Unpacking Upwork’s S-1: Metrics & Lessons for Marketplaces

The next year looks to be an exciting time for venture-backed marketplaces. A number of companies are expected to IPO in 2019 (Uber, Lyft, and Airbnb), with others (Instacart, Thumbtack, Wag, and Postmates) not far behind. We’ve already seen several marketplaces debut this month, with Farfetch and Eventbrite starting to trade and Upwork pricing its IPO last week.

We’re big fans of the marketplace business model as both consumers and investors, and are excited to see how the public markets react to these IPOs. CRV has partnered with DoorDash, ClassPass, Patreon, Pared, and others, and we’ve seen firsthand the built-in virality, favorable economics, and loyal customer relationships that come with a successful marketplace.

We’re particularly interested in Upwork’s upcoming IPO, due to both to our personal history with the company (Justine wrote her senior thesis at Stanford on Upwork!) and our broader interest in platforms that enable more flexible work. We analyzed the company’s S-1, and we’re excited to share our thoughts on Upwork’s growth path, competitive positioning, and economics compared to other public marketplaces.

If you’re building a marketplace, or have thoughts on the Upwork IPO, please email us at [email protected] — we’d love to hear from you! Also, if you’re interested in the IPO but don’t have time to read the full article, head to the “Analysis Summary” at the bottom. We’ve summarized our pros and cons based on the S-1 and our market analysis.

Note: “Over the last year” or “over the last quarter” refers to the year or quarter ended June 30, 2018, as referenced in Upwork’s S-1.

Company Overview

Upwork is the largest freelancer marketplace in the world, formed in 2015 through the merger of Elance (founded in 1999) and oDesk (founded in 2003). The company connects freelancers to businesses and individuals (“clients”) looking for help with tasks ranging from web development to audio transcription. The Upwork platform allows clients to find, hire, manage, and compensate freelancers with more than 5,000 skills across 70 categories.

Unlike many other gig economy marketplaces, most of the client/freelancer relationships facilitated via Upwork are entirely remote. Upwork believes that its competitive advantage lies not only in aggregating supply and demand but in the years of data the company has collected on client/freelancer matches and outcomes. Upwork feeds this data into machine learning models to more quickly match each client with the ideal freelancer(s).

The company has raised $168 million in venture funding, with Pitchbook estimating a valuation of $700 million for the company’s last round in 2014 (led by Benchmark). Upwork’s freelancer base includes 357,000 active workers across 180 countries, who over the last year generated $1.5 billion in gross services volume (GSV) for more than 475,000 clients.

Deal Terms

Upwork will list on the Nasdaq with the symbol “UPWK”. The most recent regulatory filing indicates that the company will sell 12.27 million shares (including 5.45 million from existing investors) at a price of $10–12 per share. After the IPO, Upwork will have just over 104 million shares outstanding, implying a valuation of $1.04–1.25 billion.

Business & Financial Overview

Upwork has several sources of revenue:

1. Marketplace transaction fees —Upwork takes a cut of revenue generated by freelancers (varies from 5%-20% based on lifetime billings with a client), and charges clients a processing fee of 2.75% or a flat $25/month. These fees accounted for 88% of the company’s revenue last year.
2. Premium offerings — Upwork offers premium services to larger clients looking for additional features, including custom reporting and invoicing, compliance services, and access to top talent. Pricing for premium services varies. This revenue is included as marketplace fees in Upwork’s financials.
3. Managed services — In some cases, Upwork employs freelancers directly (or via a staffing firm) to complete projects for clients. Upwork recognizes this revenue on a gross basis, as the company is entirely responsible for the service. Managed services accounted for 12% of revenue last year.

Upwork does not break out marketplace revenue into Standard and Premium tiers, but 10–15% of quarterly revenue typically comes from managed services as compared to the marketplace.

Because oDesk and Elance merged into Upwork in 2015, the company does not have to provide detailed financials before then. Upwork’s S-1 provided full year data for 2016 and 2017, with quarterly data included for Q3 2016 through Q2 2018. This makes it difficult to get an accurate sense of the company’s growth trends and historical economics.

However, we estimate that Upwork will do $1.8B in GSV and $265M in revenue this year, representing a 25–27% CAGR for both over the past three years. We will deconstruct these metrics as compared to other consumer marketplaces in more detail below — the ~15% take rate (revenue/GSV) is standard, while annual growth is slower than we might expect.

We estimated 2018 revenue and GSV given 1H 2018 numbers, and the fact that in 2017 Upwork made approximately 54% of the year’s revenue in 2H.

The bulk of Upwork’s GSV (80%) comes from a group of ~86,000 core clients, who have each spent more than $5,000 on the platform. They represent only 20% of active clients annually, but comprise 80% of GSV, and have much higher retention (83% for Q2 2018, versus 58% for all clients). This is known as the 80/20 rule, and is standard in marketplace businesses.

Revenue is therefore heavily dependent on two variables: 1) number of clients (more specifically, core clients), and 2) per client spend. Both of these have been reliably (if slowly) increasing for the past two years — core clients grew at a 17% CAGR over the past two years, while client spend retention increased from 85% in late 2016 to 106% in Q3 2016. This means that retained clients are now actually spending more on Upwork in each subsequent quarter.

This is particularly true of clients who are long-term users of the platform — Upwork reports that 50% of GSV in 2017 and 2018 YTD came from clients who had been on Upwork longer than three years. For 2016, 2017, and the first six months of 2018, more than 10% of the company’s revenue was generated by a single client. While not disclosed, this is likely in the managed services portion of the business, as only 2% of GSV was generated by Upwork’s highest billing client.

Upwork’s core clients include clients that have spent more than $5,000 on the platform cumulatively. The average client, as of Q2 2018, that is retained quarter over quarter is now spending more on the platform each quarter (client spend retention of 106%).

Upwork’s quarterly gross margins have averaged 66–68% over the last two years, an improvement over 62% gross margins in 2016. This is largely due to the fact that the company now charges admin and services fees to clients.

EBITDA margins have stayed between 0% and 5% over the past three years, which is slightly below the median of other marketplaces we studied pre-IPO. Upwork’s operating expenses are fairly consistent across categories on an annual basis, and are approximately evenly split between research and development, sales and marketing, and general and administrative expenses.

Upwork has seen EBITDA margins below 5% each year for the past three years, but this is in line with (if slightly below) many pre-IPO marketplaces. The company sees operating expenses that are fairly equally split between R&D, sales & marketing, and G&A.

Marketplace Dynamics

Supply

According to the S-1, Upwork does not “calculate or track freelancer retention metrics in order to manage our business” as there is a surplus of freelancers. 375,000 freelancers completed a project on Upwork over the past year, and the platform sees 10,000 applications from freelancers daily. Here’s what else we know about the freelancers from the company’s S-1:

• Upwork had 12 million registered freelancers in 2017, implying that only 3% of registered users completed a project during the year.
• 80% of Upwork freelancers have a college or advanced degree, and 34% have a post-graduate degree.
• 19% of 2017 GSV was generated by U.S. freelancers (the largest of any country by GSV).
• Freelancer acquisition cost was not disclosed, but the “vast majority” were acquired at no cost via organic distribution.

A sample set of freelancers in Upwork’s “Writing” category. Freelancers also each have their own profiles with more detailed information, previous customer reviews, and scores on Upwork competency tests for different skills.

Quality of supply (freelancers) is very important for Upwork. Many of the project categories require significant skill, such as mobile development, data science, graphic design, legal, accounting, and many more. Additionally, even for low-skill tasks like data entry and transcription, the freelancer communicates directly with the client and can significantly impact the client’s Upwork experience through communication, professionalism, and timeliness.

Demand

Upwork contracts with clients ranging from individuals to large enterprises. While the company works with 30% of Fortune 500, approximately 80% of GSV is generated by clients with <100 employees. Upwork’s sales efforts are “increasingly targeted” at large enterprises, as they are more likely to establish large recurring contracts. Clients referenced in the S-1 include Microsoft (completed 1,800 projects in under a year), General Electric (completed 100 projects), and Corel Corporation (completes ~150 project per month).

As of 2017, Upwork had 5 million clients, implying that 9.5% of the registered clients completed a project in that year. Geographically, 67% of GSV was generated from U.S. clients, with no other country generating more than 10%. In 2017, 40% of clients worked with freelancers across more than one of Upwork’s 70 skill categories.

The company does not disclose acquisition cost on the client side either, but said that more than 80% of client registrations came from unpaid sources.

Matching

In 2017, median time from posting to hire (which is a match in the Upwork marketplace) was 23 hours. The experience on both sides tends to be positive — NPS for both clients and freelancers was over 60 in both 2017 and the first half of 2018.

Upwork has an unusually large number of freelancers (“sellers”) compared to clients (“buyers”) — most marketplaces see the opposite dynamic. TaskRabbit has an estimated 40x more users than “taskers,” Uber has 20x more monthly riders than drivers, and eBay has 5–7x more buyers than sellers. Upwork, in contrast, has more than twice as many registered sellers (freelancers) than buyers (clients). This has a few implications:

• Assuming the current freelancer base is of reasonable quality, and the average client isn’t looking to hire a large number of freelancers, Upwork doesn’t need to focus on recruiting more freelancers— the number of clients is the limiting factor for growth.
• Buyers (clients) have a lot of options for freelancers. If Upwork can provide smart recommendations, this can power a great client experience. However, the company needs to abstract away the complexity of choosing between all of these freelancers.
• Competition between freelancers will be intense (we previously estimated that only 3% of registered freelancers completed projects last year). We might expect to see the “power sellers” (high frequency and/or high quality) rise to the top, while lower-quality freelancers quickly churn.

Marketplace Comparison

We identified seven public marketplaces that serve as comps for Upwork, all of which IPO’ed in the past six years. The data below is for each company pre-IPO, in order to be comparable with Upwork’s current metrics.

Data points marked with * represent an average over the two years immediately prior to the company’s IPO. This was selected to be comparable with available data for Upwork. N/A refers to data that was not available in the company’s public filings. Total $ raised refers to pre-IPO funding.

• Growth. Upwork is growing slower than all of the comps in terms of both GSV and revenue. GSV grew 20% last year (average for the comps was 55%), and revenue grew 23% (average for the comps was 60%). No other marketplace dipped below 40% GSV growth or 55% revenue growth.
• Take rate. Revenue is ~14–15% of GSV for Upwork on a quarterly basis, which is fairly standard for marketplaces. The average for the comps was 19%, and the median was 14%.
• Marketplace revenue. 86% of Upwork’s revenue last year came from the marketplace, which is similar to comps (average of 80%, median of 85%).
• EBITDA margin. Upwork’s adjusted EBITDA margin was 3.9% in 2017. This metric varied widely between the comps, though five of the seven companies recorded positive EBITDA. The average of the comps was 4%, and median was 8%.
• Capital efficiency. We calculated a ratio of capital efficiency for each marketplace, which we measured as the total private capital raised / revenue generated in the year prior to IPO. Upwork’s ratio was 1.21x, slightly higher than the average (0.95x) of the comps.
• Valuation. We also calculated a ratio of valuation at IPO to the prior year’s GSV and revenue (using the middle of Upwork’s pricing range). Upwork’s valuation ratios are significantly lower than comps — 5.7x revenue and 0.8x GSV, compared to 15.0x and 3.6x averages for comps.

Market Landscape

Market Size

The gig economy is large and growing, as more people look to freelance work to increase job flexibility and diversify income. A study from economists Lawrence Katz and Alan Krueger found that 94% of net new jobs created between 2005 and 2015 were categorized as “alternative work,” which includes freelancers, independent contractors, on-call workers, contract company workers, and temporary agency workers.

An estimated 57.3M people (36% of the population) did freelance work in 2017. The freelance workforce has grown nearly 3x faster than the overall U.S. workforce since 2014, largely due to the fact that many working millennials (47%) are choosing to freelance. If the current rate of growth continues, more than half of the U.S. workforce will freelance by 2027.

From Edelman Insight’s 2017 report on the freelancing market, commissioned by Upwork & Freelancers Union.

In total, freelancers earned $1.4T last year (nearly 30% growth over the prior year), and this number is expected to grow. Freelancers are increasingly higher income — ⅔ of those who left a traditional job to freelance now say they make more than they did before. Businesses are also viewing freelancing more positively — a 2017 survey from Accenture found that 85% of businesses planned to increase their use of freelancers in the next year.

It’s important to note that not all of these freelancers participate in online marketplaces like Upwork. Only 22% of freelancers typically go to online marketplaces to find freelance work — friends & family (43%), professional contacts (38%), and social media (37%) are significantly more popular. However, the percentage of freelancers who have ever found work online has been steadily increasing, from 42% in 2014 to 59% in 2017. 71% say that their percentage of freelance work obtained online increased in the past year.

We’ve primarily focused on freelancers in the U.S., but the value proposition may be even more significant elsewhere. Workers in emerging economies can use platforms like Upwork to access better-paying jobs, as evidenced by the fact that top markets for freelancers include India, Pakistan, Bangladesh, and the Philippines. In addition, companies worldwide use these platforms to access workers with skill sets not available locally, or to find lower-cost labor.

Competitive Analysis

Upwork competes with other online freelance marketplaces, online job boards, and more traditional recruiting & staffing companies.

1. Online freelance marketplaces. Upwork is the largest online freelance marketplace by GSV, but faces competition from both generalist marketplaces and category-specific marketplaces. We mapped competitors below — the x-axis indicates the type of tasks on the marketplace, from category-specific (e.g. design only) to broad, while the y-axis indicates whether the platform has vetted freelancers only or is open to all.
2. Traditional job boards & recruiting firms. Some clients may be choosing between outsourcing tasks via Upwork or hiring a part-time or contract employee. Therefore, Upwork also faces competition from job boards (e.g. Indeed, Monster, ZipRecruiter, Craigslist, LinkedIn Careers), as well as recruiting & staffing providers (e.g. The Adecco Group, Robert Half International, Randstand, Allegis).

One of Upwork’s biggest sources of value-add is connecting clients and freelancers worldwide, allowing clients to access a larger base of talent (often at a lower price point) than local job boards and staffing firms. Therefore, we focus on online players as Upwork’s most significant competitors.

Fiverr, which reportedly plans to IPO in 2019, is likely Upwork’s largest competitor. More than 25M projects have been completed on the Fiverr platform for 11M+ clients. Anecdotal reviews from clients suggest that Fiverr is more popular for short-term projects, while Upwork is often the platform of choice for ongoing, complex projects with a larger team. This may be a result of Fiverr’s origin as a platform focused on $5 “gigs” (e.g. logo design).

Both Fiverr and Upwork have been criticized for not vetting their freelancers more thoroughly — on both platforms, clients are often inundated with applications from freelancers who are not qualified for the task. This has created an opportunity for smaller platforms that focus on specific tasks and provide access to a heavily-vetted pool of qualified freelancers (e.g. Gigster, Clarity). In response, both Upwork and Fiverr have launched premium products that allow clients to pay for access to a curated pool of freelancers.

Analysis Summary

We’ve aggregated some of the key positives and negatives about Upwork’s financial and competitive positioning pre-IPO, based on our analysis:

Positives

• Strong macro trends. As described above, the labor market is moving toward freelance work to enable flexibility for workers and cost savings for companies. More freelancers are beginning to look online to market their skills and connect with broader pools of employers, and Upwork is well-positioned to take advantage of this growth. The company is a leading brand and already acquires most freelancers and clients at no cost.
• Scale and reach. Upwork is the largest online global marketplace for freelancers by GSV, making it the obvious choice for any freelancer or client looking to access the broadest pool of potential matches. The company’s freelancers offer more than 5,000 skills in 70+ categories, a significantly wider reach than most other freelance marketplaces.
• Data advantage. One significant advantage of Upwork’s scale and tenure is the company’s proprietary dataset on both successful and unsuccessful freelancer/client matches. Upwork’s team runs this data through machine learning algorithms to identify the best matches for a given task and to spot anomalies that may be indicative of fraud or poor performance.
• Retention and customer satisfaction. One of Upwork’s KPIs is client spend retention, defined as (Client spend in year 2 from cohort A) / (Client spend in year 1 from cohort A)— it’s a measure of whether the company can retain a group of clients over a year and get them to spend more on the platform. Client spend retention has increased from 92% in 2016 to 99% in 2017 and 106% in the six months ended June 30, 2018. Upwork also has an NPS that exceeds 60 for both freelancers and clients.
• Improving margins. Upwork has proven an ability to increase margins over the past two years — gross margin jumped from 62% in 2016 to 68% in 2017. This increase is largely due to the fact that Upwork successfully implemented payment processing and administration fees for clients while simultaneously increasing client spend retention. The company also has a positive EBITDA margin that is in line with other pre-IPO marketplaces.

Negatives

• Slow rate of growth. Upwork’s growth is slow compared to other pre-IPO marketplaces. The company’s 20% GSV growth and 23% revenue growth in 2017 are by far the lowest of public marketplaces we analyzed in the year prior to each company’s IPO. While Upwork does not provide detailed financials pre-2015, we do know that the last time annual growth in client spend exceeded 30% was in 2013.
• Lack of data. It’s difficult to fully evaluate Upwork without more data on the company’s metrics over time, particularly as we try to determine how quickly the company is growing. The S-1 only provides financial & key operating metrics for two years (2016 and 2017). It’s somewhat unusual to only have two years of operating data, especially for a company founded nearly 20 years ago.
• Freelancer quality control. The S-1 doesn’t disclose concentration of revenue on the freelancer side, so we don’t know if a small group of high-skill freelancers are driving significant activity. However, with more than 10,000 freelancers applying daily, the non-homogenous nature of this pool, and the importance of getting every match right, Upwork needs to be extremely effective in assessing freelancers and controlling quality.
• Regulation around freelancer status. Worker classification (independent contractor vs. employee) is an increasingly tricky issue, and has a substantial impact on a company’s liabilities regarding taxes, wages, and benefits. If a client using the platform misclassifies a freelancer, Upwork could be held liable. In addition, Upwork also risks misclassifying freelancers employed via its managed services business.
• Cash cycle issues. Freelancers can collect payments after submitting hourly billings on Sunday, but money from clients is often still in transit at this time. Upwork therefore has to fund any shortage via operating cash. The company holds $31M in cash currently, and covering this shortage has not historically been an issue, but this could become problematic if one or more large clients restricted funds. As the business scales, this cash cycle may also require Upwork to hold a larger cash balance than is optimal.
• Client concentration, particularly in managed services. Upwork does not disclose how many clients comprise the managed services business, but managed services represent 10–15% of revenue in any given quarter. Given that no client represents more than 2% of GSV, but one client represents more than 10% of revenue (and 100% of managed services GSV is recognized as revenue), we assume that there is at least one substantial managed services client. As with many marketplaces, there is also risk in having 80% of revenue generated by 20% of clients.

Thanks for reading! Please feel free to reach out via email ([email protected]) or on Twitter (@venturetwins) with thoughts or feedback.

We’d also love your ideas on what to write about next — let us know what you’d like us to cover! You can check out our past articles here.

Thanks to Saar Gur for his help with this article.