If you want to secure venture capital for your next business idea, start an HR tech firm — preferably one that offers a new spin on recruiting.
For the past two years, venture capitalists have been pouring money into the HR tech sector, seeding promising young startups with millions of dollars in hopes that their take on benefits, employee engagement or social recruiting will be the next disruptive thing to change the way we manage talent.
As reported earlier this year, 2013 saw a record high in both the number of venture capital deals going to HR tech firms, and the amount those companies received. So far, 2014 is no different. In the past several months there has been a flurry of deals, big and small. A few highlights:
Hireology Inc., a provider of employee hiring and selection management technology, raised $10 million in Series B funding from Bain Capital Ventures in August.
SmashFly Technologies, a recruitment marketing platform technology, secured $9 million in June from OpenView Venture Partners.
YouEarnedIt, an employee engagement app, received $1.5 million in seed funding from Capital Factory, an Austin, Texas-based tech firm incubator, in May.
Work4, a social and mobile recruiting service, raised $7 millionfrom Serena Capital and Matrix Partners, in April, bringing its total funds invested to $18 million.
ZenPayroll Inc. raised $20 million in a Series A round from General Catalyst Partners and Kleiner Perkins Caufield & Byers in February for its cloud-based payroll application.
Why they are interested
“HR tech is attracting venture capitalists because of the growing complexity of today’s workforce,” said Ryan Hinkle, managing director of New York-based Insight Venture Partners, which assumed a majority equity position in Workforce Software this year. Fragmented worker groups coupled with global employment rules and shifting health care requirements make it increasingly difficult to manage talent, he said. And he sees this as an opportunity to change the way HR works.
Rather than investing in software that merely reproduce traditional processes in a technology-based format, his group looks for innovative new workforce software that change and improve the way talent is managed. “It’s about creating HR software that is infinitely configurable,” he said.
Autumn Manning, co-founder and CEO of YouEarnedIt, agreed. “You can’t predict everything people will want to do with your platform, so you have to build technology that is adaptable for the entire organization,” she said.
The rise in cloud-based software has also made it much more likely that a startup can quickly gain a competitive advantage against bigger players and thus be attractive to venture capitalists, Hinkle said. When companies had to invest in on-premise HR tech software, the ramp-up costs for new firms were too prohibitive to get a foothold. But with software as a service new vendors can quickly build revenue and try new ideas without taking on an overwhelming financial risk. “It’s allowing lots of startups to find their own piece of the market very efficiently,” he said.
Why HR Leaders Should Care
Looking ahead, the influx of capital into HR tech companies is likely to continue, especially around recruiting technology, said Holger Mueller, principal analyst and vice president for Constellation Research. “Recruiting is the biggest problem area for companies right now,” he said.
Businesses can put off upgrading performance management or social networking tools without a huge impact, but they can’t put off recruiting, he said. Between the talent crisis and retiring baby boomers, companies need new ways to find new talent. “It’s driving a lot of innovation and a lot of investment in recruiting technology.”
This ongoing flood of capital in HR tech startups could be a blessing or a curse for potential customers. On a positive side, it means the next generation of software will make it to market faster, giving customers a chance to tap into more potentially innovative solutions to their talent management challenges, Mueller said. However, every new tool purchased from an innovative new startup means yet another round of integration projects to make it work with the rest of a talent management system. “That is going to create a lot of headaches down the line.”