Zenefits Is An HR “Rocket Ship” — But Some Customers Get Left Behind

It's one of the fastest-growing business software companies of all time. But a number of its small business customers tell a story that shows the risks of astronomical growth.

So, @Zenefits looks extremely promising. Too bad it doesn't work - won't import employees, shows no plan options, freezes up, etc.

Mike Hawkins' four-month health insurance nightmare began in November, when he started doing business with a Silicon Valley startup called Zenefits.

Hawkins, the founder and CEO of Netizen, a cybersecurity startup in Allentown, Pennsylvania, had heard good things about Zenefits, a health insurance broker that offers free human resources software as a lure for small businesses. Launched in 2013, the San Francisco–based Zenefits is one of the fastest-growing and most talked-about startups of the moment, with more than 10,000 companies using its services, a valuation of $4.5 billion, and a roster of powerful investors.

But for Hawkins, 33, who became a software engineer after serving in the Army, Zenefits was instead a source of one headache after another. A process he thought would take about a month instead dragged on into March, when Hawkins finally gave up.

One of his employees, Max Harris, 37, the chief business development officer, wanted an allergist's opinion about what was ailing his 4-year-old daughter, Caley, who had been getting sick with respiratory infections whenever the seasons changed. Harris, a former Army intelligence specialist and Arabic linguist who served in Iraq, hadn't had health insurance since leaving a job in a Wegmans deli to join Netizen in early 2014.

Finally, in late February this year, with coverage supposed to start days later, Zenefits informed Hawkins that it had made a significant mistake, attempting to enroll his employees with an insurance provider that didn't cover the company's region. The insurance wouldn't come through as planned.

"I'm done being patient with you people," Hawkins told Zenefits in an email that he shared with BuzzFeed News. "This is why no one likes Silicon Valley — companies like yours apparently have your heads up your asses. You're growing beyond your means and you'll be bankrupt within a year."

If you think @zenefits is awesome because it's pretty, it's taken me 3 months of struggle because "our system messed up" #stillnocoverage

Thanks to @Zenefits I was unknowingly w/o health insurance for a month. Tried emailing @parkerconrad to complain, got no reply. Disrecommend

As it rapidly matures into a Silicon Valley giant, vacuuming up customers and burning through a mountain of venture capital, Zenefits has also racked up a number of customer complaints, over issues like software glitches and human error. More than a dozen customers who were interviewed for this article — a small but angry subset of the company's book of business — said Zenefits turned the HR process into an expensive nightmare. In several cases employees like Harris, who had put their trust in Zenefits, were left without health insurance for a month or more after they had expected it.

According to Zenefits, which is led by CEO and co-founder Parker Conrad, these service failures are rare, and not reflective of the experience of most customers. The company says it keeps 99.2% of its customers every month.

"Zenefits' customer satisfaction (as measured by net promoter score) is exceptional for a software-as-a-service company, especially one with 10,000-plus customers," Kenneth Baer, a Zenefits spokesperson, told BuzzFeed News in a statement. "It's also true that we sometimes make mistakes. This is the exception to the rule, and happens less and less frequently with each passing month. But when we do make a mistake, we work hard to correct it as quickly as possible, and make things right for our clients."

Zenefits claims it has grown more quickly than any other company delivering business software over the internet; it acquired those 10,000-plus customers and hired more than 500 employees in under two years, according to its website.

And unlike other richly valued startups like Uber and Airbnb, whose products are largely luxury items, Zenefits makes much of its money trading in a service that is essential to people's lives. So when Zenefits breaks, or when it makes a mistake, or even when it takes a particularly long time to fulfill a customer's request, the consequences can be serious.

Zenefits’s success and rapid expansion can be partly attributed to the industry it is disrupting. The majority of the insurance brokers who serve businesses are deeply — almost defiantly — old-fashioned, using their powers of persuasion and tolerance for tedium to convince insurance providers to give their clients a good deal. It's a business overflowing with forms and spreadsheets that companies resent having to fill out. Many insurance brokers are local, independent outfits. A few, like Digital Insurance, a subsidiary of Fidelity National Financial, or Wells Fargo, which has an insurance brokerage arm, are major corporations.

The insurance brokerage business is extremely lucrative. After selling insurance policies, brokers are paid commissions by the insurance companies every month, in perpetuity, even if they do nothing. Zenefits has become a broker itself, collecting around 5% of its customers' monthly insurance premiums, in line with the industry standard.

This predictable stream of revenue has made Zenefits very popular among investors. The monthly payments cause Zenefits’s financial statements to resemble those of startups that sell software over the internet on a subscription basis (a widely used business model known as "software as a service"). Except in Zenefits’s case, the software is free. That tempts customers to use it to organize their employee benefits and payroll, which in turn often encourages them to buy insurance through Zenefits. And the payments from the insurance companies keep flowing in.

"It's a genius business model," said Jonathan Marcus, the CEO and founder of Goodsie, a New York–based startup that provides e-commerce software to businesses, and which is a Zenefits customer. "I'm very jealous I didn't think of it."

The early success of the business model has some of the world's best venture capitalists enthralled with the prospects for Zenefits. Andreessen Horowitz, which has been an investor in success stories like Facebook, Twitter, and Airbnb, now has more of its money invested in Zenefits than in any other company. (Andreessen Horowitz is an investor in BuzzFeed.)

From the beginning, Zenefits took an aggressive approach to entering the market and defending its turf. In fall 2013, just months after Zenefits launched, Conrad, the CEO, learned that a group of investors who had provided seed financing to Zenefits had also backed SimplyInsured, a rival insurance broker that used a similar business model. Zenefits and SimplyInsured had been peers in the prestigious Silicon Valley incubator Y Combinator, completing the program together in early 2013.

Conrad, concerned about a possible conflict, told the investors that he planned to return their money, according to people briefed on the matter and emails obtained by BuzzFeed News. While such a stance wouldn't be surprising for regulating later-stage investments, some experts said it was an unusual way to handle investments made at the seed stage, when a company's place in the marketplace isn't yet established.

The investors, opting to stick with Zenefits, instead sold their stake in SimplyInsured, people briefed on the matter said. Zenefits went on to raise a Series A round led by Andreessen Horowitz. SimplyInsured, focusing more narrowly on health insurance and courting smaller companies, has been left in the dust.

Zenefits is now a juggernaut, raising $500 million of venture capital in May to fuel its expansion. After opening an office in Scottsdale, Arizona, it recently signed a lease on an office in nearby Tempe, which will soon house hundreds of new employees. Late last year, in a sign of its clout, the company hired David Sacks, a founder of Yammer and a former PayPal executive, to be its chief operating officer.

"Just managing something that's growing this fast, it's kind of like building the rocket ship in mid-flight," Sacks said in a recent Zenefits promotional video. "That's an incredibly challenging thing to do."

Switching to @zenefits has been a nightmare. Bad service. Inept systems. Put my employees benefits in jeopardy with a series of missteps.

@Zenefits We don’t have an HR manager.

Setting up health insurance for a small company is a complicated process, with plenty of potential for error, regardless of who the broker is. Brokers, both old-school and new, make mistakes, sometimes forcing employees to go without health insurance for months. "It's kind of like buying a house," said Jessica Miller-Merrell, a human resources expert and blogger who advises tech companies on their HR. "You have a mountain of paperwork you have to complete and sign. If you miss a particular paper, it delays the process."

Zenefits's heavy emphasis on software, Miller-Merrell added, introduces additional risks. "When you use technology to automate the process," she said, "mistakes are likely going to be made. And they're probably big ones."

The Zenefits spokesperson argued that the company's technology actually lowers the potential for mistakes, because it is less reliant on humans.

Many customers interviewed for this article declined to speak on the record; since many of them were startup companies based in Silicon Valley, they were fearful of angering powerful friends of Zenefits, like Andreessen Horowitz or Y Combinator. But their stories showed how even small failures of the Zenefits "rocket ship" can be disastrous for its customers.

When setting up health insurance coverage, Zenefits can be prone to seemingly careless errors, several customers said — like premiums being charged for an employee who had left a company, or a current employee being incorrectly cut off from health insurance.

Several startup executives said administrative errors by Zenefits caused employees to go without health insurance while they were being resolved. In one case, a startup executive said they paid out of pocket for an employee's prescriptions during a month that the employee went without coverage.

Zenefits declined to comment on these examples. Without knowledge of the customers' identities, representatives said they could not determine whether the errors were the fault of Zenefits, an insurance company, or the customer.

Part of the problem may come down to resources. While many Zenefits customers have dedicated account managers, companies with fewer than 25 employees generally don't have one after their initial setup period. "We can't afford to have one person for every two-person company; we wouldn't be in business," a senior Zenefits executive, who spoke only on the condition of anonymity, told BuzzFeed News.

Many of the unhappy customers said it seemed to them like Zenefits was growing too quickly to adequately resolve their issues. Several described a churn of customer service representatives — they would start working with one Zenefits representative, and then learn that person had been either fired or promoted to a different job.

"Everybody I talked to got promoted within two weeks, it seemed like," said Hawkins, the Netizen CEO. Marcus, the CEO of the New York–based startup Goodsie, said, "The contacts we had are no longer there."

Zenefits very well "could end up being revolutionary," said Adam Beck, a health insurance professor at the American College, in Bryn Mawr, Pennsylvania. But he said Zenefits would have to find a way to balance its reliance on technology with a personal touch.

"There is very much a human element in many aspects of insurance, really outside property and casualty," Beck said. "You do need more human interaction, just because the nature of the financial product is inherently more personal."

3 more random people showed up on our benefits charges this week. This is absolutely insane! What's going on @zenefits??!???

@parkerconrad Our company recently switched to @zenefits and have had a terrible experience with the process. Please contact asap.

Some customers were willing to forgive missteps by Zenefits, especially when they related to software bugs — an issue that any fast-growing technology company has to deal with. But bugs in Zenefits software, which create problems when customers try to perform daily tasks, can be particularly aggravating.

Michael Schneider, a 34-year-old serial entrepreneur in Los Angeles, signed up for Zenefits in June after starting a company called Service, which aims to resolve customer complaints relating to any company. "Overall, I love the idea of Zenefits," Schneider said. "I hate paper, and I hate bullshit, and Zenefits seems to be a really efficient play to solve all those issues."

Schneider wanted to use Zenefits to pay a couple of contractors, but he was stymied when the software wouldn't verify Service's bank account. "They finally acknowledged it as a bug," Schneider said. The senior Zenefits executive said the bug stemmed from a software glitch known as a race condition, which prevented the system from verifying test deposits. Before the issue was fixed, however, Schneider used PayPal to pay his contractors on schedule, incurring almost $300 in fees. He said he was led to believe the fees would be reimbursed by Zenefits.

He never received the reimbursement, though he says he is now a happy customer. The senior Zenefits executive dismissed the notion that Schneider would be paid back, drawing this analogy: "It's like saying there was something I encountered, like a technical snafu or a bug, at Amazon, and so I bought the product at Best Buy for a higher price, and then I came back to Amazon and said, 'I want you to refund me the difference in cost.'"

Since Zenefits relies on insurance companies, some problems are out of the company’s hands. For Marcus, of Goodsie, the process of enrolling in health care for his small company last year was painfully slow, with insurance cards failing to arrive until late in September, the month that coverage was supposed to begin. Zenefits says this delay stemmed from the insurance company, which took a particularly long time.

But Marcus, who switched to Zenefits after becoming fed up with a local insurance broker, also had complaints with Zenefits itself. Despite the free software, he said, he didn't feel the process was much more automated than his previous experience. When an employee recently applied for coverage, for example, Marcus assumed the employee's status would be reflected in the Zenefits software. But Marcus only learned the coverage had been approved, he said, when he happened to call Zenefits to inquire about it.

"I thought there would be a change in the process, but there wasn't really," Marcus told BuzzFeed News. "There's just a lot of manual paperwork required by Zenefits, the same way that would be required by any broker."

"So I'm left scratching my head," Marcus added. "What are they doing to earn the monthly commission they earn off of us? The answer, as a 10-person company, is nothing, really." Marcus remains a Zenefits customer.

A number of Zenefits customers have complained about their problems through Twitter, including Netizen, the cybersecurity startup in Pennsylvania. Hawkins, the Netizen CEO, said in a tweet in late November that he wasn't able to get his employees set up with insurance. He soon got an email from Matt Epstein, Zenefits's vice president of marketing, who said a gap in a Zenefits database meant Netizen wouldn't have immediate access to price quotes.

"It looks like we have live quotes for your company zip code, but not your employee zip code," Epstein said in the email. "This happens very rarely, but unfortunately happened to you."

With the automated process having fallen short, Netizen would have to use a manual method, including sending personal information about its employees to Zenefits. The senior Zenefits executive who spoke to BuzzFeed News said Hawkins didn't send this information until late January, delaying the process. Hawkins countered that he was busy and had hoped Zenefits would help him avoid this very type of paperwork.

But then, more than a month after Zenefits had received the paperwork, and with just days remaining before the coverage was supposed to start, a Zenefits representative said in an email that the company had submitted Netizen's application to a local Blue Cross member company that didn't offer insurance in Netizen's county. "There are 4 different versions of Blue Cross that operate in Pennsylvania and the underwriter did not inform us of this until your case was sent to be finalized," the email, sent on Feb. 25, said.

Zenefits said it would have to apply again for the insurance — which would now start a month later, in April.

For Harris, the 37-year-old Army veteran who was Hawkins' first hire, the Zenefits failure came at a particularly stressful time. Harris had recently gone through a divorce. His daughter, Caley, had health insurance only through the Children's Health Insurance Program in Pennsylvania — which wouldn't fully cover a trip to an allergist to treat her seasonal illness. Harris said the problems with Zenefits aggravated his post-traumatic stress disorder.

"I had already reached out to my allergist" to set up an appointment for Caley, Harris told BuzzFeed News. "And then Zenefits was like, 'Oh, oops.'"

"I wanted to throw my computer at the wall," he said. "I was furious."

Zenefits ended up offering Netizen another option, to enroll with a different carrier by mid-March and have the coverage apply retroactively to March 1. Hawkins, frustrated by the lengthy process, dumped Zenefits instead.

He eventually got his employees health insurance through a Zenefits rival, Justworks. Harris is planning to take his daughter to an allergist in August.

“Look, I want to love the platform. It has promise,” Hawkins said in a tweet to Conrad, the Zenefits CEO, on the night Zenefits admitted its mistake. “But it has the appearance of moving too fast to keep up.”

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