Upwork Is Starting to Think Bigger About Its Growth Opportunities

When Upwork (UPWK 1.25%) released earnings in early August, the tech stock initially rallied but dropped in the days following as full-year guidance fell short of Wall Street's expectations. With the stock down more than 45% from its all-time high earlier this year, investors are wondering what could get the stock going in the right direction. Upwork's CEO Stephane Kasriel recently sat down with The Motley Fool to talk about its biggest growth opportunity: large companies. 

But it's not an easy nut to crack. Convincing established enterprises to adopt new ways of getting work done is a huge challenge. Investors would do well to understand this new opportunity, what Upwork is doing to grow this segment, and the tailwinds that might accelerate this change.

Upwork eyes a bigger prize

To help investors understand the company's active client base, management regularly shares results for its core clients, "who have spent more than $5,000 [on the platform] in their lifetime and are still active." This $5,000 figure is a pretty low bar given that it's only about a month of work for the average U.S.-based freelancer. Until recently, this statistic was the only insight shareholders had into Upwork's customer set, but management's recent comments indicate the company understands it needs to think bigger. 

Image Source: Getty Images

Kasriel emphasized the strategic importance of larger companies:

It is a huge opportunity. We now work with 30% of the Fortune 500. Some of them will spend well over $10 million this year on the platform. It's still small compared to what it needs to be... If you ask me, 10 years down the road, the vast majority of our business will be in the enterprise sector.

In the latest shareholder letter, management shared two key insights into how it's doing with large customers. First, it explained that 85% of the payments that flow through its platform (gross services volume or GSV) is tied to larger customers which have "expanded largely unaided, as we've only recently started to address them directly." Although it's not great news that the company's largest revenue categories haven't gotten focus until recently, management's transparency is impressive.

Second, it shared that "more than 50 sales-managed clients have spent more than $1 million with us in the past 12 months." By sharing these metrics, the company shows it's willing to measure its progress in enterprise growth for shareholders. But more importantly, it's already begun taking action. 

Taking a multifaceted approach to win big business

To address this opportunity, Upwork is making platform enhancements, adding to its sales team, and improving its marketing. It added two lower-tier freelance work management platforms that target small to mid-size companies, which creates a clear separation from its high-end product, Upwork Enterprise. Note that these products are for the hiring company, not the freelancer.

Data source: https://www.upwork.com/enterprise/pricing/ 

This allows the company to continue to develop feature-rich enhancements or even customize for a specific customer without overcomplicating things for smaller clients. Some of its customers who use its enterprise product include Microsoft (MSFT 1.65%), GE (GE 8.28%), Airbnb, and GoDaddy.com (GDDY 1.64%). This strategy has had great results for Shopify (SHOP 4.90%) as its high-end offering is now its fastest-growing. 

The company has grown its sales staff by more than 50% since the end of 2017, and it's starting to pay off. Management reported a four-fold increase in deals signed for Upwork Business and Enterprise customers for the first half of 2019 compared to the previous year. Although this is noteworthy, I am concerned that this stat combines two different products with different sales cycles, focused on different customers.

On the earnings call, Kasriel said Upwork Business was designed "to be a simple sale, higher velocity, shorter sale cycle and more adapted better priced for those mid-market type of customers" and the enterprise product has a longer sales cycle and "goes through the whole process of legal and procurement and things that typically takes six months or more." By managing to a metric that combines these two tiers, more of the "simple sales" could get closed to drive the number higher, but may not result in the ultimate goal of bringing in larger Fortune 500 sized customers. 

As for marketing efforts, the company recently hired Senior Vice President of Marketing, Lars Asbjornsen, to focus on brand awareness of its capabilities for larger projects. In July, the company held its Work Without Limits Executive Summit, which is a great forum to meet with representatives from the Fortune 1000 to address the barriers to freelancer adoption and better understand this important customer set. Kasriel highlighted the event in the earnings call, "the best sales pitch ever was just to put our customers on the panel and have them talk." He knows changing mindsets is an important part of his job.

Overcoming the resistance to change 

Kasriel discussed the challenge of getting large companies to accept freelancing, "unfortunately, they're also the slowest to change." Luckily, there's a number of tailwinds playing in Upwork's favor.

First, full-time employees are expensive. In fact, author of The Gig Economy, Diane Mulcahy calls the full-time employee "the most expensive and least flexible source of labor for companies." Second, software tools for remote employees are more accessible than ever. The number of video conferencing, communication, and collaboration software apps are plentiful, easy to use, and inexpensive. Lastly, remote work is becoming more accepted, which is one step closer to having freelancing be a part of how big business gets things done.

Winning big companies over to new ways of doing work won't be easy, but the reward is tremendous. Investors should keep an eye on the freelancer platform's progress in landing more million-dollar clients.