About a week ago, as I was going through my daily routine of catching up on news stories and shifting through numerous blog posts, I was drawn to an article by Jim Bruene on Finovate entitled Fintech Unicorn List: 36 companies + 34 closing in. In the article, Bruene lists the 36 companies founded since the year 2000 that break through the $1bn valuation mark that elevates them to A-list celebrity status (the list actually sets the valuation at $900m to qualify as a unicorn, but let’s not split hairs!). The article also lists the next wave of challengers coming through to join this illustrious club. Bruene names this group of 34 contenders as the ‘semi-unicorns’ based on having a valuation of $500m and above.
As I went through the well-compiled list of the Galácticos of the fintech world, I was searching for the most elusive breed of them all: the insurance tech unicorn!
Of this list of 70 fintechs, the vast majority (39) of them were either in the payments or lending space, with (only) four of them in the world of insurance. Three of them are essentially all about insurance distribution, or the sales side of the insurance market. The fourth is ClimateCorp, who, like Meteo Protect, is in the weather risk management space. Top of the insurance tech pile is Zenefits, valued at a hefty $4.5bn and at No 5 in the fintech hit parade.
How Zenefits works
Zenefits provides a free-to-use SaaS platform to deliver human resources software for smaller companies in the United States (leaving the larger firms to the likes of PeopleSoft or Workday). The platform provides an automated approach to the primary function of the HR department in a small business. It can be used to run the payroll, manage employee benefits, handle new starters and leavers, and track for vacation and employee absence. But what has this got to do with insurance?
This Californian-based startup, led by Parker Conrad, is disrupting the group health insurance market by cutting out the broker from the supply chain. It makes money by charging the insurance (and any other external service provider) a fee or commission. The reason it is categorized in insurance is that its primary source of income is through these commissions from group health insurance, which it gets by replacing the role of the traditional broker.
The opportunity in the market came from the affordability, or lack of, within small businesses for an IT system to manage their HR function. Zenefits addressed the problem in the market and built a HR platform that it provides free to use, and in so doing established a client base.
Each of these new clients that signs up to the free HR software have the same needs, which are to provide their employees with services such as payroll, employee benefits and insurance. Zenefits makes it easy for clients to buy these services through the platform as a one-stop shop, and in so doing, it takes a margin from the external provider. The reason it’s attracting so much attention is that this is the classic disruptive startup model. It has spotted an area of the market it can replace with technology automation, and thereby remove significant cost from the process.
What Obamacare did to the insurance landscape
The introduction of the Patient Protection and Affordable Care Act in 2010, aka Obamacare, was the most significant event in over 40 years to impact the provision of healthcare in the US. It also created the environment for Zenefits to succeed. Yet, Zenefits started by addressing a different problem. With nothing to do with the reforms in healthcare, it set out to tackle the problem in the market with the cost for small businesses to manage their workforce. An IT system to automate human resources functions can be costly, with manual spreadsheet-based operations the only alternative. With Obamacare, additional work was piled onto small business with the introduction of more paperwork (and cost) to enable the government’s assessment of eligibility for the public health exchanges.
Zenefits hasn’t come without some resistance from the industry and from the regulator, which is a surefire sign that the disruptive threat from Zenefits is being felt and is being taken seriously. While it’s up and running in about 30 states in the US, it hasn’t been a case of plain sailing in all of them.
Last year, Zenefits stopped taking new clients in Utah having fallen foul of the state regulator. The issue put forward by Utah’s insurance department at the time was that the free-to-use software was effectively a rebate against the purchase of health insurance, which is outlawed in the state of Utah. They also argued that the fair market value for providing HR software is significantly greater than the value of the commissions that Zenefits receives from the insurance (and other) providers, which was a tenuous argument at the least!
This action in Utah was publicly derided by Conrad and his supporters, who were able to list other states, such as Texas and Washington, that had declared this business model to be legit. The insurance broker community has a powerful lobby, but eventually Zenefits won the argument. Faced with looking like a Luddite state and being seen as anti-innovation, in April 2015, Utah quickly introduced a bill that stated that free-to-use software that led to insurance provided by Zenefits and their like would not be considered an inducement or rebate.
Raising ‘serious’ funds
In common with all the businesses on the unicorn list, the business model behind Zenefits is remarkably simple, which is what enabled it to get started on its own means without a massive early distraction trying to raise seed funding. As all entrepreneurs know only too well, raising serious levels of funding is always much easier (relatively speaking) when the startup has already established a business, albeit small-scale. As it builds traction, it gets to prove that the business has legs and is more than a pipe dream. Most importantly, it does two things:
- it shows a market exists
- it gets invaluable feedback from early adopter customers.
Earlier this month, a further $500m was raised in a series C-round of funding that triggered the $4.5bn valuation. For Zenefits, it is now in scale-up and the days of persuading investors of its business idea are history, which in this case isn’t very long, as it has only been going for a couple of years!
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here.