As long as employer-sponsored benefits are here to stay, one technology company wants to be a modern kind of broker and HR service. It may or may not spell an early retirement wave for a generation of insurance producers.
San Francisco-based Zenefits, purveyor of free online HR, payroll and benefits software, has raised $500 million in Series C investment led by Fidelity Management and TPG, with contributions from Andreessen Horowitz, Insight Venture Partners, Founders Fund and Khosla Ventures. The latest round, on top of $85 million last year, brings the company's valuation to $4.5 billion.
Zenefits' service is free for employers, and some 10,000 small and medium-sized companies are current subscribers. The revenue and business model is based on providing free HR services while being a benefits broker--a highly automated one--that earns commissions from third party insurance companies.
"There are millions of small businesses in the country that have been wasting countless hours every year juggling multiple HR systems and outdated technology," said Parker Conrad, co-founder and CEO of Zenefits. "We are not just eliminating the paperwork; we are eliminating the actual work, making it easier for small businesses to manage and grow."
Zenefits is licensed as a broker in all 50 states and is targeting the market of 5 million American businesses with up to 1,000 employees. One of those is the Animal Foundation, a Las Vegas animal shelter with 130 workers. "Zenefits saves me at least four hours of work a week," said business administrator Michael Green, in a media release. "I can spend my time focusing on the important parts of my job, helping to run a non-profit."
Zenefits, founded two years ago, offers outsourced and paperless employee on-boarding or off-boarding, direct deposit, automated deduction and 1099 filing, state and local tax payment, and benefits management. Health insurance brokerage and its commissions are key to the business model, which could also be disruptive for the existing brokerage industry.
"Zenefits has brought the benefits of software to a massive industry that had yet to embrace technology at scale," said Lars Dalgaard, general partner at Andreessen Horowitz. "And their potential market includes tens of millions of employees, using multitudes of different business applications in companies of all sizes." For Andreessen Horowitz, a $4 billion venture fund that's bet on the likes of Airbnb, Facebook, Lyft and Skype, the investment in Zenefits is the largest to date, although the amount was not disclosed.
Zenefits' pitch to automate and streamline the back-office of HR and employee insurance naturally excites investors like Internet wunderkind Marc Andreessen and Vinod Khosla, who believes that "80 percent of total doctor time spent on medicine" will eventually be "replaced by smart hardware, software, and testing."
But for the approximately 440,000 Americans working as insurance sales agents earning on average less than $50,000 annually, the prospect of a company like Zenefits is threatening and at times interpreted as an insult to the profession.
Zenefits is "definitely a formidable competitor to the independent agent, which is where a lot of the worry is," Tim Rasch, a broker with Larry Sherwood & Associates, told the Portland, Oregon Business Journal.
Though not offering a comprehensive HR web service, brokers bring employers a human face and expertise on complicated products, Rasch told the Journal. "Businesses in Oregon love high-touch customer service. I don't think a call center with a bunch of kids sitting on beanbag chairs in the Silicon Valley can do what we do."
Zenefits acknowledges that it is pulling away business from traditional brokers, who have filed complaints with a few states regulators. But the company insists that it is not "anti-broker," just a modern kind of broker. "I was thinking, wait a minute, that is a ton of money, and these guys don't do very much for it," co-founder Parker Conrad told the New York Times, referring to the commissions producers earn for group sales.
Much as price drives many buyers of health insurance, it's also very important to business owners.
"The traditional brokers came here and we had a face-to-face meeting, and they were knowledgeable and very nice," Justin Winter, co-founder of Durham-based Diamond Candles, told the Times. "But we're getting so many extra bonuses with Zenefits for the exact same price, we had to choose them."
A former Amgen product manager, Conrad co-founded Zenefits with Laks Srini, a software engineer, after the two worked together developing the free personal investing site SigFig. Today, Zenefits is gaining adoption particularly among small startup and tech companies, like Nozzle and Zendesk, and it is the main insurance broker in the state of California for new businesses. Zenefits was the leading broker for Anthem Blue Cross of California last year, and has been a major contributor to others.
"This is interesting because insurance companies are not used to seeing their brokers grow that quickly," Conrad told the website Medium. "Suddenly we had a lot of VP-level people from all these different insurance carriers coming by our office and trying to understand how it happened. They asked us, 'Hey, how can we work more closely with you guys, what can we do to get more business from you?'"
One challenge to that scale is technology. For HR, "the most intractable area, the hardest systems to deal with, are the insurance ones," Conrad told Medium. "They're all stuck in 1986. And for companies with fewer than 100 employees, they don't accept anything other than faxes to make changes to add or remove employees. It's all on paper, all via fax machine."
Another challenge comes in the form of state and federal regulations, although Zenefits is so far clearing hurdles as they come. The company succeeded in fighting a cease and desist order by Utah's insurance commissioner, and also recently hired as general counsel Joshua Stein, the former corporate counsel at UnitedHealth Group's OptumRX.