Zenefits rose faster than any unicorn. Now it's falling just as quickly.
On Monday, Zenefits cofounder Parker Conrad resigned as CEO and as a director of the company. The move comes as further questions are being raised about the steps Conrad took to put Zenefits into hypergrowth--including flouting laws about who is allowed to sell insurance.
COO David Sacks, formerly of PayPal, now steps into the CEO job at Zenefits. In an email sent to employees, he admitted the company has taken too many wrong steps. "We sell insurance in a highly regulated industry. In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die," he wrote. "The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned."
Conrad became a poster boy for Silicon Valley's billion dollar startups, peaking last year when he raised $500 million to give Zenefits a valuation of $4.5 billion. The 35-year-old was the largest shareholder of Zenefits at the time. Zenefits touted itself as the fastest-growing software service ever, based on its free cloud human resources platform that it pitched to small businesses around the U.S. The startup makes the majority of its money off commissions when those businesses use its software to buy insurance.
However, last November, Conrad was on the defensive when he spoke with FORBES, admitting revenue growth was slower than expected. Conrad had expected Zenefits to hit $100 million in annual recurring revenue by the end of 2015, but that did not come to pass. “We set very aggressive goals, but it’s always our intent to hit them,” Conrad said at the time. “If we fall short, that sucks, but we’ll be there a couple months later.”
Zenefits had frozen hiring in some departments and was reeling from Fidelity marking down its investment in the startup by 48%. Meanwhile, Conrad was also fighting revelations first reported by BuzzFeed about its business practices. Zenefits is accused of employing salespeople in multiple states who did not have the right license to sell insurance.
To further reassure investors and partners, Saks announced on Monday that he was appointing Zenefits' first Chief Compliance Officer, Joshua Stein. Zenefits also added three well-known investors to its board of directors: Peter Thiel of Founder Fund, Bill McGlashan of TPG Growth, and Antonio Gracias of Valor Equity Partners.
Zenefits may be a proof that Silicon Valley's hack-first-and-ask-questions-later philosophy doesn't work once a company reaches the big leagues. "We must admit that the problem goes much deeper than just process," wrote Saks today. "Our culture and tone have been inappropriate for a highly regulated company. Zenefits’ company values were forged at a time when the emphasis was on discovering a new market, and the company did that brilliantly. Now we have moved into a new phase of delivering at scale and needing to win the trust of customers, regulators, and other stakeholders."
As for Conrad, the last time he spoke with FORBES he said he still believed in Zenefits, despite its troubles. "Some days you’re the fire hydrant and some days you’re the dog," Conrad said. Unfortunately, there's little doubt which one he is today.
