Venture Capital Funding Frenzy Over HR Technology on Record Pace

If you haven’t started your own super-successful HR technology company it’s not too late.

Venture capitalists’ love affair with HR tech firms is on track to break records as they dole out millions of dollars to entrepreneurs who promise to transform the human resources landscape. According to HRWins by LaRocque LLC, venture firms invested $1.741 billion in HR tech companies in the first quarter of 2019 and $1.448 billion in the second quarter.

The first quarter alone was “significantly more than any quarter in 2018, and $677 million more than we tracked in all of 2017,” according to LaRocque. And Jason Corsello, founder and general partner of Acadian Ventures, an early-stage venture capital firm specializing in the future of work, predicts that HR tech deals will hit $5 billion in 2019.

The continued investment interest in this space makes sense. Despite years of VC investment into promising HR tech companies, there are still a lot of problems that current vendors haven’t solved, like:

• How can we recruit strong candidates when unemployment rates are so low?
• Why does our candidate experience still lag despite our cool new interactive recruiting page, YouTube recruiting channel and automated email response tools?
• Can I hire freelancers instead of full-time staff, and where do I find them?
• How are we supposed to reskill an entire workforce when we don’t know what skills they are going to need?

These are big, difficult questions and VCs are eager to support entrepreneurs who claim to have the answers particularly because the market is strong, said David Mallon, chief analyst at Bersin, Deloitte Consulting LLP. “Companies have set aside healthy budgets for the right solution and VCs sense that there is money to be spent.”

TA and Training Lead the Pack

This year’s deals are tipping heavily toward recruiting technology firms. “Talent acquisition is a massive problem in organizations today,” said Corsello.

This year alone Jobcase, a social media recruiting platform for blue-collar workers, secured $100  million; Built In, a Chicago-based tech recruiting and media platform received $22 million; and AllyO, an artificial intelligence conversational recruitment platform received $45  million.

The current spending spree follows at least a half-decade of heady HR tech investment. Funding and deal activity hit new highs in 2015, with firms landing $2.4 billion across 383 deals. That follows similar high rates of investment in 2013 and 2014 alike.

Also read: Venture Capital’s Love Affair With HR Tech Rolls On

This year, start-ups offering solutions to find and manage gig workers are also gaining a lot of attention because “no one has figured out how to manage the entire workforce yet,” Corsello said. He pointed to Jobble, Sense, and Instawork — all gig recruiting platforms that secured healthy VC deals in the past few months. “It’s a huge area of interest.”

Skill development is also a hot area as companies attempt to prepare for the “future of work.” The biggest deal of 2019 is Coursera, the online learning platform that offers degrees and certificates, which secured $103 million in April to push its value past $1 billion. Other learning and development companies are drawing attention and investment, though this space has been less innovative, said Mallon. “We still need a philosophical shift in how we think about developing people before the technology can catch up.”

That’s not stopping VCs from investing in this space, though a lot of these deals still feel like investors throwing money at the problem to see what sticks. Mallon points to past investments in companies offering MOOCs — massive online open courses — and microlearning formats. “It wasn’t because they were so effective as learning tools,” he said. It was about trying new solutions.

And even the biggest deals shouldn’t be seen as proof that this technology will be disruptive. “A lot of companies are still only tackling the easy stuff,” said Chris Havrilla, vice president of HR technology and solution provider strategy at Bersin, Deloitte Consulting LLP. Whether it is high-volume recruiting platforms or chunky content training apps, these tools may solve problems, but they aren’t reinventing the workflow — “at least not yet,” she said.

Mallon believes innovations will come sooner in talent acquisition than in learning and development, and he expects VCs to continue investing across this space.

While not all of these VC investments will pay off, HR leaders shouldn’t be afraid to experiment, added Corsello. He suggests earmarking 20 percent of their budget to pilot new solutions. “You can test software at a relatively low level of risk to figure out what works for you.”

HR tech is in dire need of innovation, which is driving venture capitalists to pour big money into the space. But pure venture capital firms like Acadian Ventures and Andreessen Horowitz aren’t the only ones making these deals. A number of enterprise software firms, including Salesforce, Cornerstone OnDemand, Workday and Randstad, are getting into the VC game, investing millions of dollars into promising start-ups to bolster innovation.

“Most are using it as a hedge strategy,” said Corsello. While these are still venture capital deals and not acquisitions, companies may invest in two or three start-ups with similar solutions to see which ones they may eventually want to acquire. It’s a third alternative to the build or buy model for innovation, he said. “They are taking an ‘invest, watch and acquire later’ approach.”

While some entrepreneurs may balk at investment from a software company, viewing it as an early stage acquisition, it can be a benefit. Corsello pointed to Workday’s recent investment in talent acquisition firm Beamery, which generated a lot of speculation that it was a precursor to an acquisition. “Some companies don’t want to be aligned with a single vendor, but that deal gave Beamery a lot of exposure to Workday’s customers,” he said.

These deals are also good news for companies seeking new innovations to address their talent acquisition, training and employee engagement issues. “All of this interest indicates that there is a lot of innovation happening,” Corsello said. “HR executives should be paying attention.”