Bargain or Overvalued?
Freelancer.com, run by Matt Barrie in Sydney Australia, is planning to list on the Australian stock market and raise $17.5 million AUD at a market capitalization of $218 million. They are projecting revenue to hit $18.3 million by the end of 2013, up from $10.6 million in 2012. This comes after rejecting a $400 million offer from Japanese company Recruit.co to buy the business.
The largest direct competitors for Freelancer.com are oDesk.com and Elance.com, both of which are based in the U.S. In recent funding rounds both raised similar amounts to what Freelancer is looking for—oDesk raised $15 million in Series D funding in March 2012 while Elance raised $16 million in January 2012.
Another comparative company is 99designs, also based in Australia. Unlike Freelancer, oDesk and Elance which facilitate many types of online work, 99designs has focused primarily on design competitions. 99designs raised $35 million in 2011.
Note that I have stated the figures for Freelancer in Australian dollars and oDesk and Elance in US dollars. At the current exchange rate, one Australian dollar equals 0.96 US dollars.
Growth of the online staffing market
The entire online staffing market is expected to grow from $1 billion in 2012 to $8 billion in 2018. This is a compound growth rate of over 40% per year.
This is a phenomenal growth for an industry. If Freelancer grows at this rate starting from their projected revenue of $18.3 million in 2013, they’d reach revenue of $98 million by 2018.
Note also that even at $8 billion the online staffing industry would be tiny, compared with the overall staffing market which is currently over $400 billion and projected to grow to over $600 billion by 2018. Online staffing seems to have a lot of room for growth within the overall staffing industry.
A main driver of this growth is the labor arbitrage opportunities that are available to employers that are hiring globally. It is possible on Freelancer and oDesk to hire individuals from any country around the globe. There are millions of people in the Philippines, India, Bangladesh and other developing countries who are willing to work at much lower wages than in developed countries such as Australia and the U.S.
For example on any of these online platforms it is possible to find a virtual assistant in the Philippines for as little as $2 per hour. The average wage for call center staff in the Philippines is 18,000 Philippine Pesos, which equates to $418 USD per month or $2.60 per hour. In more rural areas the wages are lower still (12,000 pesos is common in many locations). These cost savings are among the major reasons why large companies including most international banks have moved their call center staff offshore to the Philippines or India.
These opportunities are attractive to the workers too; they can often earn more at these online jobs than they can locally, and often enjoy the added benefit of working from home.
Why is oDesk currently the market leader?
oDesk generated $44 million USD in revenue in 2012. This compares with revenue of $10.6 million AUD for Freelancer.com for 2012. Elance is currently number 2 in the market with revenue for 2012 of around $20 million USD (an estimate based on their stated contractor earnings and my estimated average gross margins of 10%).
My personal view is that oDesk is the market leader for the following reasons:
- They have better traction with large businesses. For example, they had a contract once with Facebook where workers on oDesk reviewed photographs on Facebook and screen out nudity.
- They are more focused on hourly work than Freelancer and have a nicely integrated system for tracking hourly long-term work. This type of work is more sustainable and long-term in focus than short-term contract work. I believe that a large percentage of the volume through the oDesk platform is for employers that use the oDesk technology and payment platform essentially for payroll for their staff (in the US and globally). This is a significantly different business model than Freelancer’s, which is more focused on connecting employers and workers for short term contracts.
- Their user-interface is great; their website is simple and very well designed.
- They have had more time in the market and more money invested into developing their business and technology. Note that oDesk started in 2005 and Freelancer started in 2009, although Freelancer started by acquiring getafreelancer.com which was founded in 2004.
From my experience using oDesk, Elance, and Freelancer, I believe that each has slightly different strengths. Freelancer has the largest number of freelancers, partly because they have purchased several competitors. The Freelancer platform is great for getting multiple competitive bids for project-based work. oDesk is stronger for hourly work. Elance in my opinion is a little more selective in the freelancers they allow on the platform and more focused on quality.
Pricing model comparison between oDesk, Freelancer and Elance
oDesk charges a flat 10% rate. If a contractor earns $90, oDesk takes a $10 fee and the employer pays $100. Elance takes a fee of 8.75% and they also have optional monthly plans for workers to increase their prominence on the site.
Freelancer has a more complex fee arrangement that includes a 3% fee to employers and a varying fee from 3 to 10% for workers. See here for the list of Freelancer fees. They also have optional monthly membership plans for both workers and employers. Freelancer also charges employers a variety of upgrade options to make their projects more prominent in the marketplace. Freelancer does have the lowest potential fee percentage at 6% overall, although to get to this rate a contractor needs to pay a monthly membership of $49.95 per month.
Revenue as a percentage of gross payment volume
The gross payment volume is the total amount of money paid to workers on the platform. The gross payment volume listed in the Freelancer prospectus was $50.8 million AUD for 2012. Their revenue in 2012 was $10.6 million AUD, so their percentage take is 20.8%. This compares with oDesk that generated $44 million USD in revenues and $360 million USD in gross payment volume representing a percentage take on their platform of 12.2%. This difference in percentage take on the platform is I believe the result of the additional completely optional upgrades that Freelancer has for both employers and Freelancers. In my view this is a smart strategy for increasing their revenue from their platform, but they also need to be careful about upsetting their marketplace participants if their fees are not considered competitive with oDesk and Elance.
Long-term work versus short-term projects
Freelancer is primarily focused on connecting employers and workers for short-term projects (such as building a website or designing a brochure). Longer-term work is also a big opportunity in online staffing. Long-term work might include hiring a full time web developer or a team of people including full time virtual assistants, marketers, bookkeepers, etc. All three of the major platforms do facilitate long-term contracts with pay based on hours worked, although it is not the main focus of any of them. oDesk is currently the strongest in this area.
Could other companies come in future and disrupt these three freelance platforms?
In any new technology business there’s potential for a competitor to come in with a disruptive new technology and out-compete the incumbents.
I think that new players trying to directly compete with the incumbents will find it extremely difficult to get both sides of the marketplace participating at the same time. Without workers, the employers will have no incentive to post a job. Without the employers the workers will have little incentive to join.
However there are some ways to partially disrupt the existing platforms. This is something that we are doing at Staff.com. We are competing only in the segment of long-term online staffing contracts. Employers hiring long-term workers have different needs that are not served well by the three major platforms.
Niche job marketplaces that focus on specific types of work could also become disruptors. For example 99designs focuses on design competitions, and Voices.com is a platform for hiring voiceover artists.
Strengths and opportunities for the Freelancer.com business model
- Freelancer is well established in an industry where it is difficult for new companies to break in.
- Massive growth in the industry is expected for the next 5-10 years.
- Of the 3 major players, Freelancer has the largest number of freelancers and employers, as well as the lowest gross services revenue. If they are able to generate more ongoing business from their existing database they should be able to push up the total payment volume flowing through their platform.
Weaknesses of Freelancer’s position & model
- Their high gross margin is constantly under pressure from competitors. Freelancer is not strong in the area of long-term online work.
- In terms of gross payment volume, Freelancer is trailing far behind oDesk ($50.8 million AUD for Freelancer vs $360 million USD for oDesk). This is arguably a strength as well since it is a sign of room for growth.
Potential future growth of the Freelancer business
One way to estimate their potential for growth is to look at their percentage of the overall market. At approximately $50 million gross payment volume in 2012 their market share is 5% of the overall estimated market of $1 billion (in 2012).
An optimistic scenario for Freelancer in 2018 would be to increase their market share to 15% which would mean 15% of the $8 billion projected market or a gross payment volume on the Freelancer platform of $1.2 billion. If they were able to maintain their percentage take from their platform at around 20% this would translate to $240 million in revenue.
Of course increasing their market share from 5 to 15% is not at all guaranteed. The premise that they might be able to do this is based on the fact that they currently have the largest number of workers in comparison with oDesk and Elance, which means that they have the user base they can utilize to grow. Also the fact that up to this date they have not raised as much money as Elance or oDesk, so this new fundraising has the potential to give them the cash they need to accelerate their growth.
About the Author: