IBISWorld published an HR & Payroll Software market research report for the US markets earlier this year. The report estimated the industry to be worth $7 billion in revenues in the country, having grown 7% annually over the period 2010 through 2015. Cloud computing player Zenefits is a two-year-old startup that threatens the industry with a peculiar business model.
San Francisco-based Zenefits was founded by Parker Conrad and Laks Srini in 2013. Before setting up Zenefits, Parker had helped establish another company – SigFig. While working at SigFig, Parker realized two key things – small companies are not able to hire a dedicated HR person and that employee insurance and benefits processing was a highly administrative task. After Parker and SigFig went separate ways, he got together with SigFig engineer Laks Srini to build a platform that would not only manage HR issues for the organization, but also sell employee benefits.
Zenefits operates on a “hub and spoke” model where cloud-based HR software offerings are available for free to the organization, and in return, Zenefits get access to a vast clientele to sell the insurance products to.
Zenefits’ HR Software offerings include the entire suite of tools that span from reporting, analytics, employee onboarding, benefits administration, vacation and time off reporting, time and attendance tracking, and stock options tracking. Among HR services, Zenefits offers the capabilities to manage payroll and taxes, employee insurance, employee benefits, and compliance requirements.
Zenefits offers access to their cloud-based HR software for free. They act as middlemen connecting their customers with third party sellers of insurance and payroll services and earn revenues through commissions made on these sales.
Zenefits Causes a Stir
Zenefits is causing quite a stir in the insurance segment. Regular brokers are not happy because of the sales that Zenefits is taking away from them by simplifying the process of buying insurance. They have also been able to address the challenges posed by the Affordable Care Act with much speed. The Act requires a lengthy form that the employers need to file so that the government can identify the employees eligible for subsidies on the public health exchanges. Zenefits has integrated employee databases with other records for the employee on file so that the employer just needs to tick a few boxes to fulfill these requirements.
Last year, another regulation did away with the need for medical underwriting for companies with fewer than 51 employees. This allowed insurance companies to offer policies with premiums based on the postal code and employee age. Zenefits leveraged that to their benefit by getting the rates of every ZIP code, age, plan, and carrier into their system to deliver a real quote instantly.
But their success is not going down too well with the insurance brokerages who believe that the company is not playing fair by giving out free software and have approached regulatory authorities. In fact, the state of Utah has already banned Zenefits on grounds of unfair competition asking them to charge for their software. That hasn’t slowed down Zenefits’ growth.
Earlier this year, Zenefits revealed that they had over 10,000 organizations as their customers and were supporting over 100,000 employees within 18 months of setting up shop and claim to be the fastest growing SaaS company ever. They ended 2014 with revenues of $20 million and are trending at revenues of $100 million by the end of the current fiscal. Revenues are growing rapidly, but profits are not. Zenefits expects to spend nearly $100 million this year on sales and marketing and product development efforts alone.
Zenefits is venture funded so far with $583.6 million in investments from investors including Fidelity Investments, TPG, Andreessen Horowitz, Brendan Wallace, Founders Fund, Insight Venture Partners, Institutional Venture Partners, Jared Leto, Justin Mateen, Khosla Ventures, Sound Ventures, Andreessen Horowitz, Elad Gil, Hydrazine Capital, SV Angel, Maverick Capital, Venrock, Aaron Levie, Adam Jackson, Benjamin Ling, Brad Gessler, Charlie Cheever, David Petersen, David Rusenko, Sohail Prasad, Wefunder, and Y Combinator. Their latest round of funding was held in May this year when they raised $500 million at a valuation of $4.5 billion.
This segment is a part in the series : Carnival in the Cloud