On the surface, the US job market and the economy are going like gangbusters. In May, the unemployment rate fell to 4.3%—a 17-year low—and it's hovered at 4.3% or 4.4% ever since, down from a high of 10% in 2009. GDP growth has been steady, if somewhat tepid. And as of July 31, there were nearly 6.2 million job openings in the US, according to the Bureau of Labor Statistics.
But something is wrong. The year-over-year change in hiring has been on the decline since 2014, and it flipped negative earlier in the year—behavior that marked the terminal phase of the last economic expansion in 2006 and 2007. The problem seems to be structural inefficiencies in the US labor market. That is, something is hindering the matchmaking between candidates and jobs.
If it continues, it could cause economy-wide issues.
The phenomenon is best represented by the Beveridge Curve, which tracks jobs available against unemployment. Based on the economy's prior ability to match candidates with openings, the unemployment rate should be nearer to 3% right now. Businesses are sounding the alarm, with the most recent National Federation of Independent Business (NFIB) quarterly survey serving as an example of the growing frustration: 52% of small business owners say they are finding few or no qualified applicants, up from 31% in early 2012.
Yet hiring plans are accelerating. Compensation is rising, as businesses compete for the best workers. And prices charged to customers aren't keeping pace, setting the stage for profit margin compression and a drag on earnings growth.
Jobs-focused startups increaseAll of this is creating opportunities for a number of jobs-focused VC-backed companies in the US. The number of startups in the space, categorized as human capital services, has increased as the economy has improved, and the trend shows no signs of slowing down:
Number of startups in the US human capital services sector
Capital invested in those startups peaked around $860 million in 2015, falling to just under $400 million the following year and hovering around $200 million so far this year. According to the PitchBook Platform, 116 companies in the human capital services arena have raised funds since 2010, with 46 completed deals to date in 2017.
Companies in the space focus on an array of topics covering employment and the entire hiring process. Namely provides software to manage HR, payroll and benefits, while other startups such as Checkr specialize in a small but crucial part of hiring: background checks. One of the most recent companies to secure financing, ExecThread, provides a job-sharing network for executive-level job opportunities.
We've highlighted a few companies that have recently pulled in venture capital backing from high-profile VCs:
HireVue is the provider of a video interviewing platform that allows applicants to share their portfolios and offers managers tools and data designed to help them make smart hiring decisions. The company has garnered the attention of top VCs including Sequoia and Technology Crossover Ventures, and it's raised a total of $98 million at a current valuation of $267 million. Its customers range from Urban Outfitters to UnitedHealth Group to Chipotle Mexican Grill.
SmartRecruiters offers a cloud-based recruitment platform with an open marketplace for third-party recruitment services. Similar to HireVue, it's backed by some of the larger firms, including Insight Venture Partners and Salesforce Ventures. It has raised $55 million to date and has a $118 million valuation.
Hired is an online job marketplace focused on the tech industry. It connects qualified workers with recruiters in specific sectors including engineering, sales and product. The company has pulled in more than $103 million from GV, Crosslink Capital and NEA, hitting a valuation of $490 million late last year.
Upwork seeks to help freelance professionals find their next gig. The startup connects clients and freelancers, allowing them to develop a remote working relationship. It has raised $30 million from VCs including Benchmark and Kleiner Perkins Caufield & Byers. Following its 2014 financing, Upwork took a step closer to unicorn status with a $850 million valuation.
PitchBook subscribers can view the full dataset on venture capital activity within the human capital services sector.
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