 Work Tech vendors have been investing in AI for years, yet generative AI will disrupt the Future of Work more quickly than people anticipate, and the impact will be much more pronounced.
In this report we discuss why and how Generative AI will fundamentally change the competitive landscape, and why Work Tech vendors will need to establish a different competitive moat. We dive into the state of the Work Tech market, Generative AI use cases, early product releases, risks, limitations, as well as implications for M&A and VC funding. The report also looks at the impact of inflation, layoffs, lack of VC funding and tightening budgets on Work Tech vendors, and the outlook for M&A and fundraising. Current risks and limitations notwithstanding, the AI genie is now out of the bottle. As with other paradigm-shifting innovations, like the rapid democratization of the Internet following the release of the first Mosaic web browser, all vendors should take note and carefully assess the impact Generative AI is likely to have on their business.  It may not feel this way, but Work Tech is gearing up for a robust M&A recovery in 2023. Following a pause in new process launches last year, there is a notable uptick in businesses looking to explore strategic options this year. For some this is a necessity, with venture funding less abundant and some customers, particularly in tech, tightening their purses. For others, KPI’s have remained robust, and coming to market is a choice contingent only on sentiment improving – or at least stabilizing.
In terms of numbers, 47 Work Tech acquisitions were announced in Q1 2023. This is a c. 45% drop compared to the 84 per quarter, on average, announced during the previous four quarters. Considering the c. 6-9 month lag between an M&A process launching and it being announced, today’s numbers reflect last year’s slowdown.  Companies interested in tapping the debt financing market should note that lenders today are equipped with all-weather intelligence and decision-making frameworks. This facilitates continuity of lending activity during periods of high or low inflation and interest rates, positive or negative economic outlook, financial and geopolitical disruptions, and the likelihood of corporates' distress. As such, 2023 is unlikely to mark a departure from the lenders’ strategies and tactics of 2022. Instead, we are seeng creative approaches to debt financing structures, increased enthusiasm for quality deals and a greater focus on earlier start to relationship-building with borrowers.
 The macro narrative in 2022 was dominated by high inflation, the possibility of an economic recession, and disrupted asset values, particularly high-valued technology stocks. For HR Tech and Work Tech businesses, this narrative had the most profound impact on capital raising, which saw volumes drop to $2.0bn in Q4, levels last seen in Q2 2020, at the peak of the Covid-19 pandemic. However, total funding in 2022 was $19.4bn – a record amount, eclipsed only by the $46.1bn raised in 2021 and higher than the $12.7bn raised in 2020. M&A volumes remained resilient for most of the year, with the effects of the adverse market sentiment not appearing until Q4, reflecting the slowdown in new deal originations earlier in the year.
As we move into 2023, we expect that these themes will continue to affect sentiment in HR Tech and Work Tech. However, their impact will likely change due to the swift tightening of monetary policy in the US and Europe, which has started to affect a range of areas in the economy and capital markets, including inflation, consumption, employment, and business investment. If inflation in the US and Europe continues to decline without a sharp increase in unemployment, this would imply a higher probability of a much-desired soft landing–a scenario that many thought very unlikely just a few months ago.  Following a very strong recovery in 2021 and an initial softening in 1H 2022, the HR Tech and broader Work Tech businesses are adjusting to a new normal. This involves lower growth expectations for 2023 and emphasis on cashflow & profitability. In this context, Q3 shaped up as follows:
 Following a very strong recovery in 2021 and an initial softening in 1Q 2022, the HR Tech and broader Work Tech sectors are beginning to feel the impact of high inflation and uncertain macroeconomic outlook. In this context, the second quarter closed with mixed results:
Both in M&A and venture, there are two types of buyers / investors: those who take a “risk-off” approach across the board, and those who are more nuanced when assessing opportunities. Valuation expectations between companies and buyers / investors diverged somewhat abruptly, particularly for businesses that have yet to feel any adverse impact to their operations. However, we are still at the beginning of what is likely to be a protracted battle against recessionary forces. We expect that the current sentiment dichotomy will be reflected more comprehensively in the figures of Q3 and Q4, before the level of impact on businesses gradually becomes clearer and viewpoints start to reconverge. A total of $9.2Bn was invested in WorkTech and HR Tech during Q1 2022 across 205 deals. The average investment size contracted to $48.4M vs. $60.9M in the previous quarter, indicating a reversion to the mean after an abundance of later-stage financings in 2021.
In terms of M&A, 48 WorkTech acquisitions were announced this quarter – a sizeable decrease compared to Q4 '21. In part, this reflects the macroeconomic and geopolitical uncertainty that caused some transactions to be delayed. Nonetheless, M&A sentiment remains positive heading into Q2. Notable transactions included the announced acquisition of Anaplan by Thoma Bravo, and the acquisition of EdCast by Cornerstone. In the public markets, trading multiples for high-valued Workplace Productivity businesses contracted in Q1, in line with much of the broader technology sector. Pure WorkTech companies as well as their Productivity and Diversified WorkTech peers contracted by 32%, 27% and 13% respectively. Valuation for HR Services businesses showed greater resilience, expanding slightly. Valuation multiples for publicly-listed Workplace Productivity businesses contracted in Q4, in line with much of the broader technology sector. Median valuations for HR Services and Diversified WorkTech showed greater resilience, expanding by 28% and 13% respectively. In terms of M&A, 70 WorkTech acquisitions were announced, a c.9% increase compared to the previous quarter with significant interest in Talent Acquisition as well as Workforce Management assets. Private Equity was involved in c.7% of transactions. Investment volumes remained elevated, with more than $11.1Bn invested in the sector across 190 deals. The average investment size continued to grow, reaching $62.2M vs. $56.8M in the previous quarter.
WorkTech is going from strength to strength, with $12.9 billion invested into the sector last quarter across 230 transactions. Average investment size continues to increase, driven by major investments such as $1.5 billion into Articulate (online training) and $1 billion into Visma (core business software). M&A activity remained elevated, with 61 transactions being announced – a slight decline compared to the previous three quarters but still well above 2020 and even 2019 levels. Major transactions this quarter included Cegid's acquisition of Talentsoft, Blackstone's acquisition of Simplilearn and Veritone's acquisition of Pandologic. Median trading valuation for WorkTech businesses expanded to 10.9x, driven by the successful IPO’s of Freshworks and Paycor. The median trading multiple for Productivity vendors was volatile, impacted primarily by Zoom and the IPO of Monday.com.
Q2 2021 was the second consecutive record-breaking quarter for WorkTech, with $8.9 billion invested in the sector globally across 200 transactions. This compares to $5.3 billion across 178 transactions in the previous quarter. There were more than 30 funding rounds in excess of $100 million, primarily in Business Management, Compensation & Benefits, Core HR & Payroll, Corporate Learning & Development, Talent Acquisition and Productivity.
M&A activity in the quarter was in line with Q1 2021. There were 63 transactions and $12 billion of announced value. Private Equity was involved in 23% of acquisitions, with particular interest in Corporate Learning and Talent Acquisition. |
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Venero Capital Advisors offers tailored and independent investment banking services to businesses operating in HR Tech and the Future of Work sector. Our client relationships are built and carefully maintained on trust, discretion and dedication. We combine in-depth industry expertise with market leading advisory skills – delivered within a highly confidential and unconflicted framework.
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