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Understanding the Financial Health of Your HR Tech Vendor

Financial health matters when selecting your next HR Tech vendor. It an important indicator...

Phil Strazzulla
HR Tech Expert, Harvard MBA, Finance and Software Nerd
December 17, 2020
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The financial health of an HR Tech vendor is an important indicator for the quality of service you can expect.  Great products and customer service usually result in financial health.  And, vice versa (with the exception of monopolies like Verizon - every time I get a new cell phone it's always a frustrating experience and I don't think they'll ever go under!).

At SSR, we use financial health as a proxy for whether or not we want to feature a company on our website.  We also use some of these heuristics to understand how positive or negative funding / acquisition news is.

It's not unusual for a "$500 mm acquisition" to be a bad thing, or for a company that has raised $100 million of new funding to be in a precarious position.

When vendors are in one of these precarious positions, they have trouble hiring great engineers, product managers, sales people, etc.  Also, they are typically in a tough position as a result of not having a great product in the first place!

So, financial health matters when selecting your next HR Tech vendor.  Of course, most companies are not going to straight up give you their revenue numbers, so we've developed a few tricks to understand how a company may be doing.

If you're more of a visual learning, you can checkout the Whiteboard Wednesday video we put together for this here.

Employee Count Trick

If you want to figure out a company's revenues, take a look at their employee count.

Assume that each employee costs around $150k/yr, and that the company has a breakeven net margin.  So, a 100 person company * 150k/yr/employee = $15 million of revenues.

Some companies burn money (venture backed), and so you can assume they will have a lower revenue.  Some companies are bootstrapped, PE backed, or founder owned, and so you can assume they have a high revenue.

While not perfect, this trick can be surprisingly accurate.

Revenue is important because it implies product/market fit.  It's a general marker for how good a product is, and how good an organization is at servicing customers.  It's also important as it is a gauge for how much the business is worth overall.

Another pro tip here is to look not just at the overall revenue estimate, but where it's trending based on employee count.  You can see this on LinkedIn Insights (if you have a pro account), or you can look at a company's career site and multiply the number of open reqs * 4 to get a sense for how much they are hiring that year and therefore where growth is going.

Preferred vs Common Stock

Venture capitalists get special stock with lots of special rights when they invest into a company.  Some of these rights can make the common stock held by employees worthless.

Worthless common stock means it's really hard to attract/retain the talent needed to run the company correctly.  This will eventually result in a vendor you don't want to partner with.

Also, worthless common stock can be the result of a poor product, customer success, or sales.  None of those are headaches HR/TA should want to deal with.

As a shortcut, look for companies that have a ratio of value:amount raised of 3:1 or higher.  So, if a company is worth $100 million in their last round of funding (either get this via PR or your sales rep), then you want to see the total amount raised at $30 million or less.  Best in class companies with be in the 4:1 or even 6:1 range.

Financial Health

Financial health is just a part of the overall picture of whether or not you should partner with a company.  Maybe you are more than comfortable working with a startup and want the perks.  Maybe you don't really care about anything but the product demo.

However, the vast majority of rational software buyers should be thinking about this as a factor when choosing which vendors to look at from ATS to AI.

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Phil Strazzulla

Phil is the founder of SelectSoftware Reviews, a website dedicated to helping HR and Recruiting teams to find and buy the right software through in-depth, expert advice. Phil started his career working in venture capital before getting his MBA from Harvard Business School.

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