Dylan Lewis: I think, one of the most appealing things --
you have this strong business with high switching costs and a lot of people that are drawn into it.
One of the most appealing things for me, though, is the long-term trends that this company plays on.
This brings us to criteria No. 3 for you, potential.
This company is really at the center of the gig economy, which has blown up over the last
couple of years, and I don't think it's going to stop anytime soon.
Brian Feroldi: Yeah, that's something that I totally agree with.
There is definitely a push towards hiring freelancers and people taking on side jobs.
Right now, over the last 12 months, about $1.5 billion worth of transactions took place.
They call it gross service volumes on Upwork's platform.
That number has consistently grown by 20% over the last couple of years.
From that number, Upwork takes a cut from both freelancers as well as from the clients.
They charge fees to both sides.
That $1.56 billion in growth service volume trickled down to about $230 million of revenue.
They take about 14% or so of the total payment volume that goes on their network.
That $1.56 billion sounds like a big number, but even today, the estimate is that their
total addressable market is about $560 billion.
If you believe that number to be anywhere close to accurate, this company has an enormous
runway of growth ahead of it.
Lewis: One thing I want to clarify in talking about the numbers here, you mentioned
that gross service volume.
That is a somewhat company-specific metric that some investors might not be familiar with.
You also likened it to total payment volume.
If you're an investor that follows PayPal, the principle is pretty much the same.
It's the value and the volume that is being facilitated on that platform, not what that
company is necessarily taking in from those transactions.
Feroldi: That's, correct. What's exciting, as you mentioned before,
if you're a believer in the rise of the gig economy,
as they're calling it, McKinsey put out a study where they estimated that the
total amount of freelance work that will happen by 2025 will be about $2.7 trillion dollars.
Compare that to what Upwork did over the last 12 months of $1.56 billion, and I think it's
pretty fair to say that even if that estimate is off by an order of magnitude, the runway
ahead of this company is enormous. Lewis: Criteria No. 4, this is customers.
This is really looking at, how do customers interact with the business?
Does this look like something that's sustainable and serves people well?
Feroldi: Yes. Customers are the lifeblood of any business.
I like to think about the way that customers interact with any business.
Some of the things that I looked at is, how much does it cost to acquire a new customer?
This is a key metric for a lot of businesses.
Every day, about 10,000 freelancers and agencies sign on to Upwork's platform.
That growth is not free.
There is some organic, but Upwork does spend about $70 million per year in sales and marketing
costs to get that on there. That growth is not free, but I think that's money well spent.
The second thing I looked at is, how dependent on the company are the customers?
Between 2015 and 2016, the amount that an average business spent on Upwork's rose by about 106%.
The customers that they kept tend to spend more on Upwork's platform over time,
which is a great sign that the businesses that are signing up are very dependent on Upwork's network.
The third thing I looked at is, is the revenue recurring?
I do not like businesses at all where it's a one-time customer transaction.
The customer buys something, and then they disappear.
I like it when they have a relationship with the company and they continuously buy from
the same company over and over again.
I think you can say that Upwork's business is repeat purchase.
Once they sign on and offer projects, they are more likely to offer new ones.
The final thing I looked at is, do I believe that the company could establish pricing power over time?
Do I think that they could raise prices faster than inflation, and not lose any business?
Theoretically, I believe that Upwork could as it becomes the largest because it's the
largest platform in the world.
I think that eventually, both freelancers and clients will become heavily dependent
on Upwork to make that connection.
Having said that, the gross margin that we saw on Upwork did decline about 100 basis
points between 2016 and 2017.
I'm not terribly concerned about that yet, because the business is in hyper-growth mode
and they're investing all over the place, so that much of a decline doesn't bother me.
But ideally, you'd want to see that their gross margin expands as the business gets bigger.
Lewis: Investors listening at home, if you want a number that is kind of the catch-all
for what we're talking about here, Upwork has this client spend retention number.
This is what Brian was talking about with that 106%.
You can think of this the way that a restaurant has comps, basically.
You have an account that has been active for a certain amount of time.
They look at, basically, what has been spent in the past year?
How does that compare to what they spent in the 12 months prior to that period?
You want to see that number going up and to the right, ideally over 100%, because that
means people are using the platform more and maybe there's the opportunity to upsell,
and people are taking those chances to upsell.
We love to see that, particularly in the software as a services segment.
Feroldi: That's absolutely correct.
One of the things that Upwork could do over time is roll out new features, roll out new services,
and generate more revenue from their current base of clients.
That business model is very attractive for investors.
Lewis: Particularly when you already have a very large group of people using your services.