There’s a ton of money flowing into HR technology companies this year. Of course, there was the half-billion that Zenefits picked up. But there was also $92 million for Virgin Pulse, $70 million for Glassdoor, $65 million for Udemy, and $45 million for HireVue. We hear talk of even more transactions on this scale in the coming days and weeks.
So, is this a bubble? The surest sign that you’re in a bubble is people saying that you’re not, so we’re going to go with yes. In truth, the market seems overheated, and a correction of some sort seems due to take some steam out. Does that mean it will be 2001 or 2008 all over again? We don’t think so. We know that investors put money into companies that will generate a return, but we sort of like to believe that money is flowing out of stupid stuff like video games and flowing into categories that can actually have a positive impact on individuals, companies, and the world. We’d like to think that people want to invest in things that will create a new social contract — that blend life and work to focus on the whole human experience and condition. Hey, let’s focus on connecting people instead of building things that drive them further into isolation. It’s the optimist in us.
Now, for the blunt business talk. We think these are real companies solving real problems. Enterprise software companies and particularly HR tech companies are striving to solve what is the No. 1 business problem of the 21st century — talent. When the ability to acquire, engage, train, and retain people is the main competitive advantage that organizations have, they will be looking for solutions to give them a competitive edge.
What’s going on? In our opinion, there are four factors at play
- Innovation is driving opportunity. Proliferation of broadband, social, and mobile technologies is making SaaS a compelling solution for companies of all sizes, but especially organizations in the SMB and midmarket. As we reported in the 2015 HCM Vendor Brandscape Report™: “The midmarket solutions being adopted by the SMB today offer a consumerized — and sometimes gamified — interface that offers users ease of adoption and use. But they are no less complex behind the interface. The opportunity for HCM to be disrupted by solutions purpose-built for the SMB is very real, given the market opportunity.”
- Investors invest in what they know. Very typically, VCs and PE firms that are in HR technology are in all the way. For example, Insight Investment Partners, which was behind the Virgin Pulse and Udemy investments, also has investments in HR tech companies such as Zenefits, Qualtrics, HealthcareSource, and Instructure. Or look at Matrix Partners (Namely, Beyond, The Ladders, TribeHR). Investors who know the space continue to see opportunity.
- There are fewer places for money to go. Money needs to go somewhere, and quite frankly, there are few places for investors to make money and get a worthwhile return. A lot of money goes into real estate, but other than the market, where else is it going to go? As TechCrunch recently pointed out, there’s essentially the same amount of money at play as in 2005, but half the number of funds to invest in. As a result, fund sizes get bigger. Valuations get larger. Investors and entrepreneurs are under more pressure to hit home runs.
- The time between A, B, and C rounds of investment will shorten dramatically as HR tech firms look for more funds to fuel growth. Just as investors invest in what they know, they know their existing portfolio very well. They also have less risk putting tens of millions more into an existing investment, diluting other investors while strengthening their own positions for a possible exit.
What are we bullish on with current market opportunities?
- Engagement platforms: We believe that the conventional wisdom around the shift from systems of record to systems of engagement — while accurate — is an incomplete view of what’s going on. It’s more than just companies moving from PeopleSoft to Workday. The definition of engagement is broadening because companies in different categories are attacking the issue from different angles and beginning to push these categories together. For example, we see point solutions for wellness, peer-to-peer recognition, and benefits all beginning to collide in the same way that point solutions for talent came together 10 years ago in the form of integrated talent management. We really see the future of HR technology as the creation of engagement platforms that aren’t just an evolution of systems of record or talent management. These engagement platforms will be driven by innovation and completely rethink how to approach the challenge of engaging a workforce.
- Core HR: There are tons of sexy solutions out there for some of the unsexiest problems in HR — SMB HR platforms (Zenefits and Namely), benefits administration (Businessolver), payroll (ZenPayroll), outplacement (RiseSmart), and even mobility and relocation (NuCompass CoPilot). New vendors that are selling to a much larger addressable market in the SMB, or horizontally aligned point solutions, look more like B2B tech solving business problems that happen to be in HR than the HR-centric applications in the enterprise space.
- Enterprise learning: Innovation is completely changing this category as it moves away from simply automating the classroom experience and toward fostering informal, just-in-time, organic learning and collaboration, such as Udemy, Declara, showd.me, and Xyleme. Where in the past, training and learning were typically only found in enterprise-class companies because of the cost and scale of these solutions, SaaS and mobile solutions are opening up a huge opportunity in the SMB and midmarket, where organizations are hungry for training, learning, and collaboration solutions that are suddenly available and affordable. So, can Udemy truly become the Netflix of education? The opportunity is there. Just look at Lynda.com, which LinkedIn grabbed for $1.5 billion. This could end up being a bargain.
- Analytics: We believe that workforce analytics is a category that has the potential to move from early adopter to mainstream faster than any other. In other words, questions that an organization might need a data scientist for today will be available to any line manager in the very near future. For example, there’s a startup out of Austin called One Model that is an analytics accelerator, making it possible to turn your data into answers in days rather than months. So although companies such as Visier offer powerful analytics tools with sexy UIs, the potential downside risk is that innovation moves the category into commodity status faster than startups in this category can mature. In spite of this, we believe innovation will win the day. For example, Vestrics not only has the sexiest, easiest, and most truly innovative UI in analytics and not only gets you to the right answers, it gets you to the right questions. In a tricky category to prognosticate, there are solutions that are slam-dunk winners.
- Talent acquisition: Talent acquisition is always going to be a soft target for investment in our space. Every entrepreneur has had an issue hiring a person, and lots of them think they have a novel solution for it. However, this dynamic category has lots of downside risk. Buyers are fickle, and tastes change quickly. It’s easy to. Go from the greatest new thing that will change recruiting forever to yesterday’s news faster than in any other category (for example, Gild). However, we see the entire category being upended because ATS has landed squarely in commodity status. Companies throughout the category are pivoting and moving toward being more data- and analytics-driven. When you look at the kind of money HireVue got, it makes sense. It built around the ATS instead of on top of it, gained some traction in market, and got the aggressive financing it needs to spin into a full-blown IPO or acquisition.
Bubble or not, there’s a strong future for this category. It would serve entrepreneurs, marketers, buyers, and investors well to understand the near-term risks as well as the long-term opportunities.