December 5, 2016

Is Zenefits Losing Its Second CEO to Trump?

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Tags: News

Just 10 short months after replacing their first disastrous CEO, Zenefits’ second CEO, David Sacks, is on his way out the door. According to reports from this weekend, Sacks plans to step into a chairman position and open the search for his replacement.

Since its Y-combinator incubation in 2013, Zenefits has bewitched and bewildered the startup world. While executing one of the fastest growth strategies in modern history, they also became a cautionary tale for how not to run a company.

Zenefits built a product that perfectly addressed a prominent need in the market — the need for free HR software and benefits brokerage services. They took on massive investments from Andreessen Horowitz, Fidelity, and other firms. They accepted a revenue goal 20 times larger than their first year’s profits and grew their team 25-fold to hit it, scaling beyond scalability. Then CEO Parker Conrad — a 34-year-old Harvard grad — was still personally approving benefits changes and vacation requests for over 1,000 employees . . . because of reasons.

More money came in. More sales reps. More outlandish revenue goals. Then the compliance issues surfaced. Technically, they weren’t supposed to be brokering insurance deals without the appropriate state licenses. Technically, most of the deals they signed were illegal. But Conrad continued to pressure his team, instituting a vacation ban and targeting larger companies in hopes of achieving their $100 million recurring revenue goal.  

Like an overflowing trash bin that everyone was too busy to address, office culture festered. With a motto so glib as “Ready. Fire. Aim,” it’s not hard to imagine why. Won’t go into detail here, but you can check out this Vanity Fair article to read more.  

In short, Conrad was forced to step down this February under the weight of impending litigation and the culpability of his leadership decisions. Sacks, then chief operating officer, was forced to step up in order to “guide the company through the crisis.”

Sacks believes his work reviving the company . . . is mostly finished.

Why is he now leaving? Speculation varies. Sacks believes his work reviving the company after its period of scandal, bad press, and devaluation is mostly finished. That’s true, to an extent. Under his leadership, Zenefits resolved their issues with the California Department of Insurance (CDI), reset their mission and values, worked out a new (more realistic) valuation with investors, and even launched a major update of their platform.

But an anonymous source says Sacks has talked, of all things, about joining President-elect Donald Trump’s transition team. Sacks is close friends with Peter Thiel, a renowned tech investor and PayPal co-founder who joined the transition team last month.

That’s a surprise, but not weird, if you know Sacks. Although generally discreet about his political stances, he’s never conformed to the “progressive” mold that Silicon Valley imposes on young executives. In 1999 Sacks co-authored a book called The Diversity Myth that critiqued political intolerance and multiculturalism on college campuses. You may also know his production of the 2005 political lobbying satire, Thank You For Smoking (again with Thiel).

Political ambitions aside, the real question is whether or not Zenefits is stable enough to bring in a third chief executive and move forward without further melodrama. In a company memo sent out on Friday, Sacks wrote:

“We’ve achieved every goal set forth in my Day 1 memo, which outlined the turn-around plan for this company . . . I am extremely proud of the work that we did together to address crises facing the company and turn the corner towards a better future.”

A sanguine ending note for a company that earned $43 million, lost over $200 million, and laid off hundreds of employees last fiscal year. But growing pains hurt, and the faster you grow, the worse the pain. Even though Zenefits is worth less than half of its bombastic valuation from 2015, it’s in a much better place as a company and as a product.

The new platform, Z2, provides an all-in-one solution for small business HR, featuring redesigned dashboards, a powerful search function, built-in payroll, enterprise integrations, a new benefits process, and other cool stuff.

The company’s new motto? “Operate With Integrity.”