We recently read about merger of oDesk with eLance. The interesting part is that this is a merger and there isn’t a cash exchange that has happened between the shareholders of the 2 companies. The 2 companies have together raised over $140 million in venture funding over the last 10+ years and very likely some part of the funding has been written-off by their venture capitalists because of the timeline that the VC firms operate in. Even by going a modest 10x return that made sense some 3 years back, unless these companies are valued at $2 billion in the primary or secondary market – it won’t be a sweet deal for the investors. And going by the current revenue / profit numbers and their B2B model, that valuation looks very steep.
Then there are other outsourcing marketplaces like Guru.com, TopTal.com that are out there and I see at least half a dozen new ones opening every year. I also had tried my hands with a start-up in this area by co-founding a company USourceIT, raised a Series A round from a VC but couldn’t really create a success out of it. Naturally, I was very emotionally involved in this venture even though it was a part-time role for me and didn’t talk about this until a few months back.
Looking at the top-line numbers for these marketplaces and the business focus, it is baffling how less relevant this market has become and not really growing at a pace that makes it interesting for an investor. And don’t just look at the total transaction, let’s also look at the successful transactional volume (the projects which gets successfully completed!). I bet that those numbers are even smaller – simply meaning that these marketplaces aren’t really solving the problems that they started to solve. So, what does it mean – will these marketplaces die their natural death, or become a services-like lifestyle business, or is there a need for them to pivot to something that no-one has tried so far – at least publicly?
There are certain observations:
1. Bulk of the projects that these companies cater to is the outsourced product development area – and I genuinely believe that the marketplaces with matchmaking service, the way it happens today, is a bad idea. There is no trust, there is too much of competitiveness to be able to differentiate between quality and price parameters. These marketplaces continue to allow buyers to write bad project briefs and let service providers respond to those with equally bad responses, if not worse. Worse, people who realise this are building tools trying to solve the problems of buyer writing better project briefs and service providers expecting project brief – whereas today’s technology has moved away from the direction where project brief is hardly a step that should be carried out for anyone who is creating consumer internet products.
2. Mis-trust based systems – When you look at oDesk tools (and others too) that takes the screenshot of a computer of the service provider and makes it available to buyer as a proof of work, it makes you cringe. It is equivalent of telling someone “hey, go create this stuff and since I don’t trust you, I am going to put a camera to track you”. This doesn’t excite any above average guy to participate and use the system. And a good product development doesn’t get done with the average guys. I don’t have the numbers but I am reasonably sure that bulk of the products that gets delivered through these marketplace developers nowhere match the product that it was supposed to be. And it is not one party’s fault – the system is hardwired to reach that destiny.
3. The buyers on these marketplaces are not exclusive to them, and many of the good ones actually use these systems to “get a sense of” the cost / timelines or “at best create a prototype” before working with a team they found through another source. At Tekriti / Kellton Tech, we get more revenue from customers who find us through Google or search-engines than these marketplace portals even though one of our subsidiary is a top ranked service provider at one of the popular marketplace.
So, what is the solution? Is there an alternate marketplace model that may work for matching these software service providers and buyers? Or will the world move towards a intelligent classifieds model where these providers / buyers will be ranked as per their expertise and the fulfilment be left in an offline way? Will Google eat all these companies for lunch too?
I still will want to attempt solving this problem one more time, so if you have any ideas please drop me a line / email or leave comments.
