Mountain View-based Upwork (Nasdaq: UPWK), the largest online marketplace that enables businesses to find and work with highly-skilled freelancers, went public last year. I am a huge fan of this platform, and my company has used it extensively for 15 years. Upwork has just announced its results for the first quarter that missed the analyst revenue estimates.

Upwork’s New Products

Upwork has recently added two more marketplace products to focus further on the larger clients. Upwork Standard has been renamed to Upwork Basic, has zero subscription fee and targets very small businesses and freelancers. Upwork Plus has been launched for small businesses looking to engage freelancers in a self-service mode and has a subscription fee of $50 per month. The Plus plan is basically an upgrade from the Basic plan and provides additional privileges, Connects, and visibility into competitor bids. Both the Basic and Plus plans charge a client payment processing fee and administration fee of 3%. Freelancers working with clients on Upwork Basic and Upwork Plus typically pay 20% for the first $500, 10% for the next $9500, and then 5% for any amount over $10,000 that they bill. The client fee is waived in the Plus plan if the client pays via Automated Clearing House (ACH).

Upwork Business is for mid-market businesses looking for ongoing flexible access to talent that need consolidated billing and a team of advisors to help them set up their freelancer programs. Fee for Upwork Business is $500 per month with a client fee of 10% and a freelancer fee of 10%.

Upwork Enterprise is focused on large businesses that need a more tailored product solution and access to premium talent and compliance services. Pricing for Upwork Enterprise is unchanged; the subscription fee varies based on the complexity of the engagement, freelancer fee is 10%, and client fee is either 10% or 20% depending on whether the client is using the compliance offering or not.

Upwork’s Financials

For the first quarter, Upwork’s revenue was up 16% to $68.9 million, missing analyst estimate of $69.15 million. Non-GAAP net income was $0.5 million, or break-even per share, compared to a non-GAAP net loss of $(3.9) million, or $(0.11) per share a year ago. Gross profit increased by 21% to $47.8 million and gross margin was 69%, up from 67% a year ago.

Marketplace revenue increased by 17% to $60.9 million and accounted for 88% of total revenue. Managed services revenue increased 10.5% to $8.02 million.

Gross services volume (GSV) increased by 21% year-over-year to $487 million. Take rate, defined as total revenue divided by GSV, was 14.2%, compared to 14.3% in Q4 2018 and 14.7% in Q1 2018.

Core clients grew 22% year-over-year to approximately 111,000 as of March 31, 2019. Core client is defined as a client that has spent at least $5,000 on the platform and has had spend activity in the past twelve months. Client spend retention increased to 107%, up from 103% a year ago.

Upwork expects revenue in the range of $72.5 to $73.5 million for Q2 2019 and $299 to $304 million for the full year 2019. Revenue increased 25% to $253.4 million in fiscal 2018. For 2019, it expects a growth rate of about 19%.

How Can Upwork Up Its Growth Further?

Upwork has over 111k core clients that spend $5k+ a year on the platform.

These belong to three primary categories: large enterprises, agencies, and small businesses, including startups. My conservative estimate is that 25% of these are technology and technology-enabled services startups trying to operate as virtual companies, a key trend in the industry. I am particularly familiar with this segment because 1Mby1M, my global virtual accelerator, is full of such companies.

Through our work with 1Mby1M, we know that bootstrapped startups use virtual teams extensively, to keep overheads down and flexibly scale their businesses. We encourage this mode of company building.

Hiring trustworthy people is a key challenge for startups, and today, even in Silicon Valley, the virtual company trend is rising because of extreme talent war and cost of living pressure. Lending Club, a long-time San Francisco company, has just announced that it will move 350 employees to Utah. Small companies go the virtual company route instead of moving entire operations to one place.

Upwork, in my opinion, should focus on this trend and build an accelerator for startups on its platform that have a high potential for fast growth. 

Let us say, there are 25k startups on Upwork currently. Say, 10% of these are high potential. These, instead of spending $5k on Upwork, if properly supported, could spend $50k a year on Upwork. That would double the GSV from this segment. In addition, say, 1% of these are really fast growth companies that would spend $250k a year on Upwork. That would add another 50% lift in GSV. Thus, if Upwork is currently making $12.5 million in revenue from the startup segment, this number can rise to $28.75 million. That means an additional $17.5 million revenue with some focused nurturing. [Assumption: Revenue equals 10% of GSV]

For the 2019 fiscal year, revenue is forecast to be about $300 million. By focusing on promising startups, revenue could improve by almost 6%.

It may not happen in 2019, but in 2020, this lift could be achievable. Upwork will also learn what are the product extensions needed to cater to the startup audience to clinch this segment. For example, what if a startup wants to hire freelancers specifically in Bozeman, Montana, and have 20 of them locate in one co-working space? And of course, many of them are looking for some form of funding or other leveraged means of growing their businesses.

Analysts covering Upwork should start asking the company for a breakdown of its core client segments and revenue shares thereof. Each segment would require a customized strategy to grow systematically. 

Currently, Upwork doesn’t segment the core clients and caters to the segments individually.

They should.

And specifically for the technology startup segment, we have a wealth of knowledge on the requirements. Based on this, my conclusion is that Upwork is leaving a lot of money on the table.

A time will come in the not too distant a future when tens of thousands of fast growth technology startups that operate as virtual companies will dominate the planet.

Upwork should try to become the platform of choice for this segment.