Jan 2, 2019, 12:28 AM ETInterview, Fireside Chat

a16z Podcast | How One Startup Went from Being Banned by Regulators to Being Open for Business

Action Taken: The Utah Department of Insurance (DOI) challenged Zenefits' business model, asserting that its free core HR software provided an "unfair advantage" over traditional insurance brokers.
Specific Allegation: The DOI argued that Zenefits' technology lowered barriers to entry for clients, violating the state's goal of maintaining a "level playing field" for all brokers.
Ultimatum Issued: Regulators demanded Zenefits begin charging for its core service or face significant financial fines.
Initial Outcome: The DOI issued a decision blocking Zenefits' operations in Utah, citing the need to protect incumbent broker interests.

Constituency Analysis: Founder Parker Conrad initially feared a lack of public support because Zenefits is a B2B entity ("unsexy" HR software) rather than a consumer-facing app like Uber, which typically has larger, more vocal user bases.
Public Campaign: Zenefits launched a Change.org petition directed at the Governor, Lieutenant Governor, Chief of Staff, and the Insurance Commissioner.
Key Testimonial: A nonprofit client cited a specific $300 monthly savings achieved through Zenefits, enabling them to fund education for two additional underprivileged children annually.
Political Counter-Narrative: Advocates shifted the argument from a legal dispute to a political one, framing the issue as a threat to Utah's "Silicon Slopes" tech ecosystem and economic development goals.

Bill Sponsorship: State Representative John Notwell introduced a bill to clarify that existing Utah law did not prohibit the benefits model, rather than amending the statute.
Executive Support: The Governor, Lieutenant Governor, and State Senator Kurt Bramble publicly supported Zenefits, signaling a shift in policy perspective.
Final Result: The clarification bill passed the state legislature with "overwhelming support," effectively validating Zenefits' operations.
Legal Outcome: The resolution clarified that the previous regulatory interpretation was incorrect rather than creating new precedent.

Battle Classification: Organizations should immediately identify whether a regulatory dispute is a "legal" or "political" battle; political battles require bypassing lower-level investigators to engage senior decision-makers.
Early Engagement: Zenefits now proactively meets with insurance regulators biannually at National Association of Insurance Commissioners (NAIC) meetings to preempt issues in other states.
Three Critical Constituencies: Successful mobilization relied on three specific groups:
- Local Tech Community: Utah tech leaders (e.g., from Beehive Startups, Domo) who viewed the ban as a threat to the state's innovation ecosystem.
- Small Business Clients: B2B customers who, despite being fewer in number, were politically connected to state legislators.
- Conservative Organizations: Think tanks that criticized the regulation as contrary to free-market principles in a conservative state.
Narrative Shift: When addressing senior officials, Zenefits shifted focus from product specifics to broader themes of economic growth and the risks of stifling innovation.

Incumbent Protectionism: Parker Conrad notes a growing trend where existing industries seek regulatory protection as a standard reaction to disruptive technology.
State Policy Dilemma: States aiming to build tech hubs face a contradiction if they simultaneously allow incumbents to use regulation to block new entrants.
Preemptive Regulation: The ideal regulatory approach for tech-friendly states should be limited to essential consumer protection, avoiding barriers that hinder innovation.
Operational Shift: Zenefits is now conducting continuous communication with regulators nationwide to "get out in front" of complaints before they escalate into crises.