Labeled the “fastest growing SaaS company ever,” Zenefits raises a $66M Series B just five months post-Series A
When a company follows a $17.1 million Series A funding round with a $66.5 million Series B, it’s a fair bet that investors are pleased with its progress. When that B round comes just five months after the already large A, “pleased” doesn’t begin to describe things.
And so it is with Zenefits, a small- and mid-sized business (SMB)-focused SaaS HR platform startup which today announced today that it’s increased its total funding to nearly $84 million, just 13 months after launching. Zenefits’ investors, including both Series A and B lead Andreessen Horowitz* and Institutional Venture Partners, have described the company as “the fastest growing SaaS business in history.”
That claim may sound brash, when considering the trajectories of category juggernauts like Salesforce, Netsuite, and Workday, as well as earlier stage successes like Optimizely, Zendesk, and ZenPayroll (Aside: there may be something to this “zen” naming convention). But at 30 percent month over month revenue growth (leading to projected 1,300 percent annual growth projections), Zenefits is truly in a league of its own. In fact, those are more akin to consumer Web and mobile growth figures than anything the SaaS category has ever seen.
“When you’re pitching VCs, you always put together what I like to call a ‘bullshit financial model’ where you forcast out 'here’s how we see things going' – you’re trying to sell the business as something attractive to invest in,” Conrad says. “These were meant to be aggressive numbers at the time, but ones we were confident in hitting. When we pitched our Series B, I had the luxury of saying, ‘Here’s what we said we’d do in January when we spoke to you about our A, and now were 5X ahead of where we thought we’d be.’ It's like giving away free candy to seven-year-olds.”
In the five months between its Series A and B rounds, Zenefits grew from 15 to 120 employees. More importantly, according to co-founder and CEO Parker Conrad, the company has expanded beyond its original market of California-based technology companies, with 60 percent of new customers over the last three months coming from outside either category. This was key to validating its broad appeal ahead of the upcoming funding round. The company now boasts serving 2,000 companies and 50,000 employees, up four-times and ten-times respectively since January.
So what’s the secret sauce at the heart of this apparent rocket ship growth story? How a offering product that solves a major pain point faced by nearly every business in the world? Now, how about offering that product for free? Not freemium, not free trial, simply free, for life.
Think of it like WorkDay for businesses with less than 1,000 employees – a lofty comparison given that WorkDay was the holy grail of enterprise IPOs among the most recent cycle. Add in free and the appeal is obvious. Zenefits’ software platform acts as a go-between for businesses and their existing third-party software providers – such as payroll, insurance, and 401(k) – offering a simple cloud-based interface while removing the bulk of administrative tasks and simplifying the process of adding a new employee from hours to minutes. With a typical 100 person company, this can mean freeing up as many as two full-time HR employees to focus on truly important functions like culture setting and recruiting, rather than filling out TPS reports.
Offering a product that customers love is great. But Zenefits’ insistence on shouting free from the rooftops doesn’t exactly jive with the notion of its exponential revenue growth. And therein lays the genius twist of its business model. Zenefits becomes the insurance broker of record for all of its clients, earning commissions on health, dental, vision, life, disability, and any other insurance products its clients offer. For the company, nothing changes, but Zenefits is able to monetize its HR platform without charging a software fee.
“The SMB health insurance commission market is worth $18 billion today and is begging to be disrupted,” IVP’s Jules Maltz says. “People wouldn’t switch insurance brokers for no reason, but layer in a beautiful and free piece of software that solves one of the biggest and most universal pain points and that becomes a pretty compelling offering.”
Conrad wouldn’t disclose Zenefits’ revenue figures, but did say that the company is generating enough cash today and growing fast enough that it didn’t need to raise additional financing. The company still has more than $13 million remaining from its January Series A, he says. And while Conrad expected to raise a round later this year to accelerate future growth, today’s announcement came both more quickly and in a far larger sum than he ever anticipated.
“We saw an opportunity to do this now on attractive terms so we decided to go for it,” he says. “It won’t change much for us over the next six months, but will be all about setting us up for even more rapid growth in 2015. If it needs to, this runway could last forever. That doesn’t mean we won’t ever raise money again, it means that if we ever do raise money again ti will be for opportunistic reasons such as if there’s something that we want to do or buy where money is available on attractive terms.”
The Zenefits CEO was equally hesitant to talk valuations, only saying that there were several firms extremely interested and that A16Z’s offer was at or near the top and came with the added benefit of familiarity and speed. Reports suggest that the company was initially looking to raise $50 million at a $500 million valuation, so a competitive deal resulting in an even large round suggests that it likely got a valuation of at least that much. As for IVP, this deal marks a major deviation from the firm’s late-stage MO.
“It’s really rare for us to participate in Series B rounds,” Maltz says. “We typically like to invest once companies have reached scale and are looking to pour fuel on the fire. We’ve only done deals this early a few times before for Dropbox and Snapchat. We think these guys are equally exceptional as those companies. They’ve just reached late-stage like maturity in terms of product-market fit and market adoption much faster than most.”
Zenefits’ additional investors include SV Angel, Hydrazine Capital, former Twitter and Google executive Elad Gil, and actor Jared Leto (not quite the Instagram-esque deal you'd expect of a celebrity angel).
With unprecedented growth comes unique scaling challenges, of which Conrad admits Zenefits has seen its fair share. Going forward, the company’s greatest focus will be on scaling its customer support and account management teams, he says, with the goal of matching its already impressive product and sales machine – a group led by former EchoSign sales rockstar Sam Blond. It’s no small task that will require deft execution and the input of the company’s growing cadre of advisors.
“We spend a lot of time helping with recruiting senior executives, not to mention helping our companies to add independent board members and ensure IPO and M&A preparedness,” Maltz says.
Zenefits isn’t without competitors, but no company has anything near a comparable offering (or a similarly attractive business model) in the market. Workday is far too expensive and complex for SMBs to use and TriNet is a costly, full-service offering. Other companies target single verticals within the HR suite, but fail to to match Zenefits’ comprehensive offering. But now that it’s unique business model is getting more well known, it’s conceivable that direct competition will soon enter the space. The question is whether Zenefits will be too far ahead by that point for it to matter.
Both Conrad and Maltz are hesitant to look beyond the SMB space, with both men saying that the category is big enough to support a multi-billion dollar business. But neither would rule out moving upstream towards WorkDay’s enterprise market. Maltz also pointed to new revenue opportunities around the enormous amounts of data that Zenefits will gather about employee hiring, compensation, and benefits. It seems prudent to remain focused given the remaining greenfield opportunity and the challenges of keeping the train on the tracks as it barrels ahead at breakneck speeds.
“Going forward, it’s really all about making sure that while we’re growing as quickly we are, we build out our organization in a way that ensures our customers are going to have an incredible experience,” Conrad says. “That’s a high-class problem to have – these are the challenges that come with success. It’s not that they’re not hard, but we have a lot of things going for us.”
Eighty-four million things, to be exact. And counting.
[*Disclosure: Andreessen Horowitz partners Marc Andreessen, Jeff Jordan, and Chris Dixon are investors in PandoDaily.]