Georgios Markakis from Venero Capital Advisors about the current state of HR-Tech

00:00:14: Hello, everybody.

00:00:18: Welcome to Saadkorn!

00:00:19: This is Gero Hesse speaking and I'm super happy that right in advance of the Unleashed conference which happens actually next week, Georges Makakis from Venero Capital Advisors took the time talk with me about the latest report of Venero capital advisers The Future Of Work M&A and investment activity report for the third quarter in twenty-six.

00:00:43: Welcome to Saat Korn, George's!

00:00:45: It is great to have you again here on this show.

00:00:48: Thank You Gero.

00:00:51: it was actually a great third quarter as we could say.

00:00:57: The latest report describes Q three twenty six As the busiest quarter for work tech M&A In your data set which means something since I think when you're capital advisors It's now ten years old, right?

00:01:12: So probably you did not start with a report at the beginning.

00:01:15: But do you know how many yeses that we have already

00:01:19: done in this report?

00:01:20: Yeah no... We go back for many-many years and gather data to also go back.

00:01:28: so then there is good basis of analysis.

00:01:34: And as time goes on Transaction that we come across, even if it was an old transaction.

00:01:40: We still recorded.

00:01:41: so you have the most complete and thorough data set.

00:01:43: So yes It's uh has been ten years for venero And we're celebrating throughout.

00:01:51: twenty-twenty seven were going to be celebrating our ten year anniversary But also for their report I think Uh its a report That has very strong basis or For The takeaways in and the insights that it provides.

00:02:05: And yes, this quarter was a very strong quarter for WorkTech.

00:02:09: Yeah you report a record one hundred thirty-one transactions which is really unheard of.

00:02:16: at the same time investment jumped by one hundred sixty five percent to five point nine billion dollars.

00:02:23: It's amazing.

00:02:25: what's driving this search?

00:02:26: Are we witnessing sustainable recovery in the work tech market?

00:02:30: What's your perspective on?

00:02:33: Yes, as we say in the report it's not a return to twenty-one by any means and This is a bit more nuanced this time.

00:02:42: So More than seventy five percent of the capital raised he's raised by AI native companies And A very small minority of companies raise funding today without AI being front and center.

00:03:01: So yeah, it's a tale of two worlds whereby we have companies that are AI native disrupting the competitive landscape changing their business model Changing they way that they approach value for the users and the customers And then on the other hand.

00:03:19: We have companies That Are not able to do this.

00:03:22: I'm not able To catch the attention of.

00:03:25: OVC is an in private capital?

00:03:28: And those companies are different place

00:03:31: Absolutely.

00:03:33: As you mentioned, seventy-nine percent of all capital raised went to AI native companies and that's a massive shift at least from my point of view.

00:03:43: on the other hand there are also thirty nine AI native acquisition targets in Q three compared just thirteen years earlier.

00:03:53: so what we can see is established players such as service narrow velocity Ordeal are acquiring AI capabilities rather than building everything themselves.

00:04:04: And yesterday evening, I listened to the latest podcast of George Bersin and he spoke in detail about cooperation he does with Workday and mentioned also similar things.

00:04:17: So we're seeing a fundamental transformation of traditional HR software platforms?

00:04:24: Absolutely!

00:04:25: We've definitely seen this across all the categories.

00:04:29: So your recruitment is being disrupted left, right and center.

00:04:34: But also workforce management learning for sure talent management And slowly but surely even core HR potentially maybe when.

00:04:46: yeah certainly cool I wouldn't say payroll.

00:04:48: that's really core HR.

00:04:50: They also start to get disrupted sooner than later.

00:04:54: And what does this mean for the big players?

00:04:57: I mean, one could assume that there might be a big shift.

00:05:01: so they're really new competitors rise and get bigger or are being bought by bigger companies.

00:05:11: Is it really a threat to older companies here?

00:05:17: So look... It depends!

00:05:19: I think enterprise customers probably will hesitate to change Ben doors, right?

00:05:26: It's still a number You know.

00:05:30: certainly the enterprise if you look at HR yeses or some more You know critical.

00:05:36: If he will assistance within The technology stock.

00:05:42: I think those are so quite safe, you know for a number of reasons and they would be hard to be replaced.

00:05:50: But nonetheless, they do need to stay up-to date with the developments.

00:05:57: And I think a lot of them are doing what they can... ...to stay relevant and at the cutting edge of innovation because if we don't then their risk is getting disrupted increases.

00:06:11: but for now i think large guys still largely safe.

00:06:17: But that's not necessarily the case for smaller players, right?

00:06:20: So they're mid-sized companies or certainly early stage companies.

00:06:27: For them this game has changed radically.

00:06:31: Actually what the report could NOT feature I guess is acquisition of TechWolf by SAP because it just happened.

00:06:40: so there will be a topic off their reports which are coming up at the beginning next year.

00:06:47: But also, I think to me it was a big surprise.

00:06:52: I didn't know that this could happen.

00:06:55: so... It's really interesting.

00:06:56: what is your perspective on this one?

00:06:59: Yeah we wanted something for the next report but technically it wasn't part of this quarter.

00:07:06: So we chose not included.

00:07:11: Look!

00:07:11: This is just another example how the big giants and large corporates They cannot do everything themselves.

00:07:19: There's a reason why they keep buying, because despite size innovation sometimes it is hard to get right.

00:07:31: So I mean Tech Wolf was fantastic company and congratulations to SAP for getting them And It does bode well for other innovative companies.

00:07:48: But Tech Wolf was a very, very unique case if you will.

00:07:52: I think not every company kind of aspire to be at the place where Tech Wolf ended up being?

00:08:00: I'm super interested about the future actually... ...I was on the Venero Capital Dinner in Paris last year and there were the founder of Tech Wolf also sitting on a panel And i was really impressed.

00:08:14: then bought his story.

00:08:15: so it's great that they were able to just make this big step forward.

00:08:22: So, it's great!

00:08:24: Let's talk a little bit about different work tech segments.

00:08:27: so recruitment tech remains relatively weak which was super strong few years ago while workforce management and productivity software attract significant M&A activity.

00:08:40: What's behind these differences and which segments do you think look particularly promising also in terms of future outlook?

00:08:50: Yes, so TAMDAQ is really historically has been at the top on this list when it comes to consolidation.

00:08:59: And even M&A and even fundraising This time around.

00:09:05: It didn't make that the top-of-the-list this quarter because we looked Hang on an LTM base or last four quarter bases still quite active.

00:09:19: But productivity, I mean not surprisingly, productivity and workforce management those are areas where AI shines if you will.

00:09:31: Talent acquisition in the space primarily has been characterized by companies building out these capabilities.

00:09:39: You know, the whole buy versus build proposition has shifted a bit.

00:09:45: And so companies are now much easier for companies to build some of their functionality and for recruitment you know... Some companies perhaps mistakenly or not think that they can build more easily now rather than buying.

00:10:05: it may or may not be accurate because how that position could be deceptively.

00:10:11: You might think that it's straightforward, but getting right is not easy.

00:10:17: But nonetheless we are seeing more companies building rather than buy.

00:10:23: I mean salary.com was an interesting example.

00:10:26: so they recently built something in the recruitment space and wanted to develop for a while... ...but couldn't because of too expensive or difficult.

00:10:37: But now with AI, they were able to develop their functionality.

00:10:43: And of course it did done by building or not acquiring.

00:10:47: but that's really I think what has pushed talent acquisition further down on the list.

00:10:54: and then when he comes to fundraising again VCs.

00:11:06: perhaps it was a one-quarter type thing, but they tend to stay away from recruitment at the moment.

00:11:13: Perhaps because there were some temporary uncertainty around levels of hiring which jobs will stick around and which jobs would be eliminated?

00:11:22: So maybe that was a temporary pause There certainly on the M&A side as well.

00:11:27: But we expect that To correct or to reverse From the coming quarters again.

00:11:37: From a German perspective, knowing that your report is international was not too surprising for me.

00:11:45: But of course it has to do with the German economy which is difficult at the moment but does not go far in other regions.

00:11:52: so I was kind-of surprised.

00:11:54: in terms of recruitment as you described there whole buy and build thing really might switch perspectives especially on this field.

00:12:05: An interesting deal was also salesforce investment in high Bob.

00:12:12: One hundred sixty six million dollars, it's crazy!

00:12:17: You say that the report workforce data is a critical infrastructure obviously for AI?

00:12:24: Does this mean HR data could become one of the most valuable assets in emerging AI powered enterprise?

00:12:32: Yeah I mean look... as a whole is becoming very valuable, especially data that... It's not necessarily data that it's historical.

00:12:44: It's data that used and produced and reintroduced through this particular software.

00:12:53: but investors and buyers are all looking for daytime some angle regarding data for the assets that they invested.

00:13:08: So I think and we call this out a few years ago when AI, predictive AI at the time and then generative AI came to the forefront... We probably started reporting was maybe two or three years ago And said look data will give them new mode in.

00:13:26: but still you know it's certainly the case Still

00:13:32: valid.

00:13:33: yes

00:13:34: Absolutely.

00:13:36: To me, super interesting because I work on a project connected to this is the interest in trust and verification.

00:13:48: as lot of AI generated applications becoming more sophisticated.

00:13:56: Obviously trust, verification and identity technology plays a major role.

00:14:01: There was an acquisition deal acquired clarity that was clearly falling into this category.

00:14:10: What's your perspective on this?

00:14:12: Because I believe trust will become more important in the future.

00:14:17: It would be crucial.

00:14:18: Look, especially we're talking about the recruitment side.

00:14:28: Also, this also applies on the ongoing employee and skill site.

00:14:32: But certainly in the recruitment side we all follow what's happening right?

00:14:36: See these are now close to perfect.

00:14:39: like that cannot be a screening tool.

00:14:41: interviews again video interviews they can be tricky Right if someone can be reading from their screen.

00:14:50: So being able to trust and verify The entire kind of chain The recruitment side of things.

00:15:01: who it is that you were talking to?

00:15:02: what are the real skills right?

00:15:04: What does or their real capabilities when they're being interviewed, right am I talking to someone who's reading from a pronged.

00:15:11: Are there deep faith in us?

00:15:13: so all these things You know They used to be flawed as problems and issues But very quickly now we're finding kind of solutions through this problem And this will become part of our kind of daily recruitment lives, if you will.

00:15:30: So companies that deal with this would become very valuable and it goes back even to background screening which we're seeing an uptick in interest in the backgrounds screening companies.

00:15:46: Super interesting topic.

00:15:48: Let's talk a little bit about practical implications.

00:15:51: Imagine your HR leader planning technology investments for twenty seven.

00:15:56: Based on the trends in your report, what would be you three most important recommendations when evaluating HR software providers?

00:16:06: Okay.

00:16:08: Look I think that first thing is it's definitely worth trying The new functionality because they can be very powerful.

00:16:16: A lot of people are hesitant and of course It depends on their use case But definitely give a shot right.

00:16:24: so have an open mind and try the new capabilities that exist.

00:16:31: On the other hand, not everything needs to be solved with an agent okay?

00:16:36: So keep that in mind as well.

00:16:37: on this flip side of things uh using with prayer stories that look saying our customers they don't need an agent right then you're writing.

00:16:45: Right now They have an Excel And it just won't excel tool.

00:16:47: You know there's one thing to work so Not Everything means To Be An Agent.

00:16:53: Uh also Keep That In Mind.

00:16:56: Lastly, I would probably say be prepared for things to keep changing very quickly.

00:17:03: If you thought twenty-twenty six things moved fast wait until twenty seven.

00:17:10: so uh... You need to stay on top of this.

00:17:14: What's the assumption in terms of costs related to AI?

00:17:19: Because at that moment i have a feeling everybody thinks okay X amount of people saving a lot off cost obviously and do this with AI powered software.

00:17:35: But perhaps in one, two or three years from now the costs...the token cost might explode And perhaps we get completely new discussion.

00:17:45: Perhaps you'll get point-in time where People become less expensive than the token cost.

00:17:53: That's an interesting discussion.

00:17:55: And from my point of view, do you have any thoughts about that?

00:18:00: This is something I'm playing out as we speak and... ...I think it's difficult to say that humans will be replaced or humans would be more productive because there are flip sides in the argument.

00:18:22: I think the balance where we're going to land is somewhere in middle.

00:18:27: Productivity will definitely increase, but i'm not sure that head count would be reduced significantly.

00:18:38: We've seen the pendulum swing on side and back-to-the other this year already.

00:18:45: Over time productivity will improve.

00:18:50: costs will need to be taken into account.

00:18:55: But I'm not one of those who expect a huge negative impact on employment from this, but let's see how things play out!

00:19:11: A year from now we have at least some implications regarding the development.

00:19:20: In terms of talking about the future, what's your outlook?

00:19:25: If you would speak again a year form now perhaps it happens... What do you expect to happen until then based upon They experience so far.

00:19:36: It's a difficult question, I know because the development is super fast and dynamic but perhaps you have some ideas?

00:19:45: Yes!

00:19:45: So...I think there are two dimensions.

00:19:47: one is that technological dimension.

00:19:50: right in terms of technologies The pace of innovation will not slow down.

00:19:54: if anything it would continue at same pace If not accelerate.

00:20:00: On the other hand, we have the macro environment and that's another dimension of course.

00:20:04: That is relevant especially when it comes to investment in M&A acquisitions.

00:20:10: And on the macro front I mean there are some clouds gathering across both the two major economies so the US and Europe.

00:20:24: So i wouldn't be surprised if they were some type of macro And with headwind that came our way.

00:20:31: I mean in Europe, okay Germany and France have already You know seeing this impact but the US as well could see something like that In twenty-twenty seven and this group Could be a temporary at least I say temporary.

00:20:50: A few quarters or you know one to two years slow down Or head winds on the macro front so that could becoming Unfortunately, in twenty-seven.

00:21:02: From a German perspective I'm super frustrated now since we already faced this for three years or so.

00:21:10: but nevertheless last questions from my side today was there anything that surprised you reading your own report?

00:21:20: Well... A couple things i wouldn't say surprise because of course were the market with a number of transactions, we hear a lot things from people.

00:21:32: But one thing that stood out for me is how broad-based was the whole valuation conversation?

00:21:42: Because everybody kept talking about multiples resetting and valuation expectations resetting.

00:21:49: And I think what you were saying always this is our two speed world.

00:21:58: So there's the world where non-differentiated assets without a mode who are not growing, their variation multiple gets impacted.

00:22:12: But then we were saying that look... There is also another side of things whereby high quality assets in demand assets differentiated with strong technology and strong KPIs when met with the right acquirer or the right investor, they get strong multiples.

00:22:32: And again we were validated in that and many other acquisitions whereby these types of quality assets did not correlate to low multiple that was generally seen across rest space.

00:22:47: so it's no situation where by average multiple is three times revenue.

00:22:57: It's a case whereby certain quality assets with the right KPIs in the right position and still getting very attractive valuations, but others of course at the same time are not.

00:23:10: And that is something we will continue to see for the next few quarters.

00:23:15: Well one could say it would be exciting.

00:23:22: Now, I just say thank you that it took the time.

00:23:25: The report is really well worth reading and i will put in the show notes obviously as well as your LinkedIn profile.

00:23:33: so It was a pleasure talking to you.

00:23:34: thanks for taking the time looking forward to seeing you next week In Paris!

00:23:38: Thank

00:23:40: you for the invitation always a pleasure.

00:23:44: That's it for this episode.

00:23:46: Thanks For Listening.

00:23:47: On www.sartcon.com you'll find over six hundred WorkTech providers

00:23:51: and many examples of how companies

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