The HR tech industry is growing tremendously and expected to continue on an upward trajectory. According to a new report by Grand View Research, Inc the global human resources technology market size is projected to attain USD 30.0 billion by 2025, exhibiting a 10.4% CAGR. What does angel investing in such a market involve and how will it benefit HR professionals?

What Value do HR professionals need to provide?

Traditionally HR professionals have been rated on two aspects:

a) strong transactional service leading to a focus on process efficiency

b) adherence to employment law and avoidance of legal risk or in other words harmonious employee relations.

However, the emphasis today is on HR being a business partner by providing strategic and commercial support to the business. This means successful HR professionals need to demonstrate a difference to the bottom line through reduction of costs, improve ongoing employee engagement (and profitability) and assist business leaders in strategically planning for rapid disruption to the workplace. Good HR professionals therefore need to have a sound understanding of how business operates and contribute to commercial discussions around growth and profitability.

Developing Better Commercial Acumen

Investing in a start-up involves not just an understanding of the product proposition but an overall judgement of the commercial viability and success of the product. This involves a deep dive into the following areas:

1. Market size: What is the issue that the product is addressing – is the problem real life or just an interesting idea? Do you see its relevance in your organization or amongst your peer group? Is it relevant to just your kind/size of organization (e.g. large corporate) or does it apply to SME’s / fast growing start-ups? If it is a new technology are there any market research reports that indicate what the growth of that technology is going to be? Thinking of the above will help you arrive at a realistic view of the market size / total addressable market for the product. As an example, the talent management software segment is anticipated to grow at the fastest pace and register a CAGR of 13.0%. So clearly, the market size is huge and is expected to only accelerate. Through these parameters, HR professionals learn to understand the specific proposition of any start-up and gauge if it is a good investment opportunity.
2. Competition: Some questions to think of are – How many such similar products exist in the market? Which traditional segments is it going to take a slice of? Which emerging products/technology could replace it? Last year, there were around 8000 AI based start-ups in the Recruitment space alone. However, Recruitment often has the biggest budget within HR and has the greatest pressure to demonstrate speed, efficiency and savings. Therefore, while the competition in this segment can be high, the opportunities could be equally attractive. Looking at the competitive scenario helps HR professionals enlarge their market understanding and become more astute.
3. Revenues: Most start-ups have only been in operation for a few years. Hence one of the most difficult aspects is judging whether its revenue potential is achievable. This involves a good understanding of sales cycles ( 12-18 months in big enterprise) and whether sales projections are realistic . Understanding how revenue could grow ( linear/step change etc) is a great way for HR professionals to become savvy about their own business.
4. Profitability: Finally, the start-up’s ability to achieve profitable growth is a big aspect of the investment decision. This involves a close look at costs. Where has product development happened and what ongoing investment is needed for it?  What are staff costs and are they proportionate to the stage of the start-up? What proportion of spend is happening around marketing & PR and is it justified? Investigating these areas will give the HR professional a better perspective around managing their own budgets & contributing in commercial discussions with business leaders.

Investing in a start-up involves a full investigation into all aspects of the business – market size, competition, revenue potential and profitability. It is a great way for HR professionals to apply a holistic business perspective and become real business partners.

In this article we have discussed how it is advantageous for HR professionals to develop commercial acumen by being angel investors. We will delve deeper on the third aspect (being future ready) in the third part of the series over the following days.

The London based HR TECH Partnership is an investment venture in the People Tech space with most of its stakeholders being senior HR directors. It is an early stage investor and focuses on AI based HR start-ups around Talent and Workplace productivity. To know more about angel funding and how the HR TECH Partnership works visit – www.hrtechpartnership.com or write to invest@hrtechpartnership.com.