What to Make of the Boom in HR Tech Investment
HR tech firms are poised to close $16 billion in venture capital deals this year, more than tripling the 2019 record of about $5 billion. In Q1 alone, venture capital firms handed out $2 billion to firms eager to transform the workplace. In Q3, they handed out a record $6 billion. Among the 117 Q3 deals, there were nine “unicorns” who saw their valuation exceed $1 billion as a result of the influx of cash.
“I’ve never seen anything like it,” said George LaRocque, founder and principal human capital management market analyst for LaRocque LLC in New York. “We are seeing quarters that are as big as previous years.”
It’s a big change from a decade ago, when HR tech was treated like a "backwater" tech category by investors, said Josh Bersin, global HR industry analyst and CEO of research and advisory firm The Josh Bersin Company.
“Now it is recession proof," he said. "Companies need HR technology regardless of the economy.”
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The surge in HR tech deals is due in part to pent-up demand from 2020, when deals fell off during the pandemic, said Holger Mueller, vice president and principal analyst for Constellation Research. “If you smooth the curve over several years, it’s more like a 30% increase,” he said.
That increase is being bolstered by low interest rates, a booming stock market and VCs flush with cash and looking for places to invest, LaRocque said.
One of the biggest HR tech deals this year went to Articulate, the online training platform that scored $1.5 billion in a single funding round in July, bringing its valuation to $3.75 billion. Other unicorns include Papaya, the workforce management platform that raised $250 million, bringing the company’s valuation to $3.7 billion; Andela, the remote engineering talent acquisition platform that received $200 million, bringing its valuation to $1.5 billion; and employee mental healthcare company, SpringHealth, which secured $190 million, bringing it’s total valuation to $2 billion.
This is all good news for businesses that have been struggling to adapt to a pandemic-driven workplace, challenging hiring environment and need for new skills. A lot of these firms are tackling issues that were amplified during the pandemic.
“COVID, the murder of George Floyd, the #MeToo movement, remote work and demands for pay equity all link back to HR tech,” LaRocque said. “It’s brought a lot of attention to issues we are facing in HR, talent acquisition and employee engagement.”
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These deals are giving promising HR tech firms the resources they need to accelerate their efforts to transform the employee experience. That includes making mental healthcare more accessible, easing companies’ access to remote talent, and helping them create more adaptive and relevant learning experiences.
“There is a focus on putting employees first and fixing problems in a more thorough way, rather than just through incremental improvements,” LaRocque said.
The companies winning these deals also tend to more established, which is different from past trends, Mueller noted. Prior to 2020, most VC money went to innovative start-ups that offered stand alone best-in-class solutions — think video interviewing and industry-specific recruiting sites. Many of those firms were later acquired by enterprise players to help them flesh out their own HR suites.
But many current deals are going to slightly more mature talent management companies that tackle whole segments of HR, like global payroll and corporate training, and have a strong customer base. “They could compete with the big players one day,” Mueller predicted.
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It will take several years to see if any of them emerge as leaders, but in the meantime the competition is good for everyone. “If they can deliver what they are promising, it could disrupt the space,” he said.
It will also force existing companies to invest more in their own R&D to remain competitive.
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What's Next? HR Tech Buyer Beware
Not every company that secured a massive VC deal will be able to deliver on investor expectations. In the past, if a firm attracted a multimillion dollar deal, it was a good bet that the technology was strong and the company was likely to become a serious player in the marketplace. But now that so many firms are getting huge deals, it’s hard to judge which ones will stick around. Many of these companies are basing valuations at 40x revenues because the stock market is so strong, but that math problem is constantly evolving.
“If the stock market drops and the Fed raises interest rates, then the multiples drop, which means the value drops,” Bersin said. “If these companies aren’t profitable by then, there will be a big shakeout.”
It also makes it more difficult for HR buyers to decide who should win their business. Most HR solutions today are cloud-based, making it easy to switch platforms if the vendor doesn’t deliver. Too many changes can be disruptive for the business and the team, however. HR leaders want to pick a vendor who delivers on their promises and will continue to evolve.
How to Vet HR Tech Vendors
When vetting companies, Bersin suggested looking for providers that have a strong story to tell about how their product solves a relevant business problem, and can provide a clear roadmap outlining where they plan to take the technology in the next few years. They should also offer personalized support to help HR teams get these products up and running.
“HR is a not a tech buyer," Bersin said. "They need some hand-holding.”
And remember, Mueller added, “valuation doesn’t matter. What matters is if the software will help you be a better company or improve on the systems you already have.”
If an HR tech vendor can offer that value proposition, then it is worth giving them a chance.