Zenefits and Regulation
Zenefits and Regulation
From BuzzFeed :
Parker Conrad has resigned as CEO of Zenefits, following a number of regulatory compliance failures at the richly valued human resources startup he co-founded, according to an email sent to employees on Monday.
David Sacks, the chief operating officer, who formerly was an executive at PayPal and Yammer, is taking over as CEO. Zenefits also named Joshua Stein, a former federal prosecutor who is a vice president of legal affairs at the company, as its chief compliance officer. Sacks attributed Conrad’s departure to compliance failures by the startup.
“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,” Sacks said in the email. “As a result, Parker has resigned.”
I haven’t written about Zenefits before now, although the business model certainly is intriguing: the startup offers HR software-as-a-service for free and makes money by acting as an insurance broker for some number of companies using its service. In other words, the product is effectively a lead generation tool.
What Went Right — And Wrong
It’s easy-to-see why the company was so attractive to venture capitalists: Conrad and team created a unique two-sided offering in which Zenefits had an asymmetric advantage in both markets it competed in. On the product side the company was competing with paid solutions with the price of free; on the brokerage size the company could both forego expensive professional agents on the ground in favor of a call center model and explore different marketing channels beyond the ultra-expensive market for insurance keywords on Google.
However, even in a call center agents needed to be licensed, and Conrad’s resignation came on the heels of a series of BuzzFeed reports about the company’s failure to ensure that was the case. The event that reportedly led to Conrad’s effective firing was also about licensing, specifically the discovery of a Zenefits-created program that helped Zenefits’ brokers cheat on the California licensing process (which required a user to be logged in to the training program for 52 hours).
However, the company’s troubles aren’t just regulatory: between August and September Zeneifts $4.5 billion valuation suffered a 48% markdown by Fidelity , mere months after the mutual-fund giant invested in the company, and in November the Wall Street Journal reported that the company was falling well short of its revenue goals and suffering from high turnover and poor morale. Andreessen Horowitz, which counts Zenefits as its largest investment, may have a stated preference for founder CEOs, but I suspect the venture firm wasn’t particularly broken up about having such a clear-cut rationale for showing Conrad the door.
Zenefits Versus Uber
In the wake of Conrad’s departure there has been a bit of a meme about Silicon Valley needing to clean up its “move fast and break things” mentality, with most such think-pieces tying Zenefits screwups to Uber’s well-documented run-ins with regulators.
In fact, I made a connection between the two startups on Exponent over a year ago: at the time Uber was in hot water for comments made by Emil Michaels about threatening a journalist (which I condemned ), but I noted that the ride-sharing company by necessity had a certain level of scrappiness given the challenges it faced with regulators on the ground. And, as an example of how regulation could run amok, I discussed the fact that Zenefits had been banned in Utah because of its practice of giving away software for free in order to drum up insurance business, which was deemed an illegal rebate (the Utah law was later changed ).
I think that Utah episode is a useful way to understand why it is that, despite my having compared Zenefits and Uber a year ago, I don’t think today’s Uber comparisons hold water: specifically, just as is the case with regulations themselves, the validity and viability of “violating” them all comes down to context.
Thinking About Regulation
Here’s how I would think about dealing with regulations, using Zenefits’ prior experience in Utah, along with Uber, as an example:
- Is the regulation unambiguous? Utah claimed that Zenefits’ offering of free software was the same thing as an insurance broker offering a rebate, which is absolutely not clear and would need to be litigated. Similarly, while Uber competes with taxis, the vast majority of laws deal with cars that are hailed from the street or from a central dispatcher, not coordination between two independent actors via an app.
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