“Do not use the stairwells to smoke, drink, eat or have sex.”
That was what Emily Agin, Zenefit’s director of workplace services, told staff members in an e-mail.
8th of February, 2016, was when then-CEO and co-founder, Parker Conrad resigned amid a plethora of concerns regarding Zenefits’s rollercoaster-like growth. Zenefits was deep in legal problems; their insurance brokers were discovered to have been using a secret software—known as a macro—to help them cheat on California’s online broker license course.
As it turns out, it was the company that actually created it for them.
Touted as the “most unsexy company in tech”, Zenefits sells software that automates health insurance, payroll, and other H.R. functions for small businesses. Just a year after they were founded in 2013, they saw $1m in revenue, which reached $20m in late 2014. They projected $100m annual recurring revenue by late 2015 and that was the catnip.
Exponential growth. Scalable product. Enterprise tech. In Silicon Valley, that’s fucking sexy even if the company creates something seemingly boring, which resulted in them raising half a billion dollars in 2015 from the likes of Andreessen Horowitz, Kholsa Ventures and Insight Partners.
With a valuation of $4.5bn at that point in time, Zenefits’s headcount began to skyrocket. There were 1600 employees later that year and multiple offices around the country.
It was the envy of many other Valley-based startups—after all, the cult of hypergrowth, of which Zenefits was a leading exemplar, was something that many founders and investors were deep in.
Raise money to burn more money, and then raise more money because you’re burning too much money.
Growth is great. Mismanagement is not.
Imagine having to pay for someone to manage your employees’ health insurance, only to find out that because of their clumsiness, your employees have to go for stretches of time without health insurance.
“It became apparent that maybe their brokers didn’t know as much as they should,” said John Arroyo, the founder, and CEO of Arroyo Labs, who used Zenefits as their health insurance broker. Fall came and Arroyo had to submit to a random audit by his insurance carrier.
“It became apparent that maybe their brokers didn’t know as much as they should,” said John Arroyo, the founder, and CEO of Arroyo Labs.
“A week or two later, I got a letter saying I wasn’t compliant, and our insurance had been canceled,” he said.
‘It must have gotten lost somewhere’ was the reply from Zenefits, to which Arroyo canceled their service in December. The HR software giant juggernaut faced a whole slew of embarrassments and investigations in that year, which BuzzFeed News eagerly covered.
While we all known technology is prone to breaking down with bugs and all, most of the errors came from the administration, like charging for an employee that has left the company or having too little CSOs to manage customer issues.
Then came the legal scrutiny.
In the heavily-regulated industry of insurance brokerage, Zenefits knowingly brokered the sale of insurance without a license and allowed their unlicensed sales reps to do so.
That year, the insurance commissioner of Washington began investigating the company for such foul play.
Unsurprisingly, it came to light that 83% of the insurance policies sold or serviced by the company through August 2015 were sales made by unlicensed employees. SEC made history in 2017 when they slapped Zenefits with a fine—the first of its kind. Zenefits had to pay $430k fine to the SEC. Then Conrad had to pay a $533k fine to the SEC even after he left in 2016. Zenefits also had to pay over $11m to state regulators.
The financials were slow too: Zenefits missed their sales targets. Mutual fund giant Fidelity marked down the value of its stake by 48%. Expenses were curbed, according to the Wall Street Journal.
With the claws of legalities on their backs, what was exposed was the fraternity-like, alcohol-riddled culture at the company.
According to BuzzFeed News, Zenefits employees were “regulars at Scottsdale clubs like Bottled Blonde”. Sales were celebrated with shots of whiskey and top performers were given bottles of champagne.
David O. Sacks, who took over Conrad after as chief executive, soon admonished his employees in an internal memo. No more drinks at the company’s San Fransisco headquarters. No more makeshift love nests in the office stairwells.
“Cigarettes, plastic cups filled with beer, and several used condoms were found in the stairwell,” Agin said in her internal memo. “Yes, you read that right.”
Then came enormous layoffs: Sacks soon sacked 250 employees days after his internal memo. Then, 106 employees left in June.
Today, they are left with about 500.
When Jay Fulcher took over after Conrad left, Zenefits still boasted a 1,100-strong workforce. After laying off nearly half of the company’s workforce, Fulcher began to strategize.
What sort of culture will Fulcher create?
The unfettered growth of Zenefits is a tale of how hypergrowth can destroy a startup. Loads of articles out there proclaim that hypergrowth can be a curse if mismanaged but the advice given is usually the same: have a plan, have a strategy, don’t manage too closely, trust your team (though this Entrepreneur article is pretty good).
“It’s really important to recognize that growth at all cost or at any cost is not a good idea,” said Fulcher in an interview with San Fransisco Chronicle, “…managing growth and being smart and responsible about it is really a critical thing, especially for explosively high-growth companies.”
“It’s really important to recognise that growth at all cost or at any cost is not a good idea.”—Jay Fulcher, CEO of Zenefits, 2019, SF Chronicle
Silicon Valley loves the story of a fast-growing startup who raised millions of dollars to grow—wait, it’s not making a profit? No worries, Uber isn’t either. So is Lyft. Pinterest too. And Slack. Grab. In Singapore, homegrown startup Honestbee has been under fire for closing services and suffering huge losses.
In the startup world, the traditional profit-first, IPO-later has long disappeared into thin air. Today, ‘losses’ has become normalized. It is okay to be on the ‘path of profitability’. Get on Techcrunch and you’ll be good.
Build With a Floor
At a very high level of abstraction, we can recognize companies as buildings. Every profit is brick. Money is like cement. Earn more and you get to build higher, reaching for the skies, regardless of whether your process of doing that is opaque or transparent. Private companies are generally mostly opaque, which was why Zenefits suffered when the SEC eagle came with claws ready to catch.
Here’s the problem: the cult of hypergrowth in Silicon Valley is not wrong either.
It is a culture, and it is something to be respected. Growing fast is no easy feat. It takes a different type of genius to build a startup that can balloon into 1600 employees in 3 years. Not many people have that sort of gut to run a startup with that sort of expansion rate either.
While a contentious issue, Zenefits did build without a clear, controlled culture. That’s why avarice and lust pulled through. That’s also why the fraternity culture became the norm.
Why else would they celebrate big sales by having 300 of their employees down a shot of whiskey each?
Startup culture is so insanely important that it is correlated to revenue and growth. The importance of great employee experience cannot be understated for startups: when the culture of a startup simply sucks, employees leave.
Sure, the benefits are great. Working for a startup is cool. Awesome salary. When the novelty effect of these tangible effects wears off, brand and employee engagement are the only things that can make them stay.
Without a foundation, startups can fall apart quickly, especially with the multigenerational workforce today. A lot of Millennials are going to leave their jobs next year. A lot more Gen Zers are going to leave their jobs next year.
However, not everyone is good at building culture, especially when it was not set from day 1; it can become a mess to start formalizing a culture when the company has already grown to a substantial size.
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However, it is still imperative that leaders dig deep into culture-building and center it around important values.
By driving those values into every single course of action in the company, it will be easier for new employees to ease into, especially if those values are built upon empathy.
There is a wealth of information out there for your employees to take in: is another company doing better? Are they rated badly on Glassdoor? Are they in the news for anything awful?
Although Zenefits is still hiring today, leaders still need to understand that the repercussions are big for culture-less companies. Having no culture scares employees, and soon leaders lose control and grant total autonomy to the employees.
While not a picture of post-apocalyptic anarchy, businesses who are unable to build a culture and have employees embrace it are businesses who lose out on engagement and growth. Hidden costs can balloon and HR challenges are always piling up every year.
No Culture, No Yoghurt
Whoever at the top is usually the one who brings everything together. Like a script supervisor, he/she ensures that there is continuity, that leaders at the bottom are doing their best to keep the culture up.
Having 2–3 employees working hard together does not equate to culture. Yet, that is where the company needs to drive culture much deeper before it grows to 200. Even a company at a stage of 500–1000 employees can also start building culture if they haven’t: it takes time, but it can be done.
Newsflash, employees are humans.
Millennials and Gen Zers have high standards for the jobs they are in and Gen X and Gen Y leaders need to stop complaining about how they are ‘unappreciative and ungrateful’ about their rice bowls. This is the reality: their needs are sophisticated and you have to adapt fast. If you’re into growth in perpetuity, the current generation of workers will get you going in no time.
So, employees are humans. What does that mean? Matthew Lieberman, author of Social: Why Our Brains Are Wired to Connect and neuroscientist, says that humans need social connection and we’re hardwired for it. Humans are hardwired for connection.
Get curious about your employees, no matter how tough it gets.
Ignoring and neglecting your team is a surefire way to start having your turnover rates go up. Maybe there’s some kind of generation gap going on that prevents connection. Maybe it is about the employee him/herself. Maybe it is the entire company at fault. Regardless of what is the reason, businesses need to instill curiosity into the DNA of their leaders: and the best way to do is through having a human-centric culture.
- Trust your employees wholeheartedly. Trust them entirely and give them your full support. Be genuine with it, and employees will recognize it. Focus on the wealth of opportunities than the small number of losses that you might make (you live a lot happier).
- Connect with them. Be friends, or if not, get curious. What do they do outside of the office? Who are they actually? What’s their identity? What are their values and traits? Okay, maybe he’s unapproachable, maybe she’s cold, but sincerity always pulls through. Don’t act like you care, actually start caring as if they are human beings.
- Autonomy is king. Yes, you’re a manager, but many employees would love to say fuck off to their employers when they become surveillance cameras. Newsflash: it’s 2019, not 1984. You’re not Big Brother. Give some autonomy, cut some slack. They will give you value if you let them create value on their own.
- If autonomy is king, then management is queen. Both needs to come together for this. Autonomy is great, but it can become anarchy. You’re the leader but you’re not the hard carry, you’re the support. Build a support system. Let them come into your office for help. Ping them if they need assistance. Ask them if they need more resources.
- Are they frequently absent? Stop suspecting them, start being curious. Why? Are they sick? Do they have other reasons? Understand that their success is predicated on multiple factors in which you have no control of. Be empathetic and kind. Be a leader before you’re a manager.
- Do they know what they are doing? Not in the literal sense, but are there reasons propelling their actions? So what if I write one article? So what if I close one deal? How is this meaningful? You drive the meaning: involve them in the business planning and have them feel personally connected to the organizations’ success. You may be the leader, but a ship does not sail with one person in it.
- Do you take bullshit? Or are you forgiving within reason? Take a stance, what kind of leader are you? Empathetic leaders are great, but it’s still a business (or your job). You need to know when to draw the line.
Focus on the human part of employees. When you do that, you liberate yourself from the title of manager/director or whatever leadership title you hold and become a true leader. Culture is extremely important, and it starts at the top. If you’re a junior or middle-level manager, your job is to create a culture in your department and communicate with the senior-level managers.
While Zenefits is a cautionary tale for many startups, with the right culture and leadership, even the craziest of growth trajectories can be managed.