On September 21, 2017, one of the first would-be disruptors of the insurance industry, Zenefits, announced it would no longer sell insurance. Instead it would partner with insurance brokers to sell its human resource software to small businesses: Software it used to give away free to the same businesses to sell insurance.
Business model to disrupt insurance industry
Zenefits’ business model was to take over all the human resource function of small to medium-size companies. Zenefits provided these companies free human resource software allegedly integrating the companies’ existing human resource and payroll systems and simplifying the processes of hiring, paperwork, signing up for payroll, figuring out taxes and deductions, and enrolling in insurance or benefit plans.
Zenefits profit model came from its status as a licensed insurance broker in all 50 states. Its income resulted from commissions on the health insurance and employee benefit plans it sold based on its human resource software through its employees licensed as insurance agents.
Hypergrowth with huge venture capital financing
From almost the moment, Zenefits commenced business in April 2013, it became the darling of venture capitalists and pundits claiming insurance brokers for employee benefits would never compete with Zenefits business model.
Zenefits founder and president proclaimed:
Insurance brokers make way too much money for the value they provide. We say switch to us and we will do way more for you than any other insurance broker will do. About 50 percent of our customers are moving to us as their broker. We get them set up in 30 minutes, it’s a no-brainer.”
Zenefits’ press through 2014, and 2015, comprised superlatives upon superlatives:
- Zenefits doubled the client employees on its software platform “every 6 weeks…”
- its compound monthly growth rate was 60 percent;
- it would quintuple its revenue in 2015 to $100 million;
- by May 2015, Zenefits software was serving 20,000 businesses;
- in 2015, Zenefits will reach 2000 employees.
The venture capital industry read the press and believed it. In four rounds of venture financing in 2013 and 2014, Zenefits received:
- in July 2013, $2.1 million in seed capital from Maverick Capital and Venrock;
- in January 2014, $15 million in Series A capital from Andreesen Horowitz.
- in June 2014, $66.5 million in Series B financing from Andreesen Horowitz.
- then in May, 2015, Fidelity Investments and TPG (Texas Pacific Group) ponied up $500 million in Series C financing just getting on before the train left the station.
Rebating, licensing violations, mismanagement, and insurance complexity stop Zenefits’ growth
Zenefits, in its master of the universe mode, paid scant attention to fulfilling licensing requirement for its 50-state insurance agency or the anti-rebating laws of various states. However, in late 2015, regulatory actions began:
- The Utah Division of Insurance issued a cease and desist to Zenefits because its free software was an illegal rebate;
- The State of Washington’s Division of Insurance fined Zenefits $100,000 in October 2016 for employing unlicensed producers to sell insurance and issued a cease and desist on its distribution of free software as an illegal rebate;
- Zenefits paid the State of Missouri a penalty of $62,000 for alleged violation of unlicensed activity in Missouri by individual Zenefits employees;
- The State of Texas fined Zenefits $550,000 for using unlicensed employees to sell insurance and required Zenefits to pay for an independent review of past transaction.
While other states also took action, Zenefits’ home state, California, learned that the president of Zenefits had created an extension for his employees studying online to use with the Google’s Chrome browser. California had a 52-hour online training mandatory training course for persons to take before receiving a health insurance producer’s license. However, the employees using Zenefits’ browser extension did not study the required 52 hours. The extension sent false reports to the online study course’s monitoring system. Zenefits then had these employees submit under the pains and penalties of perjury they had studied the required 52 hours even though they had not.
The founder, CEO and programmer of the cheating extension was quickly ousted. However, California Insurance Department levied a $7, 000,000 fine against Zenefits for its violations in late 2016. Although the Department did suspend the fine on continued compliance by Zenefits.
Finally, Zenefits had touted to its clients and the world that its cloud-based system automatically bridged insurance transaction between employers and employees on one side with insurance companies on the other side. As Zenefits now admits insurance transactions could not all easily be integrated into its system. The had more complexity and human involvement than Zenefits anticipated or could handle.
Venture capital investment in Zenefits loses 65% in ten months
The venture capitalists who had valued Zenefits at $4.5 billion when they pumped $500 million into the company in May 2015, by March 2016, ten months later, valued Zenefits at $1.575 billion or 65% less than what they had paid.
The venture capital investors claimed they had been sold their stock on false pretenses and settled with the company by receiving an additional percentage of Zenefits equity. Equity, however, that was now highly devalued.
Zenefits exits the insurance business to focus on paid software and partner with insurance brokers
On September 21, 2017, the third president of the company in 2 years, Jay Fulcher, announced that Zenefits would be leaving the insurance brokerage business entirely. It would no earn its money by marketing its human resources software to businesses and partnering with insurance brokers. Zenefits new business plan now is to become a “all-in-one human reso
urces tool for small businesses while leaving insurance brokerage deals to partners.”
In a somewhat surprising revelation, Mr. Fulcher stated
We realize that digital brokerage in an online fashion and not in person is somewhat resonant with really small companies, but as you begin to go beyond that digital brokerage value proposition is not nearly as useful as having local, embedded brokers.”
Mr. Fulcher added brokers:
can offer the consulting and expertise to walk [companies] through the complexity.”
To exit the insurance business, Zenefits agreed to transfer by broker of record letters its existing 7,000 customers (down for 20,000) to One Digital a Georgia-based employee benefits company that operations nationwide including an office in Needham, Massachusetts.
The agreement with One Digital is not exclusive. Zenefits is now seeking to acquire greater distribution of its software product to manage human resource issues for small businesses through marketing partnerships with insurance brokers. (See invitation on Zenefits website for brokers to partner with it).
Zenefits has come the full circle from disrupting and changing the insurance brokerage distribution system for employee benefits into embracing this system as its potential salvation.