Zenefits Revenue, Valuation & Funding (2020)

hello everyone my guest today is Jay Fulcher he's the chairman and CEO at zenefits he brings more than 20 years of experience in leading both public and private technology companies to zenefits before the company Jay served as CEO of another company and agile software before that he was seen her executive at both PeopleSoft and sa P he's a member of the global leadership Global Leadership Council at the Lukas graduate school and College of Business at San Jose State University Jay are you ready to take us to the top let's go Nathan all right so you have fun stories to tell you know I want to kind of hop right in and then talk about where zenefits is today and where you and the organization is going on the future but first I've got to talk about something only you can talk about which is taking over a unicorn right amongst all kinds of different things your first week you're having to cut almost 50% of the company but still keep everyone motivated around and unite around a new vision what was that first week like back in 2017 yeah I mean it's not the way any CEO would want to kind of start to hear that's for sure but in in some ways it was kind of an exciting time right we were reimagining what we thought zenefits could really mean to the marketplace it did require really a resizing of the organization and a rethinking of a really our business strategy and one of the reasons why I was really attracted to the opportunity when you know the the partners at Andreessen Horowitz called me to see if I would be interested was the fact that you know the company had already accomplished so much and we had done some really really incredible things in terms of establishing some kind of land speed records for SAS company growth but what we hadn't yet done is we hadn't necessarily perfected our business model and really what we wanted to do with the company in terms of our value proposition and so you know it's not often when you have thousands of customers and plenty of cash with which to be able to kind of effect this pivot and to go in this new direction and so it was a hard first week but it was also one that basically was really the thing to kind of set the tone for where we are today in 2016 this was reported by CNBC the the annual corn Rebbe by the middle that that euros about sixty million down from obviously projections that Parker had raised on previously around a four billion dollar valuation their reports evaluation was cut in half and that you know there was about a hundred million loss the first six months in 2016 all that being said you know that at that time the company has basically on track to run out of cash by the end of 2017 let me ask you a question about VC a lot of times people will say when you raise venture capital it just you have to be on a different track than what you would rationally do because the nature of EC and timetables how much of managing and dreesen and other investors expectations how many how much resetting did you have to do in that first couple months on the job well first of all I'm really fortunate because we have very sophisticated investors who really understood the overall opportunity that the company was trying to pursue and quite frankly was able to kind of get over some of the crisis management work that the company obviously had to work through when we were kind of going through some of our compliance challenges I didn't really have to reset a lot of expectations instead what I basically tried to help everyone understand is that I felt like it was more important for us instead of being a broker of insurance we needed to kind of get back to our roots of being a technology company and we felt that by being a technology company we could actually instead of competing with brokers we could collaborate and cooperate with brokers in bringing a completely new paradigm new value proposition to small business where you could have HR Payroll and benefits products side by side on a single platform and do all of the things that I think zenefits now has become pretty broadly known for so it really didn't take a lot of rethinking with the Investment Group in general what we really tried to do was we tried to resize kind of the the cost of goods and the expense line for the business you know you talked about being out of cash in 2017 that's clearly not the case at this point we have actually several years of runway to go if we never raised another dime and we have you know sort of cash flow breakeven in our sights and so we've got we've got a lot of nice momentum now where the companies really reap imited itself in a very healthy way to be a sustainable long-term high growth business what or to the things you did to really control the cost of goods sold that's obviously what extended your runway significantly and now has put breakeven in your in your crosshairs yeah there's several things Nathan I think number one as you say we did in fact kind of right-size the company and so as hard as that was because these are employees that quite frankly did nothing wrong they were actually stellar performers they did great things for zenefits but we basically had to get to a better headcount perspective and part of that was not only in San Francisco but across the the three or four offices we have around the world so that when he's compete was as I said before um basically no longer being a broker and instead relying on third-party brokers to basically build their brokerage and advisory services on top of the zenefits platform that allowed me to take a lot of the headcount and a lot of the the focus and the organizational calories that are expended around insurance brokerage and instead shift that to these partners and it allowed us to retreat and kind of double down on being this tech platform I think those two things were substantial kind of resizing elements that allowed us basically to kind of be in a very different place from a cash Byrne perspective as well as making sure that you know the couple hundred million dollars that we had to work with was gonna really serve us over the course of the next several years Jay did you have to go through a period you know when you're pushing that insurance line of business off to now brokers doing it and building it themselves on top of your tech platform that sounds like that's what the refocus was but did you temporarily lose revenue as you push that revenue stream essentially onto somebody else to manage yeah you know the initial transition of what we call our book of business which was the insurance business that we had and that was a very large business at the time you know this is any quantify it yeah that's a you know a business that was coming up on 100 million dollars in revenue that was a substantial kind of transition as you shift that to third parties and so for some of the customers who potentially wanted to work with any and and whatever broker they wanted or if in fact they really prefer to work with zenefits as their brokerage gave them an opportunity to think about for the first time well what brokerage relationship do I really want and so there's some breakage that occurs in that kind of a transition which is exactly what we what we expected we were really excited in that not only in all of the modeling that we did in that process we actually lost a lot fewer customers that we sort of expected to but the most exciting part of this is that when we moved everyone off of our brokerage we also basically move from a freemium model where people got our software for free in exchange for the brokerage commissions that we that we received to a subscription pay model and you know the thing that was clearly a huge point of validation for me that I was excited about is more than 70% of our customers moved with us oh that's great now today are you pure-play SAS company with SAS like margins in the eighty-five percent range that's right we don't don't have margins in the eighty-five percent range and I know that in the past I've heard you say that you talk to a lot of companies that claim that I'm actually dubious about that but the reality is you think do you think do you think they're lying or not they're not putting cost in the right spot I think that I think that there is a lot of interpretation around cogs what do you put above the line well I think you know kind of rather than going through sort of an accounting tutorial I think it's more of a situation where there's a certain amount of fixed costs that are serger data at a floor we're sort of at the sixty five percent gross margin place right now today overtime by the way each incremental dollar I put on the top of that floor causes that 65% to start to get into the eighty-five percent range so I do believe that we have some targets that get us into the 80% plus gross margin range my view is I believe that we're sort of somewhere between 12 to 18 to potentially 24 months away from now not it argue though today a pure place ask company or are there other professional services kind of high-cost we're we're a pure play subscription software company and we're basically focused on HR Payroll and we think really importantly benefits so it's not a single platform and that's specifically focused on what we call SMB companies which are defined as sort of 1 to 500 employees got it and in that range I mean if an SM kind of company listening when I wants to sign up with you what are they gonna pay to get kind of a base layer and in month one yeah I mean it can be for really small companies that are maybe less than ten employees or less than 20 employees it can be as inexpensive as five dollars per employee per month on up to potentially fifty dollars per employee per month so you know our average contract value today is in the sort of four to five thousand dollar range a month but we a month well we have them per month or per year it depends on the size of the company but the the thing that we're pretty excited about is that we've got a we've got a fairly broad and deep set of capabilities across those three product areas that I mentioned and that really allows us to provide value to companies of all sizes and so on the one into the spectrum we might have somebody paying as ten or fifteen thousand dollars a year for what zenefits is managing across HR payroll and benefits in other cases we may have somebody paying us one hundred and fifty thousand dollars a year but on average we probably mostly have the the bulk of our contract values are somewhere between five and fifteen thousand dollars per year and I want to get into more kind of as a CEO how you're managing all the different cohort analysis not only do you have different custom cohorts you also have a bunch of different products that probably all have separate unit economics depending on where people get onboard it I want to talk about that a second but first tell us about the success here how many customers have you scaled to today yeah so what's really I think exciting for us is that we have basically around ten thousand customers these are customers that are in some cohort consuming some or all of our product line we've been able to as I said before we've been able to not only convert the customers that we have today but we've also been able to kind of expand the amount of dependence they have on our products for how they run their business today we're retaining more than ninety percent of our customers who have not annual contract with us okay so there's a little revenue retention that's logo and that's grocer net that's gross okay that's great and then on the on the negative net churn you know what's really cool for us is that obviously to the degree that we do churn some of our revenue and it's for us in the 15 to 20 percent range and by the way for SMB when you're talking with especially she's not mad that's we think that that's actually pretty much best-in-class but one of the things that we're excited about is because of the negative net churn with new products and new seats were more than making up for the amount of churn revenue we have every month what is exception look like we're really pleased with you know we got a we got a really really big customer base that's very very much rooting for zenefits they really like what we've done for them over the years I think they're really glad to see that we're back on track and I think that in general because we've been able to sort of stabilize the business here over the course last year now we're back to really growing the company pretty quickly I mean the SAS part of our business separate from the insurance business is right now growing a hundred percent year over year and we expect it to do the same this year what can you share what that's at today run reassure you know I know you've got CEOs all over the map around how they handle this do you listen up have you listened to episodes before I have nice J I'm excited I'm excited about that I'm a fan of your show now I'm not gonna go soft on you the rest of the interview though your your growth I mean ah that's good stuff um tell me though I am doing some sort of math here wrong if I take toes ten thousand customers times that four grand are put that puts you at forty million a month I know you're not there maybe in a couple years I know you're not there yet but where am I doing that math wrong well obviously first of all it's a bell curve right so you've got you've got customers at all different places in terms of how much revenue and how much revenue per customer the other the other part of it is that it's not all SAS some of its also a part of our brokerage business one of the things that we think is kind of unique about our insurance businesses that when we did move that to a third party we created a rev share vehicle over the course of several years now where we claim some of that revenue as though some of our partner fairly soon we're going to be announcing some additional new broker partners who will also be starting to build some of that capability on top of our platform which means it gives us an opportunity to sell more of our HR and payroll and benefits products to their customer bases conversely they're able to use you know some of the efficiency that we provide with our tech into their insurance book so it's a it's a very kind of a symbiotic relationship with the broker community we're excited about that but it's it's sort of in motion so some of what you're doing there is you're kind of conflating our SAS business with our insurance business and of course there's customers of all different sizes understood understood I won't try and pin you on a specific number but I am interested I mean when you look at the growth of the company in terms of run rate I mean do you think you break a hundred million this year or have you already broken that can you give me a big brain I think the best thing I can tell you nathan is the next imminent milestone that we're focused on is 100 million bucks great that's perfect I love that thanks for sharing that I appreciate it give me give me more give me more about the breakdown of the team today so obviously I did go through some restructuring a lot of that was tied to costs on supporting that insurance business what's the team size today and what's the breakdown look like yeah so we have about 500 employees and we probably have another 150 or so contractors around the world that are working with us we have a headquarters here in San Francisco and then we have a very large operation in Tempe Arizona if you're familiar with sort of the greater Phoenix area that's a hub for insurance and benefits companies and so we've we've loved being down there because it's been a great source of talent for us we also have a fairly large office now in Vancouver BC that's primarily an R&D office although it's now got some multifunctional parts and then we've got a large group of about 50 employees or so in Bangalore things so that's kind of the current mix we just opened a satellite office elsewhere here in the Bay Area to try to help with traffic issues and you know ease of of commute and that kind of thing this is interesting I think everybody's aware that you know the barre is struggling with with being a place that can kind of manage the needs of a young workforce and so we're Kanaan that and we've got some plans that I'm not really gonna divulge about some additional offices that we're about ready to open but that'll come between now and the end of the year love hearing that you said you've got breaks even in the crosshairs if you've got them to crosshairs and people really believe it that means you have an incredible amount of leverage one in terms of capital markets do you see a race happening in the near future for zenefits or or no you know I've never known a credible CEO at least that would say that they're not done raising money because you never know yeah you know one of the things that's really interesting in this day and age is that I think we're in a really frothy kind of M&A market and so you know we're constantly looking at companies and frankly we're constantly pitched with different companies that are looking for a home and so there could be some scenarios here where we would do some additional things that being said I've got a three year plan that doesn't require us to raise any additional capital and it frankly gets us not only to break-even but to gets us to profitability well before that three-year period and so we're excited about being more or less in control of our own financial destiny are you in more M&A talks right now with anybody in terms of zenefits exiting no we're not and I you know our company's not for sale it's we we're really excited about what we're doing you know as you gone Jay totally not first if Benioff comes and offers you 10x ARR you don't look at that oh we look at everything you ask me am I in a conversation with something right now I'm not and you know if you know something about my background you know that I've been relatively active and successful in monetizing companies over the years so you know for me my job is to make sure all the options are on the table whether we take the company public whether whether there's some other kind of a monetization event out there quite frankly like I said you know maybe I think you were the one that said it you know having the leverage to be able to make those choices as and when you want to is is basically the key for any entrepreneur huge it's you Jeff your space is interesting you know I'm preparing for this interview hollandaise was just on from I Sims right I mean he's built a bootstrap the Hearn a million dollar a our company doing basically one thing on on what you guys do then there's other companies like gussto that have raised a bunch but they're attacking you kind of from a different angle and it's funny I mean when you look up this space and you look at all the competition if you had I'm gonna make this up a billion dollars from our private equity firm you mean there's a lot of these companies you could roll up at essentially like point seven two point nine X ARR and basically if you thought you could buy and get leveraged across you know having all these assets under one thing you could do it I mean do you think like that or is it something you're considering or well I first of all I think that they're some segments of the private equity market or the private equity community that does think that way that that's actually been a fairly proven model for them in different enterprise sectors I think the HR space and I think I think you're well aware of this the HR space is an interesting one because it's so damn big it's just such a big opportunity I mean ninety nine point eight seven percent of all companies in the US have fewer than 500 employees so this is such a huge market globally this is about a ninety five billion dollar market and so for a lot of us we have sort of the luxury of being able to follow in the footsteps of companies that have come before us that are that are now pretty much incumbent companies that have built software maybe ten or fifteen years ago and in some cases unfortunately even longer ago than that and that really doesn't serve the needs of what I consider to be the sort of this new nature of work you know these are young companies that have only digital natives that are working in them they expect a product to work on a cell phone they expect mobility they expect products to be able to talk to one another seamless integration I mean you don't need the the commercial here but you know this ability for young businesses especially not to be distracted by all the administration of running a business is crucial and what is really cool a bit I think about what we're trying to go do is that we have this opportunity to not only do that with our own products but with a really neat ecosystem of partners that kind of extend our capabilities in ways that you know companies did not have prior to this and they certainly didn't have with the likes of ADP or any of the pay comes Paylocity z-- no the companies that have been at this for a long time in the last five years we've made a lot of progress here and we've driven and built our software with what I consider to be sort of the latest and greatest technology capability that lets these young companies focus on driving their businesses Jay let's wrap up here with the famous five number one what's your favorite business book yes of my favorite book this is a hard one cuz I love I love all of them I love so many of them but I might Mike my friend Ben Horowitz wrote the hard thing about hard things and that is a phenomenal book for any entrepreneur that's listening if you've not not only read it but then begun to dog hear it and and frankly use it as a reference point I really recommend you do that number two Jay is there a CEO you're following or studying right now so I had the luxury of reporting to both Dave Duffield at PeopleSoft and ha so plot nerd s ap and that just means I'm really old but it also means that I got to see these guys up close and personal so I learned so much from those guys but the guy that right now I think is really blazing a trail for what I consider to be sort of next generation CEO thinking as Marc Benioff I think Marc's done a great job around being a socially responsible company I think he's done a great job around the one-one-one model I love what what he means around the whole diversity and inclusion ethic and then lastly you know he built a platform business in a SAS context when people kind of made fun in them for doing it and now look at all of us we're all wanting to build a business like that that's exactly what we're doing here at zenefits number three besides your own with your favorite online tool for building your business well you know zenefits is my number one but I really like slack you know we extend our our solution where people don't actually need to leave slack in order to be able to fire off transactions and zenefits I think that's really cool and I think slack is just a really good collaboration tool I like Alexa we're actually using voice recognition products for actually utilizing and leveraging HR capability I mean there's a lot of online tools but I think lack and and some of these voice products are cool examples and number four J how many hours is he very getting every night III get you know I have a very good friend of mine in the last couple of years who I've spent a lot of time with Arianna Huffington and so I've learned a lot about sleep and the importance of sleep and I will tell you as a younger guy I did a crappy job of getting enough sort of restorative rest to be able to be as good as I need to be but yeah I get eight hours and and I'm pretty religious about it that's good and what's a situation married single you have kiddos way married four kids way married for kids in Howard Raj I'm 56 56 last question what he was your 20 year old self knew I wished that I wished I would have known that I could go slower in order to go faster I wish that I could have been a little more introspective you know one of the things that entrepreneurs asked me a lot of times when I'm speaking is you know what's the one thing that you would really have me focus on in order for me to you know kind of realize all my dreams and I think self-awareness not self absorption but self-awareness is such a critical thing for people to focus on spend time with and really delve into because the better you know yourself the better you can work with other people and that's what makes everything go go slower to go faster you heard a year from Jay had a lot of courage to jump into zenefits back in 2017 first week he's right sizing the business he's changing the cost structure completely a combination of those two things has put breakeven in profitability in his crosshairs the next big milestone they're gone for is 100 million bucks an AR are now soaring over 10,000 customers and in a market that's really a 95 billion dollar plus market ninety percent annual logo retention that's gross that's a gross number in addition about 15 to 15 to 20 percent gross revenue churn annually but net negative once you add expansion back onto that team of 500 people based between San Fran Arizona Vancouver Bangalore and a few other locations Enif it's HR Jay thank you for taking us to the top thanks Nathan