Less than a year after taking over as CEO for the rebounding HR startup Zenefits, David Sacks announced on December 2nd that he would step down. “It’s time to find the next leader.” Sacks said in an interview confirming the news, “We’re looking for an experienced operator to partner with me and take the company to the next level.”
Viewed as a threat to brokers and a disruptor to the insurance industry, Zenefits has been the subject of many articles on our blog. From an examination of their tumultuous past, to the promising future of Z2, we’ve anxiously awaited for and reported on each new development.
Thanks to our insurance industry ace-in-the-hole Michael Lujan, we’ve been able to get the inside scoop. Former President of The California Association of Health Underwriters (CAHU), and Co-Founder and Chief Strategy Officer for Limelight Health, Michael’s office is literally across the street from Zenefits. We reached out to him to give us his take on the latest Zenefits news.
Industry Expert Weighs in on Sacks’ Departure from Zenefits
Sacks’ announcement didn’t take Lujan by surprise, although he did think he’d serve as CEO for at least a full year. The timing is surprising to many, considering it was less than two months after the introduction of Zenefits’ rebranded Z2 platform.
In interviews in the weeks leading up to the official launch of Z2, Sacks appeared to be a dedicated CEO touting the company’s swift response to remediating its compliance violations and its new compliant and “more mature” culture.
Sacks said during the December 2nd announcement that he felt that he had “accomplished everything I set out to accomplish,” and that he had been discussing with the board for a few weeks the possibility of stepping down. Did he really devote enough time establishing Z2 and giving it credibility?
Maybe. Or it could be a strategically crafted message to control the damage to their reputation. Michael Lujan expressed his opinion “Sacks never wanted to be CEO and for him, he satisfied his primary goals to stabilize investor confidence, complete the Z2 launch and resolve the pending regulatory complaints.”
According to Michael Lujan “The buzz around this news is palpable in Silicon Valley. Some in the insurance industry might see this as vindication that his company and disruptive business model is a complete failure (I don’t agree), the investor and tech community may reflect on this example and, when investing in InsurTech, better understand the corporate governance and strict regulatory environment.”
Michael Lujan also cited several possible factors leading to Sacks’ decision that are worth examining. Most came to light just days before his announcement.
The $204.5M loss in fiscal 2016
In a confidential document reviewed by BuzzFeed News, Zenefits lost $204.5 million in its last fiscal year, which ran through the end of January, on revenue of $43.5 million. In the first half of its current fiscal year, Zenefits lost money at about the same pace, with a $100 million loss on revenue of $35.3 million.
The CA Department of Insurance fine of $7M
The California Department of Insurance reported that they would fine Zenefits $7 million for “multiple license violations.” Zenefits was charged with allowing unlicensed employees to transact insurance and circumventing insurance agent education requirement.
This is not only the largest penalty assessed by any commissioner against Zenefits, it’s one of the largest for licensing violations ever assessed in the department’s history. Half of the fine could be waived if the company passes an exam of the company’s business practices scheduled for 2018.
The Washington state ruling to ban their business model in WA
The state of Washington ruled that Zenefits must charge customers for their free software package because it violates the state’s law against “inducement,” rebates insurance brokers provide to clients to attract their business.
Trump’s surprise election and an opportunity to join Peter Thiel in transition team
It has been reported that Sacks is considering joining Peter Thiel, billionaire technology investor, in helping President-elect Trump’s transition team. Thiel and Sacks, friends since college, are former PayPal executives who sold the company to eBay in 2002 for $1.5 billion.
What’s Next for Zenefits?
“When the dust settles and [Sacks] names a successor, Zenefits will continue to be a massively funded online broker with tech tools and apps to help small businesses manage payroll and HR,” Michael Lujan surmises, “The challenge for Zenefits is every traditional benefits broker has access to these technology resources too.
Zenefits will have to find a new CEO who can differentiate and create new buzz and value proposition for their technology in a very robust and competitive benefits environment.”