Skill-based hiring
Replace CVs with tests
This is the Quild memo, industry memos for early-stage investors to form a thesis (or copy-and-paste). Published sporadically.
This memo covers the candidate / hiring assessment space. Much like sales & marketing, recruiters manage a funnel to hit a quota of new employees. With severe talent shortage and inadequacy of the status quo to identify talent, employers need to adopt the new paradigm of skills-based hiring.
Problem: Spending so much hiring the wrong person
Missing out on 95% of the talent. Because of resource constraints, recruiters rely on resume screeners and credentialing (e.g. Stanford graduate) to decide which ones to pass through the recruiting funnel. As a result, only 5% of applications get invited for a phone screen. The other 95% are ignored.
Hiring takes a lot of time. It takes $5,000 dollars and 60 days to hire someone, based on pre-COVID surveys. Just to give a sense of how cumbersome it is: each corporate job opening gets 250 applications, 5 candidates get invited for 3 interviews each lasting for 45 minutes. Interviewing alone takes over 10 hours.
And its not even effective. All the time and effort would be worthwhile if the right candidates are hired. But different surveys covering leadership to hourly-worker hires indicate that 50-70% of hires were regrettable or fired within 6-18 months (here and here).
Status quo: Interviews and academic tests
The status quo is still to do things manually. But forward-looking recruiters sought solutions to scale up their operations and have landed on:
Interview platforms - conduct and record interviews at scale. Some will analyze videos to infer soft skills
Sample companies: HireVue
Cons: Employers still have to review the videos manually for the most part
Cognitive & psychometric assessments - digitizing tests from academic research, mostly one-size-fits all tests. Assesses your IQ and personality
Sample companies: Pymetrics, Predictive index
Cons: It hasn’t been effective in identifying the right talent
Skill assessments - this is a fairly new category. Assesses if you can do the job
Sample companies: HackerRank
Cons: Works great but existing companies focus on coding talent
All three categories help recruiters save time but skill assessments have been shown to be more effective in finding the right talent. Interviews, cognitive tests, and psychometric tests have been used by employers for decades yet 50-70% of new employees continue to be regrettable hires.
Solution: Skills-based hiring
Skills-based hiring is the practice of recruiting employees based on the skills (both soft and hard) and capabilities they have rather than their educational or work background. The benefits and shift towards skills-based hiring are recently validated by institutions across the spectrum: McKinsey, US Chamber of Commerce, LinkedIn, Harvard University, and many more. The benefits are clear:
Access a much wider talent pool
Reduces bias
Improves diversity
Better talent retention
Employers need help with creating, administering, and reviewing skills assessments at scale. Existing companies have only focused on coding talent, which makes sense. Software engineers are in so much demand that the beachhead opportunity is there. But developers only compose 1.3% of the US labor market, and likely a lower proportion globally. The opportunity is skill assessment for the other 99%.
Why now: Talent shortage and employer expectations
Talent shortage has never been this severe. Manpower Group, one of the largest staffing firms, surveyed 19,000 employers and found that talent shortage is at its worst over the past two decades. As a result, employers have been offering incentives to retain and attract talent across all sectors and types of jobs:
A distribution warehouse in Texas has offered a $250 bonus every other week (up to $1,500) if employees work their scheduled week
A big New York-HQ law firm is offering $75,000 referral bonuses to its employees
Employers moving towards skills-based hiring. Research by Joseph Fuller, HBS professor who co-leads the school’s Future of Work Initiative, and colleagues showed that employers are increasingly removing degree requirements and focusing on skills instead. LinkedIn has also seen a 20% jump in the number of job postings focusing on skills instead of qualifications from 2019 to 2020.
Market map: Only a few fit the bill
Scoping this within the HRTech, this is the candidate assessment category under talent acquisition.
To further frame startups, there are three types of assessments and each addresses one key question:
Cognitive - what’s your IQ?
Personality / Psychometric - how do you behave?
Skills - can you do the job?
There are ~40 companies in the assessment space. But most companies are not focused on skills assessment. See market map here: link
In Quild fashion, we highlight companies with signals of becoming unicorns.
TestGorilla ($10M seed led by Notion Capital, Jul 2021)
TestGorilla provides tools to screen job candidates to talent acquisition teams so they can make better, faster, and easier hiring decisions
Vervoe ($2.7M seed extension, Dec 2019)
Vervoe replaces the traditional hiring process with skills assessments and gives every candidate an opportunity to showcase their talent by doing job-related tasks
iMocha ($14M series A led by Eight Roads Ventures, Jan 2022)
iMocha is the world's largest skills assessment solution API platform that helps organizations build winning teams
Market opportunity: $10B global TAM
Skill assessments only apply to skilled labor, this includes baristas, sales agents, and not just office workers. In the US, there are over 100M skilled workers. With a ~25% annual turnover plus overall employment growth, 25M skilled hires are made each year in the US. Assuming the lower end of 100 applicants per hire and $2 per assessment (anecdotal evidence), the US TAM is $5B. Using a 2x rule of thumb, the global market is $10B.
100M jobs * 25% turnover * 100 applications/job * $2/application = $5B US TAMThis is just the assessment category. If these companies facilitate the first engaged interaction between employers and candidates, then these startups can logically expand to the Application Tracking System (ATS) space, which is another multi-billion market, and replace traditional credentialing institutions like universities. Instead of a BS in Computer Science from Stanford, employers prefer to see a TestGorilla/Vervoe/iMocha/Linkedin certification.
Till next time, Kenn