Zenefits went from a $4.5 billion valuation to massive layoffs in less than two years
By Sarah Kessler for Quartz
Two years ago, Zenefits was being called one of the fastest growing startups in Silicon Valley history. It was raising $500 million at a clip, and had a staggering $4.5 billion valuation.
This week, the company laid off 45% of its staff—about 430 people.
What happened in-between is an increasingly familiar story: In aiming to meet exceptionally high results promised to investors, Zenefits grew too quickly and made detrimental mistakes.
Zenefits makes a free human-resources dashboard for small businesses; it collects sales commissions from insurance companies when those businesses use that dashboard to purchase healthcare benefits. Recently it has also begun selling paid apps as subscription services.
After a promising start, Zenefits’ public down spiral started in late 2015, when Buzzfeed reported that it had been allowing unlicensed brokers to sell insurance in several states and, shortly thereafter, that it had created a software to help brokers cheat on state licensing programs.
The problems didn’t stop there: Zenefits enormous valuation was also increasingly disconnected from the feasibility of what it had offered investors. “Zenefits’ recklessness seems to have been merely the worst symptom of a larger sickness that infected the company,” notes one analysis that cited former employees and others who worked closely with the management team. “That sickness: Zenefits was a company consumed by impossible expectations. In return for fund-raising at a stratospheric value, [CEO Parker] Conrad promised the moon to investors.”
Conrad stepped down as CEO and left the board in February 2016. Later that month, Zenefits laid off 17% of its workforce, citing growth that stretched both “culture and controls.” The company sorted out its regulatory misstep and settled with investors; according to anonymous sources that spoke to the the New York Times, investors felt they had “overpaid for a piece of a company whose fast growth was built on false pretenses.” That settlement effectively lowered Zenefits’ valuation to $2 billion.
Conrad’s successor as CEO, David Sacks, was at the helm for less than a year; he stepped down in December. Jay Fulcher took over as CEO on Feb. 7.
In a letter to employees, Fulcher blamed Zenefits too-fast growth:
In 2015, Zenefits grew too quickly, hiring employees to support revenue projections that far surpass where we are today. Today’s action aligns our costs more closely to our business realities and gives us the runway we need to build the business properly for the long term.
A Zenefits spokesperson told Quartz that the layoffs had been in the works for months and that changes in the company’s operational efficiency and the evolution of its business model and product, which has become more automated, have allowed the company to cut back on staff.
There are more than 150 startups, like Zenefits, that private investors have valued at more than $1 billion, and some investors are concerned that many of these so-called unicorns won’t survive. Several of them are already struggling to meet unrealistic expectations, or suffering from unsustainable growth. Co-working company WeWork set out ambitious benchmarks to validate its ever-increasing valuation, but has reportedly pulled back projections. More dramatically, biotech startup Theranos lied about the capabilities of its technology, a revelation that sent its valuation plunging from $4.5 billion to nothing.
Falling valuations are becoming so commonplace that market intelligence firm CB Insights has set up a tracker for startups experiencing that fate. So far, it’s counted 105.
First appeared at Quartz