Over the last 20 years I’ve spent a considerable amount of time working with startups in our domain. It has been interesting to observe the development of the start up landscape across HR and recruitment technology and the increased focus and attention on this now very popular sector.
Go back 7 or 8 years and start ups had little or no presence at the major HR tech conferences for example, except for founders who came to network or who had taken a punt on spending a chunk of their seed funding on a proper stand. Now, start ups not only have their own space within these expos’s they also have their own competitions, mentors and a whole host of other initiatives designed to raise the profile of the humble HR Tech entrepreneur.
They are also on the investment map too. HR tech, in particular the talent management segment, is pretty hot and attracted over 3.8bn in investment in 2015/16. Not an insignificant number.
However, despite the interest from institutional investors and the coverage HR tech start ups get, they still face a huge challenge around raising money, specifically the all important seed funding. I have focused on this in my conversations with both founders and investors over the last couple of years and there are several key challenges facing both groups when trying to raise funding:
Lack of funding capability – Unlike say, FinTech, the HR and Recruitment sector does not have vast numbers of high net worth individuals or angel groups who know the sector inside out and who are ‘current’ in their expertise in the domain. This leads to a chronic shortage of that critical early stage capital that this sector demands.
Lack of domain expertise – The lack of funding capability means there is an inevitable lack of domain expertise amongst those that are able to invest. This presents a challenge for out of sector investors when trying to decode what solutions are worth betting on and therefore what makes a good investment. It also means that investments can be hit and miss. One look at the investment landscape shows you how inconsistent and ‘unqualified’ some of the larger, post seed rounds appear to be.
Clarity of offering – for the same reasons, it is often very hard and frustrating for founders with great products or ideas to stand out in what is increasingly a crowded space. They find it hard to convey their unique point of value to those seed investors who don’t understand the domain. This is particularly relevant for founders who are also from outside the domain who can’t articulate their difference well enough due to lack of knowledge or, worse, who convince themselves they are solving a problem that has already been solved.
Increasing complexity of product – As Steve Goodman recently said at the #InfluenceHR event at #HRTechconf in Las Vegas, “software is a lot easier to build these days”. If you can quickly scale up your product, technical and sales teams (not as easy at it sounds) then it is possible to deliver to the Silicon Valley mantra of “revenue revenue revenue’.
However, increasingly, the solutions that promise to add the most value to the future HR Tech landscape in my view are those based on data science. (Such as Headstart, my awesome new home!) Most of what the next generation of automation, prediction and insight products promise depends on the creation of some very sophisticated data models and the amalgamation, manipulation and computation of significant amounts of data.
These data models don’t come cheap. And neither do they come quickly. Even if you can throw resource at them. Their value builds over time and the predictive capabilities in particular take time to build and evolve. I know several start ups that attracted early stage funding only to find themselves in conflict with the investors due to pressure to “turn revenue” at the same speed as you might with a new HRIS or CRM system.
This fundamental lack of understanding of what it takes to build real value into data science based products and ultimately realise their potential, is a key issue in our sector. At the seed stage in particular, we need to be acutely aware of this difference and investment decisions need to be informed accordingly.
Market consolidation – It’s inevitable. Nearly 10 years post recession, the emergence of the social economy and developments in technology mean that we have a landscape that is more features than actual products. Which is not surprising when you consider there have been more HR tech start ups in the last 12 months than in the previous 2 years put together.
Some of these have brought functionality that clients desperately want, catching the Enterprise vendors napping. Consequently we will see an increase in the big guns acquiring these smaller (and not so small) upstarts and attempting to retrofit them into their existing architecture. (Again, difficult to pull off well)
Others will simply melt away or merge as their business models prove unsustainable either because the space becomes too crowded or, perhaps inevitably, the market shrinks.
Clarity around where to invest as we navigate market consolidation and even economic deceleration has never been more important.
So with all that said, it’s time to do something to fill the gap and that’s where www.PeopleVentures.io comes in. Our aim is to be the first fund that brings deep domain expertise to investment in this sector and ultimately add significant value to both investors and founders alike.
If you want to know more about what we are doing, either to invest in the fund or as a start up looking for potential funding and support, please do get in touch.