Zenefits (YC W13) Just Raised $500M at a $4.5B Valuation | Hacker News Reader

Zenefits (YC W13) Just Raised $500M at a $4.5B Valuation

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97 pointscarlchenet85 comments

One of my favorite displays of how little the tech press gets it is this stark contrast. (I think Garry Tan is the one who pointed to me it originally but I don't have that reference right now.)

PandoDaily in 2013:

"While I don’t have my Tarot cards handy, I don’t think there’s a big winner in this bunch either."

http://pando.com/2013/03/26/y-combinator-demo-day-2013-still...

Startups are a function of markets and execution. Pick a big market and execute well and you're golden. It's difficult beforehand when a company is larval to tell who's picked the right market unless you're able to really think through it.

Teespring is another successful company in that batch (W13).

Journalists make terrible VCs as a general rule.

http://en.wikipedia.org/wiki/Michael_Moritz

Michael Arrington's prowess has not yet been actually assessed.

I'd say I know a few journos who aren't that bad, but a lot of tech press who are horrible.

Michael Moritz, senior partner at Sequoia Capital and arguably the best VC ever, started his career as a journalist. From his bio, it sounds like he leveraged that to start his career at Sequoia.

http://en.wikipedia.org/wiki/Michael_Moritz

> as a general rule

Also Esther Dyson, Jason Calacanis and Crunchfund (Arrington) seems to be doing pretty well.

This image (of the Pando Daily article) captures the irony :)

http://i.imgur.com/tGg4zEd.png

(arguably they aren't Dropbox/AirBnB yet, but still something)

Zenefits: you are growing too fast! Scale up your customer service and improve your customer satisfaction rates before making big customer acquisition pushes, else you risk disappointing your existing customers. (Anecdote: I am a disappointed existing customer)

I'm also a disappointed customer because my first payroll cycle was two weeks late. This (or worse) happened for my colleagues as well. Apparently the integration between Zenefits and ZenPayroll is not ironed out.

Our view of this is that growth is not inconsistent with improving the service - and, actually, quite the opposite, our growth is what gives us the ability to solve a lot of the challenges in this industry.

This is particularly relevant in your case (an installation error on Aetna's end). One of the biggest problems with health insurance for companies < 1,000 employees is that everything is done via paper / pdf / fax machine. This is of course a pain in the ass, but more importantly it's a source of large and irreducible error. Insurance companies average about 10% to 20% error rates on the stuff that we send them even if Zenefits is 100% correct. These errors aren't unique to Zenefits -- any broker or other company doing this stuff would have them -- and we spend a lot of time following up with carriers to verify, etc....

Here's the important thing -- our growth means we can make insurance companies build APIs for us, some of which are live right now, and many more of which will be live in the coming months. Only with this full electronic integration can these processing errors go away, for us and for everyone else. APIs == zero errors. Existing paper / pdf method can never fully eliminate errors b/c we (zenefits) don't control the guy on Aetna's end who is keying information into their system.

This is a really bad answer to a concern about customer service, just a heads up. We want to be reassured that you value your customers and will be working to make things better no matter what, not given paragraphs on why it's actually someone else's fault.

Agreed, and it's a running theme in most customer service interactions with Zenefits (Aetna's fault, Intuit's fault, etc.). There's also tends to be long delays in response times because of the back and forth between Zenefits and the provider, and sometimes conflicting responses which make things really frustrating.

Disagree. He's transparently articulating the causes of the error.

But when the entire "cause" is someone else's fault it rings hollow.

I don't think so, basically the HN crew wants to see the nuts and bolts, and he's giving a real reason why problems happen on the platform. I personally find it refreshing when someone from a B2B company helps me understand their internals, it helps me trust them more because either their sound or not.

Sure, it's interesting to know (even if there's no way to verify what he's saying is correct), but it starts to come off as passing the buck. I think your perspective on the HN crowd might have been more valid 3-4 years ago but let's not pretend like it's still the same group of people.

We use Zenefits and (AFAIK) have no issues with the service. Just throwing it out there that a little reassurance goes a long way.

Yeah I agree on both points. Nothing really substitutes knowing (and hearing) someone is in your corner.

The notion that "APIs == zero errors" is absolutely not sound.

As a side note, it's great that the CEO and cofounder of Zenefits still visits and replies on HN.

I hope that you're citing an API solution as a way to build your appeal with the HN crowd and not as a legitimate reply to a customer service problem. Until this API is available can you speak to the manual operations work that takes place on your end to identify and correct these commonplace errors?

edit: As someone who wants to give Zenefits a serious go but has some concerns.

Parker, I have emailed you twice now, in reference to an egregious failure of your team. First on January 29, 2015 and again, yesterday. I view receiving no response from you nor a member of your executive staff as evidence that you just don't understand how critical health benefits are to small businesses like mine (12 employees). We need a partner that values our relationship - why can't you compete on this vector with the local health insurance broker?

> I am a disappointed existing customer

Are you at liberty (and are willing) to share any specific examples of the problems?

$4.5B Valuation for an SaaS business that doesn't charge for it's service and makes money from commissions?

Did they invent something no one else can do? Why would insurance companies not just scrap the middle man and build their own thing?

I don't know about other insurance companies, but the ones I know are incredibly bad at building software (I don't know any in the healthcare or HR business though).

Still, they're burning a very worrying amount of money.

Zenefits are one of the few companies where the burn rate is probably inevitable. They're trying to get a secure foothold in a market that has slow-moving, largely technologically ignorant companies who are very wealthy. That wealth could be used to leverage the incumbent companies' dominant position if someone successfully starts to disrupt things. They need to get to a position where they can't be crowded out by the big players fast. That means spending a lot. Growing slowly isn't an option.

Uber was the same. PayPal was the same. They were both so successful at it that the incumbents in their respective markets have just accepted the loss of market share without any return strategy. I imagine that's Zenefits aim too.

Uber and paypal had the advantage of offering a service that wasn't strictly specific to the USA. I can only use Zenefits in the states; the way HR works is totally different in Canada and Europe, much less India, China, etc.

hey dude you're dead

I suppose for the same reason supermarket companies are different from food companies.

Why would hardware companies not just build their own operating system?

Like Apple?

Why apple then need foxconn ?

It's turtles all the way down.

> Why would insurance companies not just scrap the middle man and build their own thing?

One of the benefits of an HR solution like Zenefits is that it lets you shop among and switch between insurance providers. A captive solution wouldn't be able to do this as well or as independently as a third-party company. Zenefits also helps companies with more than insurance, services which would presumably be less interesting for an insurance carrier to provide.

This is also true of a PEO (e.g. Trinet).

Yes, Zenefits has a gorgeous interface which feels much more modern and sleek than something like Trinet. The trade-off is that the healthcare benefits are inferior for a small company - because unlike a PEO, Zenefits is NOT pooling together tens of thousands of young, healthy employees across many companies and getting a good deal from insurance companies. Yes, as an employer, you don't play the hefty admin fee you pay Trinet - but you just don't have access to better plans for your employees.

The other pain we've found is that at the end of the day Zenefits is simply a wrapper around third party services (healthcare insurance, payroll etc.). If everything is smooth sailing, there is no problem. the moment something goes wrong there's this super frustrating finger pointing session where you have to call Aetna directly, or Intuit Payroll and Zenefits blame each other, or no one wants to cop to a payroll tax filing error. If you have an employee waiting for some critical healthcare reimbursement, this he-said/she-said is the worst. Never had to deal with that with the one-stop-shop PEOs.

Zenefits has great software but the customer service needs some catching up. Maybe this round of funding will do it.

I would argue that this is actually the fundamental innovation here - shifting of the cost from the employer to the employee.

With Trinet, you get negotiated rates that are pretty fantastic - but all the employee sees is an outdated interface, and all the employer sees is the monthly overhead cost per employee draining their bank account.

With Zenefits, the employee doesn't see that their health care actually costs more (the employer typically covers the same amount regardless), and the employer doesn't have that monthly fee.

It's as compelling as it is accidentally insidious.

Yes, this is 100% true! My main point was not about the cost of the plans, so much as getting access to better plans. E.g. with Trinet we were able to get access to PPOs that had some out of network coverage. With Zenefits, as a standalone company of our size we only had access to EPOs (i.e. no coverage if a blood test or something got accidentally sent to an out of network provider.)

Exactly - the theory of course is that Zenefits will be able to eventually negotiate down the rates and match or beat Trinet, but right now it's basically doing "awareness arbitrage" - especially with something that people only think about once or twice a year, which is a lifetime in startup land.

It's accidentally brilliant.

This! Of course a company that reduces employer costs is going to grow like a weed. Nobody talks about the shift of cost to the employees.. it's an alarming trend with so many businesses these days; the optics are that you're getting a better experience, but the reality is that in many cases, you're paying more.

Did they invent something no one else can do? Why would insurance companies not just scrap the middle man and build their own thing?

I once worked for a company that built smaller products for insurance companies. No really big ones, but a decent representation of the market. We would put together an update for what was an internal application, and sometimes it would take 6-8 months or more for them to get around to deploying the new version to their users, assuming they didn't decide to just hold off for the next version for some reason or another.

These companies are pretty absurd in how slowly they move with anything, especially anything technology related.

I think there are some big players who do daily if not weekly releases. I worked for one. It is all tenant shared and they push client specific changes on a regular basis.

They would probably have to build a product at least 2x better than Zenefit's current offerings to gain back market share. It looks like Zenefits is starting to be the way to do things as many smaller startups.

> Why would insurance companies not just scrap the middle man and build their own thing?

Maybe I'm wrong (I'm a user of Zenefits but only from the employee side) but Zenefits seems to bring all of the disparate services (generic HR forms, payroll, insurance) together in a single place with flexible insurance coverage. If an insurance company did this I don't think they could offer as much unless they're going to branch services out. Plus this let's a company switch out insurance providers without changing services.

>$4.5B Valuation for an SaaS business that doesn't charge for it's service and makes money from commissions?

In fairness, this is also a rough description of the business model of ebay (current market cap: 70.2B). Like Zenefits probably eventually will, ebay has added various bolt-on services, but its core business has always been, as far as I can tell, making commissions on transactions between others. See also: AirBnB.

>Did they invent something no one else can do? Why would insurance companies not just scrap the middle man and build their own thing?

It's not so much that the underlying technology is that mind blowing (it isn't, or at least, historically hasn't been). Indeed, I'm hoping they invest some reasonable chunk of this cash in improving ui/ux. But execution matters, and the mere fact that, like facebook, they didn't really "invent something no one else can do", doesn't mean they aren't creating a hell of a lot of value.

I don't know Zenefits' market or business well enough to have any idea whether $4.5B is reasonable at their current stage, but it's not beyond the realm of possibility.

Nothing special. It's more a single service that handles all HR, which happens to make money from insurance commissions.

Other companies should be doing this!

Current valuation should be based on future revenue projections. If you assume a 10X multiple they'd need $450M ARR to justify $4.5B which implies growing 22.5X ($20M * 22.5 = $450M).

Last report I saw pegged their number of customers at 10,000 which would mean a $2K average customer annual value. To get to $450M ARR they either need to grow to 225,000 customers or increase their average customer value (or a combination of both).

According to the US census there's over 2M companies with more than 5 employees which means they need to capture about 10% of the market.

Doesn't seem too unreasonable especially when you consider a company can stay with their platform even if they switch providers / plans every year (minimizing churn).

"If you think about it like we’re driving a car, we want to go extremely fast at an extremely high speed, and go very far,” [CEO] Conrad said. “And if you want to do that you’re gonna burn a lot of gasoline. So this round we had to do the mother of all pit stops for gas and beef jerky, to continue building at the speed that we’re going."

I wonder what Marc Andreessen thinks of this statement...

Context: http://www.businessinsider.com/marc-andreessen-on-startup-bu...

https://twitter.com/pmarca/status/515249537385250816

Parker Conrad: "@pmarca how should a CEO eval their own situation on this? What's the rubric / framework to decide if it's "too much"?"

Marc Andreessen: "Very dependent on individual circumstances. For example, you should be investing aggressively :-)."

Going extremely fast at an extremely high speed also frequently results in a fatal accident.

Sorry, but driving fast very rarely results in a fatal accident.

Yes it does. It also wins races. Conrad recognizes that risk and is taking it.

A fella named Kevin from Zenefits sent me email once asking about our human resource needs.

I told Kevin that we have no need for human resources since our company was run entirely by strong AI. I signed it, Yours in the Singularity.

Kevin never emailed me back.

Guess he didn't need a friend with zenefits.

So essentially, he spammed you?

No no no, this is a funded startup, he used the power of social relationship and communication medium to reach out and generate interest

We're using Zenefits at the current start-up I'm at. It's not half bad. I am only a user so I can't speak for how the entire system works but from my perspective it took all of the annoying HR, payroll and insurance paperwork and put them into a single place where I can always access it, digitally sign it and fill it out / update it. This is the first place where I didn't have to manually sign up or print anything which was great.

It's a valuable service in my opinion and I'm surprised there are not more companies that make this stuff all together. $4.5 billion valuable though? I'm not sure especially since I'm only seeing the user side, not the management side.

Seriously anyone working to create just a brokerage these days is pathetic in comparison to zenefits.

Also, zenefits knows that they don't really have a moat. Anyone with a brokerage license can come along and follow their model. They need to blow up while nobody is chasing them.

My company had considered to switching to Zenefits, but decided to stick with the local middleman we've already got. The difference, according to HR, was that he knew for certain that a phone call to the current rep would fix almost any weird issue--with Zenefits, despite the convenience of doing things online, he couldn't be sure that was the case.

No to mention their platform is still far off from what i'd call user friendly. I have to download excel sheets, edit them and upload? Really??

depends on the user as to what's friendly...?

not used zenefits, but I've got several apps where I end up doing just that, because the target audience is so used to excel, that anything short of excel is a really bad experience for them. as I can't embed excel directly in, down/uploading excel files is the next best thing (for now).

I'm the first tweet on their homepage expressing my profound love for Zenefits. Great product, my praise is authentic.

Happy to see they've raised a boatload of capital. I look forward to more product development and additional customer support resources. If I had the means to invest at a $4.5B valuation, I would.

Does anyone know of a Zenefits like business that serves the UK?

I've not come across anything close and HR administration is just as big of pain in the UK as the US. I recognise the business model (commissions on health insurance) wouldn't work in the UK, but I'd be happy to pay. Our health insurance costs are so much lower anyway....

YOU'd be happy to pay, but maybe not the rest of the UK companies (or not that much, or not today, etc.). SO the growth of a UK-based Zenefits-clone will be much, much slower, and maybe never reach profitability. So I wouldn't count on that too much :/

I do not see it. I worked forMarsh & McLennan Companies, Inc. It has been around for years, has billions in revenue, and owns Mercer HR Services with customers like Toyota Motor Corp., Halliburton, American Airlines and many many others. They have a platform, SASS model, and nothing much different that what zenefits is doing. Even in the mid market they are extremely competitive. I do not see this is worth 4.5 billion dollars.

I suspect that if HN had been around when Google was raising we would have read the same type of comments there.

Based on the numbers in the article, they could very well be in the billions of rev within a few years if they can maintain the growth.

The problem I have with valuations is that they're supposed to somehow reflect what somebody might pay to buy the company. But because of the hamfisted way they're calculated they seem to be so huge or so small (depending on the case) that they're essentially meaningless.

For example, here's a company operating in an ultra-competitive space, from a fairly interchangeable position (middle-man) that has a supposed value on the market that's 225x what they expect to bring in in revenue during 2015. And they're losing 5x their projected revenue in customer acquisition costs (yeah yeah, growth stage and all that). "Valuation" as a term is clearly divorced from actual business realities.

People who claim to be smarter than I will say "but the investors figure the company's market position in through their N-round investment terms". So what do I know?

> I suspect that if HN had been around when Google was raising we would have read the same type of comments there.

Before raising, Google had a substantially better product than Altavista running on a dev server in the stanford.edu domain.

It's surprising how frequently businesses switch out their benefits and HR services as well. This is a very crowded space.

> The company said it’s on track to hit annual recurring revenue of $100 million by January 2016, and hit $20 million in annual recurring revenue in January this year.

So it sounds like they're actually worth around $100-400 million at this point in non-imaginary money, which is impressive for being so new and in such a competitive space.

> Our sources previously told us that the company expects to lose more than $100 million in 2015

ouch.

I guess their sell point is that this can be considered recurring revenue. So if companies they contract with grow, or don't switch to some other vendor, this turns into lots of money. But their customer acquisition costs are insane right now.

How we value companies is clearly completely broken.

Marsh & McLennan has a market cap of $30B -- though this also includes the Oliver Wyman consulting firm & a couple other subsidiaries

a couple? also look up seabury smith. Here is a list of their subsidiaries. http://www.sec.gov/Archives/edgar/data/62709/000119312511047... You can't tell me zenefits justifies a 4 billion dollar valuation for what they are doing.

Holy shit, now that's a slide deck I'd like to see.

I don't get the hubbub about Zenefits. They offer a commodity service for no fee, but offer worse plans at higher rates? I've heard there's some merit to using them when your company is really small. But our finance and HR teams whines about them incessantly -- saying how they can't handle larger companies well. I know their ADP payroll integration is terribad.

I just don't get the $4.5B valuation other than they don't make any money.

We have Zenefits at my job and it really is amazing. All workers should be so lucky to have that type of interface for their benefits.

What exactly are they spending the money on? Is it marketing? I assume their overhead should actually be very low.

Congrats guys, this is awesome! :)

$20M ARR... $5B Val?

jbob2000, you are hellbanned, that means every comment you've made for the last few weeks has been hidden from this forum.

Not to go off topic but this is a thing on HN? That's psychologically terrifying (though I'm assuming deserved). How does it work, exactly? Is it permanent? Just curious.

I think it's permanent.

pg defended it here:

https://news.ycombinator.com/item?id=6060954&utm_source=dlvr...

(I'm not a moderator here, though I was in another high-profile site) In particular, jbob2000 made several low-quality or sarcastic comments, not very in line with what HN wants.

The one that probably triggered the hellban:

https://news.ycombinator.com/item?id=9382992

was a sarcastic:

"Oh no! Giving something away for free! The travesty!"

but he had others like:

"Foursquare? What is this, 2009?"

which don't contribute that much.

Ah thanks for the clarification. Today I learned.

We're working on some major changes to how banning and flagged/dead comments work, so please put a mental asterisk alongside all of this. Assuming our changes hold up in testing, the community will soon be managing most of it.

The community you say? I might be doomed...

> the community will soon be managing most of it

I see this as an awesome thing and as a horrible thing at the same time. Color me interested, ha.

Note that word most. I'm hopeful we can find a good balance.

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