Intro to the Recruiting Industry
A $148B industry worldwide, with direct-hire search representing $21B, the talent-search and staffing industry is growing. The industry is largely fragmented, with the top 5 firms capturing just 9 percent market share in total.
Overall, the U.S. recruitment industry is huge, and it continues to grow, driven largely by robust GDP growth creating demand for both direct-hire and contingent (project-based) workers. Demographic trends are also accelerating the demand for recruitment services: Approximately 10,000 baby boomers will retire each day in 2020, and employers are turning to the recruiting industry to close these talent gaps. Overall corporate spending in recruiting technology continues to grow, expected to surpass $10B by 2022, according to Jason Corsello, General Partner of Acadian Ventures.
In light of all this, the environment for investment in recruiting and talent acquisition technology companies remains hot. The Starr Conspiracy’s “2019 Work Tech Investments Report” cites 107 deals funded in recruiting and talent acquisition innovation, totaling approximately $2.2B. Advisory firm HRWins reports that in Q4 '19 talent acquisition grew to be the strongest investment category within the broader Human Resources technology sector.
With 73 percent of employers struggling to find relevant candidates and more than 7M open jobs in the U.S., recruiting represents an enormous market opportunity. Typically, 29 percent of roles are filled by referrals from internal staff at companies. The remaining 71 percent of these roles provides a massive market demand and revenue opportunity that consistently fuels demand and business for innovative technology companies to capture.
The Evolving Market
Crunchbase recently interviewed Anu Hariharan, a partner at the Y Combinator Continuity Fund, who has been tracking the recruiting industry for years. Hariharan told Crunchbase News the talent acquisition technology market has evolved in response to the growing demand among companies of all industries for highly skilled talent.
Hariharan said, “Pre-2009 I would classify the recruiting market into three types of models: one is job search, which is purely listings. That was largely Monster and CareerBuilder.”
The other models, according to Hariharan, include aggregators like Indeed (popular in the early 2000s) and outwardly focused platforms like LinkedIn, which allow companies to recruit active and passive job seekers. Innovations have since continued apace in the recruitment sector, with notable companies like ZipRecruiter and Hired.com finding success. However, recent changes in employer preferences are now spurring a new wave of talent acquisition technology evolutions.
As Ian Siegel, CEO of ZipRecruiter, told Crunchbase: “When we started, and for really the first four to five years we were in business, it was all about volume. So everybody wanted to get a bunch of candidates as efficiently as possible.” Employers have since realized that recruiting for sheer numbers has its limits. No longer searching for mass volumes of candidates, today’s employers instead want solutions that find the right candidates.
As such, artificial intelligence (AI) solutions and job marketplace platforms have become the key trends in recruitment technology, as these innovations offer the more targeted recruiting approach employers now demand. Consequently, AI talent platforms are receiving investments from prominent private investment firms such as CDPQ, Gradient Ventures, Lightspeed Ventures, Randstad Innovation Fund, and Y Combinator, signaling a widespread and growing interest in applying AI to the very practical issues of talent matching and engagement.
‘Technological Advancement Is the Most Important Driver of Company Growth and Value Creation’
Increasing investment in recruitment technology may also be related to a broader modernization of talent acquisition software, says Breezy.hr CEO Darren Bounds. As he told Crunchbase News, “Increasingly, businesses are looking for the software solutions they implement to align with their consumer expectations. Compounding this push against the older systems is a modern employee that’s generally more tech-savvy than the previous generation.”
Recruitment technology startup Breezy.hr itself raised $1.7M in 2016. Similarly, mobile recruitment app CornerJob raised $19M in Series C funding in May 2017, giving it a total of $54M in funding.
Investors have found great opportunities in cutting-edge tech companies that are bringing innovation to the traditionally conservative recruitment industry. In 2019, due to the strength of its proprietary Sutro recruiting platform, recruitment providers Riviera Partners secured $25M in funding from private equity firms Kayne Anderson Capital Advisors and ROCA Partners.
“We target high-growth companies that bring game-changing software, processes, and analytics to industries that are often behind the technology curve,”said Nishita Cummings, partner at Kayne Partners Fund. “In the same way that advanced analytics changed the game of baseball, we believe that Riviera’s proprietary technology and processes are changing the way executive recruiting is done.”
“Technological advancement is the most important driver of company growth and value creation,” said Will Hunsinger, CEO of Riviera Partners.
Similarly, RFE Investment Partners Managing Director Michael Rubel expressed a belief that “the human capital services market is ripe for disruption – and fresh thinking.” Following a re-capitalizaiton with RFE Investment Partners, executive search firm ZRG Partners acquired a total of four staffing companies in 2019, including Toft Group and Miror Partners.
The Convergence of the Staffing Industry and Online Staffing Platforms
Staffing Industry Analysts (SIA) has predicted increasing convergence between the staffing industry and new online staffing platforms. This convergence will likely continue throughout 2020 and beyond.
Several leading staffing firms have already introduced online staffing alternatives, through either acquisition or organic growth: Twago (Randstad), Jobstack (TrueBlue), Adia and Yoss (Adecco), and BTG (Kelly Services).
At the same time, online staffing platforms including Upwork, Freelancer, and Fiverr have created enterprise-strength divisions that offer services beyond the purely online, low-touch freelancing talent these brands are widely known for.
Upwork, the largest freelance marketplace in the world, formed out of a merger between Elance and oDesk in 2015. In 2019, Upwork reported a total revenue increase of 25 percent over the previous year, to $253.4M. Upwork generates revenue by two primary means:
- Marketplace transaction fees — Upwork takes a cut of freelancers’ revenue (varies from 5-20 percent) and charges clients a processing fee of 2.75 percent or a flat $25 per month. Upwork also charges additional fees for larger clients in need of custom reporting and invoicing, compliance services, and access to top talent. Altogether, these marketplace transaction fees make up 88 percent of Upwork’s revenue.
- Managed services — Upwork also employs freelancers directly or via a staffing firm to complete projects for clients. Managed services account for roughly 12 percent of the company’s revenue.
Freelancer.com, another major online talent marketplace, reported gross payment volume of $536M and a positive net operating cash flow of $1.4M for 2019. The company ended the year with cash and cash equivalents of $21M.
Marketplaces like Upwork and Freelancer.com are well-positioned to continue growing their revenue as the labor market continues to shift increasingly toward what researchers Lawrence F. Katz and Alan B. Krueger call “alternative work” models, a category that includes freelancers, independent contractors, on-call workers, contract company workers, and temporary agency workers. Ninety-four percent of net new jobs created between 2005 and 2015 were alternative work, and demand for recruiting and staffing solutions that can help employers tap this alternative talent will grow accordingly.
Overall, the online staffing marketplace is growing faster than the traditional staffing market. This will likely spur many more traditional staffing firms to take advantage of the lower-cost business model offered by online alternatives, especially when many of their own temporary workers are gaining additional income by complementing their temporary assignments with freelance gigs.
‘The Recruiting Startup Ecosystem Is Showing No Signs of Slowing Down’
Sushman Biswas wrote in Recruiting Daily, “The recruiting startup ecosystem is showing no signs of slowing down. Amid fears of recession and ongoing trade wars, the recruitment technology market is going strong. Globally, recruitment startups collectively raised $1.6B as of November 1, 2019, up by $1.1B in 2018.”
In Biswas’s view, “Funding trends for 2019 reflect the larger macroeconomic issues at play in the global talent marketplace. Skilled talent shortage continues to be one of the major pain points for organizations today, and it is no surprise that startups solving for this problem have received the lion’s share of VC funding this year. Additionally, AI recruiting platforms have also raked in significant funding in 2019.”
A partial list of recent investment and M&A activity in the recruitment industry further outlines the significant market potential:
- HR tech leaders Cornerstone OnDemand (NASDAQ: CSOD) acquired AI-powered skills engine Clustree for approximately $18.5m in an all-cash deal in January 2020.
- Analytics-driven recruitment platform Jobvite raised $200M in a private equity round from K1 Investment Management in February 2019.
- Jobcase, an open-access platform for job seekers and employers, raised $100M in a growth equity round led by Providence Strategic Growth (PSG) in late February 2019.
- The AI-powered talent-matching platform eCheng raised $80M in Series C financing, led by Cathay Innovation Fund and joined by Lightspeed China Partners.
- Job websites Neuvoo received an equity investment of $40M from Caisse de dépôt et placement du Québec (CDPQ), Canada’s second-largest pension fund.
- Enterprise recruiting platform SmartRecruiters raised $50M in a Series D financing round led by Insight Partners and joined by Rembrandt Venture Partners and Mayfield Fund.
- Recruitment automation platform AllyO completed its Series B funding round with $45M, led by Sapphire Ventures and Scale Venture Partners, with participation from Google’s AI fund (Gradient Ventures), Randstad Innovation Fund, Bain Capital Ventures, and Cervin Ventures.
- Clinician placement platform Nomad Health raised $34M in equity and debt funding led by Icon Ventures with participation from Polaris Partners, RRE Ventures, .406 Ventures, and Silicon Valley Bank.
- AI recruitment platform Phenom People raised $30 million in a Series C round of funding led by WestBridge Capital, with participation from eBay founder Pierre Omidyar’s VC firm Omidyar Ventures, AXA Venture Partners, Sierra Ventures, Sigma Prime Ventures, Karlani Capital, and a fund belonging to AllianceBernstein.
- Cloud-computing talent acquisition tech company Bullhorn acquired staffing automation solution Herefish in January 2020.
- Workforce solutions provider PSI Services LLC acquired talent assessment company Caliper in December 2019.
- Versique Search and Consulting acquired Midwest Financial Search in January 2020.
- Big Four accounting firm Ernst & Young acquired talent management consulting firm PeopleFirm in January 2020.
The preceding article is published on Recruiter.com by Recruiter.com Group, Inc. (OTCQB:RCRT) for the sole purpose of general educational purposes and is not meant to be investment or professional advice, nor is it meant to recommend any specific company or service. Please consult professionals for any business or legal decision. For more industry news and recruitment best practices, please keep in touch with us on Twitter @RecruiterDotCom.