Elance and oDesk, the two largest freelance labor marketplaces on the planet, announced a merger this week. The two have been competing in the freelance space for over a decade and decided to leverage their respective resources to “create faster and better matches between opportunity and talent” for global freelancers, as Elance CEO Fabio Rosati told VentureBeat.

While the two companies will continue to operate as separate entities, with their respective online destinations odesk.com and elance.com, the collaboration has created a behemoth serving nearly 2 million businesses with 8 million freelancers in over 180 countries, bringing a forecasted $750 million in billings for 2013. Elance has been around for nearly 15 years and has raised $94.8 million to date; ODesk has raised $46.7 million to date in its nine-year lifespan. Elance’s Rosati will take over as CEO for the merged company, and ODesk’s CEO Gary Swart will assume the role as “strategic advisor.”

I’m the CEO of Scripted.com, a marketplace for businesses to hire freelance writers. I’ve watched the freelance labor segment for years, and this is by far the biggest piece of news to come out of the space. I decided to take a closer look into what this all means to companies building products in the “sharing” and “freelance” economies.

The freelance economy is booming

Overall, the global staffing market is predicted to exceed $422 billion by the end of 2013, with 30 percent ($12.6 billion) coming from the U.S., according to the Staff Industry Analysts. This means the equivalent of only 5.9 percent of the United States’ global staffing market revenue will be driven by the Elance and oDesk merger in 2013 (based on their reported billings), with a lot of room to grow.

Why is the freelance economy booming? While the unemployment rate has remained relatively flat — most recently reported as 7 percent in November 2013 by the U.S. Bureau of Labor Statistics — more than 90 million Americans have effectively dropped out of the workforce. Many of the people who’ve dropped out of the workforce have to piece together an income, and many of them do that by working various freelance gigs. It’s also part of the reason we’re seeing organizations like The Freelancers Union pop up — to effectively protect the rights of these laborers.

The gigantic opportunity, the glut of available labor, and the timing make the freelance economy look a lot like e-commerce in the late 1990s. We’re going to see a lot of innovation in the space.

There are two types of companies in the freelance economy

An interesting dynamic is going to play out over the next few years with companies in the freelance economy: Do buyers want a “guaranteed outcome,” or do they want to develop an ongoing relationship with the freelancer?

There are two distinct revenue models freelance labor marketplaces follow: transaction fee marketplaces, like oDesk, act as intermediaries between buyer and contractor – the buyer effectively contracts directly with the laborer and can use the oDesk platform to pay and work with the freelancer. oDesk’s take is 10 percent of the total contracted time, and that’s what they report as top line revenue. When and if the oDesk and Elance joint entity goes public, they’ll have the benefit of reporting 97 percent gross margins (their top line revenue – transaction fees).

On the other hand, marketplaces like Fiverr, Scripted, Washio, Exec, and countless others simply charge a flat rate on a per-project basis and the work gets done. If you, as a buyer, are unhappy with the work, you don’t end up paying for the product (typically). This puts pressure on the company to vet the freelancers thoroughly so there aren’t a lot of “loss” outcomes. On the plus side, these types of marketplaces aren’t obligated to expose transaction fees to prospective buyers (until they go public) and can charge much more than a 10 percent transaction fee. On the downside, if something goes wrong, the company is the “one throat to choke.” If and when one of these companies goes public, its revenue line will be total billings, and its transaction fees will be gross margins.

What does this mean for entrepreneurs?

Entrepreneurs are going to need to pay extremely close attention to regulatory developments in the space. With the aforementioned Freelancers Union gaining traction, and the recent Liveops case, one of the first things entrepreneurs will need to think about is protecting themselves legally (especially in the case of “guaranteed outcomes”). On the other hand, if you go the transaction fee route, entrepreneurs need to keep in mind that it takes a very long time to build a massive business. You have to somehow hit $1 billion in transaction volume to hit $100 million in top line revenue. Investors will examine both models closely in light of the Elance and oDesk outcome and decide where to place their bets.

It’s hard to tell what this will mean for the freelance economy long-run, but the Elance/oDesk merger definitely validates the space. Will investors shy away from the space because it took over 10 years to build Elance and oDesk (and tens of millions of dollars)? Will entrepreneurs shy away from the space because of regulatory issues? Only one thing is for certain: The freelance economy is, in essence, a war of attrition, and every company will eventually compete for talent (labor) and reliable customers.

Sunil Rajaraman is cofounder and CEO of Scripted.com. He toiled around at large companies such as Lockheed Martin, Applied Materials, and Navigant Consulting before making the leap into entrepreneurship. Sunil handles Scripted’s inbound marketing efforts and business development. 


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