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  • Brett Schafer

Upwork: Not So Deep Dive

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  3. Apple Podcasts

Watch on YouTube

Show Notes

(Ryan) What they do: Upwork is the world’s largest work marketplace. They are connecting freelancers and independent contractors with business opportunities.

The independent talent on the platform includes both freelancers and in some cases agencies. And the work really ranges. So if you are a client with Upwork or you’re looking to find someone to fit a particular role, you can sort by category (sales, marketing, graphic design, customer service, analytics, software development, and more), pick a freelancer and reach out to them about a role. Or on the flip side, you can list a job, and freelancers can apply for it.

Upwork then facilitates the contracts between the two parties as well as the payments. Upwork makes money by charging a take-rate on the money that is being sent between the two parties.

(Ryan) History: Upwork was formed out of a merger between Elance and Odesk, which both had their own freelance communities. So I’ll go through the history of those. Elance was founded in 1998 by MIT grad Beerud Sheth and wall street veteran Srini Anumolu. They started in an apartment in Jersey City, but shortly after moved to silicon valley. Their first product was the Elance Small Business Marketplace.

Odesk on the other hand was founded in 2003 by two friends that have greek names that I just simply can’t pronounce. One of them was in Greece and one in the US and they basically started as a staffing firm.

The merger was announced in late 2013 and the name change came in 2015. The combined company finally went public in 2018 and they hired the now CEO Hayden Brown in 2020, but she had been with Upwork for a while.

(Brett) Industry/Landscape/Competition:

  1. I’m seeing a number expecting $9 billion in expected spending on freelance marketplaces in 2027, growing 15% from now until then. Upwork claims $1.3 trillion TAM but idk

  2. Biggest competitor is Fiverr. Listen to our show with Kris/From Growth to Value to get an overview of them

  3. There are a lot of other competitors: TaskRabbit, Catalant,, Hubstaff talent.

  4. TaskRabbit annual revenue estimated at $84 million. A lot smaller than Fiverr and Upwork but still a decent size

(Ian) Management and Ownership:

  1. Hayden Brown in the President and CEO

  2. She has been with the company for almost 10 years in various roles related to product

  3. She was most recently Chief Marketing and Product Officer before transitioning to CEO in Jan 2020

  4. Ownership

  5. “Insiders” own about 9% of the company

  6. Most of that is the independent chairman of the board and two other independent directors

(Brett) Valuation:

  1. Market cap of $5.9 billion, ticker UPWK

  2. P/S of 12 based on midpoint of forward guidance

  3. P/GP of 16.6 based on 72% gross margin

  4. Share count climbing at a pretty quick rate, I would factor in 3 – 4% annual growth to be conservative they granted 5.7 million RSUs in 2020 (127 million current shares)

(Ryan) Earnings:

  1. Q2 GSV (the money being transacted on their platform) was up 50% YoY to $876M

  2. Core clients (clients that have spent at least $5k in aggregate since it began using the marketplace and have transacted in the last 12 months) grew by 21% YoY to 162k

  3. Those clients had a spend retention of 114%. So they’re spending more on the platform.

  4. Active clients (which is just clients with a transaction in the last 12 months) was up 27% to 725k

  5. Had $124M in revenue for Q2, up 42% YoY (For FY context, they’ve had about $441M in revs LTM)

  6. Their overall take rate did decline YoY

  7. Gross margin was 73%, up from 71% a year ago

  8. And they are unprofitable on a GAAP basis

  9. But $17M in FCF over the last 12 months, but cash flow negative if you ex out SBC

  10. Spent ~10% of revs on SBC for H1 2021

(Ian) Balance sheet and liquidity:

  1. Cash of $172mm

  2. Only $30mm of debt, most of that leases, the rest is pretty much short-term, low interest rate debt


Anecdotal Evidence:

  1. (Ryan) Ya Brett and I use them. Although, more as a facilitator and less as a discovery platform.

  2. (Brett) Works well with the Motley Fool. Pretty easy to tell the switching costs once a team gets embedded into the payments system

  3. (Ian)

Future growth opportunities:

  1. (Ryan) Project catalog. This is the big project they’ve been working on that competes almost directly with Fiverr. “It offers a browse and buy experience where freelancers post complete work offerings that clients can purchase on the spot.” Initially I thought this would have been catered more towards smaller clients and maybe it still is, but management said the use cases are all over the place right now. This has served as a decent customer acquisition tool, 10% of new clients have come through there.

  2. (Brett) The Budweiser limited edition Labor Day can. But seriously, they used that to promote Upwork CoLab, which helps freelancers connect with “cool” brands. It is important to get freelancers onto the marketplace vs. others, so this could be an important factor compared to someone like Fiverr.

  3. (Ian) Growing marketing spend and messaging leading to more long-term, complex projects, rather than what we typically think of as gig work. Already 85% of the business, but they want to transition even further towards that

Highlights and lowlights:

  1. (Ryan) Highlights: I think there are industry tailwinds here. They also target enterprise customers which I like. Lowlights: The declining take rate isn’t great. Also, Upwork’s bread and butter seems to be in facilitating the relationships between independent contractors and businesses. Not really as much in the discovery aspect. I think Fiverr wins there. That doesn’t make it a worse business, but that feels less defensible.

  2. (Brett) Highlights: The network effect (or whatever you want to call the competitive advantage of an internet marketplace) is strong here, good margins, feels like a market that will be won by a few companies, and Upwork will be one of them unless they totally drop the ball. Lowlights: Horrendous stock comp. Why is Fiverr growing faster?

  3. (Ian) Highlights: The market ($1.3T ???), the strategy which is potentially more stable. Seems to be more contractor friendly. Lowlights: Gross margin, lower than FVRR. Not a founder CEO

Bull case:

  1. (Ryan) Since they are the largest they have some solid network effects. If you’re a freelancer and you want the most job opportunities you have to be on Upwork. That in turn attracts more businesses or clients because they wanna go wherever the most talent is. If that network effect plus industry tailwinds is able to propel durable 20% growth over the next decade, Upwork should make for a good investment.

  2. (Brett) Ride the industry growth wave and solidify the competitive advantage the more they scale.

  3. (Ian) Upwork is able to fill the gap left by the labor shortage and companies recognize the value Upwork is providing and it becomes a bigger paradigm shift than even COVID was

Bear case:

  1. (Ryan) Competition creates a take-rate battle. Granted, I don’t think it’s super easy to switch platforms for the bigger enterprise customers. But if someone else can do it for cheaper, Upwork may have to lower prices constantly.

  2. (Brett) Fiverr takes share (not sure if they are right now since they are much smaller, but growing faster). Big slowdown in growth over the next few years.

  3. (Ian) Freelance work becomes easy through other means and the platform is not as useful as it once was. Crypto or other technologies take over

Chit Chat Money is sponsored by 7investing. Use our link or enter promo code “CCM” at check-out to get $10 off your first month of the service.

Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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