Troubles tripping up technology unicorns are spilling over into human resources (HR) tech, a development that could spook small to midsize businesses (SMBs) deciding whether or not to shift personnel tasks to cloud services. At this point, though, it's not enough to stop an SMB from making a switch; if anything, it's a great time to check out what's available.
For a while, the world of unicorns—privately held, venture-backed start-ups that hit $1 billion in value—was filled with rainbows and initial public offerings (IPOs). At long last, venture capitalists and other investors are questioning how sound those companies are and if they'll ever be profitable.
Fidelity Investments exemplifies the trend. In recent weeks, the mutual fund giant marked down investments in a number of high-profile unicorns including Snapchat, Dropbox, and Blue Bottle Coffee. Fidelity's change of heart hit the HR tech business when it downgraded an investment in Zenefits, the HR tech start-up that offers free, cloud-based HR services that are subsidized by fees small business clients pay the company to be their employee benefits broker.
Until now, Zenefits has been an HR industry wunderkind, raising more than $583 million, and getting payroll giant and one-time partner ADP to settle competing lawsuits. Earlier this fall, though, Fidelity cut the value of its investment in Zenefits by 48 percent, dropping the two-year-old start-up's total valuation almost in half to $2.34 billion, according to The Wall Street Journal. Fidelity reportedly took action after Zenefits missed revenue goals for the year, which led the company to trim costs by cutting pay and freezing job openings.
Business Model Still Strong
But Zenefits's current woes don't mean the company's business model is inherently bad. Freemium services (where companies give away a basic product as a teaser for upgraded, fee-based features) are a mainstay of tech companies that market to consumers and other businesses. But the model is still a relatively new one in HR tech. Zenefits was one of the first to build a business around it, offering a platform at no charge to entice SMBs to make the company their benefits administrator.
It caught on because, until very recently, start-ups and SMBs with one to 1,000 employees didn't have a lot of options for low-cost, cloud-based, turnkey HR tech. Many SMBs that size have no standalone HR department, which makes an all-in-one tech suite that managers and employees can use extremely attractive. It's a growing market; although small businesses remain lower-than-average adopters of all HR tech, more are buying enterprise-wide HR solutions at a much earlier stage than in years past, according to the 2015-2016 HR Systems Survey from Sierra-Cedar published earlier this fall. Getting something for nothing is pretty appealing, given that SMBs with fewer than 2,500 employees spend an average of $394 per worker per year for HR tech, plus seven or eight related HR modules, according to the Sierra-Cedar survey.
Zenefits's Popularity Stirs Competition
Zenefits's popularity has other cloud-based HR tech vendors reworking their businesses to compete head on. Start-up CoGo also offers SMBs a free HR platform that includes hiring, onboarding, time-off requests, and recordkeeping. On Nov. 11, CoGo agreed to sell a "significant" equity stake to employee benefits provider Digital Insurance. The deal allows GoCo to offer SMBs a benefits administration module with access to a network of benefits advisors, something the company claims Zenefits doesn't offer, according to a statement about the deal.
Zen Payroll, an online payroll processor for SMBs, is so serious about expanding beyond its core business that, in September, the company changed its name to Gusto. After testing offering benefits and workers' compensation administration, Gusto is offering both in California ahead of a nationwide rollout, according to Fortune. (Gusto isn't a free service; prices start at $29 per month plus $6 per person.)
Other HR tech vendors charge from $1 to $8 per month per employee but keep adding new features. For example, ZipRecruiter, a jobs platform that aggregates postings from 100 other job boards into a single site, recently expanded to offer an employee onboarding module. Early indicators are positive, according to Ian Siegel, cofounder and Chief Executive of ZipRecruiter. "We have a base of 100,000 customers to offer the product up into and it's being rapidly adopted," said Siegel.
"We have thousands of customers on the platform. What's going to happen is ZipRecruiter, Zenefits, and Gusto are going the full-service brokerage route. The three of us ultimately will probably build very similar products in that we're all going to have payroll, benefits, and recruiting components. But there will be fine nuances of flavor between us."
To Siegel's point, in late November, Zenefits added a payroll to its feature lineup, which also includes modules for stock options and other features designed to appeal to fast-growth start-ups. "Starting a business is so much easier than it was five years ago," said Matt Epstein, Zenefits Vice President of Marketing at Zenefits, in a recent interview. He likens the service to Workday, which successfully took on more established HR tech companies such as Oracle and SAP, and raised $637 million in a 2012 IPO by selling a native, cloud-based HR tech platform.
If investors such as Fidelity continue to reexamine their holdings in tech unicorns and other tech vendors—including those in HR tech—SMBs would be wise to keep tabs on what's happening. Even so, it's no reason to shy away from switching to cloud-based HR services, especially given how many vendors are courting SMBs with new services and low prices.
If you're ready for a change, take steps to understand what's involved in signing up with a new vendor and what the implementation process will be like. It wouldn't hurt to have a contingency plan, just in case the unicorn or start-up you team up with fails to find that pot of IPO gold.