Zenefits – The “Compliance” Fall Guy


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Its all over the “Benefit” news. Patrick Conrad has resigned as Zenefits CEO this past Monday and is also off the Board. One more startup, that too a unicorn where the founder and CEO bites the dust, having let go for various reasons. What’s ironic is, that a CEO who is known as aggressive, brash and outspoken hasn’t said a word yet on the latest turn of events.

The reason quoted for what transpired is “Compliance”. Due to insurance sales done over the past couple of years, through unlicensed sales agents on behalf of Zenefits, state regulatory bodies are coming down heavily upon the company. As a result, David Sacks, the COO of the company for about a year, has taken on the reins as CEO and is trying to assuage investors, clients, insurance carriers, employees and regulatory bodies by letting go of the current CEO and re-inventing the organization as one that will change intrinsically from a culture standpoint, to be an organization that is compliant and will grow in a mature manner.

There has been quite an interest from the investor community in Zenefits. For a company that grew from zero to $1M in 8 months and then, to $20M by next year, it has attracted a lot of attention. With huge investments flowing in, the last being about $500M in May 2015, the expectations were poised to rise. With that kind of money in the kitty, what is there to hold back? $100M in revenues by Jan 2016 was the target that came out, perhaps a little too aggressive, knowing that scale is important but there is the need to give time to set processes in place to form a strong foundation for that growth.

With the commitment to hit $100M in revenues by Jan 2016, and $500M to tap into to make that happen, the management of Zenefits set into action. Among other roles, a hiring spree of sales staff was on. However, what lacked was putting the infrastructure and processes in place to bring the right kind of staff, provide them the needed training and ensure they conducted themselves in a compliant manner.

Its not just Patrick Conrad that is liable for Zenefits’ current issues, but their entire management team. Of course, Patrick may have stepped down taking responsibility as the CEO or may have been the fall guy, but, David Sacks was around as COO for an year leading operations, finance and product. Having been brought in for his seasoned experience, he came in to help manage a company that was in hyper growth mode. The Sales VP, Sam Blond who ran the sales organization is also as responsible.

Josh Stein has been appointed this week as the Chief Compliance Officer by David Sacks. Why did it take so long to bring in a Compliance Officer? Everyone in the company knew they were in a highly regulated industry. It was basic. As hiring began to meet the ambitious revenue target, why wasn’t a Compliance Department put in place? Why were the checks and balances that are so innate to the health insurance business ignored?

The $100M in revenues by Jan 2016 was perhaps very aggressive, given the lapses in the organization to get there. However, all is not lost. It’s a matter of a few more months before Zenefits hits the target, going by its business model, given that it fixes its way of doing business and keeps in the good books of the state regulatory bodies. However, it’s not the magic number that should matter anymore. What should matter is the need to have a sound sales management infrastructure and related processes in place including compliance, on which the organization can continue to build. Once that is established, reaching any targeted revenue number within a meaningful timeframe should not invite so much attention.

Recent history has shown that startups are allowed to make mistakes and then, correct themselves. In many cases, they have stood up to conventional laws and helped reshape them, in light of a new economy. Zenefits has shown the same in case of Utah. In other cases, the law just cannot be ignored or broken.

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Zirtual – A Startup Story Gone Wrong


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Unless you learn to get comfortable with failure, you cannot aspire and look forward to success.

By now, most of you have heard of Zirtual, an on-demand personal assistant company founded in 2011 that went out of business last week and laid off more than 400 employees. The employees received an email on Friday, 08/14 notifying them that the company was shutting down due to financial issues. And the clients received their notifications too.

According to Zirtual’s now, ex-CEO, Maren Kate Donovan, the business was on an $11 million run rate, and was burning $400,000 a month.

There were various causes that frothed up for what happened.

Maren Kate Donovan blamed it on “burn” which is more money being spent than what came in. She also regretted not having a full-blown board in place. Another reason given was the conversion of 1099 contractors into full-time employees without considering the implications of the 20-30% employment expense increase. The lack of a full-time CFO although the size of the organization demanded one, was another factor that came up as well.

The irony is that Zirtual raised about $3.2 million in just this past June and July. Although it might look surprising that a company that just weeks ago, raised funding went under, there is more to the truth than that. Zirtual’s SEC Form D filings show that they tried to raise $5.75 million in June and July – but got only $3.2 million in total. And mind you, this is debt with its own contractual obligations.

Startups.co, depending on how you see it, came to Zirtual’s rescue or gobbled it up post the disaster and acquired it. Startups.co CEO Wil Schroter, negotiated a cash-and-stock deal and added Zirtual to his company’s portfolio of online services for entrepreneurs. In fact, Zirtual, apparently resumed services this past Monday and Startups.co re-hired 60 former employees on a contract basis and looks forward to re-hire more. Startups.co has also initiated efforts on bringing back some of Zirtual’s clients, while the competition is also pursuing them.

Meanwhile, Zirtual has its own set of issues post going out of business. A few former employees filed a class-action lawsuit against Zirtual Inc. in U.S. District Court in the state of Delaware, questioning the company’s violation of labor laws by not giving effective notice of termination. The transfer of that liability to the new owner is still in question. On the other end, there are clients who are hurt by the breach of trust and are hesitant to go back or for that matter, doubt the industry as well.

Lots of lessons here for entrepreneurs. Here are a few:

  • Make sure you raise money way before you need it and raise enough so you and your team are not eclipsed with that worry while you pursue your vision.
  • Debt Financing is great with predictable cash flows; else it can very soon become a nightmare!
  • Do not penny pinch when it comes to finding the right talent and bringing it in when you need it. Find your savings somewhere else.
  • Check, double check and triple check everything. You can never go wrong with overanalyzing operational finances.
  • Proactive and quick decision-making is important, but be wise about your decisions.
  • Your customers and employees come first, everything else comes after them for without them, there is no business.

Learn from them and go find your success!

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