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Should you buy HR Software From Startups?

BY -

Phil Strazzulla

October 28, 2020

Want to grow your HR tech knowledge 🤓?

The world of HR Tech is changing very fast, and the new technology coming from startups is the main driving force of this change.

Nonetheless, many HR and TA teams struggle with the question of whether they should partner with startups when choosing new software.  And, for good reason!

Where startups could fit into your tech stack

You'll run into startups during almost any procurement process. You may be sick of Taleo, and run into an ATS vendor that has <10 employees.

Perhaps your organization is prioritizing people analytics, employer branding, or AI much more than 98% of other companies out there.  You will find that many of the vendors in these emerging fields are smaller companies.

Whether you are adding a core HR system like an HRIS or are going after more future of work-esque initiatives, the ability to partner with startups will be there.

The Upside

For some organizations, this can be a truly game changing relationship that accelerates their business.  For example, imagine you were the first company to adopt LinkedIn Recruiter, and your TA team was able to use this before hundreds of thousands of others were sending messages and diluting Inmail response rates.

This same opportunity exists today with hundreds of other vendors.  But, the downside can be just as big as the upside.  Imagine that your ATS vendor goes out of business and you need to switch to a new system in short order.  Maybe some of the money you paid upfront for the year is also gone.  This is a real and large risk.

What’s a startup

A friend in VC did a study of their portfolio.  They found that once a B2B SaaS company got to >$1 mm in annual recurring revenues (ARR), they had a drastically higher chance of success vs more nascent companies.

Getting to the magical $1 million revenue number is a pretty good benchmark to understand whether or not a company is a “startup.”  Of course, a solution that has three customers each paying $350k/yr is not as stable as one that has 3,000 customers each paying $250/yr.  So, there is always nuance.

But, once a company has hundreds of SMB customers, or dozens of enterprise customers, it’s pretty safe to say they don’t have nearly as much risk as a startup anymore.  They have product market fit. They've figured out how to implement and support.

It's for these reasons that we almost never list vendors on our site if they are <$1 million of revenues. They typically don’t have the infrastructure to support the average company (customer success, integrations, scaling, etc), and may not have found true product/market fit yet which implies a high change they will pivot in the future.

Working with startups

If you think differently than the average company, and do want to partner with startups, here are some thoughts:

Making a bet

  • You’re making a bit of a bet on the future of the startup.  Evaluate their chances by talking to the founder - would you want to bet on this person’s vision/charisma/ability to execute?
  • What are the signals that their tech is working?  Do employees/recruiters/candidates use it very frequently?  Do they already have a few smart, early adopter customers?  Any hard ROI data?
  • Do they have strong VC backers?  This isn’t always a strong signal, but can be.
  • If you are interested enough to do the work to figure out if you should partner with this startup, then it’s probably interesting.  You know what pain points you have, how they may be solved, and there is something here that is resonating with you.  It will probably also resonate with other companies, and so this vendor is on their way to something interesting.

Tips on collaboration

If you’re ready to move forward, here’s how to make the most of this partnership:

  • Lock in a longer term deal that gives you grandfathered pricing.  NextWave Hire was one of the first customers for the now unicorn Outreach.io.  Years later our account rep would always be amazed at the price we paid per seat, and that we could even get a license in the first place (they quickly switched to enterprise only and required a $10k/yr min spend vs the <$1k we were spending).
  • Be a part of the product roadmap.  I’ve seen a few HR teams that get on product advisory councils, and make sure the future of the product is built around their use cases.  In its best form, this is like having a dev team focused on your pain.  At the very least, it’s a lot of fun to be a part of building something new.
  • Don’t be nice.  People want to encourage startups and entrepreneurs.  That’s great.  But try to be as objective as possible when giving feedback.  Startups live and die by how quickly they can find product/market fit.  Think about what would make you recommend this product to a friend, and what’s stopping you.  Then relay that feedback.

Overall, working with startups can be an incredible accelerator for your team.  It means much better customer service than most vendors give you as the company needs your business.  It also means a product that is molded to your use cases.

While working with startups is not for everyone, it’s a great way to be a part of the innovation economy while also helping your business.

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