In this series, we dive into technologies and industries we’re excited about, going deep into their change drivers and stakeholders while exploring investment trends and opportunities through an early-stage lens.
Lerer Hippeau, By: Tim Spencer, Summer Associate
Sector: The future of work
In a sentence: The future of work refers to a series of trends evolving alongside changes in technology that are driving the way we work and collaborate across digital and physical spaces.
Size and scope: The future of work encompasses a massive collection of categories covering everything from in-office technology to remote work enablers to the drivers of automation. The businesses that will enable how we do work in the future will likely be valued in the hundreds of billions of dollars. We are rapidly accelerating towards that future in real time.
Stakeholders: There are several key stakeholders surrounding the future of work, but generally employers (whether through desire or necessity) ultimately drive the majority of changes seen in the workplace. However, they face pressure from all sides. Workers, whether permanent or contracted, demand competitive pay and benefits, a strong culture, and job security. They also bring their own culture, norms, and expectations that influence how work is done. A company’s shareholders are primarily concerned with return on investment. Its customers demand quality products delivered at low cost. Lastly, society, whether through government or direct pressure, demands fairness, accountability, and a sense of corporate responsibility.
Change drivers: Three core themes are driving the shake-up in the way we work: remote work, freelancing, and automation.
Remote work: While just 5% of the U.S. workforce primarily worked from home prior to the pandemic, a clear and sharp movement towards greater flexibility was already forming. Fifty-four percent of the labor force reported a work-from-home benefit in 2020, up from just 29% in 2013.
There are a few underlying trends that suggest the shift towards remote work and globally distributed workforces will continue. Employee preference is among the most prominent as 80% of employees want to work from home at least some of the time. Another is globalization. As technology makes distributed workforces more feasible, employers are realizing that they can access top talent and reduce costs by sourcing talent from across the globe.
Finally, and perhaps most importantly, COVID-19 has forced most of the developed world into an abrupt and massive experiment in remote work. Nearly half of the U.S. labor force is currently working from home. Technology companies have told their employees to not come back until summer 2021 (if ever). Zoom’s market cap has quadrupled to nearly $80 billion. While the longer-term impact of the pandemic on remote work remains to be seen, it seems unlikely that we’ll ever fully return to our prior work routines.
Freelancing: The advent and widespread adoption of the smartphone and other technologies led to an explosion in the share of workers who are freelancing. Thirty-five percent of the U.S. labor force is now engaged in freelancing in some capacity. Gig workers are increasingly freelancing by choice and permanently, rather than being forced into a temporary solution. While regulatory considerations seem likely to impact the space, freelancing isn’t going anywhere, particularly with the unemployment rate above 10%.
Automation: Finally, automation will continue to massively disrupt the workforce over the coming decade. The McKinsey Global Institute estimates that half of all work activities can be automated by adapting currently demonstrated technologies and that 15% of the global workforce (some 400 million workers) will be displaced by automation by 2030.
As with previous waves of automation, new jobs are likely to replace those that were lost, but they will require very different skills. Jobs requiring physical and manual skills will increasingly be replaced by those requiring social, emotional, and, most importantly, technological skills.
Some employers are beginning to take note of this important trend, and for reputational or operational reasons, they’ve started taking worker retraining more seriously. Amazon, for example, is spending $700 million to teach tech skills to 100,000 of its employees. AT&T is putting $1 billion into a similar initiative. An association of U.S. manufacturers including Boeing and Caterpillar pledged to train over 1 million blue-collar workers into higher-skilled employees.
COVID-19 impact: The elephant in the room, of course, is COVID-19. The pandemic has dramatically accelerated the movement towards remote work and automation. As a result, we’ve seen an explosion of new tools seeking to address this new reality.
Over the next few years, it’s likely that the current remote work experiment will convince organizations that much of the work that happened in-person is no longer necessary. Moreover, worker preferences lean towards flexibility. Gallup found that “remote work not only improves outcomes… but is also a policy that the most talented employees desire.” While the long-term impact of COVID-19 on the way we work remains unclear, we can anticipate a lasting change to our physical spaces. Sixty-nine percent of organizations plan to reduce their office footprint permanently, and a Gartner poll of CFOs found that three-fourths plan to permanently move more than 5% of their formerly in-person workers remote. In short, COVID-19 has accelerated the shift towards remote work and automation by many years in the space of a few short months.
Where our portfolio fits: Lerer Hippeau has invested in a wide range of businesses changing the way we work. They fall into the following categories: collaboration, machine automation, reimagined workspaces, and enterprise automation.
Investment trends: The movement towards remote work, freelancing, and automation will open up a number of new investment opportunities. In particular, there will be an accelerated need for new communication and collaboration tools, automation solutions, and training and job placement platforms for workers.
Venture capital dollars were already pouring into startups backed by these tailwinds, a trend only accelerated by the pandemic. Notion’s $50 million injection at a $2 billion valuation, Loom’s $29 million Series B, and Miro’s $50 million Series B are just a handful of examples to point to.
What to look for: Companies that enable the future of work in a way that can be easily measured by employers and that employees love.
Measurable impact: It’ll be crucial for startups to be able to quantify their impact to customers in dollar terms, particularly given widespread belt-tightening amid COVID-19. Companies trying to build the future of work by developing “cool” products that are “nice-to-have” won’t be able to achieve venture scale. Startups have to spell out why customers need their products, and how they’ll improve key metrics (productivity, engagement, retention, cost reduction, etc.) as a result.
Popularity with employees: As workforces have become increasingly distributed, so too have software purchasing and renewal decisions. Some startups have no trouble laying out a product’s value proposition to employers, but struggle to win over rank-and-file employees. While such products can quickly gain traction and seem incredibly promising, they often run into retention issues later. Procurement departments looking to cut costs are keen to track whether anyone actually likes and uses external tools, and the much-noted “consumerization of enterprise” means that new tools are increasingly adopted from the bottom up. Irrespective of a company’s go-to-market, it’s critical that a product is loved by the employees who use it, not just the key decision-makers.
How to evaluate opportunities: It’s critical for investors to understand existing tools, the target user, the company’s go-to-market, and regulatory considerations when assessing opportunities around the future of work.
Consider existing tools: With so many new enterprise companies flooding the market over the past few years, it’s essential that new tools fit into customers’ existing technologies and processes. As a result, investors must understand the ecosystem. This diligence includes both understanding existing tools and adjacent or impacted processes, and considering the integrations that will be most critical for a company to nail in order to achieve success.
Understand target user: It’s important to fully understand who the target user is for a product or service, and to build a tool that adequately suits that user. Too often, a startup will come out with a “low-code” tool for business users only to find that difficulty of use dampens adoption, or a collaboration tool for developers that doesn’t integrate with existing workflows. It’s important to find founders and companies that live and breathe their target users’ biggest pain points, and whose solutions seamlessly integrate into increasingly matrixed and collaborative organizations.
Evaluate the go-to-market strategy: Different tools can have very different sales cycles and onboarding processes. In general, the more expensive and transformative a solution is, the longer and more arduous this process will be. However, there are additional nuances to consider. Selling into regulated industries or Fortune 500 companies may lengthen otherwise straightforward sales processes. A go-to-market targeting rank-and-file employees rather than the C-suite may shorten the cycle, but result in lower total contract values. Hardware for industrial automation will require a very different sales approach than a collaboration tool for designers. Ensure the company understands these nuances and has crafted a go-to-market that is tailored to its solution and customer base.
Unpack regulatory challenges: Depending on the category in question, regulatory considerations may become crucial. This circumstance is certainly true for startups addressing the freelance economy, for example. Be wary of any company that isn’t on top of the latest regulations or whose business model falls apart if the regulatory picture changes.
Seed considerations: There are several signs that an early-stage startup addressing the future of work may be well-positioned for success. The first is a strong founding team with hands-on experience in the space they’re building or with the pain points they’re addressing. Another is having thought through, and ideally having already built out, integrations to the wider ecosystem of the particular area they’re addressing. Finally, it’s important that startups have a broad vision for how they’ll fit into the future of work. We’ve seen a wave of startups catering to highly specific, niche categories. Addressing a pain point is essential, but having a compelling strategy for how the business can seamlessly expand the value and application of its solution is critical as well.