Zenefits provides small businesses with free outsourced management of employee benefits, payroll processing, and other human resources. The service, from YC W13, is completely free because it earns commissions from insurance companies. Insurance reform provisions of the Affordable Care Act (“ObamaCare”) take effect at the beginning of 2014. Many employers must also provide employee insurance starting in 2015. Therefore, Zenefits could be on the verge of explosive growth. The company may also represent a disruptive change in how back office services are monetized.
Explosive growth is possible for Zenefits because of two factors: 1) how the company makes money, and 2) deadlines imposed by changes to public policy. Every employer that signs up with Zenefits potentially results in income from both referral of a new group insurance policy as well as each employee added to that policy. So a company signing up with ten employees is eleven commissions. Since one new company with 10 employees means eleven commissions, and 10 such companies would be 110 commissions, the revenue gets very big very fast. Deadlines imposed by the Affordable Care Act then serve as a free catalyst to drive new customers to Zenefits. The effect on income is the mythical hockey stick growth.
My math, however, ignores competition. Certainly, there are plenty of other insurance brokers seeking a share of the likely rush by companies to get the tax credits and avoid tax penalties of employer-provided insurance coverage tax provisions. And that’s where it seems the result might be some altogether disruptive innovation in how back office services are monetized. In late April, Zenefits added full-featured payroll processing to its core service of managing benefits packages. The payroll processing includes 100% paperless handling of disclosures, withholdings, stock option vesting, and even templates for letters like offers of employment. Giving away entire feature sets like that for free may become necessary for companies like Zenefits to remain competitive.
Zenefits just raised more than 2 million dollars from a strategic set of investors. Those investors include Venrock Capital and Aaron Levie. Venrock Capital invests only in healthcare-related startups. Its investment in Zenefits was led by Bob Kocher, M.D., who previously served in the Obama administration as Special Assistant to the President for Healthcare. Dr. Kocher was also one of the shapers of the Affordable Care Act. Aaron Levie is the co-founder of Box, the “secure cloud content management and collaboration” platform that specializes in solutions for businesses. Box previously acquired Crocodoc, a document-management company funded by Y Combinator in YC W10.
The rate of companies seeking new group insurance policies will increase dramatically as we approach both the beginning of 2014 and also beginning of 2015. The Affordable Care Act is a form of economic interventionism that rarely occurs in the United States. As a startup at the ground level of these changes, Zenefits has the potential to profit hugely.