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Zenefits and the Insurance Industry: What Does the Future Hold?

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Zenefits has certainly received its fair share of praise, criticism, and press since erupting onto the scene in February 2013.

Once hailed as a fast growing startup rocking the insurance industry, Zenefits is now perceived as a struggling business venture that grew too fast, too soon. But has Zenefits’ “reign of terror” come to an end?

Is Zenefits’ reputation so irrevocably damaged that it cannot rebound?

Before we can predict the future, let’s take a look back on its storied past.

Parker Conrad, the founder of Zenefits, was known to be frenzied and disorganized, but fiercely intelligent.

He realized there was a need for a product like Zenefits when he was battling cancer and had to become vigilant about his own health insurance. He was familiar with the ACA and knew it was going to change a lot about the industry, and that small businesses would be the ones to suffer. As the co-founder of SigFig, an online portfolio manager, he was well aware of all the paperwork that comes with hiring and firing employees.

He had an idea and he acted on it. The result was cloud-based software that automates health insurance, payroll, and other administrative tasks. Zenefits can help streamline a business’s managerial needs by putting everything online, saving them from paperwork and the cost of staffing an HR dept.

The reason it is so lucrative is what Conrad refers to as the “hub-and-spoke” model: Zenefits gives its software (the hub) for free and takes commission from vendors like insurance providers or brokerages (the spokes). Those commissions recur annually, so once a business signs up, Zenefits profits for years to come.

The concept was so appealing, it attracted investors like Fidelity, TPG, Andreessen Horowitz, and celebrities Jared Leto and Ashton Kutcher. It raised $500 million in funds at a valuation of $4.5 billion. (Note: It later revaluated itself at $2 billion.)

To Say This Model Rattled The Insurance Industry Is An Understatement

It has forced brokers, agents, and benefit administration companies to re-evaluate their business, to take notice of how their software is packaged and priced, and worry over whether they could lose employees to Zenefits.

zenefits is after insurance brokers milkshakes

Zenefits is after insurance brokers’ milkshakes.

Conrad fueled the brokers’ fire. In a 2013 Huffington Post interview he was quoted as saying, “if you’re an insurance broker, we’re going to drink your milkshake,” borrowing words from the dramatic scene from the 2007 Daniel Day Lewis movie There Will Be Blood.

In some cases, worry turned to panic.

Utah’s Insurance Commissioner began reaching out to regulators for protection to get it banned, citing “unfair competition,” since it wasn’t charging for their software. (The ban put in place in May of 2014 was later lifted in April of 2015.)

If it all seemed too good to be true for Conrad and Zenefits, it’s because it was.

What Unfolded Next, No One Could Have Predicted

The headlines speak for themselves:

Highly Valued Zenefits Runs Into Turbulence November 2015

HR Start-up Zenefits Bans Alcohol, Sex on the Stairwell February 2016

Zenefits CEO Parker Conrad Resigns Over Compliance Issues February 2016

Zenefits Confirms 250 Layoffs, 17% of Company Workforce February 2016

How Zenefits Hired an Insurance Agent with a Criminal History April 2016

Zenefits Slashed over 100 Jobs and Closes Arizona Office June 2016

Scandal-ridden Tech Startup Slashing its Valuation in Half to Start Over July 2016

In March of 2016 Parker Conrad even made Fortune’s list of The World’s 19 Most Disappointing Leaders, awarding him the “George Costanza Medal for In-Office Frolics.”

Things couldn’t get worse for Zenefits.

Just When You Thought It Was Safe To Breathe A Sigh Of Relief, A New CEO Is Hired And Begins To Shake Things Up

Who is David Sacks?

David Sacks made his first fortune as an early executive at PayPal, then a second as the co-founder of Yammer, a social network for businesses, which he sold to Microsoft in 2012 for $1.2 billion. He was promoted to CEO from COO at Zenefits, a position he held since 2014.

Will Sacks be able to turn Zenefits’ around?

He’s vowed to adapt Zenefits’ processes to be in line with the law and to change the company’s tone, taking aim at the company’s frat house culture.

In an article on the Zenefits blog, he states:

“If there is a silver lining to the difficulties that Zenefits has gone through the past three months, it is that we have turned compliance into a core part of our values, culture, and expertise. In turn, I believe that we will be able to use this experience to improve our product and help our customers with their own compliance needs. This will ultimately make us into a stronger and more differentiated company that provides a much greater level of value to our customers.”

He then goes on to outline a seemingly well-thought-out plan to remediate the issue.

Will Sacks be able to make good on his promises?

Can Zenefits weather the storm?

Will the next headlines speak of a comeback?

Let’s Speculate

What is the worst case scenario?

David Sacks is able turn Zenefits around and they emerge stronger than before and an even bigger threat.

Best case scenario?

Zenefits’ reputation is forever tarnished. Despite a valiant attempt by CEO David Sacks, Zenefits is unable to resuscitate its image and the company ultimately fails.

Even if the latter is the case, the damage has been done. The insurance industry will never be the same. The fact remains: Conrad Parker identified a need, he knew there was a strong market for it, he delivered a quality product that satisfied the need, AND he found a way to give it away for free. If they can’t succeed in doing it, it’s just a matter of time before someone else will. NOW is the time to prepare for it.

What will the future really bring? We hold our breath and wait.

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