008. How HR tech became the preferred way for VCs to light their money on fire 🔥
Is HR tech a scam?
[Scene:] Last week, I had dinner with a founder friend in San Francisco, when he asked a fun question… and I realized the answer that was about to come out of me would make a good post. So I hit “record” on my phone, and the following is an edited version of that conversation.
Founder Friend: “Dude, your new newsletter is so good, I’m learning a lot.”
Jen: “Thanks! It’s been fun writing it.”
FF: “Yeah, you’re really showing people why recruiting is so important. One thing you’ve mentioned that I wanted to understand more – if it’s not a technology problem, why is there so much money going into HR tech startups?
Jen: “OK. So. Believe it or not, this is actually a huge improvement from where things have been. Just a few years ago, the startup ecosystem was largely ignoring People problems – so in some ways, it’s a positive sign that capital is flowing into the HR tech category.”
FF: “Right. In contrast, developer tools have been capital-rich forever.”
Jen: “Yeah, VC has always looked for a strong tech function, then growth/marketing became the big focus in the 2010s. But Org/HR has always been the ugly stepchild of startups. Back in 2014 when I joined a recruiting software startup, it was NOT sexy. Engineers I was trying to hire would say, “Why would I want to build software for recruiters? Ew.” These days, it’s more like “Who *hasn’t* had a (disappointing) stint at a HR tech company?”
FF: “I know so many founders who tried to start HR tech companies and gave up.”
Jen: “Yep, it’s basically like an entrepreneurship rite of passage – HR tech is the newer, B2B version of “Uber for X” startups. But I get it. It’s a tempting space if you’re a creative builder looking for a problem to solve. Everyone knows that workplaces have huge problems!
Founder: “And everyone’s worked in a workplace 😛”
Jen: “Here’s the thing. In the last ~10 years, companies have started taking People work much more seriously. We went from, “Meh, we’ll worry about all that crap later when we’re a ‘real’ company” to “Oh sh*t, this is make-or-break important.” But now that companies finally value People work more, they’re looking for shortcuts because they want it to be easy.”
Founder: “Yeah, looking for silver bullets to solve problems is kind of what we do best in tech.”
Jen: “Yep. Looking for shortcuts is basically the ethos of Silicon Valley. The explosion of HR tech is simply a response to that demand.”
FF: “And in tech, we want to solve everything with more tech!”
Jen: “Right. You know what’s bonkers? The fact that there are hundreds of millions of dollars poured into random HR tech startups by literal 23-year-olds, proclaiming to “fix employee communications” or “hire better with AI.” And I’m like, “Ya don’t say! Okay, what insights do you have that the rest of us don't? I would truly love to hear it.’ And 99% of the time, there’s no “there” there. These startups follow the same playbook, and fail pretty quickly because they don’t actually understand their users or get real traction – because there’s no innovation or advantage, when it’s a people problem that can’t be automated or scaled!
Saying ‘I see a problem! I’m going to solve it!’ is not enough in such a saturated space. HR tech investors should be much more critical in asking questions: Is it an efficiency or judgment problem? Why do you think this problem has persisted so long? The ground is littered with corpses of thousands of HR startups – so for the love of god – What is different about you?”
FF: “Whoa ok, you're getting fired up, let’s gooo!”
Jen: “Haha. I mean, it’s frustrating, because I’ve seen this happen over and over. If the founder happens to have a pedigreed background and access to the right networks, say ‘Engineer at Facebook then a manager at a startup,’ then they can go on to raise a decent Pre-Seed/Seed round by showing that some HR problem exists – this is how other startups get funded. Then, it’s not that hard to “do things that don’t scale” for a few friends’ companies that you sign as beta customers. But then what? You run into the fact of the universe, that People problems are not one-size-fits-all. And because People work is notoriously hard to quantify, these startups can “grow” by signing up users who can’t tell if the product is working, and the VC market rewards that. Whether it’s investors or customers, if they’re looking for an easy solution and you’re good enough of a storyteller, then yeah, you can get funded and get going relatively easily in HR tech – but it’s a house of cards.”
FF: “Yeah, I’ve seen enough HR tech product pitches, and with so many of them it’s like… ok but what does it actually DO? And then I realize what I’m looking at is a founder who’s really good at sales.”
Jen: “Yep. So I won’t name names, but after summer of 2020 when DEI was thrust onto center stage I saw 2 types of responses from HR tech: 1) So many white dude tried to start new companies saying, “I will solve diversity in hiring!” – I can literally show you screenshots of their reachouts to me. 2) Founders of established companies pivoted all of their marketing to “Here’s how we help you with diversity!” – even though the product was never designed around it in the first place. It's as if… these companies realized, ‘People are looking for silver bullets. Let's just tell them we have a silver bullet.’ Never mind the fact that it's actually snake oil.”
FF: “Damn.”
Jen: “So back to your question, “Why is there so much money going into HR tech, despite its ineffectiveness?” I could’ve gone on longer but I want us to eat, so here’s the TL;DR answer: Because people want there to be easy solutions to hard problems, HR tech is trying to meet that demand. It’s not really about the tools’ effectiveness, but motivations and incentives: of the founders, who want to be admired for starting a cool company, and VCs, who get to boast their portfolio performance. What most people don’t realize is, most HR tech companies are about marketing, not product. But as someone who actually talks to startups all day – I think people are slowly starting to realize HR tech ain’t it.”
FF: “And this is coming from someone who’s been deep in HR tech – you were early at Lever!”
Jen: “Yeah. And to be totally clear, not *all* HR tech is snake oil. There are of course useful ones, the few that actually identified the right problem to solve. It’s just that none of them are magic. But HR tech tends to market itself as magic – all you have to do is buy X, and your problems will disappear! It perpetuates the dynamic where companies under-invest in the fundamentals, and instead, chase the fantasy that the right software will excuse them from having to actually learn how to hire, manage, and build a strong People function.”
FF: “I mean, that’s what your company is doing right? 🙂”
Jen: “Yep! I’ve been thinking and iterating on the strategy for Workflow for a long time. The reason I’m building the business the way I am is because I believe that people learning how to do things *is* the solution. Hence our big focus on education and consulting.”
FF: “I love it. This is so needed. Dude, you’re going to be huge.”
Jen: “We’ll see 😉”
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Jennifer Kim is the CEO/Founder of Workflow, an education and consulting company that trains the next generation of startup leaders on all things Recruiting, People Ops, and DEI. Through its flagship program, the HireEd Accelerator, Jen and her team have taught hundreds of startup leaders to make hiring a competitive advantage. Previously, Jen was Head of People at Lever and was Advisor to dozens of top startups. She is also a Venture Partner at Symphonic Capital, and is known for her hot takes on tech industry and culture as @jenistyping.
Really enjoyed this piece and it highly resonates with my experience. I worked at startups that would implement every shiny tool, which meant we were rolling out new People tools every few months 🤯. Like you said there is some good HR tech out there, but many VCs and founders default to thinking that People problems can be solved like engineering problems with technical solution, where in reality it can only usually be solved by a human-centric process.
You're missing a ton of reasons why people do these kinds of startups. I did one. I spent plenty of time working in I/O psychology, have a patent for one of the worlds first web based EOS systems, in case you are worried about "random tech guy who thinks today he suddenly knows HR".
Here are some real reasons:
1.) We've used Workday - we know that Workday is a solution by HR, for HR, pretending to be something that the general category. Lots of people in big tech get forced to use Workday, and the immediate reaction is "this is godawful, a market that is clearly ill served by people who know what good software should look like". It has the same principal/agent problem a lot of software does, where the software reflects what the buyer cares about, not what the user does. Nobody should be surprised that the pitch for "workday but way less shitty" gets traction.
2.) The general HRIS market has a ton of products that profess to do everything, yet do nothing particularly well. Why do almost no HRIS systems understand the concept of team very well, outside of what can be fit into a simple hierarchy?
3.) HR is different by industry, often wildly so - the kind of HR systems you use in manufacturing with hourly employees is way different than one used to manage, say, a professional services workforce. Yet most solutions force you to pay for implementation in order to do industry tailoring, leading to an opening for industry specific HR systems to be relevant.
4.) People is a hard problem, and HR does not have a monopoly on that. In fact, lots of people who aren't HR end up doing HR like things in spreadsheets. HC allocation, team formation, skill matching, etc. So much of the day to day people things that engineering executives need to do are done this way that nobody should be surprised that founders emerge to solve those problems.
A sincere approach from a place of curiosity likely would work better for HR folks who want to understand why so many engineering execs get drawn to this. Calling this "oh, tech bros just want easy solutions to hard problems" is honestly a pretty dismissive take that ignores some pretty great work of startups that are really focused on solving hard problems - and in many cases, successfully doing so.