Watching Zenefits slide down the business end of the Valley hype cycle, it’s easy to write off the company as one more smug unicorn shorn of its rainbow valuation: Schadenfreude’s a bitch, let’s move on. But the truth is more complicated. We’re entering an era of unicorn rationalization, so now the hard work begins. Making a company that can last is far more difficult than making one built to grow without regard for burn rate or regulatory frameworks.
Once “the largest SaaS company in history,” Zenefits successfully disrupted the human resources industry. Now it’s being treated as a cautionary tale, the kind of company elected officials bring up as the worst examples of “ask for forgiveness, not permission,” right up there with Uber or Airbnb.
News reports claim more than 80 percent of Zenefits’ salespeople in California and 60 percent in Washington weren’t licensed to sell the insurance that provides the company’s core revenue. Did Zenefits cheat its way to unicorn status? An investigation is underway, but the company appears to have used software to purposely deceive California insurance regulators.
By the company’s own account, problems run deeper than that. In the heady fast growth phase of Zenefits’ ascent, it lost control of its culture and its ethics. “The problem goes much deeper than just process,” new CEO David Sacks said in a blog post criticizing his predecessor Parker Conrad. One of the first changes made by Sacks: No more alcohol in the office. Sex in the building stairwell was an issue, too.
Maybe that’s just how HR people like to party. In a story that reads more like cultural anthropology than news, BuzzFeed (which broke stories about Zenefits’ licensing issues) unfolds a narrative of tech bro bravado and leadership that cut corners, drank too much, and ran sloppy as the company grew from 15 employees in 2014 to more than 600 in 2015. Clearly the culture failed to mature along with the valuation and staff size.
Part of the Y Combinator 2013 class, Zenefits rose through traditional channels. Zenefits became Andreessen Horowitz’s biggest investment, and partner Lars Dalgaard, along with former CEO Conrad, led the charge to grow the company as quickly as possible.
The scale chase spawned what Farhad Manjoo describes as a “sickness” at Zenefits. In a short few years, Zenefits rose fast, then fell faster: A company built under the pressure of “scale at all costs” can grow, but unless it learns how to manage its own culture, it won’t mature.
So what does all this mean? Zenefits’ fall may play a role in regulation of startups. It also says a lot about how investors can help shape company culture and sustainability.
But scaling at all costs isn’t the only way to grow. Sharp-tongued critics of bro culture are gaining an audience (read “Sex and Startups” for just one vivid example). And while it may be entertaining to watch a unicorn humbled, the real goal of business should be to create positive change in the lives of its customers, employees, and consumers. That’s something the newly chastened Zenefits will no doubt come to understand.