Why Zen99 Shut Down (Part 2)

Considering Alternatives and Pivots

In Part 1, I discussed some of the problems we faced with our particular mix of product and market. This led to various questions: are we just too early? Is it an awareness problem, and we need to buy users? Should we try an iteration of the product?

Working in regulated spaces

The insurance and finance spaces are very regulated and difficult to work in. For example, there are often both federal and state level laws with which to comply.

In many cases, this means great opportunities for those who are willing to push through it. But it can also have significant implications on your product that prevent you from building the company you want. For example, wouldn’t it be great if we could pool individual contractors together to provide group discounts on health insurance? Indeed it would, but the Affordable Care Act made this illegal starting in 2014 (see Freelancers Union shutting down their insurance product).

We also explored recreating the W-2 experience, by acting as an intermediary to help automatically save for taxes, retirement, and other items. But intermediary tools like these fall under money transmitter laws, which are some of the most stringent laws out there. Proper compliance is expensive (several million for initial licensing, then ongoing annual costs at both the state and federal level). There are some ways around them, but you still face other issues with significant product implications (like an outdated financial system; e.g. required periods for seasoning funds, the slow ACH system).

In both cases, regulations meant we couldn’t build the products we wanted. Don’t get me wrong: startups should challenge existing regulations, and I think there is a ton of opportunity if you do it properly. But they should challenge the right regulations. Startups thrive in the gray areas or by pursuing something others don’t yet see: like on-demand companies using contractors, or Zenefits selling insurance while providing other value add services. There’s a difference between those opportunities and violating laws that have established case precedent, with penalties that could lead to millions of dollars in fines and personal jail time (e.g. money transmitter laws).

We considered many other ideas, both in and out of the contractor space. Ultimately though, our investors had invested in a team and product, and it didn’t seem fair to continue if those were going to change.

The seed stage is for experimenting

Many forget that we were a seed stage company; we started Y Combinator in Summer 2014 with a hypothesis, an idea, and zero lines of code.

We knew contract labor was rising, that many were first time contractors, and that most people wouldn’t be able to figure it out on their own. We put out a product quickly to test that hypothesis and determine if there was a good market opportunity.

Unfortunately, we found that contract workers are not very inclined to save for taxes or protect themselves with insurance. For the most part, this wasn’t due to them blatantly skirting laws. Instead, it was due to unintentional ignorance, generally being overwhelmed and having other priorities, or simply not being able to pay their tax or insurance balances. Combined with Intuit aggressively going after the space and executing well, the market wasn’t as appealing as we first thought, and iterations on the product would still be subject to the same challenges.

I think some of our longer term hypotheses will eventually be correct. For example: that benefits that are traditionally tied to a job (e.g. health insurance) will instead be tied to the individual. The Bureau of Labor Statistics found that workers between 25–34 are spending an average of three years at each job whereas their parents’ generation spent 10.4 years on average at each job. Switching your 401k and health insurer that frequently is going to be a massive headache. Contractors already have these aspects of their work decentralized from the companies they work with, but maybe a better opportunity is in helping decentralize it for employees.

Did Zen99 just take the easy route out?

Nothing about closing down a company is easy; anyone who tells you otherwise is lying or hasn’t done it themselves.

Remember that there’s a difference between being steadfast and stubborn. For every entrepreneurial story where the success is attributed to the founders being steadfast through hard times, there are probably five failures that were due to founders being stubborn or scared about making a hard decision. This is a prime example of survivorship bias, where we attribute success to traits that survivors exhibit, even if there was no causation by those traits. If we assume most entrepreneurs are steadfast, then the successful ones must instead be those who were able to take a step back and properly assess opportunities and weaknesses.

Ultimately, shutting down was the right thing to do, and sometimes the right thing is hard. I wasn’t willing to burn through another 6–12 months of capital to avoid being decisive about a hard choice. Peter Thiel says you should treat people like you’re going to see them again in the future. Opportunities will come and go, but good relationships are what allow you to go after them.

How to shut down your startup

In the next post, I’ll go into what we did well once we decided to shut down the company. Follow me on Twitter if you want to be notified!

Update: Read Part 3: How to Shut Down Your Startup

Special thanks to Kent Goldman of Upside Partnership for his help on this post.