How it Started
With over $12B in funding, 2021 was the best year for HR Tech ever. And at the beginning of the year, overall Global Funding was still strong. But then the war in Ukraine started and that signaled the end of the global funding spree, as you can see below.
How it’s going
Considering the trend in overall company funding, I received many questions about HR Tech in 2022. What’s the performance, and is HR Tech beating the trend? To which I can say: yes, it is.
I have yet to run the 2022 H1 report but I can safely say that we’re on track to beat 2021 H1 in total funding.
The chart below is cut off at June 15, but you can easily spot the trend: in 2022 every month the total funding exceeds 2021. You’ll notice that February was the lowest month. I guess that a number of companies that closed rounds in the second half of February delayed the announcement until March due to the war.
I remain firmly focused on HR solutions, bought by CHROs and their teams to run the business. I haven’t included worktech. Learning solutions are in, but Edtech and Job Boards are excluded.
I will publish the full analysis next month and send you a copy, but let me share a few highlights:
- The funding of solutions to manage and pay the global workforce remains at least as strong as before
- Solutions to support the deskless workforce are gaining traction
- HCM & Pay is still the most well funded category but Talent Acquisition and Talent Management are closing in on the top position in number of rounds.
- VCs have become even more interested in funding API-only solutions
- VCs are spreading the risk: the number of VCs participating in the same funding round is going up
Expect stronger headwinds
Despite economic warning bells going off, I have not seen a slow down in the demand for new HR Tech solutions: many companies are just embarking on their digital journey and I receive more requests for selection projects than in 2021. From what I hear from vendors, the market demand is there, especially from SMB clients.
But even though it seems like all is well in HR Tech, you should not assume that all recently funded vendors will survive a potential storm ahead. When you buy services from these HR vendors, there are a couple of reasons to stay alert.
Growth and outlook
I’ve seen many pitches from young Tech companies with great growth projections. To maintain that growth record, they typically focus on 2 categories of clients:
- High growth companies (meaning other newly funded tech vendors because they hire many employees in a short time)
- Big Tech companies
But high growth companies are downsizing and their workforce is shrinking. You can find a searchable list of Tech Layoffs here. (The good news: I only found one HR Tech that layed off people in 2022. )
Keep in mind that Saas revenue comes from a subscription fee per employee. Fewer employees means less revenue (even though there is some delay through bandwidths). And when companies receive less revenue, they will not hit their growth projections and ultimately might not be able to pay their bills.
And those big tech companies they list as their customers? If you dig deeper, you’ll find that it’s usually a few local subsidiaries, not the whole employee base.
The financial outlook of many tech companies has quickly changed and that includes HR Tech. VCs are telling these founders to slash costs and preserve funds for more difficult times. They also need to focus on the bottom line and become profitable. Well-managed startups should be able to utilize the record levels of capital investment from the last years to extend their runway through an economic downturn.
What to do now
But this also means that if you contract services from such vendors, it’s time to do your checks:
- Identify which vendors fall in this category (B2B Saas, recent funding, think broader than HR)
- Check if they are on the Layoffs list
- Have a conversation with them about their solvability
- Ask them about their layoff plans (if any), and their run rate. They are unlikely to answer but you can always ask.
- Think about alternatives, and have a back up plan in place for when one of these services unexpectedly stops working
- Also be prepared for slower delivery of roadmaps as well as M&A announcements.
Don’t assume that these companies can sustain themselves because they just announced a multi-million dollar funding round or have a high valuation. VCs don’t wire all that money at once. They release it in tranches, and companies “unlock” the next tranche when they hit their agreed growth targets.
Don’t get me wrong, I continue to believe in the potential of innovative HR tech companies. Their services fit the needs of the 2020s workforce. But you shouldn’t close your eyes when warning signs start flashing. Be realistic about what can happen. You owe that to your company and your workforce. And while you’re at it, check your entire vendor base.
This is also an opportunity
And finally: I know that many of you have been struggling to hire the tech talent you need. Due to these layoffs there are thousands of tech workers available. Some quit their job and then received word their new job offer was rescinded. Those people are in dire straits. If you’re hiring, don’t miss this opportunity to help them – and your company – out. Maybe some good can come out of this after all.