Of all the floats in 2013, the most intriguing has been the debut of online marketplace Freelancer. With a float price of only 50 cents (implying a market value of around $218 million), shares soared on listing, hitting $2.60 on its opening day (briefly valuing the business at $1.1 billion and CEO Matt Barrie at more than $500 million). Since then, the share price has fallen back to $1.37 — still a lofty premium over the listing price.
The Freelancer float was not without sceptics. Some considered the 50-cent price expensive and reminiscent of the dot.com boom during hich companies without profit (or even revenue) were valued at billions of dollars, only to collapse in a screaming heap. However, Freelancer did have two things in its favour: first, it claimed to be the market leader in the sector; and second, it was alleged to have received a takeover bid from a mysterious (private) Japanese company that had valued the business at $434 million.
Those claims (along with a very small “free float” of less than 10%) have led to the skyrocketing market valuation of Freelancer. But will Freelancer be the next Seek, or is it the next Pets.com?
Investors traditionally give market leaders a far higher multiple than the second-largest player (and significantly higher than everyone else). The reason is marketplace businesses (Realestate.com, CarSales, Seek, etc) rely on a “network effect”. The more people selling products in the marketplace attracts more buyers, which in turn attracts more sellers. (The telephone is the original and purest example of a “network effect”.) In many cases, only the largest marketplace business in a sector will prosper (although sometimes — like in the case of real estate — the sector may be large enough for multiple players).
Freelancer’s prospectus portrayed it as the number one player in the market. It used the metric of “number of user accounts”, which estimated Freelancer’s sites at just over 9 million accounts, compared with 4 million for oDesk and 3.6 million for eLance (last month, oDesk and eLance announced they would be merging). This gave the impression that Freelancer was a clear market leader, like eBay, Alibaba or even Amazon.
But Freelancer chose a largely meaningless metric. In revenue terms, both oDesk and eLance (pre-merger) are larger than Freelancer. Fairfax reported that “oDesk was the market leader at about $US360 million ($405.7 million) in 2012, followed by eLance on $US190 million with Freelancer bringing up the rear at about $US62 million”. If the oDesk/eLance merger occurs, the combined entity will be almost 10 times the size of Freelancer in terms of actual dollars spent on the site.
Freelancer claims it is the market leader based on “users”, not “sales” — this is a bit like a backpacker hostel claiming it’s more valuable than the Ritz Carlton because it has more guests (even though they pay a fraction of the amount). Freelancer notes in its prospectus that it is “the world’s largest freelancing, outsourced services and crowdsourcing marketplace by users and number of projects posted. This creates a strong competitive advantage in terms of network effects.”
Freelancer’s gross payments (which is a reasonable proxy for the business’ revenue) have increased from $28 million in 2010 to $80.9 million; however, that appears to have been partly driven by acquisitions. (The group’s stated revenue is far less, at only $18 million; however, as a comparison to traditional businesses, gross payments actually makes more sense.) Concerningly, while net revenue is forecast to increase from $10.6 million in 2012 to $18 million this year, Freelancer is forecasting a fall in earnings before interest and tax from $677,000 to $554,000.
So what of the apparent bid from privately held Japanese business Recruit Co, which was worth more than US$400 million? This amount was far higher than other suggestions of Freelancer’s value (Matt Barrie also claimed, ”you name it and there’s a fund out there that has pitched to us”).
The Recruit Co bid was never actually made public — it originated from a TechCrunch article. Recruit Co is not a publicly listed entity (and neither was Freelancer at the time), so no information was ever publicly disclosed about the terms of the bid. Recruit Co never even publicly confirmed it, and its website makes no reference to Freelancer at all.
Recruit Co itself is a strange entity — in the late 1980s it was mired in a bribery scandal implicating scores of Japanese politicians, and has since grown to be one of the most profitable internet sites globally. Its financial reports indicate it made a profit of almost $800 million last year and generated revenues of around $10 billion. But while it is understood to be looking for offshore acquisitions, $400 million for Freelancer appeared relatively pricey. The most recent comparison is Recruit’s September 2012 purchase of job aggregator Indeed.com (the largest job site in the US) for around $1 billion. At the time, Indeed had around 80 million monthly unique visitors.
A spokesperson for Freelancer told Crikey the business received around 82 million unique visitors in the past year — that makes the business around one tenth of the size of Indeed — implying that a $400 million purchase price (in relative terms, anyway) appears expensive (admittedly, Freelancer and Indeed are quite different businesses).
Ignoring the hype, it would seem the market is being generous in valuing Freelancer, a business with virtually no profits, whose growth appears to have been driven (to an extent) via acquisition (revenue growth this year is forecast at 73%). Barrie has done a remarkable job in aggregating Freelancer in less than five years, but he may have his work cut out justifying the $600 million market price.
This article first appeared on Crikey.