Zenefits is growing so fast that it has to onboard new employees in bulk: 150 at a time, once per month. Since the San Francisco software startup’s mission is to simplify the busy work of human resources tasks like payroll and benefits, it has avoided hiring its own head of HR, relying on its own software to get workers up and running.
But earlier this year, Zenefits outgrew its own software, which is designed for companies with fewer than 1,000 employees. At just two years old, Zenefits now has has just over 1,000 employees. (It hired a head of HR when it hit 800.) The hypergrowth is particularly notable for a startup in a category that even CEO Partner Conrad admits is “tremendously unsexy.”
Today, Zenefits takes a big step to continue its hypergrowth. Zenefits has raised $500 million in Series C funding, valuing it at $4.5 billion. That valuation represents a 9x jump over its last round of funding, which happened just one year ago.
Fidelity Management and TPG led the funding round, with participation from Founders Fund, Khosla Ventures, Insight Venture Partners, and Sound Ventures, the investment firm of Ashton Kutcher. Existing investors Andreessen Horowitz, Institutional Venture Partners, and actor Jared Leto participated. Zenefits noted that this round represents Andreessen Horowitz’s largest ever deal.
Zenefits has amassed 10,000 customers, who use its human resources software for free. Zenefits acts as a middle man, taking a commission when it connects companies with third party vendors like health insurance providers or payroll services companies. In March, the company closed more new business than it had in the entire existence of the company, Conrad says. The company expects to book an annual recurring revenue, an accounting term used by software companies like Zenefits, of $100 million this year, up from $20 million last year.
The money will be used to continue that growth. “If we want to hit equally eye-popping numbers in 2016 and 2017, we really need this much capital to do it,” Conrad says.
“We could always grow slower,” he continues. “If we wanted to grow less quickly, we would need less capital, but we think this is right thing to do and our metrics suggest the return on investment would be very high.”
The company plans to use the new capital to hire even more employees to help Zenefits acquire new customers and provide support to them. Zenefits believes it can serve many of the five million American businesses which have fewer than 1000 employees. (A comparable company, Workday (WDAY), provides enterprise-level HR software for larger companies.)
Zenefits’ early growth has ruffled some feathers along the way. Last year, the state of Utah banned the company from operating in its state, on the grounds that giving away software for free acted as an illegal rebate. (Zenefits itself is a licensed insurance broker.) At the time, Zenefits CEO Parker Conrad said the ban was “kind of bullshit,” and “blatant overreaching where the regulator is trying to protect brokers from competition.”
Last month, Utah reversed that ban. Since then, Zenefits has taken a softer approach toward entering new states, Conrad says. His team has been proactively reaching out to Departments of Insurance in states across the U.S. to show them the value Zenefits’ software brings to small businesses. “Once we show them a demo, they get it,” he says. Further, Conrad believes the small business owners that use Zenefits have enough lobbying power to help the company avoid future regulatory fights.
