Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

The axiom of Silicon Valley is that companies that move fast, break things and grow like weeds are winners. The corollary is that some technology startups move too fast and break.

The latest Silicon Valley cautionary tale is Zenefits, which makes software to automate human resources chores for small businesses and sells employee health insurance plans. Following reports by BuzzFeed and other news outlets that Zenefits allowed workers to sell insurance even if they didn’t have state licenses to do so, the company said founder Parker Conrad had stepped down as CEO and as a director.

The announcement acknowledges that at least some of the reporting on the flouting of regulations was true. And it shouldn't have been a surprise, given Zenefits' hiring spree in a bid to grow as fast as possible. Why? It worried a unique market opportunity would close, competitors would have time to catch up or regulators would catch on.

Silicon Valley Geyser
Technology startups are collecting record sums from investors while they are still in the cradle.
Sources: CB Insights and KPMG

What happened at Zenefits is a predictable outcome of the “move fast and break things” ethos. Broken things are irrelevant as long as you think big and win. Remember that scene in “The Social Network” when the fictional Sean Parker tells the fictional Mark Zuckerberg: “A million dollars isn't cool. You know what’s cool? A billion dollars”? Well, a billion dollars apparently isn’t cool anymore. Conrad told a potential investor that Zenefits could be a $100 billion company, according to a report in the Wall Street Journal.

Facebook ran roughshod over some of its earliest backers and became one of the most valuable companies in the world. MySpace did, too, and is a footnote in tech history. That's exactly the trouble: It is hard to distinguish sometimes between highly ambitious tech startups that moved fast, broke things and shouldn’t have (e.g., Groupon) and those that won with exactly the same playbook (just about every successful tech company).

Yet the consequences of breakage are higher for the current crop of tech startups. The list of the world’s most valuable tech startups includes a slug of young guns like Zenefits, Uber, SpaceX, Theranos and Social Finance whose businesses rely on undoing old rules in high-stakes industries like transportation, health care and finance.

The reward to the startups, consumers and societies is huge if startups can solve thorny problems in these areas. But the risk is inherently higher, too, if companies cut corners. When MySpace or Google ran a tad roughshod over rules, the consequences were fraudulent Web ads and inappropriate collection of consumer data. If Theranos cuts corners, it can give people false results on medical tests. If Zenefits cuts corners, workers might be left without functional health insurance, although there is no indication that happened in large numbers.

Did you watch the Super Bowl commercials from tech firms that promised home mortgages at the touch of a smartphone button and loans to people who are “great,” as decided by software? Again, there are serious consequences if those “innovations” are built on a rotten base.

When young companies operating within these high-stakes areas stumble, they have to be honest with themselves about the root causes. So it was unfortunate that the frank letter about Zenefits' executive shake-up glossed over the people who helped fuel habits that new CEO David Sacks called “inappropriate for a highly regulated company.”

Fidelity threw wads of money at Zenefits to buy its way into a promising young company at an ambitious valuation of $4.5 billion. Sacks, a former PayPal executive, invested his own money in the company more than a year ago. Well-respected software executive-turned-startup-investor Lars Dalgaard, did, too, joining the company's board and bragging about how Zenefits was going after a $50 billion market.

Companies don't spend money like crazy or break rules or run over compliance policies out of the blue. They do so because there are powerful incentives to do so. Investors, management and employees want a startup to win big. Second place is the first loser.

And that means companies like Zenefits don’t hit bumps in the road because of the rogue actions of an executive or two, just as Facebook or Google weren't successful only because of the brainpower and will of their founders. It's an "ecosystem," as Silicon Valley loves to say. For better and for worse, we have exactly the tech world we all create. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net