Human-resources startup Zenefits Inc. is falling short of its aggressive revenue targets and has started to curb expenses, making it the latest highly valued venture-backed company struggling to meet investor expectations.
Since late summer, Zenefits has frozen hiring in certain departments as sales teams have repeatedly missed targets, according to people familiar with the matter. It has cut the pay of some employees and dozens of people, including at least eight executives, have left or been fired, the people said.
Zenefits has said it aims to reach $100 million in expected annual revenue, based on its number of users, by January. A customer milestone hit in August suggested the figure had reached about $45 million by that point, according to people familiar with the matter, who say it will be difficult for the company to reach its target.
Between Aug. 1 and Sept. 30, mutual-fund giant Fidelity Investments marked down the value of its investment in Zenefits by 48%, implying a valuation of $2.34 billion—casting doubt on the $4.5 billion valuation investors, including Fidelity, had placed on Zenefits in May.
Zenefits spokesman Kenneth Baer said: “The demand we are seeing from thousands of small businesses who want these HR burdens to go away is so big that Zenefits is growing very fast, quadrupling its annual recurring revenue over the past 12 months.” The company defines annual recurring revenue as its average annual commission multiplied by the number of people on whom it is currently collecting the commission. He declined to give a specific number for annual recurring revenue, or revenue under formal accounting rules.
Zenefits is the latest private technology company to run into turbulence after a period of soaring valuations. Fidelity in September marked down its estimated value of ephemeral-messaging startup Snapchat Inc. by 25%. Payment-processor Square Inc. last week proposed to value itself in an initial public offering at $3.9 billion, down from a target of $6 billion last year. Other startups, including e-commerce site Jet.com Inc. and local-services website Thumbtack Inc. have scaled back expected valuations from private investors.
Founded in 2013, Zenefits calls itself a software firm, but its business is primarily health-insurance brokerage—acting as a middleman between companies and health-insurance providers. Zenefits gives away its human-resources software—which helps manage benefits and other tasks—to small businesses so that it can sign up their employees for health benefits, collecting about $450 in commissions for each “insured life,” including employees and their dependents. Mr. Baer said the average commission “has been growing” but declined to specify a figure.
Last year, Zenefits raised about $80 million from investors including Andreessen Horowitz, Institutional Venture Partners and Venrock. Founder Parker Conrad, a serial entrepreneur, called the company the “fastest-growing” subscription-software firm in history.
In January 2015, Mr. Conrad said Zenefits had $20 million in annual recurring revenue and was on pace to hit $100 million this coming January. In May, it raised $500 million from investors, including Fidelity at the eye-popping $4.5 billion valuation, giving it the resources to add staff to reach its ambitious targets.
After the infusion, Zenefits accelerated hiring, growing to 1,640 employees in September from around 400 last fall, according to an internal organization chart and people familiar with the matter. In August, some Zenefits employees gathered at a San Francisco restaurant to celebrate the company reaching 100,000 insured lives.
But cracks had started to appear. As the company added salespeople, many had trouble hitting their targets. Zenefits cut pay for junior sales staff, who make cold calls to potential customers; in Arizona, those workers took a 14% cut, to $30,000, and many left. Mr. Baer, the spokesman, says sales reps got a bump in variable pay when their base pay was cut.
Internally, the human-resources company was having trouble managing its own human resources. In March, it changed its vacation policy to stop paying employees for unused vacation time. Former employees say they weren’t paid for vacation time accrued before the change, as required by California law.
At the same time, Zenefits’s internal software was incomplete, forcing some data to be entered manually and contributing to errors, according to people familiar with the matter.
Sales efforts were complicated by a July story in BuzzFeed News citing unhappy customers. Some Twitter users continue to point out bugs in Zenefits software. One recently posted screenshots of online health-benefit forms where California was listed as “AC” and answers to a question about whether he had children under age 26 were “yes” and “on.” Mr. Baer said Zenefits didn’t see a problem on its end.
Other customers are happy. Mike Bourgon, senior vice president of human resources at Valence Health, said Zenefits has “worked out well beyond our expectations” for the 1,000-person Chicago health-insurance technology company. Mr. Bourgon said he likes that he isn’t locked into Zenefits software and can switch at any time.
In late summer, Zenefits imposed a hiring freeze in certain departments. Head count peaked around 1,640 employees in mid-September and had fallen under 1,600 by this week, according to people familiar with the matter. Mr. Baer said some departments are still hiring while others aren’t and that Zenefits has tripled staff this calendar year.
Executives expected more growth. Over the summer, Zenefits projected it would have nearly 2,200 employees by October and over 2,400 by January, according to an internal document reviewed by The Wall Street Journal.
In late October, Zenefits established a “Culture Committee,” aiming to “increase employee happiness and well-being,” according to an email from Director of Human Resources Dawn Nott reviewed by the Journal. More than 170 employees applied for the 16-member committee, according to the email.
Date: November 12, 2015