Regulatory clashes have become a badge of honor in Silicon Valley. If you’re making enough of an impact to piss off the powers that be, the idea goes, you’re probably doing something right. (Think Uber and Airbnb.)
By that measure, human resources software startup Zenefits is pretty much killing it. In just two short years, it's faced opposition from insurance industry regulators in Washington, Texas, Wisconsin, and Utah. While Zenefits has come out on top in every case, founder and CEO Conrad Parker admits, “It’s just a matter of time before we run into an issue somewhere else.”
It's a good thing for Zenefits, then, that it's just raised $500 million (at a $4.5 billion valuation). To fight the political and legal battles ahead, it’s going to need it.
The issue at hand is Zenefits’ crafty and unusual business model. Unlike most companies that sell HR software to small businesses, Zenefits gives its software away for free. Instead, the company collects a fee from insurance companies every time a customer buys insurance through Zenefits. It’s this piece that has enraged traditional insurance brokers. They argue that in giving away free software, Zenefits violates state rebate laws that forbid brokers from giving away free perks to entice people to buy insurance. Regulators in some states have taken up the call, forcing Conrad and his team to spent a substantial amount of time and money defending their position.
According to Conrad (and, it would seem, the regulators who have already dropped their objections to Zenefits), the company is not breaking those laws, because it doesn’t require customers to buy insurance from Zenefits to get the free software. In fact, Conrad says around 50 percent of users don’t buy insurance from Zenefits.
“Our view is if you give someone a toaster when they open a checking account at your bank, that’s a rebate, but if you give everyone a toaster who walks in the front door, that’s no longer a rebate,” he says. “Competition might be painful for some traditional brokers, and we don’t mean to discount the pain it causes them, but it’s not a regulator’s job to prevent that.”
And yet, Conrad knows that the task of fending off proposed bans is far from over. “They keep springing up again and again,” he says. “There’s the constant background noise of this stuff.”
All of which makes Zenefits a particularly good fit for Andreessen Horowitz, the storied venture capital firm that now lists Zenefits as its largest investment to date. Though Conrad says a significant portion of the $500 million round will go toward expanding the team to keep up with growth and managing its front-end costs, he acknowledges that dealing with regulators is also incredibly costly. Andreessen Horowitz has more than just money to help Zenefits deal with those issues. The firm also recently hired former Facebook lawyer Ted Ullyot to lead a new division that helps portfolio companies work with regulators. Conrad, no doubt, will be spending lots of time with Ullyot’s team.
Some of that work has already begun. Conrad says some members of the Zenefits team have been traveling from state to state meeting with regulators. The company even set up shop at the National Association of Insurance Commissioners annual meeting, where they try to convince insurance regulators that Zenefits is, in fact, operating above board. “That way if and when they get a complaint, they understand the product up front so hopefully they’re less likely to believe a random insurance broker who says we’re breaking the law,” he says, “But yeah, it’s costly.”
And yet, the fact that Zenefits was able to raise such a sizable amount of funding despite the very predictable political challenges ahead is a sign that the venture capital industry is increasingly willing to back businesses that operate in murky political territory. As Andreessen Horowitz partner Margit Wennmachers recently told WIRED, “If you pass on all the opportunities because of potential regulatory hurdles, we wouldn’t have Google, Facebook, Amazon, Airbnb, or Lyft.”
The difference now is, companies like Zenefits are realizing that in politics, it might be easier---and cheaper---to turn on the charm.
