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VC Funding Frenzy Over HR Technology on Record Pace
Despite HR tech investments predicted to reach $5 billion in 2019, change is anything but assured.
By Sarah Fister Gale
I

f 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 $1.448 billion in the second quarter of 2019, and another $964 million in the third quarter, putting the year’s total at $4.18 billion with fourth-quarter results yet to be tallied.

While third-quarter totals show a slight dip, the quarter saw four mega-rounds of at least $100 million, including $200 million to Gusto, the payroll startup for SMBs. “With a quarter left to go, 2019 is surging beyond investments made in 2018,” according to LaRocque.

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 Jason Corsello, founder and general partner of Acadian Ventures, an early-stage venture capital firm specializing in the future of work.

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.

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.”

The current spending spree follows at least a half-decade of heady HR Tech investment
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.

Women holding a giant dollar bill
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.”