Funding Dynamics in HR & Talent Tech
At Talent Venture Group, we are keeping weekly track of what is happening in the HR & Talent tech space. This also allows us to find and understand trends. During last year, we saw high activity in the following verticals: Learning & Development, Collaboration & Productivity, Employee Wellbeing, Online Staffing, and Employee Benefits. These verticals were among the 10 most funded verticals in the value chain, obtaining over $11 billion in funding in 2021.
Understanding and modeling the steep increase in HR & Talent tech funding is crucial in trying to anticipate the future. Our model is that two main factors are driving the increase — the first one being the pandemic and the onset of mass remote working and the second one being the “Great Resignation”. Of course, these are not the only factors. The War for Talent has been driving HR & Talent tech innovations for quite some time, and the increase in total VC funding has also contributed. Global VC funding almost doubled in 2021, while HR & Talent tech funding was 3.6 times higher in 2021 compared to 2020, according to PitchBook. The two factors mentioned above, are two that are plausible due to the timing of them.
The pandemic led to increased rates of working remotely, and many companies, such as Shopify, Coinbase, and Meta, will continue to offer remote working or hybrid working even after the pandemic is over. Remote working leads to being able to access a much wider talent pool, but at the same time it requires new ways of collaborating efficiently, new ways of communicating, and better ways of hiring.
The “Great Resignation” highlights that it has become harder for companies to both attract and retain employees. Wages are important, but perks and benefits are becoming an important strategy for employers as well. Studies and expert advice often recommend focusing on giving employees the opportunity to grow, showing that you care about the employee through benefits, and allowing flexibility as the most important strategies for retention.
For the above-mentioned verticals, remote working has been affecting them in a multitude of ways.For Learning & Development, a vertical that saw 43 venture deals in 2021 for a total value of $2.95 billion and that includes companies such as Axonify, Articulate, and Degreed, remote working has meant an opportunity for employees to search for new interesting jobs — which may mean that they need to re-skill themselves. Similarly, the demands that employers now face means that re-skilling existing employees might be worth more than trying to find new employees on the market. The possibility of learning and getting new knowledge is also a key for many knowledge workers to become more productive and engaged, according to research from Salesforce.
Possibilities of learning at the job are not the only benefits that can be used to increase competitiveness on the labor market. Companies are now adding more and more benefits to their compensation packages than ever before. Recent surveys have shown that more than 90% of employers are viewing voluntary benefits as important parts of their total compensation, this is a more than 2.5x increase from just a couple of years ago. Attracting and retaining is hard, and the pandemic seems to have made many workers rethink their views on work. This in combination with remote working opening up a lot of possibilities for workers means that the bargaining power of workers is better than ever — the response from companies so far seems to have been to increase Employee Benefits in addition to increasing salaries. Employee Benefits had 58 venture deals in 2021 with a total value of about $1.38 billion. Notable companies in the vertical are Human Interest, Ease, and Swile. Employee Wellness, which saw a total funding of $1.35 billion across 31 deals, is also part of this — giving employees access to prime healthcare, mental health services, and other wellness solutions, is also a benefit. It also serves to keep workers from dropping their productivity in the face of Zoom-fatigue and other stress related problems.
Similarly, remote working has increased demand for collaboration in teams. Where earlier it was possible to meet in person and discuss ideas, workers are now sitting by themselves at home with fewer possibilities for productive conversations and serendipitous meetings. To solve problems of Collaboration & Productivity for remote working there was an initial focus on video conferencing solutions and meeting technologies — but as remote working became a long term reality, many more solutions regarding task management, idea generation, and team building were created. Early research, before the pandemic, seemed to indicate that productivity decreases with remote working. But current statistics and studies seem to indicate that productivity is stable or higher when working remotely. This increase in productivity when working remotely is likely due to the solutions offered by startups, which would explain the steep increase in both investor interest and growth in corporate spending on collaboration tools. Over $2.66 billion was invested in Collaboration & Productivity in 2021, among the largest companies in this space are Calendly, Miro, and Notion.
Modeling the Trend
Combining these two factors allows us to understand the increase in funding. Remote working and the Great Resignation both have led to companies having to adjust their ways of working, both in hiring, retention, and in everyday operations. This has led to new solutions and increased demand for HR & Talent tech, i.e in Talent Acquisition, Talent Management, HR Systems & Rewards, and Team Collaborations — which is reflected in the funding in 2021.
Thus, the gears of the model — that are driving a large fraction of the increase in funding for HR & Talent tech — are remote working trends and the increased pressure on employers to provide comprehensive compensation packages.
Now, these two factors have influenced the economy and the workforce for about two years now. Should we expect them to continue? Recent evidence from researcher Nick Bloom with collaborators suggests that remote working is here to stay. Among other things, they find that a majority of Americans would prefer to spend at least 3 days per week working remotely. The fraction is even greater if one looks at the highly educated and the high earners. They also predict that 20% of work will be done remotely after the pandemic, which is a 5x increase from 5% pre-pandemic.
Remote working has been one factor in the Great Resignation, allowing workers more opportunities, and given that remote working seems to continue — we may keep seeing continued pressure on employers to provide more and more benefits and opportunities for learning and development to retain their employees.
What’s next?
More specifically, this model predicts that sub-verticals that are second-order to these trends also may see an increase in activity. Sub-verticals such as Engagement Tools, Virtual Workspace, Flexible Workspace, Social Remote, and Onboarding Software — are all benefiting from remote work and increased pressure on employers to become better at retention.
Example of the dynamics
An example of the kind of dynamics that we expect to drive some of the funding in the coming years comes from PEO/EOR Global Hiring. This sub-vertical is made up of professional employer organizations (PEO) and/or employers of record (EOR) that help firms with global hiring, payroll management, and onboarding. During 2021, we saw significant increases in the funding for this sub-vertical. A total of 9 funding rounds were made that exceeded $100 million in size. Competition in this market is becoming harder and the companies in here need to expand quickly to capture new market opportunities.
In the above diagram, we see that the cumulative funding for Deel, Papaya Global, and Remote has been growing rapidly. Like with the above mentioned verticals, the growth in global hiring is also partly due to remote working, not needing to have people in an office allows companies to hire workers from all over the world. For employers, the lower wages in other countries is also an incentive to hire from the global talent pool.
As we can see, the funding of these companies started in 2019, just one year before the pandemic started. These are young companies that have experienced rapid growth as well as rapidly growing valuations. This is the kind of dynamics we think are going to play out in the verticals boosted by changes in the global workforce and working conditions these past years. The successful solutions that increase productivity, engagement, successful hiring, and retention of employees will keep growing and they will need to compete against each other and already existing solutions. In that, they will become more valuable and, at the same time, they will need funding to grow and thus we will see larger and larger rounds.
Another example, that is further from HR & Talent tech, is the market for corporate credit cards and expense management software. There are four main companies competing for funding and customers on both the US and the European markets. The growth in this area has less to do with remote working and the like, instead it is more about new software outperforming older solutions. Just in the beginning of this year, we have seen three venture rounds exceeding $100 million.
In this diagram we see a similar trend, funding and competition is heating up for some of the fastest growing companies in the space. Brex, Ramp, Payhawk, and Pleo are all showcasing rapid growth and even recent market volatility has not affected their valuations much, as showcased by recent large rounds.
In general, both the PEO/EOR Global Hiring and the expense management examples are illustrative of the kinds of dynamics we expect going forward in HR & Talent tech funding.
Early Stage Investing
Looking at the earlier rounds, Pre-Seed and Seed, which we believe will continue to be elevated, shows a similar pattern to what the model predicts. (Although it is too early to draw any strong inferences) Seed and Pre-Seed investing is still going on at a high pace.
So far this year, there have been 18 Seed and Pre-Seed deals in the above mentioned verticals. The combined value of these deals is $89 million. If we compare this to all two month periods since last summer, this is just below average in terms of number of deals (21.5) and above average in terms of combined deal value ($74.6). As such, dealmaking in the early stages does not seem to be slowing down too much.
Conclusion
Overall, early evidence points in favor of a view of HR & Talent tech funding trends as driven by two main factors — remote working and companies’ problems with retention. Having this view leads to expecting funding in HR & Talent tech to stay elevated, with an increased number of large rounds accompanied with continued Seed and Pre-Seed activity as new solutions are created.
Macro variables such as market volatility, the job market stabilizing, and a whole host of other factors could make this view invalid. But based on the companies that we meet, there does not seem to be any slowing down in the attempts to innovate and improve HR processes, productivity, talent management, and talent acquisition — a good sign for continued growth.
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