The story is always the same. A new company, a darling with double-digit growth that brings the IPO, and more growth. Annual recurring revenue (that magical measurement that software companies love) went from $1 million in the company’s starting year of 2013 to $20 million in 2014 to a projected $100 million in 2015.
Now, let’s think about this — how on earth could a company selling software to small businesses in order to help them manage employee benefits even keep up with hiring the staff it would need to service that much business in a two-year period?
Still, Zenefits’ IPO raised $581 million from investors. However, Zenefits simply could not meet the projected earnings goals. Once the news broke about insurance regulators investigating the company for possible cheating by the company’s brokers in taking the states’ online broker license exams, there was no turning back. Co-founder and CEO is out; and the chief operating officer is now the CEO. The new CEO’s take? Zenefits had become derelict in it “culture and ethics.”
On the “Seven Signs” scale, here’s a summary of what was wrong at Zenefits:
1. Double-digit growth with pledges to increase it even more
2. Pressure on employees to just get the work done. Instead if fixing the software when problems developed, the employees tried temporary fixes on a per-client basis.
3. A weak board caught up in the need for double-digit growth. And too many insiders on the board. And a board not willing to slow things down to get the software fixed.
4. A Yee-Haw culture — beer kegs in its offices in Scottsdale with employees drinking up during the work day. That had to have been an HR nightmare.
5. Employees with stock options and incentives that fueled the exponential growth and clouded judgment.
Classic case, just a series of red flags that would have predicted the company’s ethical collapse. If you apply the tests, you will not invest. These types of start-ups cannot overextend themselves if investors and company leaders take an active interest in managing the company, not just promoting growth. Watch for the signs, and heed their warnings. Get out before the cheating scandal, the decline in revenues, or the kegs appear.