Zenefits’ Leader Is Rattling an Industry, So Why Is He Stressed Out?

Parker Conrad’s start-up, Zenefits, is thought to be one of the fastest-growing companies in recent Silicon Valley history, and his investors and associates describe him as an uncommonly talented software visionary. But lately, Mr. Conrad often finds himself petrified, his days a series of white-knuckled attempts to escape the clutches of sudden, inadvertent failure.

“We’re obviously growing very quickly, but I can tell you that that is just as scary as the other way around,” Mr. Conrad said during a recent interview at the company’s headquarters in San Francisco, a space so crowded with newly hired staff members that it was hard to find a room in which to chat. “It doesn’t feel like we’re successful,” he said. “It feels like we’re bouncing from one terrifying near-catastrophe to the next.”

Open self-doubt is an unusual posture for a start-up executive. Tech founders are, as a class, known to be drunk on their own hype. But Mr. Conrad doesn’t quite fit the stereotype of the young, hyperconfident brogrammer now reported to be running, and ruining, the tech industry. Though he looks the part — he has a boyish face and favors casual, gamer-guy attire — he is, at 34, relatively old. And while the tech press is consumed by apps like Uber and Airbnb, companies that wear their regulation-smashing, world-changing zeal on their sleeves, Zenefits is unusual in that makes software designed to help small businesses comply with regulations rather than fight them.

After a bout with testicular cancer a decade ago — from which he has recovered — Mr. Conrad became a self-taught expert on the byzantine particulars of the American health care market, and he is an ardent supporter of the Affordable Care Act, President Obama’s health reform law. Two years ago, after getting pushed out of his last job, Mr. Conrad realized that the new law was creating an opportunity for a start-up to remake the way small businesses buy health insurance. That process has been derided as needlessly complex, inefficient, opaque and antiquated. It is also extremely lucrative: The national health insurance brokerage market on which Mr. Conrad set his sights is worth, by one estimate, $18 billion.

Zenefits didn’t set out to become a health insurance broker. Instead, Mr. Conrad found that the health care market could make for a lucrative business model. Zenefits produces web-based software for small businesses to manage their human resources operations. It gives companies that software free, but if they decide to buy health insurance for their workers through Zenefits’ software, Zenefits receives a substantial payment from insurance companies.

Investors praise the model for simplifying the process of managing employee benefits, and the legal requirements that come with them.

“It’s the ultimate entrepreneur tool,” said Ben Horowitz, co-founder of Andreessen Horowitz, which, with another venture capital firm, Institutional Venture Partners, invested $66.5 million in Zenefits this summer; that investment valued Zenefits at $500 million. “How do you deal with anything that is very complicated that you need to learn about to be in business? Are you really going to go learn about the Affordable Care Act? Probably not. Once you have Zenefits, that’s it. You’re compliant.”

Customers seem to agree. Zenefits signed up 2,000 small businesses that employ a combined 50,000 workers in just its first year of operation, the company says. Last December, 15 people worked for Zenefits; it now employs 220. Mr. Conrad expects that number to triple within a year.

Jules Maltz, a partner at I.V.P., said this of the company: “We’ve invested in 18 software-as-a-service companies, and these guys are in a different league. When you compare some of the largest cloud companies to where they were at this age, Zenefits is growing way faster.”

If Mr. Conrad harbors much confidence about his firm’s prospects, he doesn’t show it. In conversation, his self-effacing attitude may come off at first as false modesty. But soon you notice that the worry is real. And there are plenty of reasons to worry. Zenefits is betting on certain revenue streams, but the health insurance market is changing rapidly. And as is the case for many early-stage companies, getting the first customers is the easy part. Zenefits could prove to be a truly disruptive force, or it could collapse under the weight of its own ambitions. “The problems that other companies have a year to figure out, we have like eight weeks,” Mr. Conrad said. “It’s incredibly scary. I feel like it takes years off my life.”

One-Stop Shopping

If you work at a large company, you’ve most likely used some kind of web-based human resources system to gain access to your benefits and to track your paychecks. Small-business owners and their workers, by contrast, have never been well served by software. When you’re hired by a small company, your boss usually has to submit your personal information to a half dozen or more separate systems of record: payroll, health care, retirement, time-tracking, commuter benefits and on and on. When you marry, have a baby, get a promotion or leave the company, all of those systems have to be adjusted.

Often, these transactions occur offline: Someone has to fill out a health insurance change-of-status form, fax it in and call later to make sure the changes went through.

Mr. Conrad felt this pain firsthand. In 2007, he and a college classmate, Mike Sha, founded a portfolio management start-up that eventually was called SigFig. “I ended up being the guy who had to deal with all this H.R. stuff at the company,” Mr. Conrad said, “and it was an amount of time that I deeply resented.”

In 2012, after a falling-out with Mr. Sha, Mr. Conrad was forced out from SigFig. He began looking for something to do, and H.R. software quickly emerged as the most obvious choice. His vision was simple and elegant: What small businesses needed was a single online tool to track all employee records. This software would connect to every benefits provider, so that when your boss wanted to give you a raise, she would type your new salary into the software, and it would handle the changes in all your information with every other service provider online. Mr. Conrad sought to turn a company’s human resources busywork into the sort of one-step, paperless operation we’ve come to expect from most other parts of our app-driven, on-demand world.

Building such a system would be tricky, but not impossible. Mr. Conrad cajoled Laks Srini, a software engineer he knew from SigFig, into becoming his co-founder. Mr. Srini would be responsible for coding the new app. While that proved to be a devilishly complex tech problem, the more challenging task for Zenefits was to find a business model. The software that Mr. Conrad envisioned would be expensive to create and market. But small businesses don’t generally have a lot of money to pay for fancy, all-in-one software, which is why few companies had gone after that market. So how would his idea make any money?

Late in 2012, Mr. Conrad began meeting with people in Silicon Valley to figure out how to pay for his plan. One of them was Bob Kocher, an investor at the venture firm Venrock, who is also a medical doctor and a health care policy expert. In the first years of the Obama administration, Dr. Kocher served on the National Economic Council, where he helped draft the Affordable Care Act. Now, during a series of lunches, Mr. Conrad and Dr. Kocher began sketching out a plan to dig up an enormous pot of gold buried at the center of the health care industry. That pot of gold is known as the insurance brokerage market. It was worth billions and it was stuck in the past — ruled by handshakes, paper forms and an aversion to most technology built after 1985.

When businesses buy health coverage for their workers, they often go through brokers, who play the role that travel agents once did for the airlines. They are middlemen who figure out the best fit between buyers and sellers of health care, then take a percentage of the sale. And the commissions can be quite hefty. After connecting a small business with a health care provider, a broker collects a monthly fee of about 4 to 8 percent of a company’s health premiums.

The commission rates are set by care providers and aren’t usually disclosed to the small-business purchasers. But the fees amount to several hundred dollars or more per employee annually, and they generally continue for as long as a business keeps its health coverage. The broker collects the monthly fee from the care provider even if the business never talks to its broker again.

“I was thinking, wait a minute, that is a ton of money, and these guys don’t do very much for it,” Mr. Conrad said. This presented an obvious business model for Zenefits. It would become a broker itself. Thanks to the Affordable Care Act, health insurance providers now publish set rates. This meant that Zenefits could offer brokerage online, letting small businesses buy health insurance pretty much the same way people shop for airline tickets.

Becoming a broker was not a trivial process. Brokers need to be licensed by states and recognized as legitimate by large health plans. When Zenefits set up in California, its first market, early in 2013, Dr. Kocher called up the chief executives of some of the large health plans to speed up the process for Zenefits. By registering as a broker, Zenefits could collect the monthly commission that traditional brokers are now paid. In return for that fee, Zenefits would give small businesses some very good H.R. software.

“So it’s literally the case that in return for this fee that most small businesses didn’t know they were paying to brokers anyway, they get thousands of dollars of software for free,”said Dr. Kocher, who became one of Zenefits’ earliest investors.

This unusual model is threatening to traditional health brokerage firms. In slightly more than a year of operation in California, Zenefits became the No. 1 broker submitting new plans to Anthem Blue Cross, one of the state’s largest providers, in the “small group” market, which serves businesses with fewer than 50 employees. Zenefits has since expanded and is now licensed as a broker in 50 states and has customers in 41, according to the company.

Customers describe the Zenefits sales pitch as irresistible. Justin Winter, co-founder of Diamond Candles, an online store based in Durham, N.C., signed up earlier this year after comparing Zenefits with a local broker. “The traditional brokers came here and we had a face-to-face meeting, and they were knowledgeable and very nice,” Mr. Winter said. “But we’re getting so many extra bonuses with Zenefits for the exact same price, we had to choose them.”

Like several other customers, he described the Zenefits software as a major inducement. “We don’t have an H.R. person,” he said. “Instead of having to have a full-time person dealing with benefits, we can have this nice, free solution that automates that work.”

Zenefits has hit the brokerage industry with such ferocity that, in four states, brokers have complained to insurance regulators that its free-software pitch constitutes unfair competition. Zenefits denies the accusation, and regulators in Texas and Washington have closed their investigations; in Utah and Wisconsin, they are pending.

Brokers have also responded to Zenefits by trying to modernize their own operations. BenefitsConnect, a software company that is also a licensed brokerage firm, has had success selling its technology to other brokers. Troy R. Underwood, its chief executive, said he doubted whether the Zenefits model would have lasting appeal. Good brokers, he argues, do more than simply help a business shop for health insurance; they are also a source of quick, constant help in tackling the inevitable complexities of health coverage that arise over the years.

Though Zenefits does offer its customers a personal representative, it also tries to automate many queries through software (the same way that Amazon, say, offers an online form for handling returns). Traditional brokers argue that a less personal touch might hinder Zenefits’ service in the long run.

“Since they’re based in San Francisco, they’re going to have a hard time playing golf with a client in Atlanta or Houston,” Mr. Underwood said. “Eight times out of 10, employers want to be able to look someone in the eye.”

Jonathan Gruber, a health care economist at the Massachusetts Institute of Technology, has a different critique — involving a lack of transparency in broker fees themselves. In the long run, he’d prefer that the health insurance brokerage market evolve into something like tax-preparation market: It’s now possible to file your taxes electronically without help, though you may want to pay a tax preparer to spare you the headaches.

“Once all these health exchanges are working well, we shouldn’t need health brokers anymore for shopping,” Mr. Gruber said.  “My hope would be that we’d move to a world where you’d pay explicitly for this service to help you make this hard decision.”

Its Own Guinea Pig

Before Zenefits revolutionizes anything, it has to figure out its own trajectory. “The biggest challenge that we have is scaling,” Mr. Conrad said. “Even when we think things are going well, it always feels like the wheels are ready to come off the cart.” Some of the company’s problems are the routine worries that every start-up faces, only an order of magnitude larger.

Growth problems pop up suddenly and require creative fixes. Early this summer, it became obvious that the way Zenefits was entering new customers into its database was too time-consuming. “It was a 5-pound-bag, 10-pounds-of-poop problem,” Mr. Conrad said. “Every day, we were able to load six to eight companies, but we were signing up 16 to 18.” Eventually, there was a backlog of more than a month and a half. “It was a company-ending thing.”

To fix the problem, Mr. Conrad assigned five engineers who worked day and night to rethink the company-loading work flow. They resolved the issue — only to find that as customers came pouring through the new Zenefits loading system, the employees whose job it was to manage all the customers became bogged down. “Every day, there’s a roving bottleneck that you have to fix,” Mr. Conrad said.

This is the cloud now hanging over Zenefits. As the company grows, can it serve tens of thousands or more customers mainly through software, without adding lots of staff — the way, for instance, Google has managed to do? Or, like Groupon and other start-ups that grew too quickly, will it need to hire lots of expensive sales and customer service representatives, straining its bottom line?

Moreover, the market is in flux. “It’s a pretty uncertain time for insurance sales right now,” said Larry Levitt, a senior vice president at the Kaiser Family Foundation. “The Affordable Care Act is changing everything about how small businesses and individuals buy insurance, so I’d say the future of this model isn’t certain.”

The law requires businesses with more than 50 workers to provide insurance to their workers, a provision that could expand the Zenefits target market. On the other hand, the law’s subsidies for individuals could reduce the number of workers receiving employer-sponsored coverage. In fact, the Congressional Budget Office predicts that by 2024, seven million fewer workers will receive coverage through their jobs. “This is not a growing gravy train,” Mr. Levitt said.

The Affordable Care Act also called for the creation of state-run insurance exchanges aimed at small businesses; those have been delayed, but eventually they, too, may streamline the way small businesses buy health care. But because the exchanges will allow firms to use brokers, the Zenefits business would still work under that model.

In the long run, such efficiencies could help keep down the costs of health care. “When you can see all the plans online, people tend to choose narrower-cost ones — and that has the effect of pushing doctors and hospitals to try to get into those lower-cost plans,” Dr. Kocher said.

But as traditional brokers get up to speed on the basics, Zenefits has begun adding more advanced features to its H.R. suite, which it either gives away or also sells on commission. The software now lets businesses manage their stock options and commuter benefits and track workers’ hours.

Part of Mr. Conrad’s secret is that he runs Zenefits on Zenefits — so as the company grows and problems arise, he can identify new H.R. headaches to address. In other words, the bigger Zenefits becomes, the better his chances of solving all our workplace problems.

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