Investor enthusiasm for consumer-facing start-ups showed further signs of spilling over into the enterprise technology world on Wednesday, as human resources group Zenefits announced that it had raised $500m, valuing the company at $4bn.
The giant fundraising by a two year-old company that had annual recurring revenue at the start of the year of only $20m catapulted it into the ranks of the most highly rated private companies in the software-as-a-service (SaaS) sector.
The latest investment also makes Zenefits the biggest single bet by Andreessen Horowitz, a Silicon Valley venture capital firm that has become known for backing companies it thinks will emerge as outsized winners from the latest start-up boom.
The valuations point to the willingness of investors to double down on their investments in companies that have been able to build large user bases quickly, usually by offering a free service online and then trying to charge a subscription fee for selling add-on services.
In a further sign of the large amounts of capital that are starting to become available for early-stage companies, Affirm, an online lender that also launched in 2013, said it had raised $275m in equity and debt. The company, headed by PayPal co-founder Max Levchin, extends loans to spread out the cost of online purchases.
SaaS companies such as Salesforce.com and Workday have been among the enterprise tech world’s biggest stock market successes, though such businesses usually take years to build because of the slow and expensive process of building up a large base of recurring subscribers.
Zenefits, whose service is used by small companies to handle their HR administration, forecasts it will reach annual recurring revenues of $100m by the end of this year. Parker Conrad, chief executive, said that this would make it the fastest growing SaaS company.
Selling services such as these to small businesses has been an expensive proposition, making it hard to create successful, large-scale companies, despite the number of potential customers.
Zenefits said it had overcome this by acting as a broker and charging health insurance companies for connecting small businesses to their services. Mr Conrad argued that such an arrangement produced higher revenues than a SaaS company could normally achieve from a small business, justifying the high sales and marketing costs.
The latest investment round was led by mutual fund group Fidelity and private equity firm TPG, with participation from existing investors including Andreessen Horowitz. Investors in private rounds such as this are usually granted some downside protection in case the company fails to live up to expectations.
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