Zenefits started in September 2012, provides cloud-based SaaS platform to small and medium companies for managing their HR operations with a particular focus on helping them with health insurance coverage.

Founded by Parker Conrad, Zenefits grew very rapidly and was named as the fastest growing start-up of the year in 2014. Its annual revenues grew from USD 20 million to USD 100 million from 2014 to 2015. In 2 years of existence, the company had 1600 employees, 10,000 customers and USD 4.5 billion valuation. This was definitely one of the fairy tale stories of tech start-ups that everyone likes. However, trouble soon started to show up at Zenefits doors.

In the fall of 2015, Zenefits came under scrutiny for alleged “repeated” violations of the state insurance law, including failure to maintain adequate compliance controls and train employees, said the New York State Department of Financial Services (DFS). The regulator has also singled out the founder, Parker Conrad, for writing software that lets employees evade education requirements. The observation made by the regulator is very interesting and goes to show just how much you would have to study the subject matter when creating a technology solution for the same.

The regulator had a particular problem with the software as it allowed employees to keep the timers running on online training programs even if they stepped away from their computers. From an e-learning solution point of view, this is a very critical aspect that all business leaders need to sit up and take note from as they could be liable to similar lawsuits if they are using technology which is not in line with the regulators.

The other lesson here for tech start-ups and buyers is to ensure that we understand the various aspects of the technology solution. While the technology evolution will always be ahead of the legislation evolution, it always safe to have a double check on the same. There is a lot of automation now coming your way and while you embrace and adopt the same, be sure that you are not toeing the line with any established legislation. The need for your legal counsel and advisor to understand implications of the technology solution implemented are far greater in such situations.

The reason this fine is significant for Zenefits is because the most compelling part of Zenefits was that it gave its software away, making most of its money through brokerage commissions that insurance companies paid when a client bought one of their plans. Zenefits was looking to make money by cleverly bridging the gap between two seemingly unconnected areas HR software and Insurance.

Most HR tech start-ups are started by individuals who quit their jobs to fix the human capital issues experienced by them during their tenure at one or many organizations. This limited worldview is biased and many fail to understand the overall ecosystem. This is the biggest lesson for all tech start-ups in general and HR tech in particular from this Zenefits story so far.

The other aspect is to look at the way the company grew and was run by Conrad during those times. It came to light only after Conrad was replaced by the COO David Sacks. David realized that there was no office manager or IT department and while the HR department existed it had no access to the system. Conrad thought that these were all unnecessary as engineers can fix their own computers but not realizing that if they spend their time there they would not spend time on the product. Based on customer experience and feedback it was evident that Zenefits was moving too fast to catch their own mistakes and while they focused on providing insurance to small & medium companies, they seem to have ignored the other key stakeholders like the regulators and also the main aspect of insurance – fulfillment. If I bought an insurance product via Zenefits I would look for my claims related issues also being addressed by Zenefits and this part of the solution seems to be neglected in the process of growth. Given all these problems the company has done a third round of layoff with 45% of its employees being laid off and yes a new CEO in Jay Fulcher at the helm.

“Learn from the mistakes of others. You can never live long enough to make them all yourself” – Groucho Marx