Leveraging Technology to Thrive in a Changing Work Environment – The Rise of HR Tech
Written by Ortal Sasson, Investment Associate
This article was also featured in Calcalist
Talented, motivated employees have always served as the cornerstone of successful companies. In today’s era of increased competition over talent, greater employee turnover, and new employment models like remote work- leveraging technology to stay ahead of the curve is more vital than ever.
HR has always comprised a core focus area for companies small and large. Thanks to technological innovation and significant investments in the space, a new category of tools and solutions have given rise to a new category; HR-Tech, a sector that has been garnering headlines in recent years.
HR-Tech provides solutions across the entire employee lifecycle, from recruitment and hiring, training, development, to ultimately retirement. This disruption to traditional HR is fueled by both management teams viewing HR not as cost centers, but as competitive advantages, as well as enabling technologies such as AI/ML and analytics driving the field forward. Resultantly, companies are increasingly receptive to experimenting, investing resources, and adopting HR-Tech as a crucial element to their operations.
The Rise of HR Tech Over Time and its Relevance over Current Market Conditions
The HR technology space has changed dramatically over the past few decades. Tracing it’s inception to System of Record platforms focused on automating paper transactions and record-keeping, the HR-Tech stack has since expanded to include a variety of platforms such as Applicant Tracking Systems (ATS), Workforce Planning (ERP systems), Systems of Engagement (HCM systems), Talent Management, and Employee Experience tools. Most recently, leading companies have ventured into what has been called Talent Science- tools designed to leverage analytics that assess employee behavior and performance.
When we contemplated writing a piece on the ongoing innovation within HR Tech a few months ago, we planned to start by saying that today companies’ key constraint to achieving growth is no longer capital, but rather talent. While the first half of this claim is not entirely true at the moment, given the ongoing market turbulence, the latter holds true – hiring, developing, and talent retention remains a priority for global enterprises with increasing focus from C-level personnel on deploying resources towards HR-empowering technologies.
Contrary to what is becoming common narrative, we believe the current market environment will not end the constant shortage of qualified candidates in the long term, nor will it change the fact that extraordinarily talented employees will become progressively scarcer and demand outsized salaries, requiring companies to continue optimizing their HR practices in order to recruit, retain, and maximize output from top talent.
A recent study by Gartner conducted under the current market environment highlights the continued focus of management teams on the topic, and their intentions to continue investing in the space.
An Investor's Perspective on HR Tech
Partly driven by the pandemic, investment in HR-Tech reached an all-time high totaling $12.5bn in 2021 and accelerated to $7.5bn in H1’22 alone, demonstrating strong investor appetite. Prior to COVID-19, the sector produced only 10 unicorns dating back to pioneering HR SaaS platform Workday (now worth ~$40bn), while increased interest from investors led to 15 new unicorns in 2021 alone. Today, the space’s largest incumbents (namely Oracle, Workday, SAP, ADP) compete with hundreds of agile and innovative players in nearly every market segment.
As investors, we view the constant struggle our portfolio companies face with regards to HR. Across the board, this is one of the biggest challenges they face. Thus, it comes as no surprise that in the same spirit these companies are innovating on the product front, they are also innovating in the way they think about their employee base. This, coupled with significant advances in cloud, big data, and AI/ML are enabling the rise of new technology, which is in turn driving several key trends within HR:
- Emphasizing skills vs. Experience - Recent hiring trends have proven conventional CVs are no longer the ‘one source of truth’ for ensuring ideal employee-company fit. The screening process is undergoing a revolution with the help of startups such as TaTiO, Unboxable, and Retrain.ai, enabling enterprises to improve their talent sourcing abilities in targeting optimal candidates by introducing novel methods and technologies, while streamlining the hiring process.
- Leveraging data and analytics for HR – Organizations are increasingly shifting towards data-driven decision-making, with HR being no exception. Cohorts of new entrants such as HiredScore, DreamTeam, Compete, and Venni.ai are building tools to decipher insights into massive data troves to boost growth, swapping decisions based on intuition to ones backed by concrete data.
- Prioritizing Diversity, Equity and Inclusion (DEI) – COVID-19, alongside the Great Resignation and social movements such as #MeToo, have been a driving force for DEI, in turn fostering stronger organizational culture. Solutions developed by Israeli startups such as Joonko and Canditech are enabling organizations to better execute on these key imperatives.
- Global Recruitment – Growing remote workforces and shortage of qualified talent has spurred enterprises to expand their teams to decentralized, globalized pools of talent. Startups such as A.Team are enabling companies to grow their business by recruiting and hiring employees internationally, while others such as Papaya and Deel are powerful tools for global workforce management and compliance with varying local regulations.
- Focus on employee experience (EX) and development – Embracing the same spirit traditionally used for customer success, employee experience deploys resources across the entire employee journey including development and upskilling, thus breaking away from conventional “HR processes.” Nowadays, a plethora of innovation focusing on employee development, wellness, and growth is emerging in the Israeli startup ecosystem through the likes of Gloat, GrowthSpace, Centrical, Bites, and others.
- Investing in employee wellbeing and benefits – To foster a sense of belonging and culture in the rising hybrid work model while preventing “burn-outs,” employee mental health, personal time, and wellbeing are becoming increasingly important topics. Companies such as Covver, Sorbet, Anywell, and Beex equip HR teams with the resources necessary to care for the modern workforce.
As the HR environment continues to evolve with regards to new models of employment, changes in talent preferences, and managements’ emphasis on employee experience; a new and exciting cohort of Global and Israeli startups leveraging novel technology is rapidly becoming a core part of many organizations. We believe that HR-Tech will continue to attract interest from both investors and customers alike as this ever-changing sector continues to uncover challenges and foster opportunities for innovation.