Hoping to take some of the angst out of dealing with employee benefits plans, Uniondale, N.Y.-based Online Benefits Inc. earlier this month drew $7 million worth of fresh equity and debt financing from the private equity community.
The Series D round, which was comprised of a $4 million equity portion and a $3 million credit facility, will remain open for the next month to accommodate a few strategic investors. This is expected to be Online Benefits’ last foray into the private equity arena, as it is slated to reach profitability early next year.
Existing backer GE Equity led the transaction, investing alongside repeat players Pennel Venture Partners, Sandler Capital Management, Firemark Advisors Inc. and Grand Central Holdings. Three or four new investors have also signed on, said Alan Cohen, chief executive with Online Benefits. He declined to name them, however, citing confidentiality agreements that must be honored until the financing is complete.
Online Benefits originally set out to raise $5 million, but received more interest from investors than originally anticipated, Cohen added. Moreover, the company expects to draw an additional $1 million to $1.5 million from strategic players before closing the round’s second tranche.
The three-year-old company intends to use the proceeds from the already oversubscribed round to fund its operations, as well as explore new revenue opportunities to speed its path to profitability.
It’s already well on its way, as it has dropped its monthly burn rate by 80% since the beginning of the year. Additionally, Online Benefits has gained significant traction in the marketplace, signing on more than 2,000 customers.
Stop The Insanity
In its barest bones iteration, the company is an application service provider that makes it easier for employees to bone up on their benefits options.
Many employees don’t often take the time to familiarize themselves with the benefits they are eligible for under their company’s plan, nor do they realize what their total compensation package – which includes their salary and benefits – is worth. That means a flood of calls to the human resources department, which in turn often results in increased administrative responsibilities and overhead for HR staffers.
Online Benefits seeks to eliminate a majority of the confusion and frustration associated with employee benefits communication by enabling companies to put all of that information into an “online benefits office” that is accessible to their workforce and families.
Essentially, employees get a password-protected online benefits office that illustrates exactly what their benefits plan is, what doctors they can use, what they’re eligible for and how much their total compensation is worth.
“It’s not a rocket science business,” said Thomas Pennel, a general partner with Pennel Venture Partners. “It reduces calls to the HR department, and it makes employees feel more appreciated, because they can know, with their salary and benefits, the full value of what they’re getting paid.”
Solid Sales Speak Volumes
Besides the obvious benefit to employees, the company was an attractive play for investors because its sales have increased despite the overall economic downtown, a rarity for most businesses these days.
“Sales have been good for the past six months at least, but the real differentiator is that we have cracked the distribution channels,” Pennel said.
Indeed, the company has signed on several insurance brokers to sell its product to employers and benefits providers. Pennel and Cohen chose to keep the names of Online Benefits’ business partners close to the vest, however, saying only that they were well-recognized names in the health-care insurance arena.
Interestingly, while sales were down slightly last month following the tragic events of Sept. 11, usage of the Online Benefits platform by existing customers spiked roughly 400%, Pennel said.
The company isn’t daunted by the slight dip in its sales figures, however, and expects the numbers to creep back up to pre-September levels by the end of this month, he added.
Online Benefits does have a few small competitors, but most have less than 100 customers, so they aren’t really a threat to the company’s immediate market domain, Cohen said.
Online Benefits was last in the private equity market in March 2000, when it raised a $25 million Series C round at a $60 million post-money valuation.
Robyn Kurdek can be contacted at: Robyn.Kurdek@tfn.com