Human resources is often the Rodney Dangerfield of the corporate world—it gets no respect.
Indeed, many view human resources as a corporate backwater focused on mundane matters like managing health insurance and 401(k) plans. Meanwhile, departments like sales and marketing get all the glory, command outsized budgets and dole out big bonuses to executives.
We think this is misguided, but venture-capital investors have in some sense agreed. According to data from research firms Mattermark and Pitchbook, from 2011 through 2016, the amount invested by venture capitalists in startups focused on sales-and-marketing technology (a hot sector for VCs) dwarfed the amount flowing to human resources-related startups–to the tune of $32 billion for sales and marketing, compared to $6.6 billion for HR-tech companies.
The gap between these two sectors has closed somewhat in recent years. Total sales-and-marketing startup funding for 2016 (in terms of total dollars) was 2.6 times that invested in HR companies, according to our analysis. It was the lowest that ratio has been in the six-year period we analyzed, and well below the 11.7x ratio we saw in 2013.
Still, we think this general discrepancy, and the broader under-funding of HR tech, is excessive. First, it discounts the many successful HR-technology company exits in the last few years. Microsoft clearly sees major value in professional networking site LinkedIn, for example, which it purchased for $26 billion in 2016. Perhaps the first mega-deal in HR tech occurred way back in 2004-2005 when Oracle bought PeopleSoft for about $10 billion. Other notable HR-tech exits for VCs include LinkedIn’s purchase of online-learning company Lynda.com for $1.5 billion in 2015; Oracle’s $1.9 billion purchase of Taleo in 2012; and SAP’s $3.4 billion buy of SuccessFactors in 2011, to name a few.
In fact, an analysis of the top 16 B2B software-as-a-service (SaaS) companies–based on current market cap (as of May 15) or, for those that have been acquired over the last decade, value at exit–shows that five of the 16 are in the HR-tech sector.
In addition, many of these companies are valued at strategic premiums relative to their revenue. Microsoft’s $26 billion purchase of LinkedIn was 8.1 times trailing twelve month (TTM) revenue. That’s healthy by any standard, but is actually lower than the 11x paid by SAP when it acquired Concur and the 12x it paid to acquire SuccessFactors. Public-market investors have placed significant value on HR-tech as well: Workday’s current market cap of roughly $22.6 billion is 13.5x its TTM revenue, and Ultimate Software’s market cap of $6.7 billion is 8.1x its TTM revenue.
HR software: The glue that holds everything together
More fundamentally, though, many investors’ reluctance to fully embrace HR software reflects a basic misunderstanding of how much value this technology can deliver, particularly as data science and machine learning play a larger role in talent acquisition and management. Today, HR software can do everything from help companies quickly sort and prioritize resumes; qualify the best candidates for a job opening; and even identify diverse candidates such as women or veterans.
Most importantly, these HR tools also demonstrate quantifiable ROI, just like sales-and- marketing software loaded with analytics and artificial intelligence. These products don’t directly drive customers to your sales pipeline, or help you target marketing emails to qualified prospects. But they help companies in ways that directly impact the bottom line. For example, one clear ROI could be cutting the amount of time and money it takes to fill an open position. Today, the average job vacancy remains open for 52 days and, depending on how senior the position is, you could spend anywhere from 150% to 400% of the candidate’s eventual salary to find a new hire. And that’s all before you’ve even hired them. Reducing those expenses is a huge win for any company.
Playing “Moneyball” and getting the most out of your talent
Fifteen years ago, Billy Beane, the general manager of the Oakland A’s, developed a philosophy through which the A’s acquired talent based on new, advanced metrics that other teams weren’t tracking. (This was the basis of the book and movie “Moneyball.”) The strategy allowed Oakland to tip the competitive landscape in its favor, based on data. We’ve now entered an era in which the tools and technology exist to do the same with our workforce. HR technology and applied talent science are helping companies run their businesses more effectively, driven by data and insight, even though much of this is happening under the radar.
Talent acquisition and employee benefits are two great examples of how HR tech is already delivering dividends. As the amount of raw data about job candidates and employment markets continues to expand, for example, HR professionals can do their jobs more intelligently. For recruiters, this means automating workflows related to prospecting and sourcing new job candidates. For benefits leaders, this means automating the process of discovering and analyzing benefits plans. In both cases, technology allows companies to take time-consuming, manual processes and automate them. This allows HR professionals to focus on more strategic priorities.
Employee training is also becoming more technology-enabled and data-driven. Today companies spend about $130 billion on training and development each year. Large companies like Lynda.com, Cornerstone OnDemand, and Udemy are capitalizing on this huge opportunity by delivering a massive array of online content tailored to specific employees’ needs, career paths, strengths, and weaknesses. Products from these companies can improve onboarding, enhance professional development and even help with succession planning.
Overall, companies thrive because of their people, and investing in them is the best bet CEOs can make. By becoming smarter and more data-driven, CEOs and investors who embrace this new age of HR technology will build better companies—and investors could see positive outcomes as well.
*For a full list of all Battery investments and exits, please click here.