Even as other industry segments suffer in the midst of a mixed economy, investors remain active in the HR technology space. During 2022, investors put $11.4 billion into the space, down from $13.3 billion the previous year, according to investment bank Houlihan Lokey.
But even if investments are slowing down, a number of industry observers believe HR tech remains an attractive place for investors to put their money.
In an interview with UNLEASH, Houlihan Lokey Managing Director Adrian Reed said the investment activity results from the belief HR tech has become “mission critical” for businesses.
The labor market’s evolution and shifts in the way people work have pressured employers to invest in HR solutions so they can be better equipped to compete, he said. At the same time, a stream of technological advancements has created intense competition within the HR technology industry itself. That, in turn, has spurred the need for more innovation as vendors jockey for customers.
“The increasing ‘war for talent’ is driving the need for anticipatory and flexible talent sourcing solutions, while the global dispersion of talent and mobility of the workforce are further stressing the urgency for robust HR software solutions,” Reed said.
Lots of Promise, But…
Another dynamic at play: small technology providers “continue to play a significant role in the sector as they consistently fuel growth and innovation,” said Reed’s colleague Sascha Pfeiffer, also an MD at Houlihan Lokey.
Although investment levels are healthy, venture funding in HR technology startups has, by some estimates, fallen to less than $3.3 billion over the last four quarters. That’s a notable change since 2021, when venture funding in the space skyrocketed to $10.5 billion through more than 800 deals, according to Crunchbase.
In 2022, HR tech startups raised more than $8 billion across 700 deals, Crunchbase said. However, investment data shows the most recent second quarter to be the slowest for HR tech venture funding in three years. Between last year’s second and third quarters, funding for VC-backed HR tech startups dropped by $2.7 billion, from $3.6 billion to less than $1 billion.