Silicon Valley rebels grudgingly learn to play by the rules
The hottest new club in Silicon Valley is the regulatory compliance office.
Zenefits is a fast-growing human resources company that received a staggering $4.5 billion valuation last May after barely two years in business. On its site, it touts the fact that Forbes called it "the hottest startup of the year."
And, on Monday, it shocked the startup world on Monday night by announcing that its founding CEO had resigned over "compliance failures."
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As far as these things go, it was a spectacular exit: to fix its image quickly and thoroughly, the company appointed no less a Silicon Valley patriarch than Peter Thiel, an early Facebook investor and one of the most respected people in technology. (As a rule: the more famous the new board member, the bigger the scandal they're being sent in to fix.)
A far less sexy consideration that is quickly becoming the new gospel of Silicon Valley: play by the rules.
Conrad's sudden departure was not due primarily to a lack of innovation or rocket-powered sales growth, the usual benchmarks of startup success and failure.
Instead, it was the result of a far less sexy consideration that is quickly becoming the new gospel of Silicon Valley: play by the rules.
"Without it, we die"
For months, the young startup had been under mounting scrutiny for skirting insurance laws by reportedly allowing unlicensed salespeople to sell health insurance in various states.
To do otherwise would have meant slowing down long enough to receive brokers licenses. And slowing down has long been viewed as kind of heresy among ambitious startups -- at least until recently.
"We sell insurance in a highly regulated industry. In order to do that, we must be properly licensed," David Sacks, the newly named CEO of Zenefits and former CEO of Yammer, wrote in an email to all Zenefits employees, a copy of which was provided to Mashable. "For us, compliance is like oxygen. Without it, we die."
"Our culture and tone," Sacks added in the email, "have been inappropriate for a highly regulated company."
Sacks' remarks may have been intended strictly as a repudiation of Zenefits, but it crystalizes a growing sentiment among some of Silicon Valley's biggest (and newly chastened) billion-dollar startups to play by the rules earlier and with bold gestures, or risk being torn apart by the regulated industries they hoped to upend.
The new gospel: Move fast (but not too fast), break things (just kidding!)
For years, Facebook's motto -- and the de facto ethos of Silicon Valley -- was to "move fast and break things."
It may work when the things that "break" are code rather than people.
It is much riskier to follow that approach when you are a business like Zenefits or Uber, with a fleet of salespeople or drivers, respectively, taking on entire industries.
The "entrenched interests" are "getting to regulators and politicians sooner to try to slow things down," says Bradley Tusk, the founder and CEO of Tusk Holdings who has advised startups like Uber on their regulatory battles.
The startups are taking it into account, however, as they grow big enough to draw plenty of attention.
"Investors are more aware of regulatory risk and pressing founders to address it sooner," Tusk says.
The consequence of ignoring those problems: regulatory threats.
Prominent startups have all been threatened with shutdowns, including FanDuel, DraftKings, Uber and Airbnb.
No one wants that, Tusk says. There are too many billions at stake.
Disrupting a combative mindset
Airbnb, the $25 billion room rental startup, pledged late last year to work "collaboratively" rather than combatively with cities -- paying its fair share of taxes, releasing mounds of data on its customers -- even as sources close to the company previously grumbled to this reporter about personal disagreements with the regulations in place.
A long procession of on-demand startups, including Instacart, Shyp and Sprig, have very publicly begun reclassifying their workers as employees rather than independent contractors to avoid looming lawsuits across the nascent industry over employee status and benefits.
Even Uber, the $62.5 billion ride-hailing giant that long embodied the fast and reckless approach, has admitted it can no longer afford to be "scrappy" and "fierce," as its CEO put it in late 2014.
Translation: it's time to grow up.
Zenefits, as Sacks explained in his email to employees, never overhauled the loose culture and values, which "were forged at a time when the emphasis was on discovering a new market."
And if you ever talked to Parker Conrad, the cofounder and CEO who just resigned, it's not hard to understand why. He was fervently fixated on going fast, for fear of failure.
"Now is the time to keep the gas pedal firmly pressed against the floor," Conrad told me in a conversation after raising $500 million in funding last year and securing the $4.5 billion valuation. "I'm out to try to grab as much of that market as I can."
As it turns out, in today's Silicon Valley, going fast can lead to failure too.
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Seth Fiegerman was a Senior Business Reporter at Mashable, where he covered startups, marketing and the latest consumer tech trends. He joined Mashable in August 2012 and is based in New York.Before joining Mashable, Seth covered all things Apple as a reporter at Silicon Alley Insider, the tech section of Business Insider. He has also worked as a staff writer at TheStreet.com and as an editor at Playboy Magazine. His work has appeared in Newsweek, NPR, Kiplinger, Portfolio and The Huffington Post.Seth received his Bachelor of Arts from New York University, where he majored in journalism and philosophy.In his spare time, Seth enjoys bike riding around Brooklyn and writing really bad folk songs.
