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HCM Tech Buying Spree Opens Door, and Wallet, for Startups

Human capital management technology startups were hot commodities in 2013. Startups in the sector received nearly $600 million across 208 deals last year.

March 5, 2014
Related Topics: Vendor & Software Selection, Human Resources Management Systems (HRMS/HRIS), Technology
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Startups HCM Tech

Human capital management technology startups were hot commodities in 2013, winning millions of dollars from venture capitalists eager to grab a piece of this promising technology category. Startups in this sector received nearly $600 million across 208 deals last year — both five-year highs, according to CBInsights, which tracks private companies and their investors.

“These are the next generation of talent management technologies,” said Holger Mueller, a vice president and principal analyst with Constellation Research Inc.

Interest in human capital management startups isn’t surprising, Mueller said, given the recent acquisition frenzy by software giants, Oracle Corp., SAP and Workday Inc. and others in the industry. “If these startups are successful, they could disrupt the existing talent management vendor landscape.”

Companies offering recruiting solutions to more efficiently target passive candidates are among the most attractive. “This is still the biggest pain point for talent management,” Mueller said.

Several deals last year went to recruiting technology companies, including SmartRecruiters, which lets users create, optimize and aggregate job postings to job boards and social networks that are relevant to specific candidates, and Jibe Inc., a cloud-based mobile recruiting tool. Both companies received $10 million in funding last year.

Other deals went to firms offering total human capital management solutions, like PeopleMatter — a recruiting, onboarding, training and scheduling company for the service industry, which received $19 million — and Zenefits — a free cloud-based HRIS system for small and mid-sized companies that automates benefits, payroll management and other HR tasks. Zenefits received $2.1 million in July and another $15 million in January.

Interest in human capital management startups isn’t surprising, Holger Mueller, a principal analyst with Constellation Research Inc. said, given the recent acquisition frenzy by software giants, Oracle Corp., SAP and Workday Inc. and others in the industry.

Zenefits CEO Parker Conrad said the company received its first round of financing just six days after making its first pitch. “It shows that there is a big hole in HR software right now, especially for businesses with less than 1,000 employees,” he said.

One of Zenefits’ biggest selling points is that it automatically updates data across all HR systems as soon as it is entered. “It eliminates that administration layer and creates a single system of record,” Conrad said.

Why You Should Care

It’s obviously a great time to own a human resources technology startup, but what does this mean for HR executives?

Don’t get sucked in by all the hype, said Gartner Inc. analyst Ron Hanscome. “There is a high failure rate among startups, and venture capitalists expect only a small percentage of their investments to pay off.”

In other words, just because a company got $10 million doesn’t mean it’s going to be the next Workday or SuccessFactors.

At the same time, don’t write them off. Many of these startups offer compelling solutions to real HR problems at a time when top talent is becoming harder to hire and retain.

Companies willing to take risks on an unknown tech firm may be able to gain a competitive advantage at a relatively low cost, he said.

So how do you choose?

Look for technology that aligns with your company’s strategic business goals, Mueller said. “It’s important for HR to demonstrate its relevance as a leader in the organization.” That includes the technology you invest in to make talent management more effective. “Think about value to the enterprise when making these decisions,” he said.

And only choose technology that promises substantial value compared to the current state, Mueller said. “If you don’t anticipate a 20 to 30 percent improvement in cost or efficiency, it’s not worth the headache of working with a startup.”

Once you do identify a tool that you believe has the potential to deliver real strategic talent management benefits, dedicate a small percentage of an HR budget to a pilot and benchmarking the results, Hanscome said. “If the pilot shows a disproportionate impact compared to a baseline group, you can invest more fully,” he said.

And if that doesn’t work, cut it loose and move on to the next potentially game-changing solution.

Sarah Fister Gale is a writer based in the Chicago area. Comment below or email editors@workforce.com. Follow Workforce on Twitter at @workforcenews.

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