HCM Tech Startups Are Doomed to Repeat Past Failures
2015 and 2016 were big for HCM tech startups. Hundreds of new companies were launched and hundreds of sophomore companies received new and bigger rounds of investment from angels, venture capitalists, private equity firms, rich uncles, and poor saps. It’s a bona fide gold rush.
To put it all in perspective, more money was invested in HCM tech startups during 2015 and 2016 than the previous 20 years combined. (Yes, you read that right.) Even setting aside the monster investment in Zenefits ($584 million), enough new money was invested during the last two years to create more than 1,000 new HCM tech startups and bolster hundreds more.
In fact, The Starr Conspiracy Intelligence Unit recently reported that $2.2 billion was invested in HR technology (categories ranging from talent acquisition, performance management, and learning to recognition, wellness, and engagement measurement) in 2015 and another $2 billion in 2016, with about 1 in 4 dollars being poured into talent acquisition solutions alone. Startups are taking in the bulk of this capital. I believe those numbers are conservative and the pot is closer to $6 billion invested in HR technology.
Entering the new year, there are already signs that the 2017 class of HCM tech startups will be at least as large as each of the previous two years, resulting in a new batch of hundreds of fresh-faced HCM tech startups.
The majority of these companies will fail.
By the Numbers
The last time there was a significant spike in HCM technology investment was 2000. Various sources, from VentureWire to CB Insights, peg that spike at around $1 billion. I remember those days well because it was that groundswell of investment in “HR software” that catalyzed the founding of our marketing firm, The Starr Conspiracy. Since our founding, we’ve had the privilege of working with hundreds of HCM tech companies of all sizes on matters of strategy, marketing, and sales, and are broadly recognized as the leading marketing firm for HCM tech companies in the world.
Following 2000, annual investment in HCM tech rarely exceeded $100 million until 2014. So I can tell you with great confidence that most of our success as an agency was based on that “anomalous” 2000 spike in HR tech investment that gave birth to many of today’s largest HCM tech companies, many of which have been our clients through the years. I can also tell you with great confidence that the majority of companies that drank from the investment fountain of 2000 are no longer in business.
The Starr Conspiracy’s View
As we watched the development of the HCM market segment from the turn of the century on, we became acutely aware of the differences between companies that succeed and companies that fail. We earned much of this knowledge by interviewing thousands of executives, managers, and employees at HCM tech companies and their customers over the years. (Interviewing “stakeholders” is part of our standard process for onboarding new clients and gathering information that is critical to creating effective marketing strategies, messages, brands, and campaigns.) But we also learned a lot by observing companies, conducting retrospectives on their activities, and watching in real time as the consequences of their attitudes, behaviors, beliefs, and actions unfolded.
I also feel safe saying that we meet with more HCM tech companies on a daily basis than any group in the world. It’s simply a question of scale. Our marketing firm employs about 50 people and nearly every single one of them meets with multiple companies in the HCM segment every day. Earlier today, I personally met with five companies from five different categories: employee engagement, performance management, wellness, learning, and talent acquisition. And it was a pretty slow day, and that was just me! We learn a lot in those meetings.
By 2010, many of us at The Starr Conspiracy had developed an intuitive sense for the potential of new startups based on our interactions with them, which occurred mainly in the form of briefings, sales meetings, client engagements, primary market research, and even casual conversations at trade shows. In other words, we became pretty good at predicting winners and losers. Our superpower gained international attention in May of 2015 when Steve Smith, a partner at The Starr Conspiracy and chief of our Intelligence Unit, famously predicted that Zenefits would be the biggest bust in SaaS history — only one week after the company closed an eye-popping $500 million investment round. You can read his original blog post here.
But the Zenefits prediction was merely a high-profile example of the countless calls we get right every year. Taking bold positions means we are sometimes off, but it’s a pretty rare thing. But I would put our record up against anyone’s. Based on our accumulated knowledge, experience, and research, we are able to rapidly identify the companies that are likely to succeed in the HCM market segment and those that are likely to fail if they don’t align with the attitudes, behaviors, beliefs, and actions of their buyers.
Getting back to the broader HCM tech investment history, it wasn’t until 2014 that we saw another spike. According to CB Insights, about $1.5 billion was invested in HCM tech that year. (We think the actual number is higher because The Starr Conspiracy covers a broader range of categories within HCM and is aware of many investments that are either never made public or never show up on the radar of general analyst firms.) And then something amazing happened; investment in HCM tech exceeded $2.2 billion in 2015. And then it happened again in 2016 when investment in HCM tech exceeded $2 billion. Again, our numbers are less conservative than what you might find from general analyst groups for the reasons mentioned above — but not by much.
I am sure you can imagine that we at The Starr Conspiracy are very excited right about now. But I must also admit that our excitement is tempered somewhat by the bittersweet reality of what happens next. Starting in 2015, we found ourselves meeting with many more startup companies than we had in the last 10 years. I’m a little embarrassed to admit that it took us a while to put all the pieces together, but we finally realized that we were at the front edge of a new market cycle that will dwarf the previous HCM tech market cycle sparked by the surge of investment that started around 2000 and 2001.
That all sounds sweet. So what’s the bitter part? Like I said before, the majority of these companies will fail. The only difference for us between the first market cycle and the current market cycle — besides this one being more than an order of magnitude larger — is that we are much more aware of the multiple factors that drive success or failure. Because of that, we sometimes leave meetings with a bit of a heavy heart knowing that the new startup we just met with is doomed to repeat the mistakes of the past generation of HCM tech startup failures.
In this paper, I offer a glimpse of the patterns we see on a daily basis that are predictive of success or failure in the HCM tech market segment. Some of them are anecdotal, based on years of experience and observation. Others are immutable truths based on years of research, metrics, and outcomes. I hope that by sharing this information we are able to contribute to the overall health of the industry and the success of your company. After all, we chose this market segment. We could have started a general agency or a consumer agency or a marketing firm that chased each new hot market trend from CRM to big data. But we didn’t. We started in HCM, we have remained in HCM, and we plan to stay in HCM. Why would a firm do that unless it truly cared about the segment? The honest truth is that we do care about HCM because we think it’s the only segment that can actually change the world. We watch it happen every day. And we’re frequently in the privileged position of helping.