Is HR Tech Funding Slowing Down?

A in-depth look at the first half of 2023

Hi Future of Work friends,

Greetings from Lower Saxony, where I am vacationing. Even though the newsletter is on summer hiatus, I wanted to make sure you receive the H1 2023 HR Tech Funding report while it’s still fresh.

Last summer I wrote my first book, “How to Select Your Next Payroll”. Because I enjoyed writing more than I thought, I am writing my second book. Stay tuned!

I’m looking for people to interview on the topic of Equal Pay, so send me an email if you’d like to help. We’ll keep it confidential! And watch my recent Linkedin Live conversation with Maria Colacurcio on how to prepare for the EU Pay Transparency Directive.

And finally, you might have seen that I started a LinkedIn newsletter on the topic of Paying People in the Future of Work. I did not want to change the focus of this newsletter, and there is so much going on with Pay(roll), that it needs its own spotlight.

Hope you enjoy the (Northern) summer.
See you back in September, Anita

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It’s getting cooler

Back in April, I wrote that the first quarter painted a concerning picture from an HR Tech investment perspective. That trend continued in the second quarter. Funding rounds are definitely slowing down: The total HR Tech Funding for the first half year of 2023 came out at $2.93B and 145 rounds. As you can see in the chart below, funding was a lot slower this year than in FY21 and FY22 ($7.6B in 246 rounds). April was an especially low month. While we still remain ahead of the pre-pandemic era, the feverish momentum that we witnessed in the past two years has subsided.

It is important to note that this slowdown does not signify a downturn or an impending crisis within the HR Tech sector. On the contrary, it presents a much needed opportunity for introspection and refinement. Many companies ran more than one round in the past two years and will have the funding to continue operations.

With more M&A announcements in HR Tech than in prior years, it’s clear that investors and vendors are recalibrating their approaches as well as their solutions. The focus is on nurturing and extending the existing solutions portfolio, fostering strategic partnerships, and carving out a path to sustainable growth. And that’s not only the case in HR Tech: investment rounds in all sectors are far lower than they were.

And that was necessary, because we’ve also seen several young companies fold in the last six months, simply because they ran out of money, and their business model doesn’t work in a harsher economic environment. This period of recalibration allows the HR sector to consolidate its gains, fine-tune the offerings, and find a more deliberate and balanced course towards the future. But when you have a great solution, you can still find investors to fund your business.

HR Tech innovation? Full steam ahead!

54 out of the 145 rounds were seed rounds and I find that an encouraging observation. What does that mean? Most founders bootstrap their company when they first start. They use their savings to support themselves and any employees that they might have. Then they often raise a pre-seed round, where they ask family & friends to help them with money to get the product off the ground. Once they have a few customers they try and raise a seed round. Bottom line: seed rounds are very early rounds, meant to attract capital, so you can build out your solution and gain traction in the market.

The fact that a significant portion of the funding rounds, almost 40%, were seed rounds, hints at a positive development in the HR Tech space. It indicates a continuous influx of new companies into this domain, armed with innovative ideas and solutions that have caught the attention of investors. A considerable number of seed rounds demonstrates the belief and confidence investors have in these early-stage companies, as well as their potential to disrupt the HR industry.

While it is true that not all companies that receive seed funding will ultimately succeed, the prevalence of seed rounds signifies a steady stream of fresh ideas and solutions entering the HR Tech ecosystem. These new players bring a spirit of innovation, competition, and disruption, and compel existing vendors to continuously evolve and improve their offerings. It signifies an environment where new voices, perspectives, and approaches are embraced and nurtured. I think it’s important, because a diversity of ideas drives the industry forward, and results in a much-needed upgrade of the HR technology landscape.

Continued focus on financials

The financial side of the employer-employee relationship continues to attract funding, a trend that started in the second half of 2022. When you add HCM & Pay, Benefits, Financial Wellness, Pensions and Compensation together, you’ll end up with $2.1B, over half of the total funding.

Investments in Talent Management and Acquisition continue but remain slow - even though they take up the top 3 and 4 spots. Just so you fully understand what the trend is, let’s compare what has happened this year to the full year funding of 2022. Now, funding rounds aren’t an exact science, and it is always possible that there will be more appetite to support young companies in the second half of the year. So, take this with a grain of salt. Still, it’s interesting to compare 2023 to 2022:

The overview highlights the contrasting funding rounds received across the different service categories in 2023. While Benefits and Pensions demonstrate promising growth, and are on track to outperform 2022, the funding for Talent Management, Talent Acquisition, and other categories are showing a noticeable decline. Even HCM & Pay, a long-standing top performer, isn’t attracting the same attention as in prior years.

I am especially surprised about the lack of funding in the area of Compensation, which was a top performer last year. Given the growing focus on pay transparency and the need for organizations to address pay gaps and foster inclusivity, it is surprising to see a lack of funding in this category thus far. With the introduction of new Pay Transparency Legislation across the world, compensation solutions offer critical support to measure if you are not over- or underpaying certain employee groups. I’m convinced we’ll see this pick up in the second half, as both founders and investors are realizing the strategic importance, as well as the potential.

The second surprise is Workforce Management. With more countries imposing the need to register time for employees, Workforce Management solutions clearly have ample way to grow. But it’s hard to create a workforce management solution, especially one that supports multiple countries. Let’s see what happens in the second half of the year.

Going global

As usual, the United States saw the most funding rounds happen, 64 out of 145. The United Kingdom came in second with 11, and both Canada and Germany ended up with a respectable 8 rounds. I found it encouraging to see that founders in Africa and the Middle East are starting to participate in funding rounds. These regions encompass countries with diverse labor markets, rapidly growing economies, and a predominantly mobile-first workforce. It is crucial to develop HR Tech solutions that are specifically tailored to their context and challenges.

I’ve written extensively about the different needs of a workforce population that is mobile-first and why I think that African solutions have disruptive power. These solutions have the potential to transform the way organizations manage their workforce, navigate talent acquisition, enhance employee engagement, and address unique challenges such as remote work, informal employment, and the gig economy. And the good news is that you can use them across the world to service the mobile-first audience.

What about AI?

It is obvious that generative artificial intelligence is the buzzword of 2023, and by using it in your corporate messaging, you can capture the attention of potential investors. When you hint at the promise of AI, and connect your message to its perceived transformative power, it seems you can more easily attract financial interest.

In the first six months of the year a lot (a LOT!) of tech companies, including HR Tech vendors, announced that they are building AI functionality into their solutions. From deploying AI-powered ChatGPT-like services to leveraging artificial intelligence in other critical areas, these companies are showing a commitment to offer cutting-edge technologies that help the HR professional save time and become more productive.

What I didn’t see: Even though many of the funding announcements mentioned AI support, none of these companies were only focused on AI in HR. And I think that is well done, because right now, it seems like announcing AI in a press release guarantees interest from investors. But HR is just too sensitive a topic to mess around with. Fortunately, most HR Tech vendors seem to adopt a more cautious and measured approach when integrating AI into their solutions.

What’s next?

The HR Tech funding overview of the first half of 2023 shows a notable deceleration compared to the preceding years. While the current figures indicate a slower investment pace, the industry remains in a favorable position when compared to the pre-pandemic era. But we also see more initiatives between vendors to work together, and more M&A activity. This shift serves as a wake-up call and urges vendors to invest in consolidation, innovation, and long-term sustainability. I think it’s positive that we go back to a more measured approach to fund companies, with a renewed focus on the bottom-line and a clear path to growth and profitability. In the long run, that benefits customers as well as the solution vendors and investors.

Hope you found the analysis of the first half year of 2023 insightful. Let me know what your prediction for the second half is!

Have a great day, Anita

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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:

•Productivity platforms

•Job boards

•Marketplaces for independents

•Course platforms and EdTech (a category by itself)

•Experience technology

•Solutions for gig workers

•Virtual offices

•Event platforms

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.