Time & Attendance
By Sarah Sipek
Sep. 12, 2014
Parker Conrad prefers to cut through the crap rather than dance around it.
Consider the blunt reality of his opening remarks to the heavy-hitting investors at Andreessen Horowitz, a $4 billion venture capital firm, when he went in search of funding for his cloud-based human resources platform Zenefits. While some may have tried to paint a rosy picture no matter how thin the business plan, Conrad was all bottom-line business: “Nothing’s working, except maybe marketing.”
Those words, while in a larger context called out the Silicon Valley tech scene’s massive ego, also set Conrad apart as a self-aware businessman who values substance over flash. Such fist-to-gut honesty convinced Andreessen Horowitz general partner Lars Dalgaard that this young entrepreneur was worthy of a sizable investment.
‘I did not think that I was going to invest in another HR company.’
—Lars Dalgaard, Andreessen Horowitz
“It’s very compelling to me that someone is that humble,” said Dalgaard, the tech-wizard-turned-investor who founded the HR cloud platform SuccessFactors Inc. and sold it to SAP for $3.4 billion in 2011. “I just loved that personality. It’s a very simpatico attitude.”
In a technology industry saturated with newcomers who have accomplished nothing yet assume they know everything, Conrad’s acumen and desire to push the industry instead of take advantage of it had a profound impact on Dalgaard, the HR cloud technology pioneer who holds the distinction of receiving the highest return on capital in Silicon Valley history. That rare combination of personality and business sense led Dalgaard and his colleagues to start referring to Conrad as a “Halley’s Comet.” It also motivated Andreessen Horowitz to lead both A and B rounds of funding, contributing the majority of the $84 million Zenefits has raised to date.
“I did not think that I was going to invest in another HR company,” Dalgaard said. “I’ve seen all of the things that are working, and I’m not impressed. But then I was completely blown away with Parker, and then I was blown away with the numbers.”
Despite Conrad’s dry self-assessment, he appears to have cornered a market that no other business has yet dared to enter. Zenefits functions as both a technology vendor and an insurance broker, Dalgaard said. It unifies HR functions within the cloud and negotiates insurance coverage policies with provider companies. Zenefits profits from the broker side, receiving a commission from the providers with whom it connects its client companies. The technology is then offered to client companies for free.
It’s a good thing Dalgaard is around to brag about Zenefits and its CEO, because the thought of overstating his accomplishments doesn’t seem to have crossed Conrad’s mind.
“Honestly, my reaction is nervousness more than anything else,” said Conrad, 34, in his typical understated fashion. “I’m very excited about the company, but we’re not a huge success. We’re still a very promising business that’s on its way to doing something that’s hopefully impactful.”
That desire to make an impact is what sets Conrad apart. And it makes sense given his background. His dedication to his company is more than just good business. It’s the byproduct of challenges in his own life that have made his mission to improve HR a personal goal.
From Instigator to Facilitator
Conrad didn’t set out to revolutionize HR. He also didn’t set out to own a business. The New York native’s journey began when he enrolled as a chemistry major at Harvard University in 1998. But there wasn’t much chemistry.
Instead of balancing equations, Conrad spent 70-plus hours a week as the managing editor of The Harvard Crimson, the campus newspaper. A lack of commitment to his studies eventually led him to take a year off to work at a newspaper in Little Rock, Arkansas, where he came to an important realization: He didn’t want to be the next Hemingway.
Easing Worried Minds
Zenefits is responsible for managing sensitive personal informationincluding the Social Security and bank account numbers of its clients’ employees, according to Parker Conrad, Zenefits’ CEO. But before the data is collected and encrypted to bank-level standards, the following steps are taken to ensure the new hire is comfortable giving this information to an outside provider.
1. The hiring company often alerts its new employee to expect an offer letter through Zenefits.
2. Zenefits sends a congratulatory email to the new hire that refers to the new job and company by name.
3. After following the link to the Zenefits website, the employee is welcomed by name and provided with a list of key information about the company he or she is joining, including the company’s logo and the name of the worker’s contact at the hiring company.
4. The offer letter contains key employment details: salary, title, supervisor’s name and possible stock options. These details create a sense of security so the employee feels comfortable when prompted for a Social Security number and bank account information.
5. The HR managers at client companies have the option to send employees the link to Zenefits through their own email addresses.
“Everyone else wanted to write the great American novel and had great literary aspirations, which really wasn’t me,” he said. “I realized that what I enjoyed most about working at the Crimson was running this organization and planning how we were going to go out and take down the administration in this way and get this thing done. That’s how I realized that I wanted to start a business and run businesses.”
When his yearlong Arkansas sabbatical ended, Conrad returned to Harvard with a new sense of purpose. He hunkered down, graduated in 2003 and took a position across the country as a product manager at Los Angeles-area biotech company Amgen Inc. Soon after his move, Conrad, 23 at the time, was diagnosed with testicular cancer.
The diagnosis was a shock. But after six months of treatment, he made a full recovery. The ordeal forced him to consider the realities of adulthood that most people Conrad’s age blissfully ignore. Health insurance was now a top priority.
“Once you have something like [cancer], you get very focused on health insurance and how it works,” Conrad said. “It’s something that as a 23-year-old I might not have otherwise paid attention to.”
‘I came at it as someone who personally knew
very little about HR.’
—Parker Conrad, Zenefits
Conrad encountered that very scenario when he left Amgen in 2006 to start a financial services company with his former college roommate, Mike Sha.
Sha moved from Seattle, where he was working at Amazon.com Inc., and he and Conrad relocated just outside of San Francisco. Without intending to do so, they picked one of the few states in which insurance companies were obligated to cover any eligible client with a pre-existing condition. That assurance gave Conrad the confidence to exercise his entrepreneurial skills.
While Conrad was fortunate to acquire health coverage in California, the realization that others like him weren’t as lucky ignited his support for the growing possibility of health care reform legislation.
The Affordable Care Act, which was passed in March 2010, was in Conrad’s peripherals as he focused on his fledgling business.
Six months spent squatting in a retirement community apartment owned by Sha’s grandparents with only a pharmacy and a store called A Better Denture in the immediate vicinity was a motivator to open Wikinvest, an investment tracking software company, which launched in March 2007. That’s when Conrad’s frustration with HR began.
With 40 employees at its largest point, Conrad and Sha elected to handle the HR responsibilities.
The problem was the sheer number of systems of record that they were trying to manage. Any time an employee was hired, fired, got married, had kids or changed addresses, the information had to be updated across 12 different systems. While not intellectually demanding, it was a time-suck.
“I came at it as someone who personally knew very little about HR and even less about HR software,” Conrad said. “I was a small-business owner who was extremely frustrated. So I thought that if you could just connect all these systems and do it in one place, you’d free up HR to focus on people instead of paperwork.”
According to Tony Ray, an integration product manager at IQ Navigators, a service procurement company, Conrad’s frustration was typical. Cloud technology entered the market in 2005, he said. Since then technology companies have been developing software that allows previously independent aspects of HR to communicate and share information.
This inequity is especially detrimental for small businesses, Ray said. Large companies like IBM Corp. and Oracle Inc. have the time and money to try multiple products. Small companies can’t continually test-drive HR software and meet their business goals.
Recognizing that burgeoning cloud technology was a potential solution didn’t stand out on its own. The market is flooded with large and small vendors with various iterations of cloud-based software, Ray said. It was finding a way to benefit from health care legislation still on the horizon that gave Conrad the potential to dig deep into venture capitalists’ coffers.
Small businesses needed help if they were going to stay afloat amid health care reform. Conrad resigned as president of SigFig — the rebrand of Wikinvest — in July 2012. SigFig software developer Laks Srini came, too, and Zenefits launched in September 2012.
A Zen-like State
The name Zenefits is a play on words. Conrad wanted the experience of dealing with employee benefits to be easy, simple and Zen-like. And what better place to be Zen than in the cloud?
The pair’s first step was to lighten the physical load.
Zenefits looks to scale down the HR employee’s role in administrative processes.
“When you think about it, it’s all kind of crazy,” Conrad said. “As the employer you don’t know the employee’s bank account information or Social Security number. You’re making someone go to the employee and get all this information and type it in.”
Employers go to the Zenefits website, enter the employee’s name, start date, salary and department. Zenefits contacts the new employee before the worker’s first day, prompting the employee to provide information in a database that includes the worker’s offer letter (See “Easing Worried Minds,” P. 50). Based on that information, Zenefits generates documents and stores them online. If an employee’s information changes, he or she enters the updates without involving whoever handles HR.
Conrad’s compassion and “complete obsession” with HR are admirable character traits, but his investors are more interested in the validity of his business model. Dalgaard said by acting as both insurance broker and technology vendor, Conrad has found a niche.
“The company has a moat,” Dalgaard said. “It’s a visceral analogy meaning that no one can come in. In this case the moat is gigantic because he is doing two businesses and neither of the competitors in each of those individual businesses really wants to go after him.”
And here’s the kicker: It’s all free.
Zenefits acts as an insurance broker and makes its profits on commission from insurance carriers. Employers pay nothing. In doing so, he’s bridged a gap that neither the insurance or technology industries want to cross.
R. “Ray” Wang, principal analyst and founder of technology research firm Constellation Research Inc., sees potential in Zenefits. “The innovation is the business model. It’s highly scalable and a good model to service” small and medium-size businesses. “It also adds another revenue stream that creates differentiation against pure play payroll providers.”
While Wang recognizes Zenefits’ potential, he cautions that real success likely won’t come without an industry partner, such as Microsoft Dynamics Partners, to help push its services to larger businesses. Zenefits has made initial efforts by extending its client base beyond technology companies in California.
“There’s a lot of hype in the HR tech space, but there’s a lot of innovation,” Wang said. “Zenefits is poised to do well now that it’s done a better job of diversifying its client base. The key metric will be growth rates and size of companies that drive the average revenue per user.”
Conrad agrees that there is still a lot of work to be done before his company can be deemed a success: “I don’t feel successful yet, to be totally honest. We have a huge amount of work cut out for us.”
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