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Off a cliff...
Hi, Future of Work friends! It's October and that means it's time for an update on HR Tech Funding. And the Q3 results are really something!
September and October are also HR conference months. I'm off to Unleash Paris next week so if you will be there, let me know and we'll find time to chat.
You can find me as a startup judge (Wed 11.35am Influencer stage), I will participate in the panel "The Inside Scoop on Investment: What Explosive Funding Means for HR, and Where We Go From Here"(Thu 11.35am Influencer stage) and I'll do a breakout session on the Pay & Rewards stage on Thursday at 2.35pm to talk about (of course!) "How to Select your Next Payroll"!
I am also trying something new: LinkedIn Audio Events. I will hold these live from Unleash. Follow my LinkedIn timeline for the Event invites and join the conversation. It's a chance to experience Unleash without being there in person!
In this newsletter you'll find:
Why HR should learn about web3 and the metaverse
The HR Tech Funding overview of Q3
And the 2022 HR Systems Survey report is in
Don't miss the opportunity to download the 2022 HR Systems Executive Summary! Let's get to it...
What is the metaverse and why should HR care?
‘I'm really not sure the average person can tell you what the metaverse is' says Apple’s Tim Cook. He is right. But I also think he is wrong.
Because the iPhone didn’t take off until 2012 when everyone started to develop Apps. Only then was the iPhone ready for mainstream - 5 years after its launch in 2007. Imagine if Apple had given up because the average person couldn’t explain what an iPhone was in 2008, or what it was used for.
You've read in my Web3 and metaverse newsletter series, that I believe HR should take an active role. Yes, we are only starting to discover where these innovations will lead us. And you might think you have more than enough time. But the new Metaverse Standards Forum added more than 1500 companies in two months. Global businesses are gearing up, driven by marketing and IT. I’ve noticed a glaring absence of HR professionals and that is not good.
Because we can’t wait on the sidelines until everything is clear. This is about people and the future of work, and HR needs to jump in and play a leading role right from the start. To bring you up to speed quickly, I’ve developed a cohort-based course to teach you the concepts of Web3, the metaverse, and how they will touch HR.
It will help you to separate the signal from the noise and evaluate if, how, and when Web3 will change the future of work and your career. By the end of this course, you’ll be able to understand concepts and technologies, and have a confident conversation.
I am keeping the group small so everyone can participate. Seats are limited! Don’t miss this chance to quickly master this topic – sign up today!
HR Tech Funding fell off a cliff this summer
I already gave you some hints about the direction of funding rounds, when I noticed that the outlook wasn't pretty. After two years of sheer unlimited funding rounds, investors tightened their purse strings, and the money dried up. That was most evident in July, when company announcements dropped sharply. And before you blame the holiday period, take a look at last year.
To be honest, I've said before that HR Tech Funding had gotten out of hand. I saw a lot of very niche solutions being funded with amounts that I was skeptical about, especially when it comes to point solutions. No one can be good at everything, and HCM Suites aren't always the answer. But the amount of funding flowing to solutions that address just one specific HCM problem was out of control. These companies have now become prime acquisition candidates. And that's exactly what is happening this quarter. M&A announcements are sharply up in 2022 and have already exceeded the total of 2021. Pretty sure we haven't seen the last of it.
So what happened in the third quarter? As you can see in the chart below, the number of funding rounds dropped in July to the lowest level in 2 years, and even though they are trending upwards, they haven't come back to their old levels. On top of that, the average deal value is significantly lower: from an average of $30M in H1 to half of that in Q3: $15M.
For the past six quarters, the services order has always been: HCM & Pay comes first, with Talent Acquisition and Talent Management vying for second place. In Q3, HCM & Pay and Talent Acquisition still come in strong, but this quarter the third place goes to Benefits! There were a number of large funding rounds in various geographies around the world, especially focused on flexible benefits solutions. They're back! And that seems a good thing, as companies continue to struggle to attract and retain employees, while the most important reason to change jobs is to receive more compensation.
Learning comes in fourth and Talent Management drops to the bottom of the Top 5. I did not register a single TM round in August. That might be a temporary slump, but I could also see how we have reached peak TM performance, especially since most HCM Suites include a (limited) form of talent management modules. And when companies focus on savings (as they are pivoting to) point solutions are the first to go.
From an investors' perspective, I continue to see new investors participating in funding rounds. There are only a few focused HR Tech investors, and they did not play a large role in the investments. The number of angel investors is also rising. And though the interest is great, an emerging vendor might be better off with a focused HR Tech investor who is well connect to CHROs.
Although I was hopeful at the start of the year that HR Tech Funding would be at least equal to 2021 ($12B) I don't think we'll get there. Remember that Oct21 was a stellar month, and the economic conditions are simply not there to repeat that this year. In order to get to an equal amount, companies would have to raise $1B per month until year end, and I don't see that happening. However, let's not forget that companies already raised $9B in 2022 and that is still an outstanding performance!
The HR Systems Survey Results are out!
Alongside the HR Tech Conference in Vegas, Stacey Harris released the HR Systems Executive Summary Anniversary Edition. It's the 25th year this survey was held, and it's the one HR Tech report I read front to back every year. If you haven't downloaded a copy, you're missing out! And congratulations to Stacey and the Sapient Insights team!
One of the most striking findings, that is also in line with the above Funding report, is that vendor satisfaction is down. Yes, we are buying all those solutions to improve the employee experience, but the "year of grace" is over and vendors have to show value again. It's very typical of a (pending) recession, when companies try to do more with less and reign in spending. I fully expect to see less point solutions (and more M&A), and more companies trying to use the systems they've contracted to the fullest extent.
That's not to say that companies are done replacing solutions. The report headlines that over 50% of time and payroll applications are in danger of flipping in the next 12-24 months. Analytics and Learning follow closely. The most important reason? Gaps in functionality and customization/ configuration. Which I understand, because there are huge functionality differences between traditional and new payrolls and/or time solutions.
Especially SMB's have more choice: if you contracted with a vendor five years ago, you have more options, with systems including modern features like EWA. There's still work to do, and vendors who have used the past two years to modernize their infrastructure as well as their solution are in a great position to weather the storm.
Oh, and watch the multi-country pay space, where a lot of new entrants came in with large funding rounds. They still have money to spend. It will be interesting to see which vendors will partner with whom, and which solutions will be acquired. A lot of investment has been pored into this segment, and a slowdown in the economy is a typical time to join forces. I'll be watching!
Have a great day, Anita
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