Human-resources startup Zenefits may be falling short of its revenue targets and has apparently started to curb expenses, as it struggles to meet investor expectations.

Zenefits had announced a target of USD 100m in annualized revenues to be reached by January 2016 but may fall short as August 2015 actuals are understood to be slightly under USD 45m, still a large increase compared to USD 20m in January 2015. The company reached a milestone of 100,000 insured lives in August 2015 and needs to add 122,000 more by January 2016 if it is to reach its sales target.

Zenefits, founded in 2013, comes across as a software firm, but its business model is that of a health-insurance brokerage that gives away an internally developed SAAS human-resources package to small businesses in return for signing up their employees for health benefits and receiving an average USD 450 per head in commissions. In the end, multiple insurance health carriers pay for SMB’s access to a single HR software package. Adding 122,000 lives to the existing book of business in only four months is no small feat, as it means wooing 100 to 150 employers in the 800-1200 employees segment and displacing as many, often long-standing brokerage relationships.

Zenefits had 1,640 employees in September 2015 and projected it would have nearly 2,200 employees by October and over 2,400 by January 2016. Massive hiring drives of salespeople are always hard to execute; ensuring the new employees successfully sell a new concept in a mature market against incumbent, well-established brokers with long-standing personal relationships and reputations is even harder. If past experience is any indication, it takes time and this is not the story that Zenefits’ founders sold to the investing community. Anyway, according to the Wall Street Journal, a hiring freeze is in effect as of October 2015 and some employees were laid off, signaling at least a pause in the accelerated development of the company.

In 2014, Zenefits had raised about USD 80m from investors including Andreessen Horowitz, Institutional Venture Partners and Venrock; and in May 2015, it raised a further USD 500m at a USD 4.5bn valuation. However, Fidelity’s valuation was revised downwards sharply between May 2015 and late September, from USD 4.5 to 2.3 billion.

Even at a “low” 2.3bn, how an insurance broker could be valued at 23 times “promised” sales or 50 times actual sales escapes this publication, but then what do we know? Traditionally, privately held insurance brokers tended to be sold at a price of 1 to 3 times sales in trade transactions, which already implies incredibly high EBITs (2 times Sales in an 8x EBIT transactions world implies that the EBIT is 25% of Sales – wow!).
Now, does this imply that incumbent brokers should forget about the traditional disciplines of underwriting, carrier and product selection, claims handling, customer counseling, and trouble-shooting in general, in order to focus on creating some “app” that handles, say, enrollment and claims and makes nice graphics? In addition, and looking at Zenefits’s team, perhaps a critical but then often overlooked component is a strong, experienced team of … communications specialists. Or is there something that the VC community understands that we don’t understand? Let us know your thoughts!

Follow the link here for a table and an analysis of price-to-sales ratios of some very large, listed U.S. brokers.