Zenefits, a Rocket That Fell to Earth, Tries to Launch Again
Trying to turn around a failing technology company is almost always a futile task — just ask Marissa Mayer at Yahoo or whoever it is who now runs BlackBerry.
But the challenge becomes even more daunting if your company is afflicted by something deeper than a mere implosion of its business. If the company you’re rebuilding has been racked by questions about its ethics and culture, and if on some fundamental level it became derelict in its integrity, well, good luck trying to get that turkey to fly.
That’s the situation David Sacks faced in February when he was elevated to chief executive of Zenefits, a once-admired business software start-up and “unicorn” that spectacularly lost its way. Among other problems, Zenefits, which makes human resources software for small companies, said it had discovered that one of its founders and a former chief executive, Parker Conrad, created a program to allow sales representatives to skirt requirements on a state insurance licensing course. Zenefits’s operations are heavily regulated, so the software cheat could have been a company-ending event.
Mr. Sacks has since pushed a series of reforms that have essentially remade Zenefits. In the last few weeks, billboards across Silicon Valley have posed a cryptic question: “What is Z2?” The answer, as the San Francisco company will unveil at an event next week, is a redesign of Zenefits’s software and the introduction of several new features that Mr. Sacks says will collectively signal a rebirth of its corporate image.
“This will be the month where we close the chapter on all that stuff, we move past it and we launch the future of the company,” Mr. Sacks said.
Yet Mr. Sacks’s efforts to resurrect Zenefits highlight the difficulty of conjuring up second chances in tech. By all accounts, the new chief executive has mounted an unconventionally aggressive plan to tackle Zenefits’s challenges. But even doing everything right may not be enough.
In the months that Zenefits has been rebuilding itself, a spate of competitors have set their sights on its business. One of them, a well-financed start-up called Gusto, has put ethics and culture at the core of its appeal, and it has been scooping up disaffected Zenefits customers.
“To borrow a quote from a different context, ‘When someone goes low, we go high,’” Joshua Reeves, one of Gusto’s founders and its chief executive, told me. “It’s about trust. And when you endanger that trust, it’s hard to rebuild it.”
Credit Peter DaSilva for The New York Times
Now the two companies are racing to lead a multibillion market. In a recent interview that spanned several hours, Mr. Sacks explained in exacting detail everything he has done to fix Zenefits, and argued that the company still has the inside track on what could be the next great software bonanza. It sounded convincing — but many of his points are echoed by Mr. Reeves of Gusto.
Gusto’s and Zenefits’s business may sound boring: Both are trying to become the primary human resources dashboard for small businesses, companies that hire a few to a couple of hundred workers. For years, small companies have been neglected by traditional software providers for a simple reason: They don’t have a lot of money to spend on software.
The internet has altered that calculus. Zenefits and Gusto, which charge subscriptions for some of their services, are relying on the vast scale and technical efficiencies enabled by the online cloud to make serving tiny companies feasible. Their success could alter how millions of American businesses manage, pay and provide benefits to tens of millions of workers.
Both are finding takers. Gusto, founded in 2011 as ZenPayroll (people in this business apparently love the Zen mind-set), has attracted 40,000 paying customers. In a funding round last year, investors valued the company at $1 billion. Zenefits started a couple of years later, but it grew faster and was once considered one of the fastest-growing business software company of all time. In 2015, two years after its founding, investors valued Zenefits at $4 billion, and it had ambitions to hit $100 million in annually recurring sales.
But the wheels were coming off the wagon. Zenefits under Mr. Conrad was consumed by an insatiable mania to grow at any cost. A year ago, BuzzFeed reported that Zenefits had allowed unlicensed brokers to sell health insurance to customers.
The article kicked off an internal investigation that led to the discovery of the cheating software. Mr. Sacks, an experienced start-up entrepreneur who had joined Zenefits as chief operating officer in late 2014, said he learned about the cheat from the company’s outside counsel in January; he elevated the issue to the board of directors, which pushed Mr. Conrad to resign. (Mr. Conrad, who is now working on a new human resources start-up, did not respond to requests for comment.)
Faced with investigations by regulators and outrage from investors and customers, another chief executive might have sought to minimize the fallout from Zenefits’s problems. But Mr. Sacks pushed an unusual counterstrategy for rehabilitation, one he sums up with a simple mantra: “Admit, fix, settle and repeat.”
“The turnaround strategy of this company has been to reject ‘damage control,’” Mr. Sacks told me. “Doing the right thing has been the crisis management strategy.” (Other tech companies facing a crisis, like Samsung, may want to take note.)
Credit Peter DaSilva for The New York Times
The process has been marked by radical candor about Zenefits’s problems, and a willingness to make bold moves to fix them. Mr. Sacks immediately removed several executives who had typified Zenefits’s hard-charging ethos, and he changed the company’s philosophy from “Ready, Fire, Aim” to “Operate With Integrity.” He negotiated new agreements with investors who had been agitating to sue, taking a haircut on Zenefits’s valuation — now the company is worth $2 billion.
It’s tempting to dismiss Zenefits’s new ethos as mere survival; everyone who gets caught suddenly finds religion, you might say. But Zenefits’s most important constituency, its regulators, appear to believe its sincerity.
In April, Joshua Stein, the company’s chief compliance officer, made an impassioned plea to the National Association of Insurance Commissioners, arguing that Zenefits had seen the errors of its ways and deserved a second chance. Mr. Sacks called the speech a turning point for the firm. Eight states have settled with Zenefits so far, and more settlements are on the way.
There is an irony to Zenefits’s reformation: In altering the company’s culture, Mr. Sacks has pushed Zenefits to become much more like its biggest rival. Compared to Zenefits’s once-freewheeling, highflying sensibility, Gusto has always operated closer to earth. Where Zenefits pushed for nationwide expansion and invested millions of dollars in a sales staff to encourage rapid growth, Gusto sought to escape what Mr. Reeves calls the “Silicon Valley hype cycle growth curve.”
He favored a slower, more deliberate growth plan, encouraging a corporate culture that he said prized long-term sustainability. Though the two companies are just blocks apart from each other in San Francisco, in their early years each one felt like a universe apart.
At Zenefits, the sensibility was one of a boiler room — packed to the gills, every employee on the phone, all of them cheering every sales goal. By contrast, Gusto’s office has the air of a meditative retreat. There are plants, couches and people chatting in hushed tones. Shoes are not allowed in the office, to make it feel more like home than work.
Mr. Reeves told me that Zenefits’s “implosion” had been a boon to Gusto. “I used to have to spend a lot of time making sure that the team and our investors were not distracted by the attention they were getting,” he said. “So when things came to light, it made it easier — because our internal conversations about their shortcuts were proved true.”
Mr. Sacks dismissed the idea that Zenefits had imploded. Most customers have stuck with Zenefits despite its shortcomings, he said, and he predicted that the unveiling of the product next week would win back everyone else and then some. In other words, now that Zenefits’s culture is cleaned up, the company is once again ready to take on the world.
He made it sound easy. But turnarounds usually aren’t.