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A wild year in HR Tech Funding
2022 was record-breaking in a new way
Happy New Year, dear reader!
I hope you were able to take some time off and recharge. I certainly did. And I also spent time looking back at 2022, and especially at the young companies that are building HR Tech solutions for the Future of Work.
My first keynote of the year is on January 19th. I’ll take a look at the state of payroll and tell you about the trends in paying people. The event is in Amsterdam and you can attend in-person or virtual. Hope to see you there! Free sign up here.
2022 in HR Tech Funding
With over $10B raised, 2022 was another great year for the global HR Tech market, with companies in the space raising millions of dollars to develop and expand their products and services. While the total HR Tech funding amount in 2022 was lower than the record-breaking year of 2021 ($12.3B), the fact that over $22B has been added to the HR Tech industry in the past two years is a testament to its growing potential.
A booming market
This surge in global HR Technology venture capital investments is being driven by the increasing recognition of the benefits that emerging technologies can bring to HR. The surge in the adoption of HR solutions is driving the growth of HR Tech funding and an increasing number of investors is interested in the space.
Venture capital firms, angel investors, and crowdfunding platforms are all providing capital to HR Tech startups, enabling them to raise the funds they need to grow and innovate. In addition, the success of some high-profile HR Tech companies has attracted the attention of more generic investors, who are looking to invest in the next big thing in HR Tech.
In this overview, I will take a closer look at the state of HR Tech funding in 2022. You will read about the trends in HR Tech funding, such as the services and countries that are attracting the most investments. I will also include what different types of funding rounds HR Tech startups used to raise capital, e.g. seed rounds, series A, and later-stage rounds.
Note that my observations rely on what is available publicly. Sometimes funding is announced but the amount is not disclosed or funding is raised privately, and not announced at all. In 2022 I found 27 rounds with an undisclosed amount of funding, which means that companies raised at least $10.1B in funding.
Off a cliff…
2022 was a year with ups and downs. At the start, it looked like we were on track to easily break the 2021 record. January was a stellar month, with close to $1.7B raised. In February, the war in Ukraine started. That led to a general down turn in the market, and HR Tech was no exception. Funding came to a stand still in July, with only $200M invested in 18 deals (announcements typically trail the funding rounds). And even though the market recovered somewhat in the following months, December was only slightly better than July with $282M raised in 18 deals.
The average amount raised per deal declined: from $37M in 2021 to $25M in 2022. But the number of funding rounds increased: from 330 to 409. And even better news: Out of these 409 rounds, 247 were (pre-)seed to series A. Which means that many young companies are getting funded for the first time, with new solutions to disrupt the HR industry. And new solutions are built on new technologies, which will bring the industry forward and enable the new world of work. So a bit of good news after all.
HCM and Pay are stronger than ever
HCM & Pay continues to be the service that attracts the most investors. With $4.5B raised in 2022, it was on par with the $4.6B raised in 2021. Within this category there are three clear winners:
Solutions to manage and pay the global workforce are dominant: together they raised $1.6B, the majority in B and C rounds in the first half of 2022. This was up from $1.3B in 2021.
Full Suite HCM solutions received $1.5B, with almost half going to young companies raising early rounds from pre-seed to A. Even though last year this category took in $2.6B, the number of rounds was higher in 2022, with investors especially keen to fund early stage companies.
Integrating HCM and payroll applications with external services through APIs is taking off, and investments in this category tripled to $220M (from $73M).
So what is driving this? It’s obvious that the pandemic disrupted the traditional way of working for many people. That also meant that the way HR function support these (increasing global and virtual) employees needed to change. It was a category that did exist before 2019, but it really took off in 2020 with lots of founders creating new solutions to support and pay remote workers. Many raised their first rounds in 2021 and went on to attract subsequent funds in 2022.
Full suite HCM solutions in the cloud can now be offered profitably to much smaller companies: a group of new founders focuses solely on supporting the SMB market with a firm upper threshold, thereby keeping these solution nimble. Small businesses increasingly recognize the benefits that technology can bring to HR. By automating and streamlining tasks, HR Tech can help organizations to save time and resources, and improve the quality and consistency of their HR services. This is a market space that has a real opportunity for growth.
It’s also clear that the employee ecosystem is expanding, and companies are tying platforms together to keep data aligned. APIs are being used for all kinds of checks, from employment verification to payroll integration. Other companies try to take the hassle out of bespoke interfaces, and offer APIs to move employee data between the commonly used HR systems. The underlying fee structure will determine if this will ultimately be successful: not every company is prepared to pay every time data moves through the API.
Ups and downs in HR services
Not much changed in the overall services order: Talent Management and Talent Acquisition continue to attract funding, although a bit less than before. Talent Development is getting personal, and coaching isn't exclusive to executives any longer: a number of employee coaching solutions were introduced. Micro-learning is quickly growing, where employees can watch a short video or course immediately before they execute a certain task. It also fits the shorter attention span, and the expectation that has been shaped by reels in social media feeds. Surprisingly, Mental Health funding dropped to 365M (from $1B). The pandemic, with its focus on supporting employees through a crisis, is clearly over.
Also notable, and unexpected, is the drop in Analytics funding from 218M to $78M. If there is one process that companies should invest more in, given current labor trends, it is understanding everything they can about what makes employees tick. And even though you could use the corporate analytics solution, having pre-defined reports and tested dashboards that only focus on delivering employee insights is a quick win. More competition in this space, especially in fit-for-purpose solutions for the SMB market, would be welcome.
It’s no surprise that there is an increasing interest in Compensation, which grew from $172M to $498M in 2022, and was the only service that more than doubled in funding. The labor shortage puts pressure on the job market and employers take a hard look at their current reward practices. Young compensation solutions range from benchmarking to job grading, pay transparency and pay equity programs. This is an area that is ripe for disruption as the traditional way of paying people is quickly changing, and HCM suites simply don’t have the functionality to keep up. Compensation is on my watchlist for 2023.
Solutions to support the deskless workforce received more attention in 2022, but they are still underrepresented as a category. Most companies seem to think that the mobile versions of their HR solution are appropriate, but typically they are not. I’m always amazed at how few companies focus on this enormous space (80% of the workforce). Deskless workers have different needs, and use other services than deskbased workers, like rostering and scheduling. These solutions should be mobile-first from the ground up, not some mobile version of an existing solution. They also need to include a variety of HR services in one app, that can be quickly used while on the move. It’s high time that emerging vendors and investors connect the dots here.
And finally, I found it surprising that workforce management stayed more or less the same at $260M. This is an area that receives so much interest from buyers, and doesn’t have a multitude of vendors. It might be that companies opt for local services because of legislation, but I’ve seen a number of young companies with a solid global base who deserve more attention. Also on the 2023 watchlist!
The HR Tech unicorns
We welcomed 11 new unicorns to the HR Tech space in 2022, and the picture shows all 44 unicorns. If you remember, we added 23 unicorns in 2021.
A word of caution: a unicorn is a privately held startup valued at $1B. Given the current state of the market, it’s likely that some of these unicorns do not meet that valuation criteria anymore. Pay attention to fundamentals, not valuation.
A global affair
As was the case last year, the data shows that most HR Tech companies that raise funding rounds are headquartered in the US, with the UK and India taking a distant second and third place. However, even when companies are founded elsewhere, they typically move their headquarters to the US shortly before approaching investors for series A investments.
The origin of founders and companies is much more culturally diverse than the data suggests. The global overview shows that HR solutions are created all over the world. And as HR remains a localized service, that speaks to the diversity of solutions and founders, even when companies are created with world dominance in mind. The same can’t be said for gender diversity: less than 10% of founders are women.
Even though there were more funding rounds than last year, 409 to 330, the number of investors stayed the same. As in 2021, Tiger Global and Softbank were among the most active investors, and they were joined by Y-Combinator and SpeedInvest. What was noticeable this year is that the number of angel investors more than tripled compared to last year, resulting from the relatively high number of early pre-seed rounds.
A look ahead at 2023
With $10B in funding, 2022 was a good year for global HR Tech startups, even though it did not break the $12B record of 2021. The number of rounds was higher: 409 to 330, but there were fewer $100M+ rounds, 27 versus 46 in 2021. That resulted in a drop in average deal size to $25M (vs $38M in 2021). The large number of seed rounds, 147, also contributes to the smaller average, and it points towards a great future for new HR Tech solutions.
2022 was also a year in which we saw a return to fundamentals. It’s important to show the path to become a sustainable, profitable company. Founders must focus again on building businesses that create long-term value, instead of quickly raising the next round on hype and more features. Still, there’s so much left to improve that there is enough room for solutions that embrace emerging technologies and help the HR function get ready for the future of work.
When young companies grow and want to add new product capabilities and business offerings, they often struggle with whether to "build or buy" their way in. In the second half of 2022, the number of HR Tech M&A announcements increased faster than those of HR Tech funding rounds. Smart companies have used the lower valuations to obtain unique technologies and incorporate them into their own, much faster than they could build them. I fully expect the M&A activities to continue in 2023.
Have a great day, Anita
PS: The scope
Everyone looks at the HR Tech space a bit differently, so what is the scope of this research?
This report focuses on the solutions that directly support the HR or People function and are most likely to be procured by CHRO’s and their teams.
That means that the following solutions are excluded:
•Marketplaces for independents
•Course platforms and EdTech (a category by itself)
•Solutions for gig workers
During the pandemic, a category called WorkTech emerged, which includes solutions that support the employee experience through digital workplace and productivity platforms: these solutions are excluded.
To establish the overview, investment news from sources across the world in several languages are tracked. Note that the list is not complete: sometimes a company doesn’t publish a press release – this happens more often than you think – or the investment is private. All funding rounds are shown in US dollars.