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VCs and HR Tech: The Love Affair Continues

Why bigger deals for later-stage companies dominate trends in HR technology investment.

The war for talent may be raging on, but that’s good news for HR tech startups. For yet another year, venture capitalists have poured money into deals to bootstrap the latest generation of vendors offering innovation software to support recruiting, talent management, onboarding and workforce management.

By the end of 2017’s third quarter, venture investment in HR tech companies surpassed $800 million across nearly 90 deals, according to George LaRocque, founder and principal HCM market analyst for LaRocque LLC in New York.

These include a few massive deals — Namely, an all-in-one HR platform, payroll and benefits services vendor for mid-sized firms secured $50 million in January; Yello, a talent acquisition firm raised $31 million in June; and Move Guides, a global relocation and mobility management company raised $48 million in July — which it used to acquire Polaris Global Mobility, a software company focused on ex-pat program management and payroll. And the big deals appear to be continuing in 2018, most notably with Degreed, the employee training platform, which secured $42 million in March.

The ongoing investment in HR tech is a reflection of the challenges companies face in finding and retaining top talent in this market, according to LaRocque. “The continued talent gaps and super-low unemployment has created a skill shortage,” he said. These emerging software companies promise to ease some of these woes, which is appealing to customers and venture capitalists alike.

Human capital management systems are also easier to sell than other more complex workplace technologies, said Holger Mueller, vice president and principal analyst for Constellation Research. “Every venture capitalist was once a manager, so they can relate to how hard it is to find and manage talent,” he said. They also likely remember how frustrating old HR technology was. “It’s one of the biggest advantages HR tech firms have.”

The ongoing demand for better and more innovative talent management software has created room for a lot of new vendors, especially those that integrate artificial intelligence, machine learning and other technologies that promise to disrupt the marketplace. “We are seeing an uptick in AI across the board, in benefits, learning, recruiting and core HR,” LaRocque said.

Many of the deals are focused on the recruiting side of HR as companies struggle with market competition for talent. Mueller pointed to the constant pressure recruiters face to fill open positions and their willingness to try something new if it promises better results. “Recruiters may have two to three weeks to fill an opening,” he said. If their current software isn’t helping them close that deal, they are quick to move on to the next one. That’s creating opportunities for companies to get a foot in the door and to prove their solution is better than their peers’, he said.

HR tech vendors that serve small and mid-sized businesses are also popular, as more small firms seek vendors who cater to their specific HR technology needs. “In the past, the small and midsized market was predominantly served by payroll and job boards, or watered-down versions of enterprise solutions,” LaRocque said. Now he estimates 98 percent of new HR tech firms focus on middle-market customers.

Bigger but Later

While interest in HR tech hasn’t waned, the timing of the current deals and the companies receiving big investments has changed. Early on in this trend, VCs focused on young startups with big ideas and a few talented engineers. But today’s recipients of venture capital are more seasoned. “The hardest money to raise now is early funding,” LaRocque said. “The larger investors want companies that are further along because they are safer bets.” They are looking for firms with an established customer base, strong workforce, and a few years of solid performance to win their attention.

This trend could signal a future slowdown in the HR tech marketplace as the next generation of start-ups struggles to secure the seed funding needed to get them going.

In the meantime, while having so many options can feel overwhelming, industry professionals should look at the bright side. “There are so many opportunities to leverage new technologies to address talent issues that have been difficult to deal with in the past,” LaRocque said. And because these tools are primarily cloud based, they may be easier to access and integrate with existing HR systems. “It’s an exciting time to be in HR.”

Though to avoid wasting time with novelty tools that won’t add real value, he encourages HR leaders to stay current on the latest trends, read industry reports and talk to their peers before making an investment. They also should try not to be closed off to new ideas. “Many of today’s talent management problems can’t be solved using old software capabilities,” he said. “So look at what is possible before setting rigid requirements for your next system.”

Sarah Fister Gale is a writer in Chicago. Comment below or emaileditors@workforce.com.