After Zenefits, Will VCs Rein in Their Unicorns?
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Lyft and Uber skirt similar kinds of seemingly useless regulation but they're completely up front about it. They don't pretend that their drivers are licensed or get any benefit from having licensed drivers in any way. They're simply offering a different product than what taxis offer - getting a ride with a random unlicensed stranger.
Lyft, Uber, and Airbnb are betting that reputation systems (ratings, reviews, etc.) will provide assurance for consumers just as well if not better than government regulation. So far the market is showing they just might be right.
Zenefits seems to have been driven by a similar cultural distaste for onerous and probably out-dated regulation - who can blame them? But instead of letting the market decide how valuable that regulation actually is they simply cut corners when they hoped no one would find out.
That deceptiveness, more so than the regulation dodging itself, is ultimately really bad for a B2B business.
It is inevitable. The reality is that this is how a lot of regulation starts. It doesn't always come from an anticompetitive place. We just forget that we actually asked for the regulation. Once we have, it's nice to always be able to blame the government or some regulator when something goes wrong. And then someone else can come in and "disrupt" the market by using a loophole of pretending like the regulation doesn't apply to them, when it's clearly intended to.
Maybe the fact that cab drivers need a licence and are thus screened more thoroughly?
Case in point - when an Uber driver raped a woman in Delhi, this is exactly what the Delhi government did.
Chronic problems would be over charging - put it this way, the day before taxis were forced to charge a certain amount each mile, all taxis would have been free to charge different amounts as uber and lyft can.
We do ask for regulation - and always in response to symptoms. Regulation is not pre planned rational thought ...
Now it's legal because it flies under the banner of "rider sharing". But we all know that there is really no sharing to be had. It's just a for hire service. The regulation will return, eventually.
Like Zenefits, the government regulation that Lyft, Uber, and Airbnb are skirting has one important consequence: It protects the rest of us who are not their customers from them. If a Yellow Cab driver does something dumb, malicious, or against the rules, I can complain to the city regulatory authority and that agency can take action. If it fails to take action, I can pressure my elected leaders to correct that stance. If it takes action in an open way that is transparent to the populace and finds that I am not correct in my complaint, so be it. I need not be a customer of Yellow Cab to complain about the actions of one of its drivers.
Replacing public rules enforcement with "reputation systems" is completely useless if I never enter into a business arrangement with those companies. As it stands, the only way I can complain about any of them--especially with Zenefits actively working to hide its bypass activities from the relevant authorities--is to be a customer and poorly rank some allegedly-independent-contractor. Or I can use Twitter and complain publicly but get drowned out by the noise.
That's no substitute, in my opinion.
For the rest, as you state, they have been largely clear about their opposition to perceived out-of-date regulation and have worked tirelessly across the country and world to have new rules or exemptions or trials put in place.
Being disruptive isn't the same thing as breaking the law with willful abandon.
Here's a good take: https://stratechery.com/2016/zenefits-and-regulation/
I certainly do think the value prop to consumers for Zenefits' rule breaking was not very clear. However, I'd argue that lack of clarity stems from the fact that they were breaking rules in small and kind of sneaky ways, and not in a clear way baked into the core of the product.
If they were totally unappologetic about bending laws from the beginning - ie their pitch was more like "Zenefits lets anyone sell insurance and provide other services to small businesses, making these things more accessible and affordable" - then I think people would credit all benefit they get from Zenefits to its rule bending, and put up with a lot more of it.
Instead, Zenefits was kind of trying to have its cake and eat it too, which just pissed people off.
To be fair though, I suspect that creating an explicitly unlicensed insurance brokerage would be much, much harder to pull off than an explicitly unlicensed taxi service.
In my building, renting out with something like AirBnB is against their occupancy agreement. While I don't know everybody in my building, I certainly know everybody on my floor. I used to know everybody in the building, but a number of people have moved out and I haven't learnt all the new people yet. I'd be really pissed if I found out that someone was offering an AirBnB rental right next to me.
Zenefits sells to HR departments whose raison d'être is to make sure the company complies with its duty of care to employees, including observing all the relevant regulations. The idea one of their partners might have been using inadequately trained and unlicensed insurance brokers that didn't really know what they were doing to sell their employees expensive health insurance plans is kryptonite for that partnership.
(and I say this as someone who always ran the blindingly obvious "how not to take a bribe or sexually harass your colleagues" compulsory videos in the background whilst getting on with more productive work)
> In a Feb. 1 meeting at its blandly luxurious Sand Hill Road offices, venture firm Andreessen Horowitz urged the chief executive officer of one of its most prized and promising companies to resign.
1) The first sentence references a meeting that very few people would know the details of. Likely only those at a16z plus a few executives around Parker/Sacks. Unlikely Parker is talking to the press, given the legal issues swirling.
> Days after Chief Operating Officer David Sacks gave that information to Lars Dalgaard, an Andreessen partner who sits on Zenefits’ board, Conrad was out, say three people familiar with the matter. At Conrad’s suggestion, they replaced him with Sacks
2) Sacks gave the information to a partner, then Conrad (basically blamed for fraud) suggested they replace him with Sacks. Which raises some questions:
a) Why trust Conrad? He's fired + off the board + likely under legal investigation.
b) As COO, no question as to whether Sacks knew anything or that they needed fresh blood? Also, he was suggested by the person who was just removed for fraud.
> At the meeting, Conrad tentatively agreed to resign, relinquish his board seat, and make Sacks CEO, say three people close to the company.
It then takes an abrupt turn and starts repeating everyone's favorite Silicon Valley trope du jour: the unicorn bubble is bursting, the fundraising environment is tightening up, and the halcyon days of multi-billion dollar valuations for everyone are over.
There's really no connection between the two.
A unicorn wants to go public, but that means first getting your compliance ducks in nice rows. The growing realization that unicorns are in fact very non-compliant pushes them towards the easier route of being acquired/merged. So there is a direct link between compliance and the very existence of unicorns.
This feels like a very hyperbolic claim. There are definitely high-profile examples of startups that had compliance issues and are struggling to bring them under control or remain in arguably grey areas (Zenefits is an example of the former, Airbnb the latter). But it's hard to imagine that it's a truly universal problem; many startups are in industries without heavy regulatory rules. Can you elaborate on what makes you believe this to be the case?
Ask any tech lawyer to list all the laws applicable to a startup. Bring a lunch. Until a company has devoted resources (ie a full-time compliance team including lawyers) and has a decade or so of experience with the relevant rules, imho proper compliance is a pipe dream. At best you can hope to keep the wolves away long enough to get whatever they want ready asap.
Anyone here working at a startup, just have a look at the PCI DSS, specifically the SAQ you are meant to fill out every year (if you handle credit cards). And this is basic compliance 101 stuff, no lawyers required.
https://www.pcisecuritystandards.org/documents/SAQ_D_v3_Merc...
They had people selling health insurance without a license. This isn't just a failure to sit through the "don't bribe foreign officials" training.
https://support.stripe.com/questions/do-i-need-to-be-pci-com...
Services like these are part of the problem. They can verify that the service they provide is compliant, but nobody can determine remotely whether or not you are compliant with something like PCI. You cannot outsource compliance. It is something you have to actually do.
And fyi these "iframe" services that allows a merchant to opt for SAQ-EP rather than the longer SAQ-D, that might be going away in the next couple years. Merchants may have to go with a full redirect, not a frame, if they want to wash their hands of chd.
Things move quickly...and that's an understatement...
There is a fever that descends upon a team on the brink of hitting a "home run"...the push is incredible..
Do what needs to be done NOW, we'll clean up afterwards...so difficult to resist...
The qualifiers in "successful startup" and "serious compliance issues" make it hard to say whether the statement is objectively true or not, but I see two factors that probably exacerbate the problem for startups: regulations designed by established companies to thwart upstart competitors, and the "disrupt"/"move fast and break things" attitude that doesn't mesh well with red tape.
I note that the Zenefits CEO was ousted after missing targets and during a time when I think we can all at least agree that the industry is less exuberant. Maybe he would have gotten sacked anyhow, but missing the numbers sure didn't help him.
Here's the regulator's description of half of the requirements:
http://www.insurance.ca.gov/0200-industry/0050-renew-license...
There exist many tick-box requirements in the vast, vast field that is compliance in regulated industries. There is a political valence to this observation.
My personal favorite one is the time where I had to threaten to fire myself if I ever misused patient information. I threatened to fire myself if I ever misused patient information. I then documented the fact that I had threatened to fire myself if I ever misused patient information. If I am ever investigated on suspicion of failing to have threatened to fire myself if I ever misused patient information (a crime which is separate from misusing patient information), I will be able to produce adequate documentation attesting to the fact that I threatened to fire myself if I ever misused patient information.
Typically the voiceovers are short, e.g. 60 seconds, to ensure that you are actually at your computer clicking "next" rather than just letting the voiceover run while you do something productive.
Once you've clicked "next" 52x60=3120 times you are then permitted to take the exam.
Zenefits "Macro" automated the clicking, allowing their people to simply learn the material and then take the exam.
tl;dr; The state of California says "you must learn this material very slowly" and Zenefits employees are fast learners.
One of my proudest hacker moments* a while back was taking online defensive driving school (to have a speeding ticket excused) and figuring out what to type into the Javascript console to make the 'next' button clickable before the timer on the page ran out. (This technique would have been subverted had there been any server-side checks whatsoever, but nope...they completely entrusted the client to keep the time. I suppose they don't have much of an incentive to make it any more difficult given that the government probably doesn't have a very rigorous accreditation process for these courses.) That cut whatever was left of the required 6 hours down to about 20 minutes. I guess I'm an unethical monster that should never be allowed to run a company. :\
*I know, it's pretty lame in comparison to, say, figuring out how to jailbreak an iPhone, but I'd be lying if I said I wasn't proud.
We certainly don't want giant companies influencing policy changes (though, that happens frequently). I think a good indicator of whether a policy can justifiably be circumvented is if it actually hurt anybody. Has the "macro" hurt anybody yet? The articles have been vague.
The employees who used it and then signed a false declaration are at risk of jail.
That was their choice, but they were seemingly under pressure from their CEO, so it seems fairly evident (to me) that Parker created a real problem for his team, even if the customers are OK.
[Edit: Removed out-of-place "committed"]
Lyft and Uber skirt similar kinds of regulation but they're completely up front about it. They don't pretend that their drivers are licensed or claim any benefit for having licensed drivers in any way. They're simply offering a different product than what taxis offer - getting a ride with a random unlicensed stranger. They're not trying to get the best of both worlds - the legitimacy of being licensed and the cost saving of not bothering with it.
Lyft and Uber, and Airbnb too, are simply offering a new product that doesn't come with any reassurance for consumers from regulatory compliance. They're betting that reputation systems (ratings, reviews, etc.) will provide assurance for consumers just as well if not better than government regulation. So far the market is showing they just might be right.
I suspect that if Zenefits had offered a platform where anyone can sell insurance to anyone from the beginning then people would be less pissed about it. Of course offering an unlicensed insurance brokerage product would probably be a lot harder to pull off than offering an unlicensed taxi product.
P.S: I'm totally for sensible regulations. However, sensible regulations usually require wide amounts of nepotism, cronyism and backstabbing to break. If a regulation is important enough that people could be hurt by it, then it should not be circumventable by a web script.
I would actually rather have companies like Zenefits sidestep regulations like that to show the regulators where they screwed up than Zenefits pump money into skeevy Lobby groups.
In any case, what's the point of "show[ing] the regulators where they screwed up" if you don't want them to change anything anyway? What's the point of having regulations at all if you're going to let them be a joke?
'Making trainees watch a video' seems like silly regulations asking to be circumvented. Why not make the exams more stringent so people are forced to actually pay attention.
But I see it as symptomatic of a cultural contempt for regulations. It seems like a conflict of interest for a company to wantonly decide which regulations are worth following and which aren't. Especially when the salespeople could be personally liable, and the catastrophic outcome is somebody finding out that their $1m surgery isn't covered by their insurance despite promises it would be from the salesperson.
Supposing that the exam is supposed to test the candidate's actual knowledge -- i.e., their ability to correctly represent things and act in compliance with the law while engaged in conversation with potential customers -- I certainly can see a risk of someone just saying "eh, I'll skip the material, take the exam with a reference open on my desk, pass it and be fine" and then getting into major trouble later when it turns out they did actually need to know a lot of that stuff off the top of their head in order to do their job.
Just breaking the law is stupid.
Airbnb and Uber are managing to fight the regulatory hurdles with ~5x is ~13x the valuation of Zenefits, respectively. While Zenefits is ~5x the valuation of Aereo, it seems they have some catching up (read: fundraising) to do.
Plus sometimes you know how bad the worst case legal scenario is and it's the best option. With stuff like taxi regulations the fines probably aren't too bad.
Other wise it seems to me that is requirement is just as unnecessary as requiring cosmetology license for hair braiding ( see http://www.texastribune.org/2015/04/06/bill-would-untangle-m...)
I wouldn't go that far. It's just the naïveté of "Why there gotta be so many laws obstructing my disrupting?!" taken to its logical extreme.
If you buy a policy from an unlicensed broker, and it turns out not to be in compliance, the carrier probably isn't obligated to pay out, whether you're paid up on your premiums or not. The carrier doesn't want to be at fault for not having to pay out, so they offload that onto the broker, and "protect" the consumer (really, though, themselves) with a licensure regime.
Insurance companies, being in the business of managing and mitigating risk, have all kinds of meticulous i-dotting and t-crossing procedure and regulation. This is — again, at a guess — just another example of that.
Read Ben Thompson's piece about how this differs from more "gray area" compliance breaches:
<<That was how executives discovered the macro, which Conrad had created based on a belief that 52 hours was too long to spend in training, the lawyer for Sacks said.>>
http://www.buzzfeed.com/williamalden/zenefits-program-let-in...
I have no issues with Zenefits and I am actually happy they were able to see phenomenal growth. However I must say this whole situation of the CEO stepping down feels staged to me.
It is as if everyone was in on it and this move was calculated by all of them a long time ago. Like when we ready and my stocks are safe and sound blame it on me.
However what I am sure of is there is absolutely no way this 4.5 Billion company was acting illegally and only one person , the CEO, knew about this for YEARS and is responsible for it end to end.
Of course it was staged: you have a corporate guard change. What don't you "buy" about this story?
I would not recommend anyone use Zenefits for any reason, regardless of whether it turns out they complied with legally-mandated training requirements or not. The fact that they were so incredibly sloppy is just inexcusable. You cannot mess around with people's pay like that.
(Posted with a throwaway account for hopefully obvious reasons.)
The most valuable asset of a startup seems to be hot air.
That being said, it is interesting how many visible unicorns are either flaunting the law or outright frauds (i.e. zenefits, uber, airbnb, theranos).
Happily or sadly (per your point of view) - it's seems still worth it. The Zenefits ex-CEO lost his job but he never ever needs to work again (and can afford the best of the best lawyers if needed)
The language indicates that the VC's are the controlling owners of these companies.
Anyone know the investment thesis on that?
Clearly someone bought in to the pitch, but what strategy would they believe would easily rectify this situation?
But start ups are all about momentum and PR.
Plus they'll need money for investigations and settlements. VC capital is expensive.
Skipping the video is not in itself what could potentially kill the company. However if clients are able to claim that their insurance was mis-sold by Zenefits, it seems to me that could. Mis-selling of payment protection insurance in the UK has already resulted in settlements north of 5 billion GBP, and the issue is not fully resolved yet.
Also, it's a good idea to assume that the documents which established the valuation likely have many terms which make the published numbers not represent the economic reality of the investment/contract. Liquidation preferences make any comparison between private and public companies extremely difficult, if not impossible.
We're now seeing the downsides of their thesis. Workday's market cap has since cratered, down 33% in the past year, indicating a weakening interest in the enterprise IPO market. Zenefits itself has a number of growing concerns- regulatory and competition concerns (ADP is only getting better by the day).
For Zenefits/Parker to facilitate and encourage their staff to do it is most certainly ethically wrong.
Telling your staff that they should cheat the rules, sign a false document and perjure themselves is completely unacceptable. Zenefits employees face the risk of jail time because they did what their CEO told them to do - that should never happen and Parker deserved to go for that reason alone.
Or, at most, I will concede that it is not ethically and morally wrong if we concede that the United States is a plutocracy and not a democracy, and there's nothing ethically or morally wrong with a plutocracy.
If these laws are in fact stupid, get them changed. You have tons of money and tons of happy users, right?
More generally, I don't see a good way for our society to collectively figure out the cost/benefit ratio for many regulations other than experimentation (the institutions that should be doing so are permanently out to lunch). It's not ideal, but from my standpoint startup companies pushing boundaries is the best solution we've got for dealing with stagnated industries.
You're confounding tyranny of the majority with corruption; the reason marijuana is still criminalized in most places is because a large enough percentage of the population thinks it should be, for whatever reason.
Another example would be the woman who has the gall to braid hair without a license - if she hadn't broken the law, nobody would talk about it, there would never be any chance for reform, and we would all be incrementally poorer for it.
I'm not taking a position on specific laws, just that it's important that some laws occasionally be broken so that as a society we can test whether or not it matters if someone breaks them. If breaking a law doesn't result in negative outcomes, it shouldn't be a law.
The counterpoint is that civil disobedience requires harsh punishment of the disobedience in order to be effective. If somebody flagrantly violates a law because they claim it's bad, and walks away with little to no punishment for doing so, the public's impression will be "well, must not be such a bad law if that's all that happens", which will not serve to change things.
I am pretty okay with even large numbers of companies, with different motivations and financial incentives, all deciding that the same law is stupid. (One case seems to be the export regulations on non-open-source crypto-using software, for instance.) Even if they're all companies, that is much more defensible on democracy and not plutocracy.
Imagine you're an entrepreneur, and you've identified a heavily regulated industry full of sclerotic companies with connections to the regulators that serve large numbers of customers extremely poorly. You believe that you can't break into the market without violating some regulations that have a strongly negative effect on product quality.
What should you do? Go to VCs and ask them to fund a decade-long lobbying campaign with a very high probability of failure in which you pour your heart and soul into getting some obscure regulation in some obscure area that nobody cares about changed, and then afterwards start a company to better serve the customer (along with everyone else who is rushing in to benefit from the lightened regulatory load)? Or try to start a company, show everyone that they regulations are dumb, make customers happy, and then force the regulators to change out of sheer embarrassment?
If we don't occasionally reward people who took the second option (and were right!), I don't think we would get safer, more ethical change, we would just get less and everyone would be worse for it. I'm obviously fine with people who break regulations and end up hurting others being punished to the full extent that the law allows, but there needs to be an escape valve for when the government has it wrong.