Posted: 11/28/2014 07:55:25 PM PST
Updated: 11/28/2014 07:57:56 PM PST
SAN FRANCISCO -- Software company Zenefits is the fastest-growing startup in recent memory, but selling computer applications isn't how the company earned that superlative.
Instead, Zenefits has morphed from a skeletal 15 employees into an army of nearly 500 and counting -- its revenue growth outpacing that of many valley software giants -- by upending the health insurance industry.
That's because this high-tech startup is also a health insurance broker, working as the middleman between businesses and health care providers such as Anthem Blue Cross.
It's a business model that hasn't been successful before, say venture capitalists and insurance experts, and it's made Zenefits one of the most-watched startups in the country and launched Parker Conrad, the company's unassuming and mild-mannered co-founder and chief executive, into the hard-charging, high-stakes valley tech boom. It has also sparked a bitter turf war between Zenefits and traditional insurance brokers, many of whom see the company as the greatest threat to their paychecks since health care reform.
'Zenefits is definitely a competitor to all employee benefits and insurance brokers,' said Paul Mifsud, founder and chief executive of Melita Group, an insurance and HR firm in Santa Clara. 'They are certainly a threat to the industry. Every broker in the country is scared now of Zenefits.'
But lest they watch their six-figure incomes be eaten away by a 34-year-old Harvard graduate and journalist-turned-tech entrepreneur, insurance brokers are now scrambling to launch a counterattack.
'We're building our own (software) solutions to compete,' said Rudy Garcia, a broker and founder of Qandun Insurance Agency in Southern California. 'Brokers are working harder than ever to keep their jobs with the Affordable Care Act and they are not going to lose to Zenefits, too.'
How did a piece of software create all this fuss? San Francisco-based Zenefits is a program for human-resource professionals to manage and administer employee health benefits, payroll, 401(k) plans, stock options, maternity leave and vacation time. And by most accounts, the software works remarkably well.
'It's all the things you need to get someone's attention and keep it over time,' said Alan Katz, a health insurance consultant and former president and chair of the National and California Association of Health Underwriters. 'They are smart folks. They are giving away software that is actually meaningful.'
The company can give software away for free because it makes bundles of money facilitating the sale of insurance between health-care providers and employers as well as earning a commission or broker fee. In this way, Zenefits is both selling health insurance -- online and without the paper-pushing typical in the industry -- and providing businesses a program where they can manage it. Competitors such as Workday, a Pleasanton-based HR software company, don't act as brokers.
'Nothing changes about your insurance, your insurance card and the price you pay,' Conrad said. 'But all of it happens online. You just hit go and we take care of everything, soup to nuts.'
Zenefits has a broker license in every state, although its 2,000 customers are spread across just 47. In California, Zenefits is the top broker for Anthem for companies with fewer than 50 employees, based on new business it brings the health-care provider.
Across Silicon Valley, investors and industry watchers say Zenefits' growth is unmatched. Lars Dalgaard, a partner at VC firm Andreessen Horowitz who invested in Zenefits, said the startup has outpaced even the lofty goals Conrad set.
'It blew my mind,' said Dalgaard. 'The typical ratios that a successful business would have, theirs were five to ten times greater.'
In August, the company made about $1.5 million in new business, its best month ever. In October, that number more than doubled. Zenefits launched in April 2013 after completing Y Combinator, a startup accelerator in Mountain View.
By the end of this year, its revenue will likely have grown 20 times greater than in 2013, although it is not profitable. This month, Zenefits opened a new office in Arizona to house 1,300 employees, more than tripling its San Francisco workforce.
'We don't see companies with this growth, ever,' said Jules Maltz, a partner at Institutional Venture Partners, a Zenefits investor. The company has raised $84 million, valuing the startup at an estimated $500 million. 'We've invested in 18 software-as-a-service companies and Zenefits is by far the fastest-growing of any of them.'
Insurance brokers have noticed. Many have asked Conrad to partner -- they would use the software to sign up their clients and split the commission. Conrad has always told them no, saying brokers are trying 'to grab a lifeline.'
'I do feel bad for them,' Conrad offers. 'I hate it when I lose a customer. I know what that's like. It sucks if your business isn't doing well.
'But for my part, I'm trying to build something myself. I don't get a particular joy out of it being painful for the next guy.'
To which brokers have responded -- game on.
'I tried to tell him that the brokerage community is a very tight-knit community and we protect each other and if it looks like you're coming in here to take business away, you're probably going to shoot yourself in the foot,' Garcia said.
Garcia said he is working with tech firms and health insurance agencies on a software program but didn't provide details. He is part of a growing group of brokers who are increasingly tech savvy, turning to online applications to serve businesses run by younger and high-tech CEOs.
'I don't think it will be very long before there are entrepreneurs out there providing brokers with similar software,' Katz said. 'In 12 to 18 months, you'll start seeing competing programs.'
Armed with similar technology, brokers could have a leg up. They argue Zenefits will never have the personal relationships with employers that is the key to success in the industry.
'If I'm going to spend $25,000 on a health plan, I want to talk to someone face to face,' Mifsud said. 'The process of making this decision is so complex it would almost be like replacing your CPA or attorney with an online system.'
About 44 percent of employees at small businesses and 62 percent of employees at large businesses get insurance from their employer, according to the Kaiser Family Foundation. Brokers traditionally make in-person visits to business owners to explain insurance options. Zenefits has a call center and does most of its business over email.
'They have people in their 20s fielding these calls and when difficult questions come in about a very specific situation, they're going to hit a point where they can't resolve a problem,' Garcia said.
But for now, it would seem businesses are just fine with the 20-somethings answering their phone calls. B&C Transit, a public transit firm in Oakland, switched from a traditional broker to Zenefits in August. The company is growing quickly and the prospect of hiring more HR staff was daunting.
'The idea of going paperless and having software where we could store everything was very appealing to us,' said Rashid Sigg, executive vice president of operations. 'The only concern we had was are they going to do as good a job as my previous broker. And they did.'
Contact Heather Somerville at 510-208-6413. Follow her at http://ift.tt/1fC6JL3.
zenefits' CEO
Name: Parker ConradAge: 34Residence: San FranciscoEducation: Harvard University, bachelor's in chemistry, 2003Previous jobs: President and co-founder, SigFig; co-CEO and co-founder, Wikinvest; journalist for the Arkansas Democrat-GazetteFamily: Wife, Alexandra; Dog, AjaxImportant facts: He's a testicular cancer survivor, and he's read the Affordable Care Act in its entirety
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