Affordable benefits for your company in minutes.
Funded on May 11 2013
Zenefits connects with your existing payroll and benefits in seconds. Need benefits or payroll? We'll give you quotes and set you up. And we're free. When you purchase or manage insurance through us, we get paid by the insurance company, just like any other licensed broker. We don't take a single penny out of your pocket.
The new round, which includes the initial $372K chunk of capital the startup raised out of Y Combinator from Andreessen Horowitz, Yuri Milner, General Catalyst, Garry Tan, Justin Kan and Alexis Ohanian, was led by Venrock and Maverick Capital. A big reason why Zenefits was keen to bring these two investors on board in particular, Conrad tells us, was that Bob Kocher, who led Venrock’s investment, was a key player in helping to write the Affordable Care Act (a.k.a. Obamacare) when he worked at the White House.
It turns out there’s a hidden $50 billion-ish market that’s ready for a startup to come in and overhaul — the process of hiring and managing employees.
Sometimes the internet just makes life easier -- from food delivery to finding a doctor to ordering a pair of shoes. So, why couldn't something as tedious as corporate benefits be the same way?
Zenefits founder Parker Conrad believes it can, and it should.
Just as upcoming laws stand to shake up the health care industry, Parker's Y-Combinator-backed startup, Zenefits, makes managing corporate benefits easier than ever. Now, buying and managing employee benefits is as easy as setting up a Gmail account.
Corporate benefits is an industry that has been left behind by the internet age. Buying insurance traditionally requires business owners sitting down with an insurance agent who gives them a few plans to select from. Because of the time it takes for brokers to research each plan, business owners often miss out on the highest value plans by seeing only a fraction of the options available to them. Once selected, the deal is completed offline, with a flurry of back-and-forth paperwork.
Parker experienced the nuisance of this transaction first-hand while managing benefits for SigFig, the last company he founded. Prior to founding SigFig, Parker had just recovered from cancer, and he needed to scramble to purchase company insurance before his existing coverage expired. The inefficient purchase process almost caused him to have a lapse in coverage, which would have been a disaster. Through purchasing a plan and then managing it, Parker learned the nitty-gritty details of the process, and then founded Zenefits to prevent others from going through the same hassles he experienced.
The Obamacare legislation created the impulse Parker needed to solve the corporate benefits problem. Changes in the law are causing many insurance agents that served the small business market to look elsewhere for customers, and those are exactly the customers that Zenefits is going after.
According to the The United States Government Accountability Office, "almost all of the insurers we interviewed were reducing brokers' commissions in response to the PPACA." With commissions coming down, brokers may stop selling to small businesses. Zenefits is stepping in to serve the small business owners that won't have access to agents.
"It is going to be this transformative shift [in healthcare], like how the launch of the iPhone changed consumer software," Parker said. "iOS provided a platform that lets users access apps and services on mobile that were previously unavailable. Zenefits is disrupting the industry by making things straight forward, by bringing a process that used to require paperwork completely online."
Prior to Zenefits, Parker was the co-founder and head of product at SigFig, which is the largest online financial tracker with over $40 billion synched to the platform. After leaving SigFig to solve the challenges of managing insurance, he wasted no time getting started. He searched for a technical co-founder, used Code Academy to teach himself how to code, and got the prototype up and running in just 3 months.
Laks Srini joined as a co-founder, bringing his years of experience building out hedge fund trading systems to the team.
"The insurance industry has been wanting to move towards online enrollment for years," Laks said. "We've built the same online enrollment process with a two-person team in the last six weeks."
Zenefits is now able to provide quotes from dozens of insurance plans and delivers instant results via a browser. It displays all available plans and gives a price-quality comparison that is optimized for the employee's individual needs.
Companies with up to 100 employees can use Zenefits in San Francisco, and can choose from hundreds of different plans in California. Zenefits will launch in New York next month.
So, how does it work? A company signs up with login credentials for their payroll system and chooses a plan that's the best fit for them. When a new employee joins, Zenefits sees the new employee show up in the payroll system and emails him to ask him to select a plan.
In addition, if the employee changes their address, has a child, or gets married, Zenefits can quickly update their insurance provider.
It is common for employers to mistakenly continue to pay insurance for employees who leave for a few months, due to their inability to keep track of changes as they occur. Having made these mistakes himself, Parker designed Zenefits to identify when an employee leaves the company. Zenefits automatically removes the employee from the benefits plan as soon as they are off the payroll, saving employers thousands of dollars.
Zenefits already offers health, vision and dental insurance, and plans to provide 401Ks, pre-tax transportation, and childcare in the near future.
I really like the Patient Protection and Affordable Care Act ("PPACA" aka "Obamacare") and want it to work. My idea serves a niche market that will likely grow as the insurance industry adapts to PPACA: many industry experts project that the legislation will (indirectly) drive health insurance brokers to either abandon the small-group market, or begin charging small customers for administrative services. Today, small employers rely on brokers to shoulder much of the administrative hassle of offering basic employee benefits like health insurance.
I also remember the annoyances of setting up employee insurance and benefits for my last company (Wikinvest/SigFig). I've spoken with a lot of insurance brokers and small-company founders. Most say they would use the service.
My last role at Amgen (6 years ago) was focused on payor strategy so I'm familiar with health insurance. I also have California Life, Health, Property & Casualty insurance licenses – necessary to start this company. At SigFig, I led the team that built our sync integrations with around 100 different brokerage firms (we didn't use Yodlee) so I have expertise in building sync technology.
What's new is my integration with payroll systems and the fact that my platform will bring together several distinct tools into one coherent product. Some companies are building good insurance quoting engines. Others are building online enrollment tools. Still others are building marketplaces where you can compare prices across insurance carriers. I'm the only one I know of that aims to knit all three together and connect them to companies' payroll systems to create a coherent benefits service.
Today, small companies buy health insurance from brokers. Brokers are salespeople, and pursue the administrative, after-market service aspect of their jobs with varying levels of enthusiasm. Even the most diligent brokers can't set up payroll deduction changes and so that task is always left to the employer. For non-health benefits, WageWorks (NYSE:WAGE) is an employer service that sets up tax-advantaged accounts employees can use for things like transportation and child-care costs. Employers pay $5 / employee / month for this service (I plan to be free). And because WageWorks doesn't integrate with payroll systems, employers still have to handle changes manually when an employee says he doesn't want to put money towards a MUNI pass this month because he's on vacation.
Brokers own most of the client relationships today. There are thousands of them, ranging from sole-proprietorships to behemoths like Marsh & Mclennon (NYSE:MMC).
HR firms like TriNet take this entire headache off your hands, but they cost about $200 per employee per month, while I am free.
There are some companies like Bloom Health (acquired by WellPoint) with slick UIs that help small businesses put employees on individual insurance plans rather than group insurance. While this offers employees more choices, it unfortunately doesn't have the tax advantages of group plans. This is trendy right now because many people believe small businesses will stop offering group health insurance in 2014 once they can foist employees into the state exchanges. I'm more skeptical of whether this will happen but my platform can be agnostic and offer whatever coverage employers want to offer.
Health insurance companies themselves are going after this space -- creating online tools for small-business enrollment, acquiring companies that do the same, and hiring companies like Empyrean Health to build them their own small-business health benefits exchange. Most of the big insurers think the business model for small-group brokers is going to break in 2014 when they cut commissions, and want to have a system in place to fill the void. These guys scare me the least, because they don't have good technology people and tend to make bad choices on product.
The PPACA-mandated state exchanges will also sell small-group health plans to businesses under 25 employees. But these exchanges will be a marketplace only (no servicing or administrative help), won't sell dental or vision plans, and anyway I don't think the health care equivalent of the DMV has a chance to win in this space.
Good product is hard. Most large, non-tech companies are constitutionally incapable of building great technology, and they tend to make short-sighted choices when it comes to product. This is particularly true in the insurance industry.
Not if you're doing it with technology. Brokers are just as much victims of the poor state of technology in this industry as their clients. Their profitability is challenged only because they do so much work manually & on paper.
That the right product needs to make life easier for a company's CEO or HR person.
Astoundingly, most tools the insurance industry is developing today are designed to make brokers' lives easier, but don't do anything for the employers themselves. Several companies are building software that connects brokers' off-the-shelf agency management systems to carriers so that brokers can enter clients' information just once but get quotes from multiple carriers (today brokers have to do this separately for each carrier they want to quote). These tools don't serve employers.
Other insurance sites are too focused on price-comparison. Cost savings is a powerful message if it's true, but these sites aren't able to deliver on it. And because they don't offer tools to service and administer policies going forward, they make life harder for their client in comparison to working with a broker.
Initially, commissions on health insurance sales. But other products I plan to offer on my platform (dental and vision insurance, 401Ks, pre-tax transportation accounts for employees, pre-tax cafeteria plans for childcare expenses) also generate revenue without requiring me to charge the company or its employees.
In California today, health insurance commissions are 7% of policy premiums, paid in perpetuity. Because they are paid by insurers, not my clients, I can offer my users a free service while making significant revenue per user from day one.
As an aside, the insurance companies are threatening to cut these commissions by 30%-50% in 2014 as a result of the Medical Loss Ratio Minimums stipulated by PPACA. I am hoping they do so, because I think this will squeeze out a lot of traditional brokers that would otherwise compete with me.
As an example of one of the other, future revenue streams: if I offer free 401K plans on my platform under my own brand (most likely outsourcing the back end / execution to State Street bank) asset managers that run mutual funds will pay me ~ 50 bps on any employee assets invested through my platform (Vanguard is the one notable exception). Even if I outsource the 401K portion of my platform to another company like Fidelity, I'm pretty sure I can get them to pay me $300 - $500 per funded 401K account because 401K accounts are a big profit center for most big asset managers.
I have a couple strategies to get clients:
1) Initially, I want to sell to tech companies in the bay area. I have a strong personal network of potential clients here and insurance companies' weak technology is most painful for companies enrolling for the first time (and particularly infuriating to tech companies, which expect better). So, my easiest sell will be to new companies that don't already work with an insurance broker. I'd like to get investment from several of the most active angel investors, and request introductions to their portfolio companies as potential clients as part of the deal. Because commissions are high, I can probably fund a lot of my own growth with revenue from these early clients if necessary.
2) My projected revenues per client company are high enough to support a direct sales force (My client-service costs are much lower because I'm doing it with technology instead of by hand the way traditional brokers do).
I don't really know, and it doesn't matter a great deal for my business. We'll integrate with the exchanges when they come out, and they'll be just another source of plans on my site -- just like United, Blue Cross, Kaiser. We earn commissions for selling plans on the exchange, just like for regular plans.
Companies with less than 100 employees. There are around 2.2 Million businesses in the US with between 5 and 99 employees.
Not being able to reach customers fast enough to be able to grow quickly.
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