Investors are also looking to invest in start-ups that offer solutions in process management, employee engagement and L&D
Currently, tech HR start-ups make up only about 25-30 per cent of the Rs 30,000 crore HR industry. There is a lot of scope for innovation, especially in recruitment and L&D functions
In the past four years, venture capitalists have poured Rs 1,000 crore into the HR start-up industry and according to People Matters estimates, the HR industry is now valued at Rs 30, 000 crore. Globally, this influx is at an even larger scale. According to a research by CB Insights, investments in HR technology were recorded over $560 million in the first two quarters of last year, while the total valuation of funding in the space of HR technology since 2009 has been over $2.3 billion.
Evidently, investors attracted to tech HR start-ups have shown faith in ‘start-up solutions’. We call it start-up solutions as such start-ups use product-led business models that are driven by technology unlike the traditional service-led business models. With the increasing interest of investors in technology-based start-ups and the ‘Software as a Service’ market, the tech HR start-up ecosystem is getting a lot of attention from investors.
The most recent activity on the investment front involved a recruitment tech start-up HackerRank. It received a “strategic investment” of $7.5 million from Recruit Holdings. Other recruitment tech start-ups like Belong, Hiree, GrownOut, PiQube and Jombay have also witnessed flow of investment into their products. Belong raised $5 million in Series A funding led by Matrix Partners India and Blume Ventures, while Hiree raised funding of $3 million from IDG Ventures. Referral hiring analytics platform GrownOut raised undisclosed funding from Outbox Ventures and Matrix Partners while hiring intelligence tool PiQube raised funding of $500,000 from The HR Fund. Jombay, an online psychometric assessment and talent analytics platform, got funded from Nirvana Ventures.
A system of supply and demand
There is enough literature on the complexities associated with HR functions from sourcing talent to their retention. Work across HR functions is still very manual as technology is mostly used for admin-related work. The HR industry is plagued with inefficiency as processes are time-consuming and often fail to deliver results. There is a significant scope for innovation in the HR industry across most, if not all, verticals. As the industry seeks actionable solutions urgently, tech HR start-ups are emerging as solution providers with their innovative ideas. The eagerness to extract the HR market potential has resonated among entrepreneurs and investors alike.
This growth of start-ups and influx of investments is akin to a demand and supply chain. Supply is finally catching up with the growing demand for solutions. However, the HR start-up eco-system is still at a nascent stage in India. “Currently, tech HR start-ups make up only about 25-30 per cent of the HR industry,” according to Utkarsh Joshi, Principal, The HR Fund. The start-ups are still either seed funded or Series A funded; or in other words, the investment has been in the range of a few million dollars. As the market is still relatively untapped, it holds the promise of a huge potential in the future. Hence, it is not just ideas and innovation that drive HR tech start-up eco-system, but also their scalability and consequent market possibility.
Recruitment – The Golden Egg
The maximum traction has happened in the recruitment domain. As Niraj Singh, Founding Partner, Outbox Ventures, put forth, “Hiring is the golden egg.” Recruitment is the largest function in the Indian HR ecosystem and is also the most common problem faced by companies. Any start-up that can come up with a solution for this business issue can extract substantial returns from the market. The problem is so generic, yet the biggest predicament for organizations. Businesses want candidates that fit their organizational culture and have the necessary skill set to match the intricate job profiles. There are prevalent time constraints and inefficiency in the whole mechanism, which makes recruitment all the more challenging. It is the first problem that companies are solving or need to solve. For HR start-up solutions and investors alike, it is a big opportunity. The recruitment problem is affecting businesses at a scale where they are ready to pour money into a workable solution. “Companies are ready to pay anything to hire the right kind of talent in a short duration. It is the largest problem to be solved, and that is where the biggest money also lies,” said Tarun Davda, Director, Matrix Partners India. But entrepreneurs should not enter the segment on the premise of its popularity in the industry and among investors. A clear understanding of the problem is the basis of a good solution. “There might be quite a few start-ups in the recruitment function, but I do not see many of them doing it effectively because of their inability to comprehend the problem,” said Outbox’s Niraj Singh.
Next in line: L&D, employee engagement
VCs are also looking to invest in start-ups that offer solutions in process management, employee engagement and learning & development. Process management and employee engagement are the other verticals within HR that Matrix Partners is looking at, said Tarun Davda. The process management function qualifies as a viable option as there is scope for innovation, the process can be standardized and the solution is scalable.
Tracking applicants is a big problem yet to be solved by companies. The absence of applicant tracking system handicaps a recruiter when trying to re-approach a candidate who was fit for the job but couldn’t be hired earlier. Without an applicant tracking system, the whole exercise becomes redundant and results in wastage of time. Employee engagement is another “interesting” space where Matrix Partners India is looking at. HR Fund’s Joshi is of the viewpoint that the leadership and development function has a lot of scope for innovation because companies are looking to refurbish the prevalent old world business models. Consequently, start-ups are targeting this market and innovations such as virtual learning, video-based learning and tablet learning have emerged. However, Joshi feels that L&D will continue to evolve as the way people consume information has been changing constantly over the years. When people start changing the way they consume information from an L&D perspective, that is when the real L&D change will happen,” he adds.
A good time for Tech HR start-ups
While recruitment is the most sought after function of both investors and start-ups, there is still enough space for fresh faces to emerge and solve the principal problem of companies – hiring quality talent. Matrix Partners’ Tarun Davda aptly articulated the business side of the situation. He said, “The tech HR industry in India is a multi-billion dollar industry and within tech HR, the recruitment function is worth $1 billion growing at 20-25 per cent annually. However, this $1 billion recruitment industry is fragmented across 30,000-40,000 staffing agencies. This fragmentation implies that there is a huge scope to build a company in this function, which has a significant amount of revenue potential.”
Start-ups in other HR functions haven’t been a part of the investment trend yet, but with a changing market context and an increasing scope of innovation, they can also expect to catch the eye of investors. HR is a titanic space, having as big a demand for solutions as its size. By observation, it can be concluded that the start-up ecosystem is expanding and will continue to expand – different solution providers will emerge and investors will continue showing faith in them. The current start-up market, with all its fragmentation, has an immense opportunity for a player to devise a workable and scalable solution, consolidate further and emerge as a business leader.
(Disclaimer: The HR Fund is an investor in People Matters)