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Upwork Inc. (UPWK)

Early in the fourth quarter we meaningfully increased our position size in Upwork (UPWK). Upwork is a global employment marketplace that enables businesses to vet, hire, and manage talent as part of their distributed workforce. Upwork facilitates labor and demand side connectivity on a global scale by providing the infrastructure to create trust and to streamline talent sourcing, contracting, analysis and payment. Freelancers benefit from having a reputation ranking system that feeds their marketing channels, allowing them to have access to quality, flexible work and on time compensation. Businesses on the demand side benefit by having extensive access to specialized talent, enabling faster and more cost effective hiring, and by having the strategic optionality inherent in the ability to flex a portion of their workforce based on changing demand requirements.

Labor markets have long had unnecessary frictional inefficiencies driven by regional talent imbalances and long-term trends of increased specialization of labor and declining labor mobility. Meanwhile, innovations in communication and global connectivity have transformed the way work gets done. Knowledge workers seek the flexibility and geographic advantages of on demand work, but the barrier to adoption has historically been established habits and work standards on the demand side. The Covid-19 global pandemic has broken down those barriers. We see three steps in the path to enterprise usage and shareholder value creation.

First, Upwork is reducing frictional barriers to on demand labor adoption on the demand side by modularizing the most common jobs served on the platform. Project Catalog is a collection of predefined projects that businesses purchase through an e-commerce purchase experience. Users on the demand side benefit from a frictionless way to purchase well defined, quality verified tasks to augment more complex work being done by full time employees. On demand workers on the supply side benefit from having a new avenue to market and sell the services they consistently perform. Importantly, Project Catalog widens the customer acquisition funnel by providing an easy on ramp for new customers to source and connect with talent, enabling businesses to quickly start with small projects and scale to larger and longer-term projects and relationships.

Second, Upwork is shifting its go to market strategy to target large enterprises. Currently, enterprise customers with more than 100 employees account for 20% of Upwork’s $2.7 billion in gross services volume. As part of shifting the go to market strategy, small and medium sized business customers will move to a fully self-service offering, allowing Upwork’s sales force to focus on capturing the $3.5 trillion in gross services volume that large enterprise customers currently spend on contingent labor. As Upwork’s sales team targets the large underserved market opportunity presented by enterprise customers and raises awareness of the quality verified modular work units available in Project Catalogue, there is a long runway for Upwork to power offline to online conversion in the on demand labor marketplace while breaking down the barriers to adoption and growing the overall size of the market.

Third, Upwork is evolving to become an enterprise resource planning system for businesses to manage their on-demand workers. There are 3 main parts to this. One, Upwork is expanding its employer of record status to all businesses. Employer of record status indemnifies businesses from misclassification risk and the inherent punitive fines and back taxes, creating a situation where managers “don’t get fired for choosing Upwork”. Two, Upwork is expanding its payrolling solution. The expansion of the payrolling solution creates a centralized global offering for businesses to pay independent workers in 160 countries. A payrolling solution with escrow protection provides value by ensuring that businesses only pay for completed work, and on demand workers get paid on time and in full. A recent product initiative, Direct Contracts, enables escrow protection of on demand workers outside of the Upwork marketplace. Upwork’s position in the middle of payment flow naturally pulls users onto the marketplace as Upwork provide a distribution relationship where they bring the value to both parties. Three, Upwork is expanding analytics and reporting functionality for productivity, compliance, and risk controls. Increased functionality further ingrains Upwork in enterprise workflow as it becomes the single pane of glass for managing on demand workers.

These three steps in the path to increased enterprise usage create value by changing the way enterprises utilize on demand workers. As enterprise customers utilize Upwork’s platform to vet experienced talent to create their virtual talent bench, the benefits of greater control and flexibility to dynamically manage their cost base and flex operations as they scale becomes ingrained in their way of doing business. As younger generations that are twice as likely to engage remote workers in an on-demand capacity ascend to managerial roles with hiring and decision-making authority, the secular trend of increasing on demand worker utilization only grows stronger. While the strategic initiatives and secular trends push the business forward, Upwork’s significant growth investments that are being expensed as Research and Development, and Sales and Marketing on the income statement paint a picture far different than the run rate profitability both currently and at scale. With a current marketplace gross services volume of $2.7 billion and a contingent work addressable market worth upwards of $500 billion in gross services volume today, we see a long runway for Upwork’s global scale to drive transformation of on demand labor usage to reduce frictional inefficiencies in the labor market and create meaningful shareholder value.


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