Investing in engagement: A look at where VC money is going in HR tech

Despite a recent slowdown in global VC tech investment, money is still flowing into HR tech, according to a recent analysis of investor data provided exclusively to HR Brew.

As we previously reported, the industry reached an investment milestone of $16.8 billion worldwide in 2021. And investments in HR tech continue to make headlines, with companies such as Velocity Global, which offers a software platform that handles onboarding, payroll and other HR needs, and Rippling, an employee management platform, raising $400 million and $250 million in single funding rounds, respectively.

HR tech is a broad field, encompassing everything from employee-engagement platforms and online job marketplaces to AI-enabled burnout detection tools and beyond. To zoom in on where the investment money is flowing, we asked Pitchbook Data, a venture capital, private equity, and M&A analyst, which sectors of the HR tech space investors seem most bullish about.

Engagement is paramount. Pitchbook crunched numbers from the last six years, across seven categories of businesses: employee-engagement platforms, IT consulting services, management-consulting services, online job marketplaces, project-management software, recruitment platforms, and talent management.

The data, which analyzed investments from 2016 through May 27, 2022, shows that among US HR tech firms, employee-engagement platforms, recruitment platforms, and project-management software are leading the way, respectively. (The report was compiled by Pitchbook’s machine learning tools, which scan the Web for “regulatory filings, news sources, websites, press releases, and more for publicly available data,” according to the company.)

With one exception, investment totals in 2021 for every category were the highest of the last six years, according to Pitchbook’s data, with employee-engagement platforms accruing over $1.4 billion and management-consulting services netting over $2.1 billion. (Overall investment in IT consulting-service tech was higher in 2018 than in 2021.)

Sarah White, CEO and principal of Aspect43, an HR tech research and advisory firm that works with both investors and vendors, explained that employee-engagement tech is attracting a lot of investor interest due to advancements in technology in a category that’s lagged behind.

“One of the big reasons we’re seeing a huge influx of investment in this area is really, for the first time, the technology has caught up to what we need to do,” White said. “And we also have business cases and data showing engagement and retention and the impact it has on business value,” she explained to HR Brew.

There is “a true business value to properly retaining and engaging our current employee base,” White added. “It’s also significantly cheaper than recruiting.”

The global picture. Global HR tech investment, which includes US firms, echoes the national data. This year, employee engagement platforms are leading the way with $1.4 billion, followed by project management software with $937 million, and IT consulting at $614 million.

According to White, investors playing the long game are likely thinking about employee experience, which White says correlates to engagement, and by extension, retention.

Over the next three to six years, “as we see more of the boomers retire off, we’re going to see companies trying to fight for the talent in a way they didn’t have to before. And that is through retention, not just through recruitment.” White believes employers will place greater importance on figuring out how to retain and engage with “our contingent workforce, our contract workers, our consultants, our alumni—the people that have maybe retired out, but we need them to come back to do some special projects.”

The future is…not quite yet. The HR industry might not be in for an immediate technological revolution. As John Sumser, principal analyst at the HR tech analyst firm HRExaminer, previously told HR Brew, bigger companies tend to adopt new tech first and then weed out the products that don’t work. Overall, it’s a process that flows downward, he said.

“Thinking about [how] technical adoption works, you have early adopters who can take risk and who can afford to take risk, and you have technology laggards who can’t afford to take risk,” Sumser said. “And technology flows towards the laggards.”—SB

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