SAN FRANCISCO — Zenefits, the fastest-growing software startup in recent memory, announced Wednesday a $500 million funding round, setting up the tech firm for more dramatic expansion and the potential upheaval of the health insurance broker market.
The Series C funding puts Zenefits’ market valuation at $4.5 billion, a sum that is nine times the company’s valuation at the middle of last year when it had raised $84 million. It also marks the largest private or public financing round for a software-as-a-service company since October 2012, when Workday, another human resource software provider, had an initial public offering. Pleasanton-based Workday raised $637 million in that IPO, also at a $4.5 billion valuation.
Since launching slightly more than two years ago, the company has earned the awe of venture capitalists and the ire of insurance brokers whose profession has been threatened by the work of Zenefits co-founder and Chief Executive Parker Conrad, a scrappy journalist-turned-entrepreneur with a Harvard degree. The company has morphed from a three-person startup into an army of more than 1,000 and counting — its revenue growth outpacing that of many valley software giants — by upending the health insurance industry.
“The company is growing faster than any software business that we’ve seen,” said Jules Maltz, a partner at Institutional Venture Partners, a Zenefits investor in the Series B funding. “The potential market opportunity for the company is so large that it could be an enormous public company at some point.”
The San Francisco startup makes software to help small- and medium-size businesses manage human resource tasks, such as benefits, stock options, maternity leave and payroll. But it also acts as a health insurance broker, working as the middleman between businesses and health care providers such as Anthem Blue Cross. Zenefits then makes money by earning a commission or broker fee, which also allows it to give away the software for free. This business model — one experts say no one else has tried successfully — has allowed the company to grow so quickly.
Zenefits has more than 10,000 customers, up from 2,000 at the end of last year, and is on pace for $100 million in annual sales by early next year. Zenefits closed more new business in the month of March than it did in the first 15 months of the company’s life.
Conrad said the company is aiming to sell its software to each of the 5 million businesses in the U.S. that employ two to 1,000 people.
“We want to continue growing really fast and there are places we want to get to,” Conrad said. “So we need a lot of gasoline so we had to make a pretty big pit stop to fill up the tanks.”
The funding round — which was bumped up from Zenefits’ initial target — includes Founders Fund, Khosla Ventures, Insight Venture Partners, and Ashton Kutcher’s and Guy Oseary’s Sound Ventures. Andreessen Horowitz made its third investment into the company, and institutional investors Fidelity and TPG also joined.
Zenefits has a broker license in every state, although its customers are spread across just 48, and it continues to face backlash from some state insurance commissioners and the insurance broker industry. Until recently, Zenefits’ most fierce opposition had come from Utah, where the state insurance commissioner banned the company. But in April, the governor signed a law giving Zenefits the green light to operate there.
“Zenefits isn’t doing anything that violates any state laws,” Maltz said. “Anytime you have disruption you’re going to have people fight back, just like traditional taxi drivers … and hotels are fighting against Uber and Airbnb. That dynamic exists with Zenefits.”
Contact Heather Somerville at 510-208-6413. Follow her at Twitter.com/heathersomervil.
