Zenefits was already the hottest startup of 2014. Now it’s making a case to grab the same title in 2015.
The HR startup announced on Wednesday morning that it raised a blowout $500 million in Series C funding in a round led by Fidelity and TPG. The new investment values Zenefits at a $4.5 billion valuation, hurdling the $1 billion mark to make it one of the top 20 most highly valued venture-backed tech startups in the world.
This is Zenefits’ third funding round in less than a year and a half. The company raised $15 million in its Series A last January, then added $66 million in an June Series B round that valued it at more than $500 million.
Zenefits offers a cloud-based software-as-a-service human resources platform for small businesses that tries to be an all-in-one solution for compliance, onboarding, payroll, health insurance, and other employee benefits. The key is that the software is free to businesses; Zenefits makes its money as a broker of services, for example earning a fee from health insurers who register new businesses through Zenefits.
With this latest deal, cofounder and CEO Parker Conrad could become a billionaire. He tells Forbes that he remains the largest individual shareholder of Zenefits, although declines to cite his exact ownership percentage. The 34-year-old is now running a company with approximately 1,000 employees. He was previously the cofounder of Wikinvest, which became Sigfig, before getting kicked out in 2013. (Conrad’s Zenefits cofounder and CTO Laks Srini is another Sigfig veteran.)
Conrad argues the money is well spent on upfront costs, including an explosion of new employees, especially in sales (Zenefits plans to double headcount this year). He hopes to make up that massive burn rate in the long run, as small business owners begin to rely on the service. “Investors look at our SAAS metrics and say gosh, there’s a lot that’s exciting,” says Conrad. “They agree that we should be stepping on the gas and pushing the pedal to the floor. We’re trying to get as much of the market as we can.”
Zenefits is on a rocket ship trajectory. After reaching an annual recurring revenue figure of $1 million in January 2014, it grew by 20 times, reaching $20 million ARR a year later, and it expects $100 million by the beginning of 2016. The company says it closed more new business this past March than it did in the first 15 months of the company’s life. Just over 40% of its 10,000 small business customers are outside of the tech industry.
Conrad wants to reach the 5 million small businesses in the U.S. with under 1,000 employees. While it costs an extraordinary amount to build a salesforce that can cold call every one, he argues the unit economics makes each new customer a worthwhile investment.
“It’s a lot easier to approach smaller companies,” says Conrad of this approach. “Try getting on the phone with a decision-maker at a 1,000-person company. It takes weeks if not months. We can close a lot more 100-person companies more easily.”
Other VC firms who invested in Zenefits’ current round include Founder Fund, Khosla Ventures, Insight Venture Partners, and Aston Kutcher’s Sound Ventures. Previous investors Andreessen Horowitz, Insitutional Venture Partners, and Jared Leto all added to their stakes.