Zenefits

Zenefits raises $15 million: 'The hottest deal in Silicon Valley'

January 22, 2014: 12:54 PM ET

Zenefits has raised $15 million to help automate HR for small and mid-sized businesses. Andreessen Horowitz's Lars Dalgaard explains why.

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FORTUNE -- Lars Dalgaard knows cloud-based enterprise software, having founded and run SuccessFactors until it was sold for $3.6 billion to SAP (SAP) in late 2011. Now he's delving back into the space in his new role as a general partner with venture capital firm Andreessen Horowitz.

The firm has led a $15 million investment in Zenefits, a San Francisco-based developer of a cloud-based HR platform that connects to existing 3rd party systems, helping small and mid-sized businesses outsource everything from payroll to health insurance to 401(k) program selection and management. Moreover, the service is free to use. Instead of charging the SMBs, Zenefits charges the insurance companies on a commission basis (just like an insurance broker).

So we chatted with Dalgaard about the deal, and we've published an edited transcript below:

FORTUNE: What's the background of your decision to invest?

Lars Dalgaard: The truth is that when I first looked at it, my first reaction was that I didn't want to go back into HR. I felt it was something that had been taken care of. But the job of a VC is to meet with everyone, because you never know if you're wrong. So we met. I was very impressed with the CEO, but more shocking was how beautiful the product was, and how it handled regulatory things like Affordable Care Act compliance. It's not scrolling all over the place, and gives instant access to what people need to do in a simple, understandable language.

And not only have they built a beautiful product, they also have decided to give it away for free, which isn't something anyone else is doing. Instead of charging customers, they're leveraging the insurance model and acting as a broker with licenses in all 50 states.

What is to stop a successful company like Workday (WDAY) from dipping down into the SMB market, or won't Zenefits eventually want to approach big enterprise?

If you look at Workday's original press release, this is what they wanted to be... Eventually these two companies will collide. But I'm excited about the one that is simple and doesn't take 40 hours of training to use. It's just one page long.

[Note: The original Workday press release mentioned "mid-to-large sized companies," rather than SMBs. That said, current Workday statements only refer to large companies.]

What is the primary execution challenge Zenefits faces over the next year?

The biggest one is just pure growth. There is no hockey stick for this company, just a straight line up. So you have to make sure the culture doesn't get away from you, so that they can give customers a way out of this compliance hell... It's interesting. Silicon Valley traditionally can't get into this business because it doesn't want to be an insurance broker, and insurance brokers can't get in because they don't want to be software companies. Zenefits has leveraged that void.

Word is that this was a competitive deal. Why do you think you got it?

This was the hottest deal in Silicon Valley. I got emails from about 10 people saying that if someone had to win it, they were happy it was us. Even yesterday I got people asking to buy out some of the seed shares. And we did end up allowing [seed investors] Venrock and Maverick to get higher than pro rata because they wanted it so badly.

I think we won because I had a really strong connection with the entrepreneur, and also because Andreessen Horowitz offers so many levels of support, from marketing to recruiting of engineers.

Plus what you were willing to pay, right?

The CEO told me that we actually came in at a lower price than anyone else.

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