The a16z Show - a16z Podcast: How One Startup Went from Being Banned by Regulators to Being Open for Business

Episode Date: April 24, 2015

When (now) two-year-old startup Zenefits was banned in Utah because it offered its HR management software for free, CEO and co-founder Parker Conrad felt upset, anxious, and scared. Especially because it was a B2B company with a much smaller supporter base: "If you're Uber or Lyft, then you have this built-in constituency using the service and millions of people to complain and go to the mat for you... But man, we make HR software. That's totally unsexy. No one's even going to pay attention to this,” he says. In this episode of the a16z Podcast, Conrad shares how Zenefits went from being banned to the state reversing the ban. As the state governor stated, "Utah is open for business... There are always going to be innovators and disruptors as technology accelerates business growth and we believe government needs to be able to work with these innovators to ensure strong and efficient economic policies and an open marketplace.” Of course, this is just the beginning... ––– The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments and certain publicly traded cryptocurrencies/ digital assets for which the issuer has not provided permission for a16z to disclose publicly) is available at https://a16z.com/investments/. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information. Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The content here is for informational purposes only, should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. So hi, guys. I'm Sonal Choxy. I'm from A16Z editorial. I'm here with Parker, Conrad, from Xenifitz. And Zenefits recently went through a couple of regulatory issues in Utah, and we thought it'd be interesting to hear their perspective and also what other startups might be able to take away from that experience. So Parker, do you want to just kind of give us a really quick summary of like what went down?

Yeah, so basically what happened is a Zenefits service that sort of helps companies manage all of their HR in sort of one place. So a lot of different specific individual functions like payroll and medical insurance and commuter benefits and time and attendance software and FSAs and things like that all through one central system and a law online so that you don't have to spend a lot of time running around betting people up in all these different places. And one of the sort of interesting wrinkle in our business model is that we give the core system way for free and we make money in a variety of different ways, but one of them is that we act as a broker on companies' lines of health

insurance. And in most states, you know, the regulators have said, well, you know, this isn't really, this doesn't look like the kind of thing that we should be getting involved in. and they've taken no action. But in Utah, the insurance commissioner in Utah decided to take action and said that listen to one of their missions as a DOI was to make sure that there was fair competition, brokers in the state, and everyone was on a level playing field. And they said that Zennifitz's technology actually gave us an unfair advantage in competing for these clients because we made it so easy for companies to get up and running with insurance

that it was unfair to other brokers. And so they said that we had to start charging for our service, or they were going to start levying some really big fines on Zanifis. You obviously were probably frustrated and struggling with hearing all that when you started off, but you ended up with a very successful outcome. Like, how did you guys actually get there? Well, so we were kind of going back and forth with the DOI for blew up. And then, you know, we thought maybe we were going to work it out, that, you know, they weren't

really going to sort of do this. It didn't make any sense. and then, you know, they kind of like issue as a preview of their decision. And, I mean, I felt like I'd been punched in the gut because, you know, in starting a company like this, I feel like, you know, I understood sort of like sales and I understood stuff like that. But this was just like a real, you know, something completely out of left field where suddenly there's that's like government agency that's like, you know,

telling us we're not allowed to operate and, you know, we're quite a bit bigger now. But at the time, we were really, you know, a small startup. You know, it didn't seem like we were doing anything wrong or anything illegal. You know, and so it was quite upsetting or create quite a lot of anxiety at first. And actually quite a bit of fear because I thought about it as like, gosh, if you're Uber or Lyft, and like everyone, you know, just like millions of people who want to sort of complain and go to the map for you and say, this is ridiculous that, but, you know, man, we make HR software. That's totally unsexy.

there's like no one, like everyone's eyes are going to glaze over, like no one's even going to pay attention to this. They're just these natural constituencies for consumer technology companies because there are so many consumers that are using their service. But for like a B-to-B SaaS company like us, where we're selling the businesses, there are just fewer constituents that are customers of ours who want the service to be available. And so I was like, uh-oh, you know, maybe we're going to be in really big trouble here because, you know, we're not going to be able to kind of get this done. So by constituencies, you mean, like, people that would actually be able to speak up for your product. I mean, not to make it literal, but obviously a lot of people, like in Congress, a lot of people use Lyft and Uber. So if they're not getting access, they're personally inconvenience. And so is that what you mean by a constituency base?

Yeah. Yeah. We were like, who's it's like, you know, like our consumer base in measure of number, in terms of number of people is much, much, much smaller. And the cause seems like superficially much less sexy because it's HR software instead of, you know, Uber, which is. you know, sort of, you know, much more in the public eye, at least at the time. But one of the things that was really great is, you know, we kind of like went to the mat, and we sort of, you know, started telling people who try to access the service that Utah was blocking us and, you know, created, you know, a change.org petition about this issue that

went straight to, like, the governor and the governor's chief of staff and the lieutenant governor and the insurance commissioner and stuff like that. And suddenly there was just this, like, overwhelming response from lots and lots of people in the tech community, but also just lots and lots of customers that came out of the woodwork and said, gosh, like, we really love benefits, you know, we use the software. We had one customer that was a nonprofit. She said they were a nonprofit that used benefits to help underprivileged kids apply to college. And she said, switching the benefits, help them save $300 a month over, you know, sort of who they were using previously. And because of that, they were going to be able to send two more kids to college this

year. And so there were a lot of, like, you know, interesting stories like that where it was like, gosh, from like a political and like a policy perspective, you know, we're able to say, listen, I understand that brokers are an important constituency for some, for a lot of politicians in the state. In fact, some of the politicians actually are brokers themselves. But there's another side of this argument, which is that benefits is able to make life easier and sort of ease the administrative burdens for, you know, millions of small businesses. And that makes a difference, too. You know, and that has to be, those sort of impacts have to be weighed against the fact that insurance brokers are losing out and are upset.

I think there were a lot of people, you know, the governor, the lieutenant governor, and, you know, some critical folks in the state legislature, this is not what Utah is all about. There were a lot of people that led a state representative named John Notwell, you know, who kind of said, this is, you know, a bad thing for Utah. We need to change this. And so he introduced a bill, like almost immediately. I forget what the technical term is, but he basically, before there was even a language for a bill, he sort of like said, listen, I want to, you know, he kind of reserved a spot for a bill that would. And technically what the bill did, Bill did is I think it actually didn't change the law. what it did is it clarified that the existing Utah law never made benefits of legal in the first place.

So it was a clarification rather than a change of the law, but he sort of announced his intention to do that almost immediately. You know, the lieutenant governor and the governor reached out to us and said they were, you know, incredibly supportive. And there was a state center named Kirk Bramble who was supportive as well. And then, you know, we worked with those constituents to sort of get this bill passed. You know, then it was, you know, we had, you know, some folks that we hired to kind of help us out or plead our case to, you know, all the various different legislators. And luckily for us, it got passed with sort of overwhelming support.

So, okay, so I think the bigger picture question is that, you know, it feels like there's like a definite shift in how states have to start thinking about reform and regulation around new technologies. I mean, how did that sort of play into your views of how things played out? Well, you know, I think what happens is, you know, anyone who's trying to build a technology company, almost anyone is going to run up against some kind of incumbent out there in the world who's going to be upset about sort of the ground. I think, you know, if you are growing really from regulators or the one of the challenges is that, you know, there are always more entrenched constituencies for the existing way of doing things than there. There are, for some of the great things about Utah, is that there is a sort of really nascent and budding tech community there.

And Utah cares a lot about, you know, trying to develop Salt Lake City as a tech hub. You know, they talk about Silicon Slopes and sort of all of the companies that are out there. And I think a lot of folks, you know, the guy named Clint Betts from Beehive startups and Josh James from Domo and previously from Amateur, who, you know, are really strong and influential members of that community who kind of rallied a lot of those folks, but also sort of reached out to politicians and said, hey, guys, like, you know, you guys are talking all the time about how you want to sort of nurture this sort of pro-tech environment in Utah.

This is like a great example of a real failure of doing that. And you can't kind of have it both ways. You can't say, listen, you know, we want there to be lots of successful technology companies in Utah, but only as long as they don't tread on the toes of any of these other entrenched interests or any of the existing companies in existing markets out there. Because that's just not the way it works. I think if you're a state out there that, you know, is trying to develop, you know, tech jobs and technology industry,

the best thing that you can do is to sort of shield technology companies from, you know, from attacks by incumbents. You know, we're going to try and have, I think in general it's probably a good idea to have, you know, only the regulation that's really needed. for consumer protection, and if there isn't a real reason from a consumer protection perspective to have regulation, then gosh, like, it's probably getting in someone's way somewhere who's trying to do something innovative. So, yeah, so, you know, Parker, so what does this mean that you're done? You don't have to worry

about this anymore? And what about other companies who are confronting similar issues with different technologies? Like, how do, what would you tell them to do? I mean, what would you do differently, if at all? I think what I probably would have done differently in the case of Utah is I probably would have, I wish I had realized earlier in the process that we were in sort of a political battle rather than a legal battle with the Department of Insurance. It took us a lot longer than it should to sort of reach outside of the ordinary channels. You know, we were getting an inquiry. We were sending our response. We were getting on the phone with the investigator to go through a demo.

And, you know, we thought we were sort of like following the process. and really what we should have been doing much earlier on was, you know, trying to hire someone who could help us get to the people that were much, much, much more senior in the state government so that we could sort of plead our case with them and say, hey, here's what's going on. You know, because I think some of the folks, like, on the ground level were a lot more subject to influence by sort of, and it wasn't really until we sort of broke out of that. And we're talking with, you know, the much more senior. folks in the state that they were like, hey, listen, this is not how we want to do business.

Did you change the information that you presented to them? Like, were you still doing demos, or were you just telling them a bigger story? Or were you doing the exact same thing with the different audience? It wasn't like we were telling them something different. But, I mean, we were probably trying to cast it in sort of much broader terms and broader language about Utah and technology and sort of economic development. While it's like with the insurance investigator, you know, we were talking much more about the specifics of like how our product actually worked. So at the end of the day, it probably was a good thing for us because like the amount of press coverage that we got, like in Utah, this was a really big deal. And the amount of press coverage that we got there, you know, now that we're back in the state, we've got tons of companies that are, you know, really interested in like hearing more about the service.

The other thing that we started doing, you know, very early on in sort of when we were sort of having trouble with Utah is we started reaching out proactively. to all of the insurance departments for every state around the country. And so we're actually meeting with them at an EIC, which is the National Association of Insurance Commissioners. They have meetings twice a year. So we go there for each of those meetings, and we have a room and try and set up meetings to sort of do. We're doing that twice a year.

We're communicating, you know, like sending people a lot of information about benefits and saying, hey, listen, we're here to answer any questions about our service. here's what we do. And that's probably helped us head off issues in other states. I'm sure that Utah will not be like the last crisis we have like this. But, you know, if you can get out in front of this stuff, you can probably sort of reduce the number that you encounter. So let's talk about some more takeaways for other startups who are going through the same kind of things. Like what would you have told Parker a year ago? And when you're in a political battle, a legal dispute, and if you have a political battle, you want to sort of very quickly move outside of, you know,

just the sort of regular legal framework with this. You want to try and figure out a way to get access to the sort of decision makers and the powers that be at a much more senior level so that you can plead your case to them. I think you want to identify, you know, who are your constituencies, who are the people that are going to support you? For us, we thought, like, gosh, there are going to be no constituencies. There are going to be supporting benefits because, like, it's HR software and no one cares. But that actually wasn't true. I mean, there were really, there were three constituencies that we had that were all extremely helpful.

And one constituency was the startup community and the technology community in Utah itself. And so there were a bunch of folks that were extremely helpful to us and really cared. You know, this was, you know, I think in part because a lot of them saw that, you know, gosh, maybe someday, If they were successful, you know, someone is going to be trying to ban them. Our clients. And, you know, as a BDB SaaS company, there are just fewer people that are clients than there are for, like, a lot of consumer companies. Right. But as it turns out, I think a lot of the people, like small business owners in our case, like, tend to be politically very well connected.

If you're a governor who cares about the technology economic engine of your state, you would care about nurturing that small and medium-sized community for sure. Exactly. You know, in Utah who have, you know, if you have a company that has, you know, 15. or 100 employees, like, that's a pretty big deal. You know, you probably know your local state representative, and he or she's going to pick up the phone when you give them a call. And so, you know, that was actually, the customers were small and number, but incredibly influential. And the third one in our case was actually a lot of sort of conservative political organizations. There were a lot of, you know, conservative think tanks that were very much supportive of

benefit. You know, Utah is obviously a very conservative state politically. And so to have conservative think tanks saying, you know, man, Utah really got this one wrong. You know, what's going on here? How are you guys going to fix this? I think that was, particularly for the folks in the government that were predisposed to agree with that, they kind of said, yeah, gosh, you know, we've got to, we've got to turn this around. This is not what we do in Utah. The great thing about this whole thing is it does feel like, you know, I've met, I mean, I feel like I really know a bunch of people in Utah now. And so it's been really fun, you know, as part of this whole process, I went and spoke at a Utah tech event and, you know, really got sort of,

I thought, a front row seat at what's going on in Utah with technology was quite exciting. Met a lot of the key players there. So also, so, you know, in Utah specifically got to meet sort of all the folks in the technology industry and also got to meet some of the state legislators and, you know, learn a bit about their jobs and what they were up to, and that was a lot of fun. But then also, you know, more nationally, it sort of put us in a position where we're, talking to insurance regulators and all these different states and really sort of establishing a relationship early on with them by having a conversation up front about what we do and why we think

that some people might complain, but this is, you know, very much within the law and very much a good thing from a public policy perspective. And so, you know where to reach us. You know, please give us a call so that we can talk through it with you. Well, thank you, Parker. Really appreciate you taking the time and talk to us about this today. And congratulations, by the way. We're really, we love what you guys are doing. We're huge family. Okay, cool. Great. Thank you very much. Bye. Take care.