How will employee-benefits startups fare when their corporate customers start slashing costs as the market goes downhill? We’re going to find out if current trends continue.
There was a spike in the number of startups offering employee-benefits services through a B2B2C model last year, as nearly every company focused on employee benefits amid the Great Resignation in an effort to retain and attract talent. These startups sell everything from paid care leave coordination and fertility services to discounted gym memberships to consumers through their employers.
But the freewheeling spending of 2021 is now over, and some of these startups could find their offered services on the chopping block if market conditions continue to worsen.
If there is indeed a recession on the horizon, many of these startups would be right to fear for their future growth, but Brian Kropp, chief of HR research at Gartner, doesn’t think this downturn will mirror the last. Kropp told TechCrunch that even if the market enters a recession, it won’t be similar to what we saw in 2008 because of the ongoing labor shortage.
“Even with some of the headlines about an increase in layoffs and economic uncertainty, one of the things that is really interesting is that the labor market is really tight.” Kropp said. “We are still in an environment where hiring is really high, all things considered.”
He added that a recent survey Gartner facilitated found that 40% of companies still planned to increase hiring this year, less than a third are planning to cut back on hiring, and the rest are looking to stick to their prior schedules.
Because the labor market is so tight, Kropp said, employers should focus on keeping their benefits if they can. He said that taking away a benefit has a much higher negative outcome on existing employees than the positives associated with adding one, even if few people are using the benefit to begin with.
“The mistake that people make is assuming the only people getting value out of the benefits are the people using those benefits,” he said. “A lot of the value of the benefit is that people know they could take advantage of it if they need to. For example, it’s nice to know that my employer would provide long-term coverage if I have a significant disability, but I hope to never use it.”
He said that companies that added mission-driven benefits should be especially careful. For example, a wellness company slashing its gym reimbursement benefit would not come across well to the employees who joined due to value alignment.
“It becomes a real disconnect between your values and actions,” he said. “What do you stand for? What do you believe in as a company? You need to make the decision on would you offer this benefit or not, or take it away.”
It makes sense. Plus, if a company already lost a significant amount of employees to the Great Resignation, cutting a benefit may only add fuel to the fire. Kropp added that employers are better off pausing hiring or deleting open positions to save money in the long run.
It seems many companies understand this. Gympass, a $2 billion startup that offers discount memberships to a variety of gyms as well as wellness offerings to consumers through their employers, had its best quarter in its 10-year history in Q2 2022, Carolee Gearhart, its chief revenue officer, told TechCrunch.
“We just finished Q2. It was the biggest quarter we have ever had. It was close to 40% higher than Q1,” Gearhart said. “We are only seeing continued acceleration amid this recognition that things have fundamentally changed and they aren’t going back.”
While Gearhart admitted that her company hasn’t been able to track how much its fitness-focused benefit helps retain talent, she said 30% fewer Gympass users leave their companies than their counterparts who don’t utilize the benefit.
While many companies who sell to large corporations seem safe for the time being, how long that will last seems dependent on which types of companies these employee-benefit startups are selling to.
David Frankel, a partner at Founder Collective, said that if things continue to get worse, the health of a B2B2C company’s underlying customer base is critical. If you sell to a late-stage startup that was overvalued last year, it might be focused more on saving costs now, and your growth might be at greater risk than if you sell to a company like Amazon.
“Who are your customers?” Frankel asked. “Who are your customers and how strong are they?”
For now, it seems that employee-benefits startups are safer than we might have guessed, at least as long as they sold to the right companies last year and there are no big changes regarding the supply and demand balance in the labor market. Kropp said while companies that are in a position of desperation would shred their employee benefits, it doesn’t look like we are there yet.
“They expect competition for talent to stay hot,” Kropp said. “Only a third of companies in the competition for talent will decrease hiring.”