Zenefits just raised $500 million by giving its software away for free

With somewhere around $500 million in funding, Zenefits is now worth $4.5 billion, an impressive feat only made more so by the fact that the startup is only a couple of years old. What’s especially interesting about Zenefits is that, despite the fact that, despite being an enterprise software company, it gives away all of its software for free. So why the hell are investors so interested in it?!

The latest software company valued at over $1 billion doesn’t make a dime selling software. Rather, San Francisco startup Zenefits is luring small businesses with free employee-benefits tools in hopes of selling them health-insurance plans. That unusual business model is upsetting the brokerage industry, frustrating regulators and giving investors a reason to bet big. On Wednesday, Zenefits said it raised $500 million from a group of investors led by Fidelity Management and private-equity firm TPG. The round of funding values the company at $4.5 billion, a staggering nine times the price investors paid just 11 months ago. After only two years, Zenefits is now valued at more than many publicly traded business-software makers including Box and Zendesk. To live up to those expectations, Zenefits will need to rein in its massive costs, overcome regulatory resistance and prove it can eventually turn a profit.