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Zenefits, a cloud software startup that helps small companies manage health insurance, compensation and other matters related to their employees, has raised a stunningly huge $500 million series C investment at an implied valuation of $4.5 billion.
The investment brings Zenefits’ total capital raised to north of $581 million and comes only two years into its life. Investment firms Fidelity Management and TPG led the round.
The venture capital firm Andreessen Horowitz also joined the round, and said its position in Zenefits is now its largest single investment, outstripping even Tanium, in which it has invested a combined $142 million. Andreessen led its A and B rounds and its general partner Lars Dalgaard sits on the Zenefits board.
Other investors in the round include Insight Venture Partners, Founders Fund, Khosla Ventures, Sound Ventures, Institutional Venture Partners and the actor Jared Leto.
The deal also constitutes the single largest funding event for a cloud software company since Workday went public in 2012, and the second private investment since Cloudera raised $740 million last year.
So what does Zenefits do and why does it need so much money? Its cloud-based software helps small companies manage all sorts of routine things related to something every company has: Employees.
CEO Parker Conrad said that while most cloud software players go after a relatively small number of large companies as potential customers, Zenefits goes after the smaller ones. “There are five million small and medium businesses with 1,000 employees or less,” he said. “We want to have conversations with all of them.”
Zenefits gives away its software for managing employee health benefits, time and attendance tracking, flexible spending accounts and other benefits. The chief way it makes its money is by acting as an insurance broker. Companies who use the software have the option of buying their employee health insurance through Zenefits, which resells policies from health insurance companies and books a percentage of revenue from the sale.
Having all those conversations with so many potential customers brings in a lot of revenue, but carries significant front-end costs. Software engineers have to build the application and add features; a huge sales team has to be deployed across the country. “It’s like we want to drive a car at a very high rate of speed over a long distance. We’re going to burn a lot of gas,” Conrad said.
There are also legal costs. Insurance brokers in every state see how Zenefits has horned in on their otherwise staid business, so they complain early and often to state regulatory bodies. Many states have so-called anti-rebate laws, designed to prevent kickbacks, which forbid giving anything away in exchange for being named as a company’s insurance broker. The basis of most of the complaints center on the free software. Parker says companies who use it aren’t required to use Zenefits as a broker, but more often than not, they do.
“What is happening is that politically-connected insurance brokers are misusing the regulatory agencies,” he said. “These aren’t legal battles we’re fighting. They’re political battles.”
Even so, complaints pile up and require the deployment of lawyers to respond. Usually, the complaints are rejected. One such battle saw Zenefits briefly banned from operating in Utah. The ban was lifted last month.
Since its 2013 launch, Zenefits has signed up more than 10,000 small- and medium-sized companies in 48 states across numerous industries including education, the tech industry, health care providers and professional services of every stripe.
The growth has been impressive. At the start of 2014, it was on track to do $1 million in revenue. By the beginning of this year, it was on track to do $20 million. If it keeps growing as it has been, it will hit an annual run rate of $100 million by January of 2016.
This article originally appeared on Recode.net.
