ZenPayroll raises YC’s largest seed round from the Mt. Rushmore of Valley entrepreneurs

By Michael Carney , written on December 11, 2012

From The News Desk

What funding crunch? There’s been plenty of chatter about a drying well of early stage capital, but for the best teams tackling the most ambitious ideas, there will always be investors. Y-Combinator (YC) Winter 2012 alum ZenPayroll proved as much by raising a $6.1 million seed round, the largest in the accelerator’s storied history. After a limited beta, the company is launching publicly today.

As its name suggests, ZenPayroll is taking on the enormous and incredibly complicated challenge of bringing payroll services into the modern era with an automated cloud solution. The issue is so compelling, to both employers and employees, that not only did the startup attract traditional institutional investors, but also nearly a dozen fellow founders and CEOs of wildly successful tech companies, who themselves experience the problem first hand on a daily basis.

ZenPayroll’s round included Box CEO and co-founder Aaron Levie, Yammer CEO and co-founder David Sacks, Dropbox CEO and co-founder Drew Houston, YouTube co-founder Jawed Karim, Yelp CEO and co-founder Jeremy Stoppelman, Badgeville CEO and co-founder Kris Duggan, SugarCRM CEO Larry Augustin, and Zuora CEO and co-founder Tien Tzuo, as well as Google Ventures, Data Collective, Sherpalo Ventures, and Although unannounced until today, the company closed the round in April, following its graduation from YC.

Interestingly, ZenPayroll raised nearly $1 for every US business than needs payroll services – more than 6 million of them. Needless to say, it’s a big market, one dominated not by 800 pound, but by 800,000 pound gorillas. ADP. Paychex. Intuit. Combined, they represent $50 billion in publicly traded market cap. They also represent slow-moving incumbents, disincentivized to pursue innovation.

These legacy companies rely on selling to other enormous enterprise clients whose opportunity cost of switching services provides a sufficient lockin – for now. ZenPayroll is focused on the longer tail of the market, namely small and medium sized businesses (SMBs). The product is designed to be enterprise grade, however, and when it catches on with SMBs, don’t expect it to stay in that market.

Faced with expensive and complex software options, many SMBs still rely on bookkeepers, spreadsheets, and manual processes to manage their payroll. Also, those small businesses that do rely on traditional payroll systems still face a daunting list of taxes and fees to pay, not to mention regulators and agencies to manage. In California also, for example, businesses have to pay 12 different taxes.

With ZenPayroll, companies can handle the standard functions of adding employee hours, overtime pay, bonuses, reimbursements, garnishments, benefits, etc., and issuing periodic payments via check or direct deposit. The system then automatically calculates and paperlessly files payroll taxes to to the federal and state governments, as well as reports new employees to the state. All pretty vanilla stuff, but more automated, frictionless, and “delightful” than normal, to use co-founder and CEO Joshua Reeves’ favorite word.

Where ZenPayroll really sticks its head above the crowd is in the long term tracking and management for both employees and employers. On the platform, companies can log into a Web dashboard to view pending tasks and upcoming important dates, view past payroll cycles and pay stubs for each employee, and track and report vacation and sick days.

Each employee, for that matter, gets persistent access to their own personal profile. Employees can change payment settings, access paystubs and employment documents, manage personal and financial details, and review pay and benefits data. Rather than relying on a paper documents in a dusty file cabinet (or shoebox), employees get free permanent digital access to their historical records, even after changing employers.

ZenPayroll is available to business California only at launch, with more states coming in Q1 and a nationwide rollout expected by Q2, says its CEO. Businesses pay a fixed monthly fee to be on the platform and a “small fee” per employee paid each month. If the employee does not receive a paycheck (physical or digital), the company is not charged. After a 10 minute signup process, and approximately five minutes to add each employee, companies can begin processing payroll immediately.

In the few months since launching into private beta, the startup has received thousands of eager signups via its website. More than just other “in the know” startups and tech companies were interested. Reaves says they heard from flower shops, realtors, and other everyday SMBs without any marketing or advertising. The company spoke to many of these eager customers and learned that they had simply been searching for “easy payroll” or other similar phrases. With a dearth of options (and likely some good SEO from the startup), they arrived at the ZenPayroll landing page.

Despite this early frenzy, the company's biggest risk is effectively marketing to the SMB longtail. Direct sales is not a cost effective model in this market, meaning the startup will have to employ some smart customer acquisition strategies to live up to its lofty ambitions. Reeves points out that this is a problem that’s been solved before, and plans to model much of his company's methods after those employed successfully by Square. Namely, traditional online marketing and word of mouth. The company will also look to work with partners that already have access to this target market.

There’s little arguing that payroll is a necessary evil: heavy on the evil. In tackling the market, ZenPayroll has set out the biggest, hairiest, of audacious goals. But coming at this problem from the perspective of a scrappy entrepreneur is exactly what the market demands. The early inbound customer interest and who’s who of Silicon Valley entrepreneurs lining up to invest in the company speak to the demand for a better solution. It looks very much like the right time, and ZenPayroll may be the right David to topple a few Goliaths.