2023 has been a difficult year for the global economy – not only is there is conflict in Europe and the Middle East, but sky-high inflation has triggered a cost of living crisis across Europe and in the US, and we have seen a few banks collapse (the most newsworthy being Silicon Valley Bank in March).
Despite these significant headwinds, the HR tech sector continues to boom, both in terms of investment and funding rounds, but also mergers and acquisitions (M&A).
The UNLEASH Editorial Team sat down in Paris at UNLEASH World 2023 with Ralf Hofmann, co-founder and managing director of Drake Star, a global tech investment bank, to discuss the reason for HR tech’s continued success, as well as what the future holds.
Inside the “very active” HR tech market
Hofmann shares that over the past few years, employers have begun to recognize that “their most valuable asset is people”.
Therefore, they’ve gotten more focused on attracting and retaining talent, which has increased the demand for cutting edge technology that really streamline HR and workplace processes, as well as drive better employee engagement and experience.
“This is a long-term trend, recession or not”, states Hofmann.
As a result, investors realized that there was a strong demand for HR tech – and so they remained “highly interested” in the sector, the incumbent players, as well as the new disruptors entering the market.
“The result is that the market is still very active” – there were more than 200 transactions in the third quarter (Q3) alone (with a total value of over $1 billion). This brings the total for 2023 so far to 623 deals and with more than $15 billion invested, according to Drake Star’s reports.
A key driver of active HR tech M&A in 2023 is large vendor’s desire to consolidate their position in the market by acquiring their smaller competitors.
Larger vendors are keen to acquire “new technologies and new capabilities [that] help them to really extend their functionalities” – often smaller players have deeper expertise in niche areas.
“Even though we are talking about product companies, it is also about people” – by acquiring smaller companies they are buying in talent that has “the experience and skill set” in certain areas, but also certain markets.
Of course, M&A doesn’t just come from big vendors – a standout deal for Hofmann in 2023 was Silver Lake’s majority deal of Qualtrics for $12.5 billion.
Hofmann notes: “It was huge and very impressive. It just illustrates how large private equity firms really value the sector.”
Along a similar note, Hofmann calls Credit Agricole’s acquisition of Worklife “strategically important”. It “was very interesting to see a bank acquiring a software company [in order to] provide this innovative product offering to their clients.”
Other noteworthy transactions in 2023 include modern all-in-one HR tech company Rippling’s $500 million fundraising, particularly because it happens after the Silicon Valley Bank collapse, and proved “that investors were interested in the power of innovation at Rippling, and HR tech in general”.
Then there was HR document management company aconso’s majority recapitalization, which Drake Star advised on. Keensight led the investment, but Hofmann was impressed by how much “competition and interest there was from investors in their field”.
The promise of AI in HR
Hofmann is particularly impressed by aconso’s offering because it is “really automating process in the HR department, which is very important”.
So, UNLEASH was keen to find out from Hofmann his views on the topic of the moment, AI.
Automation and AI were center of stage at UNLEASH World 2023. Josh Bersin opened the whole show with an exploration of how to use AI best in HR – it also top of mind for Muriel Pénicaud, senior advisor at Bain Capital and former French Minister of Labour – while Volker Hirsch picked up this thread on day two in his keynote.
For Hofmann and Drake Star, 2023 has seen a lot of experimentation of AI, but 2024 will be the year of truth – will the HR use cases actually demonstrate return on investment?
In the interview at UNLEASH World 2023, Hofmann adds that now whenever he and his team have investor meetings with HR tech companies, they always ask “How do you look at AI? What role does AI play in your product offering?”
In addition to AI use cases in recruitment, as well as analytics – “you have all this talent, and you need to identify… opportunities for them to develop and take the next step [in their career]”, Hofmann sees real promise for AI in making the HR department’s lives easier – it’ll help them do more with their resources, and ultimately drive efficiency.
Beyond AI, other top HR trends for Hofmann are employee experience and engagement – he is very excited about talent intelligence platforms (a technology which The Josh Bersin Company’s latest dynamic organization research also called out) – as well as diversity and inclusion.
Inclusion and belonging challenges are slightly harder to solve with technology – but a standout vendor here for Drake Star is Sodales Solutions.
A bright future for HR tech
Drake Star publishes data on the HR tech market every quarter – and it has just published its fourth quarter (Q4) report.
It found that deal making in the Q3 was pretty stable, with particularly good performance for human capital management (HCM) and talent management.
Deal count was slightly down on Q2, but “investors still believe that the entire sector is worth a premium”.
There are still a lot of problems for HR to overcome – talent shortages remain a problem, meaning that retention, internal mobility and wellbeing will continue to a focus for organizations into the future.
And in this context, technology, particularly new innovations in AI and beyond, will play a crucial role in that.
UNLEASH World 2023 was a great opportunity for Hofmann and the Drake Star to meet with the future movers and shakers of the HR tech world, he said.
The UNLEASH World Startup Award was a particular highlight for Hofmann – congratulations to the winners, Talk’n’Job.
“I want to get to know new people, and make new connections, but also strengthen relationships within our existing network,” adds Hofmann.
And UNLEASH World “is such a great venue to be doing that”.
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