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Startup Report

The Reluctant CEO: David Sacks On Zenefits's Rough Ride And The Road Ahead

David Sacks didn't seek the CEO role at Zenefits, but he feels obligated (and hopeful) that he can fix the company.

The Reluctant CEO: David Sacks On Zenefits's Rough Ride And The Road Ahead

[Photo: Flickr user TechCrunch]

When I got to the Zenefits office last Monday, things were buzzing. It was the day before the company’s big relaunch: People were walking in and out, moving big objects, all in preparation for a highly coordinated event. All this, just shy of nine months into a turnaround effort led by the new CEO David Sacks, who took the reins of the battered unicorn once valued at $4.5 billion before everything went to hell. 

Over the last week, Sacks has been on a press spree repping the launch of a new product, dubbed Z2, but I was more interested in what led to this launch, and specifically why Sacks thinks this turnaround is going to work.

David Sacks took the reins as CEO of Zenefits in February 2016.

Sacks, the former COO of PayPal and cofounder of Yammer, met me in a conference room wearing typical casual startup garb (read: not dress pants and a sport pullover). He presents himself as a sort of "warts and all" guy, which is a definite contrast from the usual hyped Silicon Valley entrepreneur. It’s likely the only way he can present such a company given the circumstance. Sacks, Zenefits's former COO, was elevated to chief executive during a time of crisis to bring the company to glory once again. Less than nine months in, his job has shifted from crisis manager to messenger. He must explain to me, the rest of the press, investors, clients, regulators, etc., that everything is great.

"The is the most significant product launch we’ve done since the beginning," he tells me, after going through precisely what Z2 is: a marketplace that brings together apps for HR, benefits, and payroll. "This is really the culmination of a vision that really started with the founding of the company," he says, "which is to be all-in-one."

The Rocky Startup Road

Zenefits did begin as all-in-one offering, or rather, an automated answer to the headaches of human resources bureaucracy. Any solution that makes the onerous hell of workplace regulations more user-friendly has the potential to be a success. And until early 2016, that’s just what Zenefits was.

At its peak in 2015, the company was valued at $4.5 billion. Then, as revealed through a series of BuzzFeed News articles, numerous issues came to light. One, the company skirted many insurance laws, which resulted in sales people selling the company’s products illegally. Two, in an attempt to get more employees certified, the company used software—called the "macro"—to make it easier for people to pass the online exam. And three, the stressful sell-sell-sell culture inside the company created a toxic, competitive environment.

Taken together, they resulted in the company’s now storied fall from grace early this year and the loss of half of its valuation. Zenefits' founder and CEO Parker Conrad stepped down (but not before cashing in $10 million in stock). Sacks, who's a sizable investor in the company as well as its COO, stepped up.

"If you’ve raised a lot of money you think you can do everything," Sacks says. "No startup can do everything," he explains. "It is particularly important, I think, for startups to focus." So Zenefits' new focus is on small businesses. Before, it was selling its suite of HR products to anyone, big and small. Customers included Netflix and Jet.com. Now both those customers have left, and the company says it doesn’t want to deal with those big entities. "[Enterprise] is not where we play," he says.

Forging A New Path Forward

The turnaround didn’t hinge around a mere customer refocus. It was also an attempt to upend both the previous culture and the wrong the company had inflicted. Sacks had a strategy for that when he first took over the company. "We made a list of key stakeholders in the company," he says. They were regulators, industry partners, customers, employees, and investors—pretty much everybody involved with the company. "Okay, how are we going to restart relationships and rebuild trust with all of these groups?" Sacks recalls asking.

"There was a recognition that in order to solve the company’s problems, we first have to admit what they were," he tells me. "And we have to be very transparent about that." For regulators, that transparency was achieved in the form of an audit. Zenefits hired a "Big Four" accounting firm to look into all of its licensing missteps and reported these findings to state regulators last May. "We hired another independent firm to do an investigation on Macro," Sacks adds. 

For industry partners, Sacks focused on buddying up to others in the insurance and HR space. "Our relations with brokers in the past was needlessly adversarial. There are a lot of things that we have in common with brokers," he says. He underscores how Zenefits is now an "active member" of the National Association of Health Underwriters (NAHU). To rectify things with investors, the company reached a settlement with investors that cut its valuation by more than half.

For employees, the company quickly changed its shoot-from-the-hip sales ethos—known internally as "ready, fire, aim"—and installed a new set of core values to make things less tumultuous. Sacks also offered a buyout to any employee who wanted to leave in a move he calls "The Offer." He’s quick to add that only 10% of the company took the offer.

This focus on a new internal culture is important for the CEO, because it shows the company's ability to grow. Zenefits started as a scrappy startup that wanted to piss off the insurance industry. Though it initially did that, when Zenefits got bigger, its values didn't grow along with it. "The culture needed to mature," Sacks says. "The culture just didn't scale, and I thought that was ultimately a fixable problem."

Now we’re seeing the customer part with Z2. This, says Sacks, was his plan from the get-go. "The approach was to identify who the key stakeholders are and figure out what the things are that are going to rebuild trust with these groups," he says.

Turnarounds Are Hard

By Sacks's own metrics, the odds are stacked against him. "I’m a big believer in founder CEOs," he says, when asked about taking the reins. "But in this case, it stopped being possible because of what happened." As for the behemoth task of changing the hearts and minds of critics after the company’s very public fallout, Sacks readily admits, "I know that turnarounds in tech are very hard—and they almost never work."

But there are a few glimmers of hope that could spell victory for Zenefits' future. For one, Sacks points out that Zenefits' services fill a market gap. Other tech turnarounds failed because the product went out of vogue or became obsolete. "When you think about companies that have had to have turnarounds—something more like Yahoo or AOL or something like that," he says, "they are all companies that lost their product market fit. Fundamentally the product became obsolete." That was never the case with Zenefits, he says. "The market thesis has never been refuted; in fact, everyone’s copying it."

There are a slew of other companies offering very similar services. Gusto is one example. Sacks maintains (obviously) that his company’s offerings are superior. "Competition is something that happens whenever you have a good idea, but we still feel like we’re pretty far ahead of everybody else."

Sacks also points to the speed at which the company acted when news hit of insurance malfeasance coupled with internal culture struggles. Conrad stepped down, Sacks took over, and instantly Zenefits tried to reinstate new values. The values were written on the walls, dozens of meetings were held to explain this to employees, and the company gave awards to employees who exhibited them. Sacks tells a story about an employee who received a core value award for messing up but reporting it, something that would not have flown in the previous culture.

Not The Only Ones Facing Crises

Beyond quickly reshaping workforce morale, he thinks the way Zenefits handled the external side of it was the only route possible. By owning up to past mistakes and systematically trying to right the wrongs done, a path was set for potential success.

"You just saw the other day what happened with Theranos where they’re now in a lawsuit with investors," he says. "All it really takes is one unhappy investor to do that, and it’s very damaging for the company." Conversely, Sacks dealt with those issues up front. He calls this transparency and forthrightness a "business necessity."

He points to Wells Fargo, too, as a company that didn’t deal with its compliance and cultural issues up front. "When you look at what some of these other companies have been through, you do feel a little bit of vindication in terms of the way we dealt with things."

Though the company has relaunched and is methodically reaching resolutions with individual states so they can continue to do business there, there are still many more battles to fight. Sacks says Zenefits has resolutions with about nine states, and more will be coming shortly. "In regulatory time this has been, I think, pretty quick in terms of being able to move past these issues," he observes.

The next year will dictate whether or not his turnaround works. Sacks is determined and an experienced entrepreneur. "This is not the job I sought," he admits. "I agreed to do it because I felt a responsibility to employees, investors, and customers. You know, I think the company would have had a hard time getting through this particular crisis."

But is being a member of the PayPal mafia and cofounding Yammer (scooped up by Microsoft for $1.2 billion) enough to help save Zenefits? For Sacks, it's all about just making it a possibility. "I knew we had to take bold, decisive action," he says, "if we're going to have a chance to make things successful."

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