Another day, another diligence memo! Today I focused on a company in the HR/Talent Acquisition space.  For this one, it wasn’t done around a specific deal, simply about the company overall.

Company: Headstart

Website: https://headstart.io/

Key Takeaway

• An AI/ML focused startup that has the potential to disrupt the HR/Talent Acquisition landscape through focused execution and a diligent leadership team.  Initial traction between users and corporate accounts demonstrates execution and upside potential but tempered by intense competition and fears of this being a feature and not a full-fledged company.

Company Description

• Headstart is a developer of a job matching platform designed to help employers identify the best-suited candidates in the shortest amount of time. The company’s platform utilizes machine learning technology and combines psychometric testing and algorithmic analysis to offer effective, engaging and unbiased applicant review, enabling job-seekers to connect directly with businesses and companies and save time and money by accurately finding candidates who meet their exact job recruitment. The Company’s ability to combine traditional objective job traits with context and cultural fit of the target company is their key differentiator. They recently participated in Y Combinator’s Summer 2017 batch. (source: PItchbook, company website)

What could make Headstart a success? What could make it struggle to succeed?

• Headstart could be a success if it can continue to provide positive outcomes for its large corporate clients while not losing sight of the job seeker experience.  This balance between serving two-sided marketplaces is fraught with peril so appropriate consideration must be given to not only the job seeking user experience but also the corporate user and their KPIs around time to hire and using the algorithms to find strong cultural fit.
• Headstart could struggle to succeed if the Company’s algorithms do not improve candidate selection metrics for its corporate customers. It could also struggle to succeed in acquiring job-seekers amidst hundreds of other competitors and have low conversion rates for the target companies and high customer acquisition costs.

Market Potential

• Source: Apps Run The World, January 2018

The talent acquisition market within HR tech is expected to reach $4.7BN by 2021.  This is a massive opportunity for Headstart to continue to break into this market. That said, the majority of the market is currently made up of by the big names in the space (LinkedIn, IBM, SAP, etc.) but there is continued interest in new/emerging technologies which could drive greater adoption for Headstart.

Management Team

• • The team is led by two co-founders with backgrounds in edtech and a Thiel fellow as well as neuroscience/ML/AI. The two co-founders combined with their extended management team have all the makings of a strong team poised to execute well and their ability to attract large corporates as well as YC backing, especially the AI Vertical group, is a testament to this ability.

• Nicholas Shekerdemian – Co-founder (CEO)

• • • NIcholas is a Forbes 30 under 30, a Thiel Fellow, and also started an online tutoring/consulting edTech company focused on China and the UK prior to founding Headstart.  Just age 23, he seems dedicated, driven, and passionate about enacting real change in the talent acquisition market

• Jeremy Hindle – Co-founder (CTO)

• • Jeremy is a Forbes 30 under 30 with a strong background in neuroscience, AI/ML and programming

Investors/Financing

• Headstart was recently accepted into Plug and Play’s enterprise 2.0 batch for 2018.  Prior to that, the Company was in YC’s summer 2017 batch and before that the company bootstrapped itself. According to Pitchbook, total financing is at $120k but a few other sources have the total raised at $600k.  
• Regardless of true total raised, the Company has shown strong capital efficiency in that it grew its team from bootstrapped 2 co-founders to 17 employees all on a minimal amount of investor capital which combined with their customer adoption, leads me to believe they are generating decent initial revenues.  
• Headstart’s ability to drive solid adoption and close corporate customers while bootstrapping and on minimal capital is a very positive development and demonstrates their ability to effectively manage capital yet still execute on the business.

Competition

• The competition in Talent Acquisition and the broader HR tech landscape is immense.  Competitors range from multibillion dollar companies to well-funded growth stage startups to a handful of other early stage businesses.  This provides market validation of the need for new approaches to recruiting but also makes the potential for success that much more difficult.  
• LinkedIn, Glassdoor, ZIpRecruiter, Lever, Indeed, Smartly, and many others are just a few of the companies vying for a similar budget that Headstart is going after.
• A lot of the competition is looking to differentiate in certain ways via metric tracking (Lever), mass market adoption/1st mover advantage (Linkedin), education/value add services (Smartly) and Headstart is no different. Their focus on AI/ML to drive comprehensive hiring is a strong differentiator if they can execute on it.
• Koru appears to be the closest direct competitor I could find to Headstart in that it is also aiming to get predictive on hiring based on more than objective criteria for those early in their careers.  According to Pitchbook, they have raised $15m to date but it looks like they did a Series A2 in Sep 2017 at a down round from their Series A in 2015. They did have a solid investor syndicate in their Series A (Battery, First Round) so I would want to dig further on Koru and look to connect with their investors or the company itself to get a better sense of what caused the down round and if it was company execution or more macro issues and use that for guidance with Headstart.

Financials/Growth/KPIs/Business Model

• The Company has had solid success in its first year of founding, they have over 100 corporations signed up and over 20k students signed up.  The business model is corporations pay for posting and using the service whereas job seekers and small start-ups can use the platform for free.  
• Similar to the Company’s capital efficiency, their ability to attract sizeable numbers of students and corporations all while growing the team substantially is a positive indicator about future upside.  I would want to learn more about the Company’s customer acquisition channels and how they plan to fulfill both sides of the market while maintaining growth and managing cash burn.
• One of the biggest questions i have regarding Headstart as a potential investment opportunity is their focus on expansion.  Do they plan to really build out a true double sided market and become the next LinkedIn/ZipRecruiter? Or are they comfortable using their algorithms and matching software as more of a traditional enterprise sale or feature to then be built into a larger platform such as LinkedIn’s offering.  I find it would become fairly cost prohibitive to go after the double sided market given the large incumbents but I could see more viability in focusing on the corporate clients it just may become more difficult to effectively train their algorithms with less job seeker data.
• For KPIs, I would want to learn about their CAC, their Sales cycle for corporations, their average sales price, their revenue concentration by client, their churn, their conversion rates from candidate to being hired, and their ability to truly tailor candidates to more than just a job description and really source for culture.

Key Strengths

• The team’s ability to execute on minimal capital and drive substantial initial results is by far the most impressive thing to me so far.
• The AI/ML angle is the second most impressive potential strength. If the company can continue to prove their offering and their algorithm can match better candidates for fit/culture then they will truly be an outsized venture-level success in market.
• The HR tech market is also a strength as there is a lot of appetite for new products and an ability to prove ROI on recruiting via time or cost savings.
• The user experience on the consumer user side can also be seen as a strength as they appear to be able to have a single application/profile for each user which drives ease of use and easier adoption.

Key Risks

• Can the company achieve scale? They have gotten initial validation and some key customers but can they really achieve growth on both sides of the market to feed their algorithms and continue to amass the dataset needed to truly change the market around talent acquisition?
• It appears they have lost their head of Psychology/Psychometrics based on his updated LinkedIn profile.  Can the company continue to achieve scale with the right management team while dealing with turnover/hiring their own candidates?
• With any AI/ML or algorithm approach, there is always risk that someone else can make a similar algorithm and/or a “better mouse trap”. How do you view your IP/Algorithms as defensible to the major incumbents (LinkedIn, Google, etc) and what is stopping them from using their vast user base and data sets from creating a similar offering?

Key Questions for Management

• What information is needed to best feed the algorithm? Job seeker data or corporation data?
• Is acquiring Job seekers vital to the algorithm and if so, how do you plan to profitably acquire users at scale? How has using school groups and ambassadors worked so far?
• Koru the company – are you aware of them and their history? If so, did they have any issues in market or just company specific issues?
• What are your expansion plans? WIll you look to raise traditional venture growth funding or plan to run the business via sales/profitability using corporate customers?
• What has been the feedback from current customers? Has there been any churn? If so, what was the reason for the churn?

Final Thoughts

• I think Headstart has a lot of upside and has shown their ability to execute on minimal outside capital. I think they have a strong team and are hitting the timing right with their focus on AI/ML in market and the appetite for corporations to utilize new technologies to recruit the best candidates. This combined with their recent acceptance into Plug and Play’s 2018 Enterprise 2.0 batch makes Headstart a company I will continue to follow and recommend for further diligence.