The Human Capital Paradigm Shift by harborviewadvisors

The Human Capital Paradigm Shift November 2023

Executive Summary

THE HUMAN CAPITAL PARADIGM SHIFT

While working in the Human Capital Management sector over the years, we have seen our fair share of disruption and innovation. As the dust has begun to settle in this postpandemic environment, some fundamental trends have surfaced that are more sustained than simply a response to the pandemic or economic cycle. The nature of work, including the relationship between the employee and employer, has changed. Technology has allowed for more productive and innovative solutions to be adopted on a global level at super sonic speed. And demographic changes will require employer to do more with less, as low birth rates and boomer retirements have coupled together, creating stagnate workforce growth. Work: The shift towards a knowledge-based economy has made talent a more strategic imperative as employer needs and employee skills have become more malleable across industries. As such, the best human resource departments have evolved into a quintessential hub for attracting and retaining the best talent in order to stay competitive. Technology: Technological advancements have accelerated innovation and created a fastpaced environment where the skills needed to operate these evolving technologies change just as quickly as the technology itself. In response, reskilling and upskilling programs have emerged as more new technologies begin to be widely implemented. Demographics: As Baby Boomers continue to retire, a large population of knowledge workers prepares to leave, and their replacements are simply fewer in number. Meaning, companies will need to focus on keeping their older workers longer and ensuring that every employee is as productive as possible. These trends (evolving working dynamics, technology, and demographics) have sparked a unique shift in the industry, creating disruption as well as opportunities as unique solutions have arisen to tackle these ever-evolving challenges. In this paper, we identify these key mega trends, look at some specific solutions that have begun to emerge and analyze some of the compelling investment trends in the sector.

Carolyn Mathis Partner

Harbor View Advisors

Table of Contents 1. Driving Forces

2. Enabling Solutions

3. Investment Trends

4. Outlook

5. Market Map

6. Glossary

7. Endnotes

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Driving Forces

THE HUMAN CAPITAL PARADIGM SHIFT

The War for Talent is experiencing a paradigm shift. A quarter of the workforce is preparing to exit over the next decade, as 41 million of the most experienced workers will reach retirement age. This, in combination with ongoing changes in the employer/employee relationship and technological advancements, will have a profound impact on the makeup of the labor force and the nature of work. We anticipate that the coming decade will place a premium on talent, increasing demand for solutions to help employers attract, develop, and retain workers. A shift towards a knowledge-based economy has been under way for decades. Talent became a more strategic imperative as employees were needed for more than just manual, repetitive tasks. The need for employees with knowledge of specific fields became more prevalent. Educational requirements became essential and hiring became more strategic. This has continued to transform over the years, aided by emerging HR technology tools alongside evolving needs. Shifts to a knowledge-based economy, changing career dynamics and tech advancements have led us to our current moment Prior to World War II, the United States economy was industrial and product based. Low-skilled manual laborers were a driving force of production, and factory towns and pensions caused workers to stay with one company through their entire lives. In the decades after the war, the economy started to shift toward a knowledge-based and serviceoriented economy. The dynamic between employers and employees shifted, moving away from a long-term, paternalistic connection to a model where employees bear responsibility for managing their career path and eventual retirement. This shift widened the scope of responsibility for employees and aided in the Harbor View Advisors

fluidity of the workforce. Human resource departments became more strategic as attracting and retaining the best talent became a competitive advantage. It also opened opportunities for new technology advancements and investments. Today, the labor market is experiencing another critical shift that could further alter the future of work. As Baby Boomers prepare to retire, a large population of skilled knowledge workers is on the verge of departure, intensifying the need for prompt solutions to address this challenge. This, in combination with stagnant labor force growth, means the number of available workers is plateauing. Technological advancements are changing skills required at an ever-increasing rate, sparking the emergence of a skills-based economy. As the skills for jobs continue to evolve, so has the need for specialized talent and career-long learning. The pandemic acted as a disruptor, exposing the looming impact of Baby Boomer retirements while also enabling widespread adoption of various workforce and talent management tools. Demographic data points to, in the longer term, a more constrained yet fluid labor market, fueling the next evolution of talent acquisition, talent management, and workforce management. The Talent Gap is Secular, Not Cyclical The Baby Boomer generation, born in the 20 years immediately following World War II, is the largest generation in U.S. history. Throughout their lifecycle, Boomers have created mega-trends in their wake: from entering the labor force and the housing market and now preparing to exit the labor force and transfer their wealth. They began entering the workforce in the mid- ‘60s, and for the

Increased Boomer Retirement

Decreasing Fertility Rates

Declining Labor Force Growth

Driving Forces

THE HUMAN CAPITAL PARADIGM SHIFT

the next 20 years, were the driving force in a wave of economic growth fueled by the surging numbers they brought to the labor market. Since the 1980s when the youngest Baby Boomers entered the workforce, growth in the labor force flatlined. As the youngest Boomers reach 65 and the full impact of their retirement is felt over the next decade, the sense of urgency to adjust will strengthen. The Baby Boomer generation makes up 1 out of every 4 employees, totaling approximately 41 million.1 Their departure from the labor market is set to have far-reaching effects across nearly all industries. Since 2012, 2 million Baby Boomers have retired annually. The pandemic spiked early retirements, pushing that number to 3 million.2 As the world began to re-open, they were less likely to rejoin the labor force, exacerbating the labor shortage and highlighting impending labor tightness. Annual Increase in the Retired U.S. Baby Boomer Population (in Millions)1

Sum of Total Social Security Retirement Insurance Applications

+3.2 +3.0

+2.6

2015

+2.7

2016

2017

+2.9

2018

2019

2020

+3.1

+2.9

2021

2022

2023

Baby Boomer retirement plus lower fertility rates in subsequent generations has stagnated labor force growth. As this trend continues, the available labor force is expected to plateau. In fact, labor force growth has been declining since the ‘80s and is projected to stagnate at an anemic 0.4% growth over the next decade.3 Declining workforce participation in key demographics is also a driving factor in labor tightness. Women make up the majority of the

educated workforce, yet their labor force participation has declined since the turn of the century.4

Percent 4

The Labor Market is Set to Stagnate2 Growth of Real Potential GDP and Its Components

Projected 3

2.3

0.7 1.6

2 1 0

2 1.4

2.5 1.6

1.6

1.2

1.3

1.4

0.5

0.4

1950 1974 1982 1991 2002 2008 2023 2028 -1973 -1981 -1990 -2001 -2007 -2022 -2027 -2033 Potential Labor Force Potential Labor Force Productivity

Men’s labor force participation has been declining since the ‘80s. Among men with a high school education, the skills gap is particularly acute, creating a distinct challenge with labor participation. There is a skills mismatch between the available labor force and available jobs. Not All Shortages are Equal These demographic trends will not affect all industries equally, with certain sectors experiencing more pronounced impacts. It will be felt most within industries where the workforce skews older and the necessary skills require years of specialized training and experience. For example, commercial airlines are expected to face an annual shortfall of 8,000 pilots over the next decade.5 Nurses are projected to have over 200,000 openings per year through 2031 when retirements and workforce exits are considered.6 Similarly, shortages are expected in skilled tradespeople, with an estimated 3 million trade jobs remaining unfilled by 2028 despite a projected 10% industry growth.7 As retirements continue, these industries are faced with more significant deficits in their labor supply.

[1] Social Security Administration (SSA) Monthly Data for Retirement Insurance Applications [2] Congressional Budget Office, The Budget and Economic Outlook: 2023 to 2033

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Driving Forces

THE HUMAN CAPITAL PARADIGM SHIFT

Mitigating Factors: 1. Longer Careers A combination of improved health, changing job requirements, and insufficient retirement savings has opened the door to longer careers. Although 10,000 Baby Boomers turn 65 daily, only approximately 60% of those leave the workforce.9 In fact, their labor force participation rate is 29%, surpassing the previous generation’s rate of 21%.9

Although 10,000 Baby Boomers turn 65 daily, only approximately 60% of those leave the workforce

Increased life expectancy has enabled longer careers, allowing individuals to continue working without significantly impacting the number of years spent in retirement.10 Technological advancements like automation have made longer careers possible. Automation has reduced the physical demands of many jobs, allowing older workers to continue in industries for extended periods. The Labor Force is Aging3

20 15 10 5 -5 1971– 1981

1981– 1991

1991– 2001

2001– 2011

2011– 2021

16–24

25–64

65 and older

2. A More Fluid Workforce In conjunction with changes in the composition of the workforce, there have also been significant transformations in how work is defined and conducted. While many of the solutions enacted during the pandemic were well under way, the pandemic acted as a catalyst in their wide-spread utilization. For example, hybrid work was initially seen as a temporary solution, but in some industries, it has delivered cost-savings and efficiencies. In fact, post-pandemic, remote job opportunities have risen to 15% of total job openings in the U.S., a notable increase from the pre-pandemic level of 4%.12 As a result, traditional barriers imposed by office environments have dissolved, giving rise to more geographic flexibility. 3. Productivity is Key Robotics, automation, AI, and machine learning have already made significant inroads across industries. As these technologies continue to develop, employers will be able to do more with less, alleviating some of the burden of an impending worker shortage.

Labor force by Age Group (Thousands)

transitioning industry knowledge, lessening the severity of talent shortages, and aiding the retirement savings gap that many face due to longer retirements. Consequently, as more Baby Boomers do retire, companies that have prepared for their exit and have transitioned knowledge will be ahead of the game.

2021–2031 projected

The U.S. Bureau of Labor Statistics projects a notable increase of 5.5 million individuals aged 65 and above in the labor force over the next decade.11 This increase in career length is critical in

Looming demographic trends and shifts in the workforce environment will continue to transform the workforce and the nature of work. As the workplace continues to evolve, so do the possibilities for innovative answers to growing challenges, creating compelling investment opportunities.

[3] U.S. Bureau of Labor Statistics (BLS)

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Enabling Solutions THE HUMAN CAPITAL PARADIGM SHIFT

As organizations strive to remain competitive and agile, the need for innovative HR solutions has never been more pronounced. There is a range of dynamic strategies available in the market, each designed to tackle distinct aspects of the talent puzzle. From fostering internal mobility to empowering underutilized segments, these solutions are reshaping traditional HR paradigms and propelling organizations towards enhanced productivity and sustained success.

Accessing a Wide Range of Talent Pools In a labor scare environment, companies will need to think outside the box when it comes to their talent acquisition strategy. Investment has already begun in an effort to access underutilized talent pools, contingent workers and the global workforce. The Under-utilized: Low workforce participation rates have resulted in large numbers of under-utilized workers. As we begin to shift towards a skills-based economy, accessing these underutilized labor pools can prove fruitful. Micro-credentialing and hiring on skills rather than education allows companies to hire previously overlooked talent. For those who leave the workforce temporarily, often for family reasons, returnships, internship-like programs that allow for a smoother transition back into the workforce, can provide a path to ease return to work. Curated programs are available to help companies implement returnship programs. Technology-supported mentorship programs enable Harbor View Advisors

A holistic DEI data platform that helps measure, benchmark, and act on company DEI goals under-represented groups to connect with experienced professionals, fostering skill development and confidence. Pay transparency tools provide clarity on compensation structures, aiding in closing the gender pay gap and job-sharing platforms facilitate flexible work arrangements, making it easier to balance career and caregiving responsibilities.

Tech-enabled employee benefit solution that assists employees in finding childcare A broader set of benefits offerings that include paid family leave, employer-provided childcare subsidies or flexible schedules are beneficial in attracting this underutilized labor source.

The External Workforce: As a recent survey highlighted, CEOs are increasingly concerned about hiring challenges hindering their ability to operate at full capacity. In response, companies have increasingly looked to contingent talent to efficiently fill talent gaps and mitigate costs. In some cases, a company can employ as many as 6 different kinds of workers, from full-time to part-time, seasonal, temporary, leased, or contingent workers. In times of productivity lulls or changes to company needs in the face of growth, many companies will look to tap 7

Enabling Solutions THE HUMAN CAPITAL PARADIGM SHIFT

into these categories to obtain talent in a costeffective manner. Talent tools like scheduling software or talent management resources that allow for the smooth handling of these various employment types will be essential for a company to efficiently handle and manage a complex workforce.

Global Talent Pools: The pandemic opened the world to a global talent pool with the expansion of virtual talent management and hiring tools. The skills required for growth can now be accessed from anywhere with many vetting and screening processes also moving online. Employers of record (EORs) ensure

An online marketplace that connects businesses with freelancers offering digital services

An end-to-end workforce management system for global workforces

Like contingent models, outsourcing has garnered attention. It is not always economical or efficient to build out departments that may be essential for running the business but not necessarily core to operations. This is especially true in cases where the department requires specific expertise, like

A network that connects freelance talent in business, design and technology with companies accounting or IT. In fact, the business process outsourcing (BPO) market is expected to double in size to $492 billion by 2028.13 A decentralized strategy may be the business model of the future as it allows companies to obtain the skills they need, minimize overhead costs, and utilize resources to scale.

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compliance when companies hire employees and contractors globally without establishing local entities, manage payroll across currencies and offer benefits that comply with local regulations. Digital video interview tools have allowed companies to vet potential hires more efficiently and cost effectively. Workflow and communication tools have aided in incorporating remote workers into the company and productivity and talent management tools have created accountability points. These tools have allowed the interview and

A mentorship software that enables organizations to implement programs to connect employees onboarding process to become more streamlined for candidates near and far. Moreover, virtual interview products that incorporate gamification or virtual reality allow the candidate an opportunity to visualize how they will fit into existing workflows. Barriers to hiring across the globe have been lowered.

Enabling Solutions THE HUMAN CAPITAL PARADIGM SHIFT

Maximizing the Existing Workforce Employee retention is key to maximize the workforce. This is especially pertinent when considering strategies to engage older workers for longer and developing career plans that entice employees to remain with a company. Older Workers: Solutions to accommodate older workers will be paramount in retaining their valuable skills and experience prior to their transition into retirement. Workers aged 55 and above contribute significantly to the national output, approximately 40%, despite representing only 35% of the population.14 Solutions that assist in their continued contribution should not be overlooked. Personalized communication platforms and employee engagement tools that facilitate ongoing dialogue allow organizations to understand the evolving preferences and goals of their workforce, regardless of age.

An employee scheduling software for shift-based operations in mission-critical industries Strategies that align with the principle of "aging in place" allow senior employees to remain engaged, share their expertise, and mentor younger colleagues, helping to mitigate the potential loss of valuable institutional knowledge that can occur when experienced employees leave abruptly. The adoption of flexible scheduling, part-time retirement, and phased retirement plans are tools that benefit older employees while contributing to a diverse and multigenerational workforce.

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Internal Mobility: On average, employers in the United States spend over $4,000 per job on hiring.15 Given the substantial investment and importance of choosing the right people, data has become the name of the

An AI-powered talent lifecycle management platform that enables internal mobility game and internal mobility the emerging playing field. Internal mobility typically leads to higher tenure rates with employees staying on average 60% longer.16 With average tenure for Gen Z being less than 3 years, companies will be incentivized into pursuing strategies that ensure that the right talent stays with their company.17

A workforce agility and talent marketplace platform that assists in career pathing employees Internal mobility tools that allow companies to make data-driven decisions based on clear visibility into their current workforce have become critical. Pairing internal mobility solutions with upskilling and career pathing tools has been increasingly important as companies balance sourcing and upskilling internally versus hiring talent with the necessary skills. Predictive analytics, AI-powered talent management and career pathing software for data driven insights will be increasingly important in this emerging environment. Analyzing attrition rates, growth projections and market trends results in data-driven recommendations regarding hiring, training, and talent development to ensure that the right people are in the right roles at the right time. 9

Enabling Solutions THE HUMAN CAPITAL PARADIGM SHIFT

Employee Engagement: Employee retention and engagement has been a growing concern as hybrid work, burnout and the global nature of the workforce expands. Employee engagement solutions fall into three key areas: Listening & Feedback Software, Communication & Collaboration, and Improving the Employee Experience. These tools leverage data analytics, communication platforms, and employee feedback mechanisms to create a more engaged workforce.

An employee recognition platform that offers peer-topeer recognition Employee engagement surveys conducted through these technologies provide valuable insights into employee sentiment and areas that need improvement. Additionally, modern HR tech platforms offer real-time feedback channels, enabling managers to identify issues promptly and make data-driven decisions. They also facilitate personalized learning and development opportunities, which can boost employee morale and engagement.

Upskilling and Reskilling: Central to this paradigm is the recognition that the nature of work and the skills demanded by industries are in a constant state of flux. Rapid advancements in technology are reshaping entire sectors, necessitating a workforce that is not only adept at the current skill set but also primed to swiftly adapt to emerging trends. Through comprehensive career-long learning initiatives, organizations demonstrate their commitment to providing employees with the tools and resources needed to stay relevant in a fast-paced environment.

A visual work platform designed for collaboration

In response to these challenges, forward-looking companies are seeking novel solutions that facilitate the process of cultivating talent from within. Leveraging emerging technologies, such as artificial intelligence-driven personalized learning platforms and virtual simulations, businesses can create tailored learning journeys for employees. These journeys are designed to bridge the gap between existing skill sets and the skills demanded.

An upskilling platform that helps discover content, build skills, and certify expertise

Comprehensive Approach to Career-Long Learning If employers take a comprehensive approach to career-long learning, it widens the talent aperture at the front end to recruit the right people while creating a pathway to continuously upskill employees as technology evolves. Harbor View Advisors

Other Tools: Skills assessments help employees and employers identify strengths and skills gaps. Career pathing tools help guide individuals in charting their professional growth within the organization while fostering skill development and career advancement. Micro-credentialing has enabled 10

Enabling Solutions THE HUMAN CAPITAL PARADIGM SHIFT

employees to acquire and showcase specific skills and certifications aiding them along their designated career paths.

of opportunities for employees to channel energy into tasks that demand critical thinking, problemsolving, and ingenuity.

A cloud-based collaborative platform and database Hacking the Future of Work In today's rapidly evolving business landscape, leveraging productivity enhancements to streamline mundane and repetitive tasks has become a pivotal strategy for organizations striving to remain competitive and foster innovation. Low-Code/No Code: No-code/Low-code platforms simplify and expedite the development and deployment of HR technology solutions. These platforms help companies customize and create optimized programs for a range of cases, expanding from applicant tracking systems (ATS) to employee management and HR data analytics with minimal coding knowledge. While the initial integration process may involve some training, the limited educational requirements needed to utilize this technology expand the reach of customizable solutions and product integration. Productivity: Technological advancements continue to provide new tools that harness the power of automation, allowing employers to produce more with fewer employees. By incorporating AI-driven software and machine learning algorithms into various workflows, companies can systematically identify and streamline repetitive tasks that consume substantial time and resources. These tools, capable of executing routine processes with precision and consistency, effectively alleviate the burden on employees. This, in turn, unlocks a realm

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In the context of a growing company, this approach is particularly impactful. As expansion fuels increased demand and operational complexity, the imperative to maximize employee output becomes even more pronounced. By strategically implementing productivity tools, organizations can effectively scale their operations without an immediate proportional increase in workforce size. This scalability, rooted in automation and optimization, provides the foundation for sustained growth while mitigating potential labor constraints. The rapid advancement of AI technologies, such as ChatGPT and other generative platforms, underscores the ongoing transformation of productivity tools. These platforms are evolving from simple assistants to sophisticated collaborators, capable of engaging in complex interactions and generating valuable content. Although the full extent of their transformative impact remains a subject of ongoing exploration, there is no doubt that they will reshape the dynamics of work, fostering a more productive, creative, and dynamic workforce.

Investment Trends: M&A THE HUMAN CAPITAL PARADIGM SHIFT

In recent years, HR technology has witnessed a remarkable surge in activity, reflecting the growing recognition of its pivotal role in modern workforce management. The convergence of technological advancements and evolving workplace dynamics has spurred a significant ramp-up in the development, adoption, and investment of HR technology solutions. Since 2017, HR technology has experienced increased investment interest across each of the main categories: Talent Acquisition, Talent Management and Core HR. This heightened activity underscores the industry's commitment to reshaping traditional HR practices, ushering in a new era of efficiency, data-driven decision-making, and enhanced employee experiences. While we also include staffing, this section will mainly focus on the three main categories as staffing tends to follow its own trend lines. However, as the contingent workforce continues to become more utilized, staffing activity has been interesting to monitor. M&A by Year4

200 150 100 50 0

2017

2018 Staffing

2019 Core HR

2020

2021

Talent Acquisition

2022

Talent Management

Out of these sub-categories talent management has become significantly more active in deal making than just 5 years prior. From 2020 to 2022, this category saw a 400% increase in deal activity. While 2021 and 2022 were record years for the industry, economic pressures, increased interest rates and market hesitancy has slowed deal activity in 2023. Nonetheless, 2023 is already set to outpace pre-pandemic levels. 250

Acquisitions by Acquiror Financing Status5

200 150 100 50 0

2017

2018 Financial

2019 PE/VC Backed

2020 No Backing

Public

2021

2022

[4] Pitchbook, HVA Research [5] ibid

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Investment Trends: M&A THE HUMAN CAPITAL PARADIGM SHIFT

Top Sub-Sectors: Learning solutions, workforce management platforms, payroll management systems, and advanced hiring tools have emerged as dominant forces in the landscape of HR technology investments. This trend signifies a strategic shift towards enhancing employee development through cutting-edge learning technologies, optimizing workforce efficiency and scheduling through advanced management tools, ensuring seamless payroll processes, and leveraging sophisticated hiring platforms to attract, evaluate, and onboard top talent. This gradual dominance underscores the evolving priorities of organizations in optimizing their human resources processes and capitalizing on the transformative potential of technology.

M&A by Company Type6

300 250 200 150 100 50 0

2017

Core HR

2018

2019

2020

2021

Talent Acquisition

Compensation and Benefits Workforce Management Payroll HRIS

Hiring Tools Pre-Employment Screening Sourcing Assessments Recruitment Marketing

2022

2023 *

Talent Management Onboarding Video Interviewing

Learning Employee Engagement Wellness Leadership Development Talent Analytics

Performance Management Rewards and Recognition

*As of 6/30/23

Active Buyers: Learning:

Payroll:

HR Tools :

Workforce Management:

[6] Pitchbook, HVA Research

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Investment Trends: Top Sub-Sectors THE HUMAN CAPITAL PARADIGM SHIFT

Hiring Tools

M&A Deal Count

Hiring tools have grown substantially in the face of hiring challenges. Skills shortages, decreasing labor market growth and increased cost of talent has highlighted the importance of investing and creating a strategic and data-driven hiring process. With the average cost of hiring a single employee hovering around $4,000, companies have made moves to invest in software and solutions that streamline this process in a more effective manner.

20 15 10 5 0

2017

2018

2019

2020

2021

2022

2023*

Source: Pitchbook, HVA Research

Compensation and Benefits 30 25

M&A Deal Count

Compensation and benefits has also seen steady growth. Recent focuses on DEI, aging workforces, and pay transparency have highlighted this area of HR. As companies aim to attract, retain, and comply, solutions that create holistic approaches that solve these issues and expedite processes have garnered attention. As such, solutions that can offer personalized benefits, tracking and swift integration with already utilized platforms are ahead of the game. This category has seen steady activity, and 2023 is already set to outpace 2022.

20 15 10 5 0

2017

2018

2019

2020

2021

2022

2023*

Source: Pitchbook, HVA Research

Learning 40

In 2022, Learning saw significant activity as companies identified the importance of upskilling and career pathing. This has become increasingly evident with 74% of workers willing to learn new skills and 87% of millennials identifying professional development as important when choosing an employer.18 Over 90% of employees want personalized training, and retention rates are 34% higher within organizations that offer career development.19

M&A Deal Count

35 30 25 20 15 10 5 0

2017

2018

2019

2020

2021

2022

* 2023

Source: Pitchbook, HVA Research

*As of 6/30/23

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Investment Trends: Venture Capital THE HUMAN CAPITAL PARADIGM SHIFT

9,000

HR VC Capital Invested ($M)7

VC Financing Activity8 20 B

8,000 7,000

18 B

6,000

16 B

5,000

14 B

4,000

2017

2018

Core HR

2019

2020

Talent Acquisition

2021

2022

Talent Management

2021 was a record year for venture capital funding. While the number of funds raised that year remained stagnant, the average fund size grew substantially. Total capital raised exceeded 2020 by more than 1.5x at a record $128.3 billion. This brought the cumulative dry powder in the industry to around $222.7 billion. Unsurprisingly, 2021 was a record year for many companies in terms of VC investment, including HR tech. Talent management VC deals saw the most capital inflows with around $8.5 billion in investments. This was followed by Core HR at $5.9 billion and Talent Acquisition at $3.5 billion. While some of the momentum has trailed off due to increased interest rates and economic uncertainty, 2022 significantly outperformed pre-pandemic levels, receiving approximately $11.8 billion of capital invested into the HR tech space. 2023 is expected to further decline, however HR remains quite active with the AI boom contributing to significant investment and innovation for the industry. While the split between early-stage and late-stage deals has mostly remained consistent, a decrease in VC spending starting in 2022 has put a capital strain on many startups. As with private equity, interest rate hikes increasing the cost of capital and [7] Pitchbook, HVA Research [8] ibid

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200 174

168

150

134

6B 4B 2B

300

222

1,000

350

$11,854 250

10 B

2,000

366

317

12 B

3,000

400

$18,024

$2,813

$3,830

100 $2,970 50

$1,296

2017

2018

2019

2020

Sum of Transaction Sizes

2021

2022

Transaction Count

constraining valuations has slowed deal activity, including capital investments. Late-stage companies are experiencing around 2.5x the capital demanded from the capital provided and early-stage companies are experiencing a capital gap of around 1.5x. This will likely lead to consolidation opportunities in the industry as those who cannot raise capital will need a partner to stay afloat. Quarterly Estimated Venture Capital ($B) Demanded by Stage9 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0

Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Early-stage VC

Late-stage VC

Venture growth

[9] Pitchbook

Investment Trends THE HUMAN CAPITAL PARADIGM SHIFT 20.0 B

VC Funding by Company Type10

18.0 B 16.0 B 14.0 B 12.0 B 10.0 B 8.0 B 6.0 B 4.0 B 2.0 B 0.0 B

2017

2018

Core HR

2019

2020

2021

Talent Acquisition

Compensation and Benefits Workforce Management Payroll HRIS Resume Tools

2023*

2022

Talent Management

Hiring Tools Pre-Employment Screening Sourcing Assessments Recruitment Marketing

Learning Employee Engagement Wellness Leadership Development Talent Analytics

Onboarding Video Interviewing

Performance Management Rewards and Recognition

*As of 6/30/23

Workforce Management is currently outpacing other HR Tech sub-sectors in terms of investment, receiving $882 million year to date and has been a top investment sub-sector since 2018. Unsurprisingly, hiring tools led in 2022 as start-ups that focused on prevalent labor shortages and dispersed workforces were prioritized. Wellness led in 2021 coming out of the early days of the pandemic, signaling an emphasis on health and well-being that was challenged during 2020. Going forward, skills shortages, productivity concerns and 3.0x

Estimated Venture Capital Demanded to 2.5x Supplied by Quarter11

2.0x

Average deal size has begun to normalize coming out of the record 2021 year with early-stage deals below $15 million and late-stage deals hovering at $30 million. VC valuations have begun to normalize, and capital constraints will offer investors consolidation opportunities. Looking at market needs and anticipating upcoming challenges will be beneficial to those looking to enter the industry. Funding by Stage12

$94M

1.7x $58M

1.5x

1.0x

0.0x

growth projections will impact what companies desire out of their HR platforms.

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2017

2018

2019

Early-stage VC [10] Pitchbook, HVA Research [11] Pitchbook

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2020

2021 Late-stage VC

2022

$32M

$31M

$34M

$19M $6M

$10M

$11M

2017

2018

2019

2020

*As of 6/30/23

Early-Stage VC

$26M

2021

$33M $14M

2022

$9M 2023*

Late-Stage VC

[12] Pitchbook, HVA Research

Investment Trends: Select Investments Per Year THE HUMAN CAPITAL PARADIGM SHIFT

2022 M&A:

2022 VC: $470M JUN 2022

RECEIVED INVESTMENT FROM

$400M MAY 2022

RECEIVED INVESTMENT FROM

$300M APR 2022

RECEIVED INVESTMENT FROM

$5.7B MAY 2022 ACQUIRED BY

$3.7B AUG 2022 ACQUIRED BY

$2.3B SEP 2022 ACQUIRED BY

2022: Core HR dominated the top VC deals of 2022. The Personio investment shows interest in the growth potential for small to mid-size businesses as they pursue more structured HR practices. The top M&A transactions were more diverse, encompassing talent acquisition, talent management and core HR. Frontline Education historically has served the K-12 space, but through its partnerships with Roper Technologies and previously Thoma Bravo, it has been able to roll out new products, including a Human Capital Analytics solution.

2021 VC: $1.5B JUL 2021

RECEIVED INVESTMENT FROM

$500M DEC 2021

RECEIVED INVESTMENT FROM

2021 M&A: $425M OCT 2021

RECEIVED INVESTMENT FROM

$5.2B OCT 2021 ACQUIRED BY

$1.8B AUG 2021 ACQUIRED BY

$1.0B JUN 2021 ACQUIRED BY

2021: Top VC investments ranged from half a billion dollars to $1.5 billion, coinciding with record deal making across multiple industry segments. Articulate’s $1.5 billion series A investment marked the excitement surrounding the learning space. As reskilling and training has become increasingly important in retaining and attracting talent, learning software that makes training more accessible has garnered interest from investors. Clearlake’s acquisition of Cornerstone showcases private equity’s interest in the talent management space and the consolidation potential of the industry.

2020 VC: $150M FEB 2020

RECEIVED INVESTMENT FROM

$145M JUN 2020

RECEIVED INVESTMENT FROM

2020 M&A: $125M NOV 2020

RECEIVED INVESTMENT FROM

$22B APR 2020 MERGED WITH

$3.5B DEC 2020 ACQUIRED BY

$1.5B JAN 2020 ACQUIRED BY

2020: While the top VC transactions encompassed talent management, talent acquisition and core HR, the top M&A deals were all core HR. The merger of Kronos and Ultimate Software at an enterprise value of $22 billion showcased a pivotal moment in the space during an overall slow year in deal making. Harbor View Advisors

Outlook

THE HUMAN CAPITAL PARADIGM SHIFT

HR technology has seen increased investment and deal activity in recent years, driven by the changing workforce environment and the need for strategic HR solutions. Companies are investing in datadriven hiring tools, compensation and benefits solutions, and personalized learning platforms to address skills shortages, improve employee retention, and support career development. Venture capital funding has reached record levels, with talent management receiving the most investment, followed by core HR and talent acquisition. While investment decisions are invariably influenced by economic cycles, current conditions suggest that HR technology continues to be a vibrant arena brimming with potential opportunities for investors. The industry has witnessed consolidation opportunities as capital constraints and increased cost of capital put strain on startups. However, both

private equity and venture capital investors have accumulated substantial dry powder, indicating a positive outlook for the HR tech space. Workforce management has been a top investment sub-sector, indicating the importance of addressing productivity concerns and skills shortages. Average deal sizes have begun to normalize, but market needs and upcoming challenges will continue to shape the industry. Overall, the HR tech industry is experiencing growth and innovation, driven by the evolving workforce and the need for effective talent management solutions. The focus on data-driven decisionmaking, personalized learning, and holistic HR approaches will shape the future of the industry. Despite challenges, investors entering the space can capitalize on the growing demand for strategic HR solutions and contribute to the evolution of the industry.

Connect with Harbor View Advisors ABOUT HARBOR VIEW ADVISORS:

Harbor View Advisors provides M&A advisory, turnkey corporate development, and strategic consulting to innovative companies. Our unique approach combines the strategic thinking of a consulting firm with the execution expertise of an investment bank to provide clients with the full spectrum of guidance they need to achieve their goals.

Carolyn Mathis

Margaret McCormick

Tatiana Lathion

Carolyn is Co-Founder and Partner of the firm. She has parlayed her more than 20 years of investment banking experience into helping entrepreneurs prepare for market, evaluate strategic alternatives, and navigate every step of a sale or capital raise.

Margaret is Vice President and works with clients on sell-side M&A, buy-side M&A and strategic consulting engagements with expertise in HR Tech/HCM. She has ten years of investment banking and consulting experience with Harbor View.

Tatiana leads Harbor View’s research efforts, providing in-depth research for the various verticals, serving as the cornerstone to our industry white paper program.

Email: cmathis@hvadvisors.com

Email: mmccormick@hvadvisors.com

Email: tlathion@hvadvisors.com

PARTNER

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RESEARCH ANALYST

Market Map

THE HUMAN CAPITAL PARADIGM SHIFT

Global

DEI

External

Skills

Engagement Internal

Productivity

15Five: A performance management platform that focuses on performance evaluations, engagement surveys and coaching and training tools for managers Airtable: A cloud-based collaborative platform and database that can create customizable workflows and data management Bambee: A leading outsourced HR solution for small to large businesses Beekeeper: A communications and operations platform designed for frontline workers Beamible: A cloud-based platform that focuses on work design and people analytics Beamery: An AI-powered talent lifecycle management platform Betterworks: A cloud-based human capital management software that provides data-driven performance management solutions Bounsly: A peer-to-peer recognition platform Bright Horizons: The largest provider of employersponsored childcare Cognota: A corporate learning and development platform CultureAmp: An employee experience platform that provides tools and insights for employee engagement, performance management, and employee development Credly: An end-to-end solution for creating, issuing, and managing digital credentials Deel: An all-in-one HR platform to manage an international workforce Degreed: An upskilling platform that helps individuals and organizations discover content, build skills, and certify expertise Diversio: A DEI platform that provides diversity training, consulting, and tools for organizations to improve cultural and genetic diversity

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Flexibility

Freelancer: A freelance marketplace where businesses can hire freelancers for various jobs and projects Fiverr: An online marketplace that connects businesses with freelancers offering digital services Gloat: A workforce agility and talent marketplace that helps companies unlock skills and prepare their workforce Go1: A learning and development content platform that offers a curated eLearning library GoCo: An all-in-one HR software solution that streamlines manual tasks Guild: An education, skilling and career mobility platform Hybr1d: An end-to-end workforce management system to streamline people, IT, and finance operations ICims: A cloud-based recruiting software company that leverages AI to deliver recruitment guidance Kudos: An employee recognition platform that offers peer-to-peer recognition Lattice: A people management platform for employee engagement and performance management Leapsome: A platform for people enablement aimed at driving employee development, productivity, and engagement Mathison: A DEI data platform that enables organizations to measure, benchmark, and act on DEI goals Mural: A visual work platform designed for collaboration OutSystems: A low-code platform that provides tools for companies to develop, deploy and manage omnichannel enterprise applications OpenAi: An artificial general intelligence (AGI) platform that focuses on conducting AI research and tool generation

Market Map

THE HUMAN CAPITAL PARADIGM SHIFT

Oyster: A global employment platform that offers solutions for hiring, managing, paying and taking care of globally distributed teams Papaya Global: A SaaS platform that automates global payroll and global HR processes PeopleKeep: A provider of personalized benefits administration software that enables small businesses to set up and manage customized employee benefits Phenom: A global HR technology company that offers an intelligent talent experience platform PrimePay: A comprehensive payroll, HR, and benefits solutions company for small to mid-sized businesses reacHIRE: A returnship platform that partners with companies to diversify their workforces and provide end-to-end support, training and resources for women returning to work Remote: A global HR platform that provides solutions for hiring, managing, and paying global teams Shiftboard: A provider of employee scheduling software for shift-based operations in mission-critical industries SkilMil: A HR networking platform for veteran talent and compliance solutions SkyHive: An AI-powered workforce data management and reskilling platform Switchboard: A data engineering automation and real-time analytics platform The Mom Project: A digital talent marketplace and community that connects professionally accomplished women with employers Timely: An AI-powered time tracking software that helps teams track their time accurately for reporting client, project, and work hours Tinypulse: An employee engagement software that specializes in surveys, peer-to-peer recognition, private messaging and share-back reports Together: A mentorship software that enables organizations to implement best-practice workplace mentorship programs Tootris: A childcare platform that aims to make highquality childcare more accessible and affordable for parents Toptal: A network that connects top freelance talent in business, design and technology with companies V School: An end-to-end career preparation academy for code and design targeted towards veterans and women Workana: A freelance marketplace that connects businesses with remote talent

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Workera: A skills development platform that leverages AI-powered skills intelligence to unlock the full potential of the workforce WorkMarket: A freelance management platform that allows businesses to onboard, verify, manage, and pay independent contractors Zavvy: A people enablement platform that combines talent management tools and connects them all in one place Zoho: A cloud software suite designed to improve business efficiencies

Glossary

THE HUMAN CAPITAL PARADIGM SHIFT

Baby Boomers: Generation born between 1965-1980 Core HR: Refers to companies that provide services or products to deliver basic HR functions, including employee information, workforce management, benefits data, etc. Dry Powder: Cash that has been committed by investors but has yet to be “called” by investment managers in order to be allocated to a specific investment Labor Force Participation Rate: The number of people in the labor force as a percentage of the civilian noninstitutional population that are working or actively looking for work Micro-Credential: Recognized proof or certification of assessed learning that is additional, alternate or complementary to a specific topic area, that is a short, stackable or formal component of a formal qualification Potential Labor Force: Estimate of the size of the labor force that would occur if economic output and other key variables were at their maximum sustainable level Potential Labor Force Productivity: Ratio of real potential GDP to the potential labor force Real Gross Domestic Product: Inflation adjusted value of the good and services produced by labor and property Returnship: Short-term engagements, like internships, for professionals who want to reenter the workforce after an extended period. Skills-Based Economy: Where job candidates are assessed based on applied competency and industry-approved qualifications Staffing: Refers to companies that provide outsourced staffing services across various industry sectors Talent Acquisition: Refers to companies that provide services or products in sourcing, recruiting, hiring and orienting talent Talent Management: Refers to the products and services that assist in onboarding, career pathing and developing the employee once they have been hired Unemployment: when an individual who is not employed and is actively seeking employment but cannot find work

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Endnotes

THE HUMAN CAPITAL PARADIGM SHIFT

1. Fry, R. (2018, April 11). Millennials are the largest generation in the U.S. labor force. Pew Research Center. 2. Fry, R. (2020, November 9). The pace of Boomer retirements has accelerated in the past year. Pew Research Center. 3. Congressional Budget Office. The budget and economic outlook: 2023 to 2033 - Congressional Budget Office. (n.d.). 4. Fry, R. (2022, October 12). Women now outnumber men in the U.S. college-educated Labor Force. Pew Research Center. https://www.pewresearch.org/shortreads/2022/09/26/women-now-outnumber-men-inthe-u-s-college-educated-labor-force/ 5. U.S. Bureau of Labor Statistics. (2022, October 4). Airline and commercial pilots : Occupational outlook handbook. U.S. Bureau of Labor Statistics. 6. Fact sheet: Nursing shortage. (n.d.). https://www.aacnnursing.org/Portals/0/PDFs/FactSheets/Nursing-Shortage-Factsheet.pdf 7. The trades. FACTS, FIGURES & FUTURE. (n.d.). 8. Fry, R. (2019, July 24). Baby Boomers are staying in the labor force at rates not seen in generations for people their age. Pew Research Center. 9. Fry, R. (2019, July 24). Baby Boomers are staying in the labor force at rates not seen in generations for people their age. Pew Research Center. 10. Social Security Administration. Life Expectancy for Social Security. Social Security History. (n.d.).

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11. Director, S. N. A., Nadeau, S., Director, A., Shepherd Director, M., Shepherd, M., Director, Director, E. L. A., Lofgren, E., Zhavoronkova, M., Bleiweis, R., Olinsky, B., Reynolds, S., Woolf, S., & Weller, C. E. (2023, June 2). Five facts on older women in the labor market. Center for American Progress. 12. WP Company. (2022, November 28). The great mismatch: Remote Jobs are in demand, but positions are drying up. The Washington Post. 13. SkyQuest Technology Consulting Pvt. Ltd. (2022, September 19). Global Business Process Outsourcing (BPO) market to generate sales of $492.45 billion by 2028: Top 10 players generate 60% market revenue. 14. AARP. AARP report finds that older population makes significant and growing contributions to global economy. MediaRoom. (n.d.). 15. staff, S. O. (2019, August 16). Shrm Benchmarking Report: $4,129 average cost-per-hire. SHRM. 16. Maurer, R. (2021, July 6). Study: Internal mobility boosts retention. SHRM. 17. CareerBuilder. Millennials or gen Z: Who’s doing the most job-hopping - careerbuilder. (n.d.-c). 18. Flynn, J. (2023, June 30). 35 key employee training and Development Statistics [2023]: Data + trends. Zippia For Employers. 19. Flynn, J. (2023, June 30). 35 key employee training and Development Statistics [2023]: Data + trends. Zippia For Employers.

The material in this report is for information purposes only and is not intended to be relied upon as financial, accounting, tax, legal or other professional advice. This report does not constitute and should not be construed as soliciting or offering any investment or other transaction, identifying securities for you to purchase or offer to purchase, or recommending the acquisition or disposition of any investment. Harbor view advisors does not guarantee the accuracy or reliability of any data provided from third party resources. Although we endeavor to provide accurate information from third party sources, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.