Hiring is slow. Payroll is a headache. Managing people is harder than it should be. There is a lot of room for improvement in how companies hire, manage, and get the most out of their team everywhere in the world, but the opportunity is even bigger in Latin America. We’ve written 15 guides to help founders recruit and manage their team better because getting people right is one of the most important things a founder can do.
HR tech startups are one of the most common types of startups we see at Magma, likely because HR is so frustrating! Over the last decade, we’ve reviewed hundreds and invested in several, including Ontop, ChileTrabajos, Quansa, Listopro, and more.
Still, most HR tech startups in Latin America struggle to reach the scale to deliver the returns that venture capital funds need to be able to make money for their LPs.
In this article, we’ll share how we think about HR tech in Latin America: the three main types of HR tech startups we see, the common traps, and what we look for when investing.
HR teams are in charge of three main things:
Within each category, there are several different business models:
Most successful HR tech startups start by solving a single, painful problem in one category exceptionally well.
HR tech startups face several hurdles in Latin America that make it more difficult to build a venture-scale startup than in other markets like the US:
A one-size-fits-all HR tech platform for Latin America doesn't work because laws in each Latin American country are different. Unlike other software categories where one product can work across markets, HR tech is deeply tied to local labor laws, tax laws, and regulations, so you need local expertise in each country. There is no inherent advantage to being multi-country, making expansion slow and expensive.
In many parts of Latin America, accounting firms handle HR functions. For example, payroll in Latin America is complex and compliance-heavy, but accountants are inexpensive compared to the US or Europe. Unless an HR tech product is dramatically better, cheaper, or easier to use, it's hard to displace these existing relationships.
In the US, the SMB market is huge, and customers are willing and able to pay for HR tech. In Latin America, SMBs have lower budgets to invest in HR tech, even if they need it, making selling into SMBs extremely difficult.
About 50% of Latin America's workforce is informal, shrinking the market for payroll & benefits platforms. Many businesses pay workers in cash or off the books, skipping software that tracks contracts, payroll, or compliance.
HR tech startups with SaaS business models face all the same headwinds as other SaaS companies: lower willingness to pay compared to US customers, longer sales cycles due to bureaucratic processes, and significantly lower exit multiples. Most Latin American SaaS companies struggle to surpass $5M ARR, making the path to venture-scale returns extremely narrow.
While every startup is unique, there are four recurring reasons that we pass on investing in early-stage HR tech startups:
Many HR tech startups start as service businesses, then try to become tech companies. The shift is hard. Most never fully automate, or they sacrifice quality to do it, and end up with scalable software no one wants. White-glove HR service companies can be solid businesses, but won’t be able to provide the returns that VCs look for.
Many HR techs set out to solve a pain point for companies, but often end up causing more pain by building an overly complicated product. It’s fairly simple to build additional products in HR tech, but it’s really hard to build great products that solve a real problem for customers.
The best HR tech solutions are simple and intuitive to use. But most HR techs end up looking like this Swiss army knife: too many tools and you never know when to use what.
More ≠ better, and usually more = worse for early stage HR tech startups.
The best early HR tech startups solve a clear problem for a specific type of customer. If you serve everybody, you usually serve nobody well. You should be able to explain why your solution fits your clients’ geography, company size, industry, and workforce type.
HR techs often track metrics customers don’t care about. If buyers don’t value “employee happiness” metrics or trust your “we save you $x by saving y hours” claims, they won’t pay. Prove impact with hard data, or you’ll never get paid for the value you deliver.
Despite these challenges, we still believe entrepreneurs will solve some of Latin America's biggest people problems with a new generation of HR tech companies. We look for companies that:
We look for HR techs that solve real problems for a specific customer. Many HR tech startups build ‘nice to have’ products that companies might pay for in good times, but cut when budgets tighten.
For example, we invested in Ontop because they solved a problem we and many of our portfolio companies faced daily: hiring and paying international team members.
Complex labor laws and regulations in different Latin American countries create challenges that global HR techs can’t solve, opening opportunities for local players who understand the region to build better solutions.
We like HR tech startups that build a solution that their clients love, and can’t live without, before expanding and building other products. If you have multiple products, we want to know that you have a clear reason why you built them. Regardless of if your first product is in Recruiting, Core HR, or People Management, we see that it’s usually best to build your next product in the same category.
HR techs in Latin America face a Catch-22: they need multiple products to be able to generate the returns that VCs hope for, but launching too many products too soon can backfire.
It's OK to be an HR services company, but services don't scale like software. Real HR tech needs automation, AI, or software-driven solutions.
Not every good HR tech business is a fit for VC funding… and that’s OK! If you're solving a real problem and can reach a few million in ARR but are unlikely to deliver the 10-20x returns that VCs look for, you’re likely better off raising as little capital as possible, even if VCs are willing to write bigger checks. Building a sustainable business that generates cash and keeps your options open is often a better path than hopping on the VC treadmill.
HR tech is hard, especially in Latin America. But hard problems are worth solving. We’re looking for founders who stay focused and use tech to solve real pain points. If you’re building something that HR teams, CFOs, and CEOs can’t live without, we’d love to hear from you. Feel free to create a Magma Memo to get feedback, even if you don't think you’re a good fit.
