SaaS Interviews with CEOs, Startups, Founders
1095 His First Move at Zenefits? 450 Laid Off. Now Eyeing Profitability and $100m in ARR
24 Jul 2018
Chapter 1: What is the main topic discussed in this episode?
This is the Top Entrepreneurs Podcast, where founders share how they started their companies and got filthy rich or crash and burn. Each episode features revenue numbers, customer counts, and other insider information that creates business news headlines. We went from a couple of hundred thousand dollars to 2.7 million.
I had no money when I started the company.
It was $160 million, which is the size of many IPOs. We're a bit strapped. We have like 22,000 customers. With over 5 million downloads in a very short amount of time, major outlets like Inc. are calling us the fastest growing business show on iTunes. I'm your host, Nathan Latka, and here's today's episode.
Chapter 2: What challenges did Jay face during his first week at Zenefits?
Hello, everyone. My guest today is Jay Fulcher. He's the chairman and CEO at Zenefits. He brings more than 20 years of experience in leading both public and private technology companies to Zenefits. Before the company, Jay served as CEO of another company, Anagile Software. Before that, he was senior executive at both PeopleSoft and SAP.
He's a member of the Global Leadership Council at the Lucas Graduate School and College of Business at San Jose State University. Jay, are you ready to take us to the top?
Let's go, Nathan.
All right, so you have fun stories to tell.
Chapter 3: How did Zenefits' revenue and valuation change over time?
You know, I want to kind of hop right in and then talk about where Zenefits is today and where you and the organization is going on the future. But first, I've got to talk about something only you can talk about, which is taking over a unicorn, right, amongst all kinds of different things.
Your first week, you're having to cut almost 50% of the company, but still keep everyone motivated around and unite around a new vision. What was that first week like back in 2017?
Yeah, I mean, it's not the way any CEO would want to kind of start their tenure, that's for sure. But in some ways, it was kind of an exciting time, right? We were reimagining what we thought Zenevitz could really mean to the marketplace. It did require really a resizing of the organization and a rethinking of really our business strategy.
And one of the reasons why I was really attracted to the opportunity when You know, the partners at Andreas and Horowitz called me to see if I would be interested was the fact that, you know, the company had already accomplished so much. And we had already done some really, really incredible things in terms of establishing some kind of land speed records for SaaS company growth.
But what we hadn't yet done is we hadn't necessarily perfected our business model and really what we wanted to do with the company in terms of our value proposition. And so it's not often when you have thousands of customers and plenty of cash with which to be able to kind of affect this pivot and to go in this new direction.
And so it was a hard first week, but it was also one that basically was really the thing to kind of set the tone for where we are today.
In 2016, this was reported by CNBC, the annual recurring revenue by the middle of that year was about $60 million, down from obviously projections that Parker had raised on previously around a $4 billion valuation. Their reports valuation was cut in half and that, you know, there was about $100 million lost the first six months in 2016. All that being said, you know, that...
At that time, the company was basically on track to run out of cash by the end of 2017. Let me ask you a question about VC. A lot of times people will say when you raise venture capital, you have to be on a different track than what you would rationally do because of the nature of VC and timetables.
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Chapter 4: What strategies did Jay implement to manage investor expectations?
How much of managing Andreessen and other investors' expectations, how much resetting did you have to do in that first couple months on the job?
Well, first of all, I'm really fortunate because we have very sophisticated investors who really understood the overall opportunity that the company was trying to pursue. And quite frankly, was able to kind of get over some of the crisis management work that the company obviously had to work through when we were kind of going through some of our compliance challenges.
I didn't really have to reset a lot of expectations. Instead, what I basically tried to help everyone understand is that I felt like it was more important for us, instead of being a broker of insurance, we needed to kind of get back to our roots of being a technology company.
And we felt that by being a technology company, we could actually, instead of competing with brokers, we could collaborate and cooperate with brokers in bringing a completely new paradigm, new value proposition to small business, where you could have HR payroll and benefits products
side by side on a single platform and do all of the things that I think Zenevitz now has become pretty broadly known for. So it really didn't take a lot of rethinking with the investment group. In general, what we really tried to do was we tried to resize kind of the cost of goods and the expense line for the business. You know, you talked about being out of cash in 2017.
That's clearly not the case at this point. We have actually several years of runway to go if we never raised another dime. And we have, you know, sort of cash flow break even in our sites. And so we've got we've got a lot of nice momentum now where the company's really repivoted itself in a very healthy way to be a sustainable, long term, high growth business.
What were one of the or two of the things you did to really control the cost of goods sold? That's obviously what extended your runway significantly and now has put break even in your in your crosshairs.
Yeah, there's several things, Nathan. I think number one, as you say, we did in fact kind of right-size the company. And so as hard as that was, because these are employees that quite frankly did nothing wrong. They were actually stellar performers. They did great things for Zenefits. But we basically had to get to a better headcount perspective.
And part of that was not only in San Francisco, but across the three or four offices we have around the world. So that was one piece. The second piece was, as I said before, basically no longer being a broker and instead relying on third party brokers to basically build their brokerage and advisory services on top of the Zenefits platform.
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Chapter 5: How did Zenefits pivot from being an insurance broker to a tech platform?
I think those two things were substantial kind of resizing elements that allowed us basically to kind of be in a very different place from a cash burn perspective as well as making sure that ā The couple hundred million dollars that we had to work with was going to really serve us over the course of the next several years.
Jay, did you have to go through a period, you know, when you're pushing that insurance line of business off to now brokers doing it and building it themselves on top of your tech platform? That sounds like that's what the refocus was. But did you temporarily lose revenue as you push that revenue stream essentially onto somebody else to manage?
Yeah, the initial transition of what we call our book of business, which was the insurance business that we had, and that was a very large business at the time. Can you quantify it? Yeah, that's a business that was coming up on $100 million in revenue. That was a substantial kind of transition as you shift that to third parties.
And so for some of the customers who potentially wanted to work with any and whatever broker they wanted, or if, in fact, they really preferred to work with Zenevitz as their broker, it
gave them an opportunity to think about for the first time well what brokerage relationship do i really want and so there's some breakage that occurs in that kind of a transition which is exactly what we what we expected we were really excited that not only in all of the modeling that we did in that process um we actually lost a lot fewer customers than we sort of expected to but the most exciting part of this is that when we moved uh everyone um off of our brokerage
We also basically moved from a freemium model where people got our software for free in exchange for the brokerage commissions that we received to a subscription pay model. And, you know, the thing that was clearly a huge point of validation for me that I was excited about is more than 70 percent of our customers moved with us.
Oh, that's great. Now, today, are you pure play SaaS company with SaaS like margins in the 85 percent range?
That's right, we don't have margins in the 85% range, and I know that in the past I've heard you say that you talk to a lot of companies that claim that. I'm actually dubious about that, but the reality is that- Do you think they're lying?
They're not putting costs in the right spot?
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Chapter 6: What steps did Zenefits take to control costs and extend runway?
It depends on the size of the company. But the thing that we're pretty excited about is that we've got a ā We've got a fairly broad and deep set of capabilities across those three product areas that I mentioned. And that really allows us to provide value to companies of all sizes.
And so on the one end of the spectrum, we might have somebody paying us $10,000 or $15,000 a year for what Zenefits is managing across HR, payroll, and benefits. In other cases, we may have somebody paying us $150,000 a year. But on average, we probably mostly have the bulk of our contract values are somewhere between five and fifteen thousand dollars per year.
And I want to get into more kind of as a CEO, how you're managing all the different cohort analysis. Not only do you have different customer cohorts, you also have a bunch of different products that probably all have separate unit economics, depending on where people get onboarded. I want to talk about that in a second. But first, tell us about the success here.
How many customers have you scaled to today?
Yeah, so what's really, I think, exciting for us is that we have basically around 10,000 customers. These are customers that are in some cohort consuming some or all of our product line. We've been able to, as I said before, we've been able to not only convert the customers that we have today, but we've also been able to kind of expand that.
the amount of dependence that they have on our products for how they run their business. Today we're retaining more than 90% of our customers who have an annual contract with us.
Okay, and that's logo or revenue retention?
That's logo.
And that's gross or net?
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Chapter 7: How has Zenefits achieved customer retention and growth?
I'm not going to go soft on you the rest of the interview, though.
I understand that. I would expect nothing less.
100% year over year growth. I mean, that's good stuff. Tell me though, I am doing some sort of math here wrong. If I take those 10,000 customers times that four grand ARPU, that puts you at 40 million a month. I know you're not there. Maybe in a couple of years. I know you're not there yet, but where am I doing that math wrong?
Well, obviously, first of all, it's a bell curve, right? So you've got customers at all different places in terms of how much revenue and how much revenue per customer. The other part of it is that it's not all SaaS. Some of it's also a part of our brokerage business.
One of the things that we think is kind of unique about our insurance business is that when we did move that to a third party, we created a rev share vehicle over the course of several years now. where we claim some of that revenue as does some of our partner.
Fairly soon, we're gonna be announcing some additional new broker partners who will also be starting to build some of that capability on top of our platform, which means it gives us an opportunity to sell more of our HR and payroll and benefits products to their customer bases. Conversely, they're able to use some of the efficiency that we provide with our tech into their insurance book.
So it's a very kind of a symbiotic relationship with the broker community. We're excited about that, but it's sort of in motion. So some of what you're doing there is you're kind of conflating our SaaS business with our insurance business. And of course, there's customers of all different sizes.
Understood, understood. I won't try and pin you down on a specific number, but I am interested. I mean, when you look at the growth of the company in terms of run rate, I mean, do you think you'd break 100 million this year or have you already broken that? Can you give me a big range?
I think the best thing I can tell you, Nathan, is the next... imminent milestone that we're focused on is a hundred million bucks.
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Chapter 8: What is Zenefits' current financial outlook and future goals?
If you're familiar with sort of the greater Phoenix area that's a hub for insurance and benefits companies. And so we've loved being down there because it's been a great source of talent for us. We also have a fairly large office now in Vancouver, BC. That's primarily an R&D office, although it's now got some multifunctional parts.
And then we've got a large group of about 50 employees or so in Bangalore. So that's kind of the current mix. We just opened a satellite office elsewhere here in the Bay Area to try to help with traffic issues and ease of commute and that kind of thing. This is interesting.
I think everybody's aware that the Bay Area is struggling with being a place that can kind of manage the needs of a young workforce. And so we're working on that. And we've got some plans that I'm not really going to divulge about some additional offices that we're about ready to open. But That'll come between now and the end of the year.
Love hearing that. You said you've got breakeven in the crosshairs. If you've got them in the crosshairs and people really believe it, that means you have an incredible amount of leverage when it comes to capital markets. Do you see a raise happening in the near future for Zenefits or no?
You know, I've never known a credible CEO, at least, that would say that they're not done raising money because you never know. You know, one of the things that's really interesting in this day and age is that I think we're in a really frothy kind of M&A market. And so, you know, we're constantly looking at companies and
Frankly, we're constantly pitched with different companies that are looking for a home. And so there could be some scenarios here where we would do some additional things. That being said, I've got a three year plan that doesn't require us to raise any additional capital. And that frankly gets us not only to break even, but to gets us to profitability well before that three year period.
And so we're excited about being more or less in control of our own financial destiny.
Are you in M&A talks right now with anybody in terms of Zenefits exiting?
Uh, no, we're not. And I, I, you know, our company's not for sale. It's, uh, we, we're really excited about what we're doing.
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