What downturn? Investors remain bullish on HR tech as the Great Resignation slows

Platforms, not point solutions, might lead the way

The market for HR tech, which runs the gamut from workforce management to applicant recruitment and tracking systems, has proven remarkably resilient in the face of both pandemic and economic headwinds.

In fact, some would argue that it’s precisely because of these headwinds that HR tech has attracted, and continues to attract, investors’ attention. The pandemic spurred companies to invest in digital infrastructure as their staff moved remote, while macroeconomic fears upped the pressure on HR teams — some of which had to contend with layoffs among their ranks — to vet candidates carefully.

And investors saw the opportunity clearly. In 2021, venture investors funneled more than $12.3 billion into HR tech startups, roughly 3.6 times the amount invested in 2020, according to PitchBook data. That trend continued in 2022, with megadeals ensuring more than $1.4 billion was invested in the sector in the first two months alone.

“HR tech startups will need to demonstrate a clear return on investment not just by impacting top-line growth but also bottom-line efficiency.” Allison Baum Gates, general partner, SemperVirens VC

In early January, Paris-based payroll software developer Payfit closed a $287 million Series E that brought its total funding raised to nearly half a billion. The same month, Darwinbox, which offers an HR tech platform for recruiting and virtual onboarding, landed $72 million at a valuation of over $1 billion. The list of successes goes on: Remote raised $300 million in April; SeekOut secured $115 million in January; and Personio nabbed $200 million in June.

Davor Hebel, who leads the ventures team at Eight Roads and has invested in several HR tech startups, sees several dynamics generating enthusiasm for the sector.

He feels the pandemic has removed the boundaries that used to confine many companies’ workforces, creating a need for solutions to manage employees across geographies and time zones. Meanwhile, he added, the talent shortage is fueling demand for platforms that promise to reduce churn and decrease recruiting costs by, for example, offering new project opportunities.

“[The pandemic] seems to have been a major catalyst in crystalizing some of the trends. It was around March of 2020 that we saw a massive growth spurt, where HR tech platforms became mission critical from small to large companies alike,” Hebel said in an email.

“Remote and hybrid work environments are a tailwind for tool adoption, as it can act as a glue for company culture and productivity coordination. We also don’t foresee the war for talent in certain segments and professions disappearing, so I would look for tools that can continue to drive retention and happiness of talent in companies.”

To Hebel’s points, the U.S. Bureau of Labor Statistics reported that 7.7% of those employed worked remotely as of April. Employers posted 11.3 million job openings in May, well above pre-pandemic levels and perhaps indicating that the remote trend will have legs as demand for talent remains high.

Allison Baum Gates, a general partner at SemperVirens Venture Capital, notes that the unemployment rate remains relatively steady, which is good news for firms with HR products to sell. While conceding that tech companies are increasingly being affected by layoffs and hiring freezes, Gates told TechCrunch that she’s seen no such pullback from employers in SemperVirens’ network of HR executives, who work at companies including UPS, Visa, IBM and Disney.

“As the pandemic accelerated the long-term shifts to more digital, distributed and data-driven work, innovation in HR tech has exploded,” Gates said via email. “[Our network has largely] expressed a sigh of relief that the ‘Great Resignation’ may be abating, and they can shift their focus from managing record-level attrition to once again investing in solutions that will help activate existing talent.”

In a recent poll, The Hackett Group, a business advisory and consulting firm, found that HR tech spending will increase by more than 9% in 2022, with talent management, including recruiting tools, at the top of the spending list. Return-to-work strategies and other pandemic-related issues are at least partly responsible for the boom, said the report, which surveyed a number of executives at firms with over $5 billion in revenue.

IDC concurs, predicting that the worldwide human capital management applications market will grow by 7.7% to $22 billion this year from 2021.

Gates is particularly bullish on platforms designed to upskill employees, productivity tools for remote collaboration, tools for onboarding independent contractors and project-based teams, and HR workflow automation and analytics technologies.

On that last point, there’s market data to suggest AI has a particularly bright future in HR applications. Some 30% of organizations intended to use an AI tool as part of their HR technology complement in 2021, up from 17% two years ago, according to a 2020 Gartner survey.

However, Gates believes that the current economic environment, which has some investors reluctant to spend, will require HR tech businesses to adjust their products and sales processes to focus on “productivity and business outcomes.”

Those that don’t might risk repeating history. In 2020, when the pandemic pummeled the global economy, HR tech companies laid off large sections of their workforces in response to belt-tightening from corporate customers. The vendors that emerged unscathed largely did so by pivoting to meet the needs of the changing work landscape.

“[HR tech startups] will need to position themselves as end-to-end solutions, not just point solutions. They will need to demonstrate a clear return on investment not just by impacting top-line growth but also bottom-line efficiency,” Gates said. “More than ever, as the pandemic ends and we move from a phase of disruption and experimentation to one of integration and scale, it is critical for startups to align themselves with the internal goals and metrics of HR buyers.”