[FVRR, UPWK] Freelance marketplaces
In his seminal paper The Nature of the Firm, Ronald Coase posits that in cases where it is difficult to reliably procure labor or draft and enforce contracts that unambiguously cover the full scope of future activities, a firm will handle production itself rather than rely on arms-length market transactions. For example, hiring freelancers to write scuttleblurb would be tough because the quality of each post depends on lines of inquiry that can’t be delineated ahead of time and are usually contingent upon things learned during the research process.
Not only can activities be difficult to specify ex ante but the division of surplus in future periods may depend on who owns the scare resource1. The boundaries of Amazon’s e-commerce business are always expanding and demand is unpredictable, making it difficult to describe in advance all the logistical contingencies that may arise in the delivery of goods. But also, to fulfill demand, third party logistics suppliers who own the trucks, aircraft, and delivery hubs may extract more surplus for themselves in the future. Therefore, to deliver goods at minimal cost and with the speed and reliability its customers expect, Amazon takes ownership of its logistic network.
The kinds of goods and services that can be outsourced to markets tend to be low-variance and well-defined. Starbucks doesn’t have a fleet of drivers stationed all over the country because Taxis and ride-sharing services fulfill the clearly scoped task of getting from one address to another. In fact, smartphone technology has eliminated the transaction costs of sourcing and hiring drivers to such a degree that ride sharing services themselves draw from a market of independent contractors.
And while I handle all the research and writing that goes into a post, I use freelancers from Fiverr for one-off projects, like fixing website errors, where the output is binary or easily measurable. And it’s not just small business owners like me who leverage outside help. Large enterprises often rely on temporary labor to cover capacity constraints in areas like accounting, engineering, and design during seasonally busy periods or ahead of large product launches.
Most of that temp labor is sourced offline, either through word-of-mouth or through traditional staffing agencies like Adecco, Manpower, Robert Half, and ASGN Inc, which latter earn the difference between what they bill to clients and what they pay to temps on payroll. Manpower and Robert Half were founded in 1948; ASGN in 1985 and Adecco in 1970. These companies operate staffing branches all over the world and cater to a range of industries, including retail, hospitality, and software across functions like call centers, accounting, IT, etc.2 By contrast, UpWork and Fiverr, each founded less than a decade ago3, rather than arbitrage payroll, run online marketplaces that connect businesses to freelancers.
None of the incumbent staffing agencies have made material progress online. Adecco’s online temp network, Adia, launched around 3 years ago, is confined to low-skill hospitality, warehouse, and retails jobs that have been crushed by COVID. YOSS, a freelance marketplace that competes directly with UpWork and Fiverr, shut down this past August after having its supply cannibalized by its parent Adecco’s existing offline vertical-specific brands. Robert Half and ASGN are, for the most part, the same labor heavy organizations that they were in the ‘90s, with an online presence that resembles job boards from that time.
The valuation disparity between the incumbents and UPWK/FVRR is stunning:
Fiverr has less than 5% of Manpower’s gross profits but 65% more enterprise value.
The divergence in valuation in part reflects frenzied excitement over stocks that play on COVID trends. Upwork and Fiverr, whose platforms cater almost exclusively to knowledge work that can be performed remotely, grew revenue by ~20% and ~70% ytd, respectively, while Robert Half and Manpower experienced double-digit top-line declines. Beyond the exigent circumstances that forced remote work this year, COVID has pried open the Overton window to include working from home, hosting high profile business calls over Zoom, treating medical conditions online, and hiring remote freelance labor on the internet.
But even prior to COVID, things were already moving in FVRR/UPWK’s favor. The escalating costs of real estate and skilled labor in coastal cities, combined with improvements in communication platforms, were propelling adoption of remote freelance work. Why hire a developer in San Francisco when a developer with comparable skills in the Ukraine is willing to work for less than half the rate? Moreover, millennials and Gen Xers accustomed to the internet were assuming senior positions, replacing boomers accustomed to hiring manually vetted candidates through professional temp agencies.