How This Company Is Helping Businesses Find Zen in Human Resource Paperwork

Human resources, most would say, is a monumental pain in the ass.

The volume of paperwork facing small businesses is staggering: Beyond hiring and firing employees, HR encompasses the benefits that attract and retain staffers, like healthcare packages, investment options, vacation time, transportation subsidies and retirement plans. The field also spans everything from payroll management to regulatory compliance—state and federal tax laws, as well as reforms like the Affordable Care Act, each with its own nuances and complexities.

In the absence of a dedicated HR manager—a luxury many small businesses simply can’t afford—all of this falls squarely on the founder’s desk. The impact is enormous. According to nonprofit entrepreneurial advisory Score, HR responsibilities devour between 25 and 35 percent of the average small-business owner’s time.

Parker Conrad believes this is utter nonsense. The CEO of San Francisco-based software-as-a-service firm Zenefits knows firsthand how time-consuming and energy-draining HR administration can be: At his previous startup, stock research tools provider SigFig, he shouldered much of the burden.

“We never had enough money—or we were always too cheap—to hire any kind of administrative staff, so [my co-founder] and I were always the ones dealing with sending out offer letters, setting people up on payroll or signing them up for health insurance. It was a couple of hours per month that I deeply resented,” Conrad says. “I would stop off at Kinko’s on my way home to fax in their insurance applications, because that was the only way to get things in to the insurance company. I remember every time thinking, ‘This is ridiculous. I can’t believe they don’t have systems for this.’”

They do now. Zenefits, which Conrad and Laks Srini launched in April 2013, aggregates a multitude of HR functions into a single cloud-based dashboard. Employers connect their HR systems to the Zenefits platform—for employee onboarding and offboarding, payroll management, disability/workers’ compensation, time and attendance tracking, whatever—and Zenefits software handles the rest, instantly and automatically completing tasks and processes that can require human staffers days or even weeks to accomplish.

No less significant, Zenefits offers its software absolutely free to business customers, generating revenue by claiming commissions from its benefits provider partners—e.g., health insurance carriers—if the customer chooses to manage its benefits program through the Zenefits platform.

What Zenefits does isn’t sexy. “HR is essentially pretty boring,” COO David Sacks admits. But arguably no Silicon Valley startup is hotter. Zenefits has signed up more than 10,000 companies across 48 states—serving more than 100,000 American workers—and as of May was managing more than $700 million in health insurance premiums on behalf of its customers. In January 2014, Zenefits recorded $1 million in annually recurring revenue; this rocketed to $20 million only 12 months later, and Conrad projects the firm will reach the $100 million milestone by January 2016.

In May, Zenefits closed a Series C funding round totaling $500 million— the largest private or public financing round recorded by any SaaS company since October 2012, when on-demand HR software vendor Workday raised $637 million in its IPO. Zenefits is now valued at an estimated $4.5 billion.

“This will be the fastest company in enterprise software to $10 billion. It could be the first $500 billion enterprise software company,” says Lars Dalgaard, general partner at Zenefits’ lead investor, Andreessen Horowitz, and founder of cloud-based human capital management solutions startup SuccessFactors, acquired by SAP in late 2011 for $3.4 billion. “There are 5 million small businesses in America. They are all held back because there’s so much admin work they can’t get to, or they have to spend so many of their resources on admin work. What if all that admin work could go away, through software eating it all, and they could be in a position where they could spend all those resources on building great products faster? [Zenefits] will be the entrepreneur’s best friend.”

Conrad’s story isn’t particularly sexy, either, but it’s colored with rebellion. A self-professed mediocre student, the New York native nevertheless gained acceptance into Harvard University on the strength of neuroscience research he conducted as a high-schooler competing in the annual Westinghouse Science Talent Search (now sponsored by Intel). While nominally a chemistry major, Conrad focused much of his attention on his duties at The Harvard Crimson, the university’s daily newspaper, rising to the position of managing editor.

“I spent too much time at the Crimson, and not enough in class,” sighs Conrad, now 35. “I got kicked out of school for a year.” He spent his sabbatical working at the daily Arkansas Democrat-Gazette in Little Rock. “Everyone there wanted to be Hemingway—they all wanted to write the Great American Novel. That had never been my thing. What I enjoyed about journalism was leading this, like, pirate organization to sort of screw with the Harvard administration. I enjoyed the ‘band of rebels’ aspect. That’s when I said, ‘Maybe it would be fun to run an organization.’”

Conrad had to finish his degree first, and after returning to Harvard to complete his studies, in 2003 he landed a marketing analytics gig at biopharma-ceutical giant Amgen in Santa Monica, Calif., eventually shifting to a product manager role. Three years into his Amgen tenure, Conrad’s former Harvard roommate Mike Sha reached out to propose starting a company, and together they brainstormed a digital investment-tracking service.

“I really enjoyed my time at Amgen. It was a lot of fun, and I did pretty well. But I realized it was going to be a very long, slow career path,” Conrad says. “I thought, ‘Man, I will kick myself for the rest of my life if Mike goes off and does this and it’s a huge success, and I didn’t do it with him.’ I didn’t want to miss out. If I knew what I was getting myself into, I probably wouldn’t have done it, to be totally honest.”

Conrad relocated from Santa Monica to San Francisco, where he and Sha launched Wikinvest (now SigFig) in early 2007. To cut expenses, they lived rent-free in an apartment owned by Sha’s grandparents, located within a gated community exclusively for senior citizens.

“We lived illicitly in this retirement community for six months, which was the worst six months of my life,” Conrad says. “Every time you drove in, you had to check in with a security guard, and we would say we were there to visit Mike’s grandparents. The downstairs neighbors were very nice and gracious and didn’t tattle on us, although they easily could have, and the security guards just rolled their eyes.”

Conrad dedicated nearly six years to building Wikinvest, with projects including a portfolio tracker synchronized with users’ brokerages; an interactive, freely embeddable stock chart; and Hurricane, a tool enabling real-time extraction of structured data, like earnings results culled from press releases.

Conrad and Sha shared Wikinvest’s CEO title and duties during its formative years, but by the time the company officially rebranded as SigFig in May 2012—revamping its investment platform to offer wealth management advice to consumers—relations between the two men had disintegrated. According to Conrad, Sha’s family agreed to invest additional funding on the condition that Sha would become the firm’s sole CEO. Conrad remained with SigFig as president and head of product before exiting in July 2012. He started work on Zenefits the same day.

“When people ask me what I learned from my experience at SigFig, I always tell them that I didn’t really learn anything at all, except that failure sucks, and you never, ever want it to happen again,” Conrad says. “But also, it’s the kind of thing that gets you up in the morning. One of the things we talk about at Zenefits is that we want to hire people who have a chip on their shoulder—an intensity to prove they can accomplish something, or prove people who have doubted them wrong. I felt a lot like that myself when I started Zenefits. I needed to prove I could accomplish something—that I wasn’t a failure, even though it felt to me like I was. That’s how a lot of this stuff got started.”

Zenefits is an uncommonly personal startup. There’s a reason Conrad is especially qualified to navigate small businesses through the maze of health benefits: While at Amgen, he was diagnosed with testicular cancer, and the experience gave him profound insights into the byzantine workings of the American healthcare system.

As Wikinvest’s de facto HR department, Conrad and Sha regularly advised employees on the intricacies of healthcare plans, helping identify the most appropriate coverage for each worker.

“When I moved to the U.S., I had no idea how health insurance worked,” says India-born Srini, Zenefits’ co-founder and CTO, whom Conrad poached from the SigFig engineering staff. “Parker was the person who was experienced in all this, and he told me about the different plans. That’s where [Zenefits] came from. This should be easier. Small businesses shouldn’t have to struggle. Running a small business is hard enough.”

Conrad spent six months teaching himself to code the software underpinning the earliest iteration of the Zenefits platform before applying to Silicon Valley’s Y Combinator and gaining entry into its winter 2013 incubator. He further fleshed out the concept by meeting with insurance brokers, investors and other experts, sizing up an HR market that was highly lucrative but saddled with antiquated, disconnected processes and technologies.

Conrad’s solution was simple yet sophisticated: an all-in-one, cloud-based tool that enables small businesses to automatically track and update all employee records and data and connect it to benefits providers via the web, effectively eliminating paperwork and its related time suckage.

“The problem I had at my last company wasn’t just that the health insurance piece wasn’t online,” Conrad says. “It was that every time you hired or terminated an employee, there were 20 different places where you needed to set that employee up or remove them. Over time, as things changed about them, all of these different systems had to be updated individually and separately. That was such a pain in the ass. [With Zenefits] you have one central system of record—like a hub—and it connects to all of these different spokes. Companies and employees know there’s one place to make changes, and it automatically updates all these other systems and makes it as seamless as possible.”

Conrad’s research also shaped the crucial decision to give away the Zenefits software gratis, with no contracts or hidden fees—a model he co-opted from insurance brokers who sell their business customers not only insurance but also payroll systems and other administrative solutions, sharing a percentage of the resulting profits. On average, a broker who connects a small business with a healthcare provider collects between 4 and 8 percent of the company’s health premiums—fees that translate to several hundred dollars or more per employee per year, and keep coming in for as long as the business customer continues to maintain coverage.

Holger Mueller, who tracks the HR sector as principal analyst and vice president at Constellation Research, contends that Zenefits’ revenue model is the most revolutionary thing about the company, comparing its approach to Google, which also gives away its digital services for free (then monetizes its accumulated user data by selling it to advertisers).

“Zenefits is changing the way [HR] software is being used and being sold,” Mueller says. “Traditionally software is sold through licenses and subscriptions, and you pay for using it. Zenefits is making money on commissions. It’s a totally different model for monetization. The question is whether Zenefits can retain that model. Some people say they’re just doing it to gain market share right now.”

There’s no question that giving away the Zenefits platform has dramatically accelerated its customer growth. Conrad says small-business owners and decision-makers are more receptive to exploring new products and services that don’t require them to fork over any cash. That’s held true from the earliest days of the business, when he would personally fire off emails extolling the benefits of Zenefits to potential clients (mostly existing contacts within his professional network, including other Y Combinator graduates).

It’s not just next-generation West Coast startups heeding the call, either: In 2013, more than 90 percent of Zenefits customers called California home and 80 percent identified as technology firms; today more than half of all businesses using Zenefits services are based outside the Golden State and operate in sectors other than tech.

Charlotte, N.C.-based Passport, which develops private-label mobile payment apps for municipal parking and transit services, adopted Zenefits in February 2015. “Zenefits takes away a lot of the tedious work and allows me to focus on bigger-picture items,” says Jeremy Hay, Passport’s director of talent acquisition and HR. “It’s also a much more professional experience for the employee. Think about how you’d feel if you were to sign up with a company, and all the paperwork’s online, and you can digitally sign all of your documents online. It makes you feel like, ‘Wow, I’m with a company that has it all together,’ even though Zenefits is really doing all the legwork.”

The insurance broker establishment isn’t going down without a fight. Late last year, officials in Utah moved to ban Zenefits; the state’s insurance commissioner, Todd Kiser, sent a letter to the company calling its business model a violation of state laws. Many states, including Utah, do not allow insurance brokers to offer rebates to consumers to encourage insurance purchases; according to the Utah Insurance Department, free software counts as a rebate. The state petitioned Zenefits to pay a settlement fine of up to $97,000 with 24 months probation but pledged to waive the penalty if Zenefits would begin charging a fee for its software.

Zenefits went on the offensive, enlisting the public support of high-profile investors including Marc Andreessen and Academy Award-winning actor Jared Leto, and in April, Utah legislators reversed the ban, updating statutory insurance inducement definitions to allow online companies like Zenefits to conduct business across the state.

Zenefits also has run afoul of the legacy HR systems on which its platform piggybacks. In early June, payroll services colossus ADP suddenly blocked Zenefits accounts from accessing its ADP Run HR and payroll solution for small businesses, claiming that Zenefits traffic was overloading its servers and that Zenefits connected with ADP payroll resources in a manner that threatened to expose Social Security numbers and other sensitive customer data.

“ADP—the world’s largest payroll provider—has cut thousands of their small business customers off from using Zenefits to automate their time-consuming payroll administration work,” Zenefits wrote in an open letter to customers that it later posted to its blog. “ADP did so without permission from these small businesses, and also without notifying Zenefits, who has partnered with ADP amicably since we were founded.” A public war of words followed, culminating in ADP suing Zenefits for defamation.

“When ADP first discovered that Zenefits’ unauthorized activities in our Run payroll system were causing serious issues that threatened service disruptions for ADP clients, we were open to resolving this issue amicably,” an ADP representative said in an email. “However, Zenefits chose to embark on a public campaign of false statements and outright defamation aimed at discrediting ADP in the marketplace. These malicious actions and the refusal to retract defamatory statements by Zenefits led to our initial court filing.”

The ADP suit, filed June 9 in U.S. District Court for the Northern District of California, was pending at press time. In July, Zenefits filed a motion to dismiss, citing California’s anti-SLAPP (strategic lawsuit against public participation) statute, aimed at preventing the use of legal action to censor critics.

“I think [ADP has] always had a bit of cognitive dissonance about Zenefits. On the one hand, we don’t do payroll—we’re a sales channel for them for payroll. On the other hand, although people think of ADP as a payroll company, they make a lot of money by taking that core payroll business and upselling clients on all of this other stuff,” Conrad says. “I think what happened for ADP is that at a certain point, their view of us flipped from uncertainty to a decision that they absolutely didn’t like us. Who knows? They might decide in six months to a year, ‘Oh my gosh, this is a mistake, we’d much rather partner with Zenefits—they have a lot of customers in the market, and we don’t want to block ourselves out of all of those customers.’”

Conrad dismisses the ADP lawsuit as “an attempt to shut us up,” adding, “I think ADP expected they would block us, and we would sulk off and curl up in a corner and die. What’s interesting is they were telling customers they were going to sue us a week before they blocked us and a week before the alleged defamation occurred. The lawsuit was always part of an intimidation strategy to snip the connection we had with their system.”

Conrad insists that these threats to Zenefits’ core value proposition don’t worry him. “What keeps me up at night is our own internal stuff,” he says. “If somebody’s going to kill Zenefits, it’s going to be Zenefits. We’ve got to keep moving quickly.”

Conrad is working to guarantee that forward momentum by calling in reinforcements. At the close of 2014, he hired Zenefits’ first-ever COO: David Sacks, who served as PayPal’s COO from 1999 until eBay acquired the company in 2002 for $1.5 billion. Sacks struck again in 2008, founding enterprise-focused social network Yammer, which he sold to Microsoft four years later for $1.2 billion.

Andreessen Horowitz’s Dalgaard persuaded Sacks to meet with Parker about joining Zenefits over the course of a nearly four-hour conversation at San Francisco’s Dolores Park Cafe. “Because this company was growing so fast, Lars suggested to Parker, ‘Do you need a COO?’” Sacks recalls. “Parker didn’t want some kind of big-company, corporate-type person who wouldn’t fit in with the culture. Because of my experience as an entrepreneur, the relationship clicked.”

Some tech-industry insiders expressed surprise that Sacks would agree to step into the No. 2 role, let alone that he would enter the HR segment. “When I joined, a lot of people didn’t understand why Zenefits would be this huge company, although I think they’re getting it more now,” Sacks says. “People don’t want to be doing this stuff. They would so much rather have us take care of it for them. That’s what makes it an exciting business. The market is huge, and the need is intense.”

Moving forward, Zenefits expects to carry even more of the load. Conrad says the company is poised to expand beyond HR into IT provisioning—for example, automatically creating employee accounts for services like email, Salesforce and Box, then instantly deactivating those accounts when an individual exits the organization.

“The really cool thing is that all that work for the employer is sort of fixed, no matter how many of these various different spokes it’s got connected up to our system,” Conrad says. “If you want to hire someone, and you have one thing you can connect up to Zenefits or a hundred things you can connect up to Zenefits, it’s all the same for you. It’s ‘I want to hire this guy, here’s when he starts, and here’s how much money I pay him.’ That convenience is what makes Zenefits so powerful.”

Conrad has no intention of stopping at HR and IT. He believes the Zenefits platform will ultimately evolve into “an operating system for small business,” auto- mating and transforming virtually every facet of tomorrow’s workplace culture.

“This is something much bigger than HR. All of the boring crap that you don’t want to deal with, you can put on autopilot,” he says. “I want to make this something that’s almost a new category. It’s not an admin tool. It’s not really a [human resources management] system. It’s a much more ambitious effort.”