What do investors look for in their next HR tech project?

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When searching about what to look for when it comes to investing in startups, a quick Google search throws up that investors are looking for a good product, a potentially large market, and a business plan that makes sense.

In addition, many investors also like the idea of finding a founder or leadership team they can get behind. Seemingly, all straightforward stuff.

Dig a little deeper and Forbes reporting shows that the detail in the pitch deck, time of year, and how good a startup’s data is all play a role. Yet, if it came down to just making a good product, having a good-enough PowerPoint to sell it, and reaching out to investors on a nice sunny summer’s day, surely every startup would be the next AirBnB, Instagram, LinkedIn, or Uber in waiting.

Unfortunately, the cookie doesn’t crumble that way. According to Embroker stats, 90% of startups fail within the first year; 10% within the first year. Furthermore, venture capital firms are inundated with pitches from startups needing cash.

Those who hold investing power get more than 1,000 proposals a year on average, with more than three-quarters having to rely on business loans, credit cards, and lines of credit instead.

What sets the HR tech scene apart?

For founders looking to become the next Rippling, Gusto, Personio, Deel, or Lattice and reach mythical unicorn status — something that only 1% of startups manage to do — or get enough funding cash to reach the top 2% of HR startups who turnover more than $500m a year, they’ll need to appeal to those with the cash.

Whilst some might look towards the state of the startup scene itself for clues on how to do this — such as looking at the fact that almost six in ten HR tech startups are in personnel management and payroll — and replicate it, it’s probably best to understand from the investors themselves what they want.

That way, before you go reaching out to funds like 500 Startups, who have invested in 17 HR tech startups in the last ten years, or SV Angel, which has funded BetterUp and Lattice, you’ll be armed in the knowledge of what it is investors are looking for. And not just hoping for the right sunny day and that the fact the investor likes your slide formatting.

As such, read on to find out more about what those who invest in HR tech are looking for.

Scrappiness

Boris Musielak is a partner at SMOK Ventures, a US venture capital fund looking for startups in Europe. He’s already invested In Herofiy, a Poland-based startup that allows recruiters to quickly assess the skills of salespeople, marketers, and analysts without having to interview all the applicants.

Whilst he says he likes to see everything that one might expect from a startup — a minimum viable product, team quality, knowledge of the HR space, whether or not they’ve done extensive customer discovery and validation before starting the fundraise (at least 100 customers) — he also wants an X factor: fight.

He says: “Scrappiness is key. Scrappy teams usually can somehow create something usable that showcases what they will build in the future on zero resources, which is always appreciated. I also want experience in the space.”

Consolidation

No one would argue against the fact that the HR technology marketplace isn’t fit to burst at the seams.

In fact, with the global value of HR tech startups already at $22 billion and expected to grow at a rate of 5.88% annually, Danny Wen, head of strategic partnerships at Findem, explains that he looks at startups that can replace multiple things at once.

Citing WorkDay, who consolidated a lot of back-end functions that were previously piecemeal when they burst on the scene, Wen adds that the same amalgamation is due for the HR tech front end and that he would stay away from investing in companies that are pigeonholing themself into one tech area.

He says: “The ability to consolidate is the most critical factor for me when evaluating investments. That’s especially the case in HR tech where point solutions have saturated the market.

“You know how they say that ‘there’s an app for everything?’ That’s an incredibly very fitting statement for HR and talent because there’s literally a point solution for everything in the space today.”

The 10x experience

For Dan Drechsel, general partner of Panoramic Ventures, who has invested in SkillCycle, if an HR tech venture is to ‘make it’ it must be doing something fundamentally new, fundamentally better, or have people who have previously worked in HR for large or important organizations.

It’s in this way he thinks that HR tech startups will successfully attract financing.

He explains: “I look for companies that address the problems HR leaders, employees, and companies face, and products that have the potential to provide solutions with impactful results. They need to create a 10x improvement in some dimension of value: 10x faster, 10x cheaper, and 10x more likely to produce a result.

“Simply moving a process from on-premise to the cloud, or creating efficiencies by way of features and improved design, is not going to change the game or fix a broken system.

“Founders / CEOs who have no direct experience or skin in the game are traditionally also a red flag.”

Novel and fast-growing areas

Over the last ten years, there has been an undeniably wave of HR tech startups, many capturing the attention of investors and venture capital firms alike.

What this often does is start off a ‘space race’ where one startup venture creates a product or service for an underserved niche, which creates a whole new market where others follow suit.

For Jonny Blausten, Co-founder and CEO at Sprout, it is faster-growing areas that are most appealing from an investor side.

He tells UNLEASH: “Faster growing industries, and those with more complex HR requirements, are typically the most attractive areas for investors. However, although many HR tech startups may make sense on paper, it’s difficult to pinpoint the ones that will win in the long run.

“The reasons for winning in an industry might vary. The best ‘product’ doesn’t always win – sometimes it’s isolated factors such as timing, a good sales team, or something that just resonates with a subset of customers for whatever reason.”

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