new CEO, is taking will likely mitigate any penalties imposed on the company. Several employees, including former CEO Parker Conrad and sales VP Sam Blond have already left the company, and more may follow. Zenefits now has its first compliance officer. Mr. Sacks also seeks to change Zenefits values.

I’m skeptical, however, that Zenefits can or will quickly change its culture and core values. I respect Mr. Sacks’ intentions, experience and abilities. He deserves a chance to make his turnaround work. Yet changing a company’s culture usually takes considerable time, and Zenefits’ culture is deeply infused with the Silicon Valley ethos of speed, innovation, disruption and risk taking. To transform Zenefits requires a different world view. Yet in announcing Mr. Parker’s resignation, the company added three board members—all current investors with no domain expertise.

In fact, no current Zenefits board members or executives listed on the site appear to have any experience in running a human resources firm, payroll company or insurance agency—the services Zenefits delivers. What they share is deep experience in well-known tech companies. Zenefits may be a technology company, but that tech is supposed to accomplish something. Only in places like Silicon Valley would lack at the top of the company of this domain expertise be celebrated. Zenefits seems to exist in a Valley-sized bubble, and it’s tough to change what’s in a bubble from the inside.

The Real Lesson of Zenefits

Yet Zenefits is likely to survive. It reportedly has enough cash on hand and no need to seek more. The most probable outcome from the various investigations is that, absent findings of intentional and substantial criminal malfeasance, Zenefits will keep its licenses, carriers will continue paying commissions and investors will keep their money in the company.

We don’t yet know how Zenefits’ saga plays out. What we do know are some lessons this scandal teaches, especially to brokers:

Lesson one: Consumer protection laws matter. Violate them, and there’s a huge price to pay; as there should be.

Lesson two: Arrogance is unbecoming and unhealthy. Zenefits is a company whose leaders proclaimed that community-based brokers were dead meat, promised to drink brokers’ milkshakes, claimed brokers barely knew how to use email, described their profession as a dead beast lying in the desert and, well, you get the idea. The danger is that arrogance of this magnitude easily morphs into hubris. Zenefits’ hubris was the apparent belief that it could ignore rules if they get in the way of achieving the growth promised investors.

Lesson three: Even broken companies get some things right. Zenefits identified a latent customer demand. Clients want more from brokers than help with benefit plans. They want to focus on their businesses and not be distracted by HR and benefit administration. Zenefits success makes clear there’s a disadvantage to only selling and servicing insurance plans. Clients want more from their brokers. Even in the unlikely event Zenefits goes away, this client need will not.

Lesson four: There’s more where they came from. Zenefits’ demise would not mean the end of well-funded tech companies challenging community-based benefit brokers. If Zenefits falls to the wayside, others are ready to take its place using the same tactic of giving away software to employers in exchange for being named the employers’ broker of record on benefit policies.

Seeing a bully humbled is always fun, and there’s no harm in brokers enjoying the sight of Zenefits in disarray. Those brokers who believe Zenefits predicament means they no longer need to step up the services and value they deliver their clients, however, are making a costly mistake.

How Likely Is Zenefits to Change?

Zenefits changed CEOs the other day, but is meaningful change really likely at Zenefits? Founder Parker Conrad is out as Zenefits’ CEO, and David Sacks— who was its chief operating officer—is now in charge. The reason: lax compliance procedures leading to investigations by Washington state and others concerning alleged sales of insurance policies through unlicensed agents. If found guilty by Washington regulators, Zenefits could face a criminal fine of as much as $2.8 million, see some employees go to jail and potentially lose millions in commission dollars. While the penalties are unlikely to reach those levels, that is what is at stake.

Perhaps this situation is a result of incompetence and naiveté by the company’s management. Maybe. Then again, it could be the result of a culture that puts growth above adherence to the rules—an “act now and ask for forgiveness later” attitude—an approach sometimes applauded and rarely condemned in Silicon Valley and similar locales; unless, that is, it hurts the bottom line.

Not surprisingly, then, when Sacks took over he declared the company’s old culture inappropriate and promised to instill new values in the company. On taking over as CEO, he informed employees that “a new set of values are necessary” for the company to continue considerable growth. He ended his letter proclaiming, “This is Day 1.”

I don’t doubt Sacks’ commitment or intentions. But is Zenefits really likely to change its core values? Can it transform its culture? The problem, as I see it, is that the company, its values and its culture reflect those of Silicon Valley. That is both a blessing and a curse.

They dream big in Silicon Valley, and Zenefits became big, one of the fastest-growing enterprises in American business history. The company is funded by an A-list of Silicon Valley heavyweights. As of May 2015, Zenefits became the single largest investment of Andreessen Horowitz, one of the Valley’s most august venture capital firms. Several of its board members are Silicon Valley royalty.

The Valley values speed, innovation and disruption (“worships” might be a better word). While I’ve questioned whether Zenefits’ business model is innovative, the fact remains that the company has quickly shaken up more than one established industry.

However, being of the Silicon Valley model also means Zenefits exists in a bubble (not the stock market-crashing kind, but the island of unreality variety). For example, none of the executives listed on Zenefits’ site has any background in human resources, payroll or insurance sales. Yet that is what the company does. Outside Silicon Valley, this would raise eyebrows, maybe even create concern. But not there. Of course, Zenefits has direct reports with subject matter expertise, but why do none of the company’s top eight leaders (nine before Conrad’s departure)? It looks like a bubble to me.

Sacks is a Silicon Valley rock star. In a December 2014 Pando’s article reporting on Sacks’ joining Zenefits as chief operating officer, Conrad was quoted as saying, “When you have an opportunity to hire LeBron, you hire LeBron.” And it was an apt analogy. Sacks is good. Extremely good. He was the first COO of PayPal and was the founding CEO of Yammer (purchased by Microsoft for $1.2 billion). He knows how to run a company—a Silicon Valley company.

It’s also true that Sacks has been COO and a board member of Zenefits for a year now. Doesn’t that make him part of the company’s “old” culture? As chief operating officer, didn’t he have at least some responsibility for knowing about Zenefits’ compliance problems? Maybe he did and raised the alarm internally months ago. Maybe.

So that’s where Zenefits stands at the moment, stuck in a vortex of maybes. Maybe it takes an insider to lead the company outside the Silicon Valley bubble. Maybe it takes someone who has seen the company’s failure to understand what can no longer be overlooked or ignored. Maybe Zenefits can both grow and follow rules. Maybe the company can swagger less and execute better.

Maybe.

Who knows? Until it’s clear Zenefits has the willingness and ability and to change, perhaps a bit of skepticism is in order.

Maybe.

zenefits

Zenefits Compliance Saga Takes a Turn

Things happen fast in the start-up world.

Early yesterday, I wrote a post on how Zenefits’ compliance challenges in Washington state could cost the company millions of dollars in lost commissions. While noting that it was only a matter of time before someone at Zenefits lost his job over the situation, I had no idea that Zenefits CEO Parker Conrad would resign later in the day, citing the compliance problems.

In a press release cited by VentureBeat.com announcing Conrad’s departure, Zenefits’ new CEO, David Sacks, who had been COO, declared, ”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.” (The entire press release is worth reading).

The loss of a founder and CEO is another cost Zenefits will pay for the alleged failure to comply with states’ insurance laws. I don’t believe they’re done paying for their mistake, however.

What follows is a slightly edited version of my earlier article:

Washington regulators are investigating Zenefits’ alleged use of unlicensed agents selling insurance policies in the state. This is not only embarrassing for a company as brash and boastful as Zenefits, but the company’s finances could be substantially affected, too. Not just because, if found guilty of this felony, Zenefits could face a multimillion-dollar fine. The far greater risk to Zenefits is the prospect of losing commission income — a lot of it.

William Alden at BuzzFeed News has done a great job pursuing the story of Zenefits’ unlicensed sales. Now Alden is reporting that, based on public records, it seems “83% of the insurance policies sold or serviced by the company through August 2015 were peddled by employees without necessary state licenses….”

The potential fallout is quite substantial even though only a small number of sales are involved — just 110 policies out of 132 sold or serviced by Zenefits in Washington between November 2013 and August 2015. “Soft dollar” costs include a damaged brand because of the bad press, distractions at all levels of the company and the need to address whether the company is ignoring other consumer protections.

Then there are the hard costs. 110 policies times the maximum $25,000 per violation that Washington can impose means fines of as much as $2.8 million. Financial penalties imposed by other states could add to this figure. While paying a $2.8 million fine is no laughing matter for a company losing money every month, this represents less than 0.5% of what Zenefits has raised from investors. However, the legal fines are, potentially, just the tip of the proverbial iceberg. As Alden points out, the fallout from this investigation could result in carriers dumping Zenefits, and that could cost the company far more than any criminal fines.

Carriers require agents to meet several requirements before contracting with them, and agents must continue to meet these requirements to keep the agreement in-force. Common provisions include being appropriately licensed, maintaining adequate errors and omissions coverage and not committing felonies or breaching fiduciary responsibilities. Fail to meet any of these requirements, and agents can find their contract terminated for cause.

Terminations for cause usually allow insurance companies to withhold future commissions from the agent and, depending on the specific terms of the contract, from the agent’s agency, as well. If an agency or agent knows or should have known he was in violation of contract terms when executing the agreement, carriers may be able to rescind the contract and demand repayment of commissions.

Being found guilty of a felony in Washington state could allow a carrier — any carrier, anywhere in the country — to terminate Zenefits’ agent contract for cause. Late last year, Zenefits CEO Conrad claimed the company was on track to earn $80 million in 2015. So, let’s see, millions times 50% … carry the one … yeah, this hurts. A lot.

A nuclear outcome is highly unlikely. The Washington state investigation into Zenefits is continuing, and Zenefits, to date, has been found guilty of nothing.

Even if Washington regulators find Zenefits committed a felony, for reasons described in a previous post, the outcome is highly unlikely to be a fatal blow to the company. Insurance regulators have considerable leeway in determining fines and penalties. Absent proof that Zenefits intentionally violated state law or that consumers experienced actual harm, the Washington State Department of Insurance is likely to conclude that this situation resulted from incompetence. The department might then impose a modest fine on Zenefits and subject the company to enhanced review of its licensing practices for a few years.

Let’s put this in perspective. Richard Nixon resigned the presidency as a result of what started off as a two-bit break-in. That kind of cascading escalation is extremely rare. What we’re seeing unfold in Washington state is probably not Zenefits’ Watergate moment.

Zenefits has already paid a small price for what it allegedly did. I’m guessing the whole mess has been a bit distracting to management. And the fact remains: Mishandling more than 80% of sales in a state is a sign of immense ineptitude, arrogance or both. Having this reality aired publicly is not good for Zenefits’ brand, and resources will need to be expended to make sure it doesn’t happen again. I’m not aware the company has fired anyone as a direct result of the lax licensing controls, but that could happen.

As a result of this fiasco, Zenefits has already taken down its controversial broker comparison pages in which the company used carefully selected criteria to compare itself to community-based agents. (I guess the company was reluctant to add “being investigated for multiple felonies” as one of the comparison points). This is a small sacrifice as the comparison page was likely an attempt to enhance search engine optimization rather than an effort to take business from the competition.

Zenefits has paid a small price. The open question is: How large a price will the company ultimately pay?

Zenefits’ Problems Are Real but Not Fatal

Zenefits has hit a rough patch. Given the insults the company’s CEO, Parker Conrad, has heaped on brokers, the schadenfreude percolating through the broker community is understandable. Yet declarations of Zenefits’ demise are premature.

Zenefits raised $500 million in May at a valuation of $4.5 billion. At the time, Conrad claimed the company was “on track to hit annual recurring revenue of $100 million by January 2016.” That was then.

Now, the Wall Street Journal is reporting that Zenefits is falling short of its earlier revenue projection. According to the Journal and Business Insider, through August Zenefits’ revenue came in closer to $45 million, and the $100 million annual revenue figure is likely out of reach. In response, Zenefits is reportedly instituting a hiring freeze and imposing pay cuts. The latter step is cited as a reason at least eight executives left Zenefits.

In light of the news, in August or September Fidelity Investments reduced the value of its Zenefits investment by 48%, estimating the company was now worth about $2.34 billion. That’s a seismic event: In May, Fidelity thought Zenefits was worth $4.5 billion. Just five months, later Fidelity thinks this was being a tad optimistic… if by “a tad” we mean “$2.16 billion.”

In an interview with Business Insider, Conrad admits Zenefits is unlikely to keep his promise of $100 million of recurring revenue this year. However, he claims Zenefits continues to hire (although not as fast as in the past) and is happy with its revenue growth — “more than $80 million of revenue under contract” (which, it should be noted, is not the same as saying “we’ve taken in $80 million so far this year,” but maybe that’s what he meant). Conrad also asserts that Zenefits is getting “closer and closer” to being cash flow-positive, although he doesn’t expect it to get there until 2017 at the earliest.

Missing his $100 million commitment and having to address the subsequent fallout is no doubt adding to Conrad’s stress levels. Because Conrad went out of his way to insult community-based benefit brokers on Zenefits’ way up, the joy that brokers are taking in his discomfort now is to be expected — and is arguably earned.

Should brokers assume Zenefits is no longer a threat, however? No. It is still bringing in tens of millions of dollars in revenue. According to what I’ve heard, only about 60% of this revenue comes from commissions. An ever-increasing portion of Zenefits’ revenue flows from fees earned by selling third-party services or its own non-commission services. Zenefits launched its own payroll service, so its non-commission revenue will continue to climb. Zenefits may not be valued at $4.5 billion any more, but it is still valued at more than $2 billion. And while no CEO is happy when a serious investor marks down his company by nearly 50%, Conrad says Zenefits won’t be out raising money anytime soon. As a practical matter, the impact of the devaluation on Zenefits is minimal.

In short, Zenefits is sticking around.

But I predict Zenefits is in for a rough time. Direct competitors like Namely and Gusto are raising money and stepping up. Community-based brokers are increasingly leveraging technology. (Full disclosure: Im co-founder of the company launching NextAgency, software that will help brokers level the playing field against Zenefits, so I’m delighted to point out this trend.)

While new initiatives like the payroll offering will create revenue streams for Zenefits, they also carry significant risk. Current partners will view Zenefits as a potential competitor. Management will be distracted from the company’s core business. New skills and expertise need to be acquired. There’s something to be said for focus, and Zenefits may be losing its.

Schadenfreude is German for deriving pleasure from the misfortunes of others. That Zenefits’ current problems generate this impulse in the brokers they’ve insulted should surprise no one. That Zenefits will face challenges, problems and setbacks moving forward is inevitable. That community-based brokers should continue to take the threat Zenefits represents seriously is wise.