The Indian startup scene is an exciting phase with entrepreneurship at its zenith. In addition to several government initiatives to promote entrepreneurship, venture capitalists sank $4 Bn into India in 2014 in some 300 deals—almost twice as much money as they invested in 2013 and 14 times the level of a decade ago, according to Indian data tracker, Venture Intelligence. Many a times, entrepreneurs rush to seek funding without having a strong grip on their own business or on investor's needs or criteria.
Given such a scenario wherein India Inc. is looking forward to organized staffing and workforce solutions to reach its various business goals, the HR solution companies have witnessed considerable evolution with niche, customized, and innovative products and systems with increased focus on technological interventions for staffing, recruitment, and other HR shared services.
Recruitment process outsourcing (RPO) and other HR shared services (HRSS) have caught up in recent times with growth in dedicated technology oriented solutions. HR technology and other services like payroll, training and development, verification, social recruiting, background verification, onboarding, training and induction, leave management, attendance management, reimbursements applications and referral hiring etc. are the buzzword in the HR space. Besides, focusing on core services and key talent areas, HR solution industry is increasingly initiating strategic initiatives, such as wellness programs and workforce analytics.
With a focus on continual improvement of the HR function, organizations have achieved lower turnaround, higher employee engagement, and more productivity, thereby benefiting from better business outcomes. These services are generally outsourced with competent HR solution companies working on cloud-based solutions and complaint systems in place for the security of vital data.
Having seen the need for growth of the HR space, an increased number of investors are finding it lucrative to invest in growth-oriented HR companies with niche product and service areas. The size of this space is expected to be upwards of INR 300 billion in FY14-FY15. There is increasing community of start-ups within the industry that is developing products and solutions that enhance HR processes and release the bandwidth of HR team within the organizations so that it could focus on more strategic aspects and align with business goals.
A good investable idea in the HR space can be assessed on 3 major things to begin with. If these things are in place the business will become attractive for any investor in the HR space:
- Value Proposition: The most important question is what is that HR problem which the entrepreneur is trying to solve? Since HR as a standalone function has been around for some time, there are certain standard practices that exist across the various functions. Does the new solution provide a new way of doing things or does it make the HR manager's life easier? The second critical thing is innovation against efficiency or what is the value proposition? The clearer and more defined the value proposition, the higher the chances of getting the business funded. Additionally, with the increasing strategic importance of HR, another important dimension of feedback has come into play. This is a clear value-add for companies as they are now able to track, analyze and manage their employee workforce more efficiently.
- Functionality: Entrepreneurs who operate in the HR solution space enjoy the niche dimension or face the unique challenge where employees as well as HR managers are both their end–users. In most cases, HR managers will employ these solutions for their employees to use so it is important that both these types of users are addressed effectively. The employees should be able to use the solution with ease and the HR managers should be able to manage it easily and quickly. It is important to ensure that not too much of HR or employee bandwidth is spent on managing this solution. Well defined functionality will greatly enhance usage and adoption of the solution and thus becomes an important criteria for investors to look at.
- Team: Many times HR entrepreneurs are right brain folks. While they bring the necessary creative and functional skills to the table, they sometimes lack the left brain or analytical/operational skills needed to scale up and run a business. While the Idea is definitely central to the venture, at the end of the day functions like finance, sales, and operational client management become critical to the success of any venture. Hence it is important that the management team has well rounded skills to run the business effectively. Also, with the scalability that technology brings, the HR solutions market is seeing rapid movement from service led models to technology and product led models.
So along with functional HR domain and operational experience, it is becoming equally important to have someone in the team who understands technology.
Apart from the three parameters mentioned above, client signups and stage of business/funding requirements are two more important criteria that any investor will look at.
Firstly, it is obvious that more the users, the more attractive the business would become for potential investors. However, selling HR solutions comes with its unique challenges. While more and more clients are employing HR solutions to address their requirements, the HR function still lags traditional functions like information technology (IT) and infrastructure, etc. in terms of adoption of HR products and services. Thus, a tailored, HR specific approach needs to be taken while selling in this market. Also, it is possible that there would be cases where HR departments are using external HR solutions for the first time. In such cases the selling approach needs to be tweaked accordingly.
Secondly, the entrepreneurship ecosystem in the country is definitely heated up and as a result there are multiple businesses vying for an investor's attention. Thus, stage of business along with the funding requirement becomes an important decision making criteria for any investor. Gone are the days when a power-point business plan got easily funded. Now, the market has matured and if one is looking for seed capital, then one should keep ready the proof of concept and prototype. Most of the times, entrepreneurs reach this stage using their own resources or angel funding. If one is looking for series A capital, then it is imperative that one should have recurring early revenue numbers along with considerable client signups. The series B and C rounds thereafter move upwards in similar proportions.