The "gig economy" is growing up. Elance and oDesk just merged to dominate it

By Michael Carney , written on December 18, 2013

From The News Desk

The staffing world is getting a major shake up this morning thanks to the announcement of a merger between freelance labor marketplaces oDesk and Elance. The deal is poised to create a giant in the online workplace at a time when both companies separately were looking for scale.

Terms and financial details of the transaction were not disclosed but both Elance CEO Fabio Rosati and oDesk CEO Gary Swart are positioning this as a merger of equals. Elance is a 15-year-old company that has raised $94.8 million to date, while oDesk has raised about half that, or  $46.7 million in its nine-year history.

Combined, the two companies have more than 8 million freelancers and 2 million business customers across more than 180 countries, and are projecting $750 million in combined yearly billings when 2013 wraps up in a few weeks. Elance charges companies an 8.75 percent fee on top of its freelancer’s hourly rates, while oDesk charges 10 percent. Assuming the companies were each responsible for 50 percent of this year’s billings, that would translate into approximately $70.3 million in combined revenue, although all indications are that oDesk has the larger business, meaning this figure is likely higher.

Rosati will continue as the CEO of the combined company, with Swart stepping back as a strategic advisor, a move he claims he was already contemplating independent of the merger. ODesk Executive Chairman Thomas Layton will retain that role and title within the combined company. The name of the combined company has not been revealed, and will not be announced until the deal clears antitrust scrutiny – something which Rosati says he doesn’t foresee being an issue. This NewCo will continue to operate both the oDesk and Elance platforms in parallel, and Rosati plans to engage the customers of both companies with the hopes of identifying what attributes make each platform unique, and what they want added or changed in the future.

“We’re looking to reinvent staffing industry, and to help companies and freelancers connect and collaborate in real time at larger scales,” Rosati says. “Together we can deliver better tools, higher quality results, and accelerate our overall growth.”

ODesk and Elance were the clear number one and number two in their market, and over the last decade have had a healthy competition. Each had strengths. ODesk has been known as a place for sourcing hourly workers and establishing ongoing freelancer relationships while Elance has excelled with fixed-price, short-term project-based work. Both are trying to solve the same problem of accessing flexible and on-demand labor and see significant advantages in solving it within a single, larger, combined entity. Both Rosati and Swart expressed confidence that the two cultures would mix seamlessly, although it’s never easy in practice.

According to both CEOs, the next phase of growth, had the companies stayed independent, would have looked remarkably similar, including an emphasis on hiring a large number of data scientists and engineers, focusing heavily on mobile, and expanding globally. The not-so-radical thinking is that by combining the two existing workforces and recruiting for these new roles in unison, the combined company will be leaner and more formidable than either could have been on its own.

Together, the combined company will boast 240 full-time employees and approximately 500 freelancers (ODesk reported having 120 full-time employees and 350 freelancers as of September.) As for the possibility of layoffs, a company spokesperson said via email, “We're striving to retain everyone. The combined company will have aggressive hiring plans and is continuing to interview candidates.”

The global staffing market is estimated to exceed $422 billion in 2013, according to the Staffing Industry Association (SIA). As such, the combined company has a paltry 1.7 percent market share and plenty of room to grow. The bulk of the market is dominated by legacy, offline staffing giants like Allegis Group and Manpower Group. As the market shifts toward an all-digital world, however, solutions like oDesk’s Private Workplace online talent management platform will find greater demand.

Early on, both companies were viewed as villains in Silicon Valley and the US at large for shifting shipping jobs overseas and seemingly making it impossible to succeed as an engineer in the US. Both were, and still remain heavily weighted toward international talent. But with demand for skilled labor like coding, writing, and designing has outpacing the supply in many global markets, both Elance and oDesk have become critical elements of the corporate machinery.

“Staffing is an entirely archaic industry,” Rosati says, who went went on to compare it to the commerce sector, which was disrupted a decade ago by Amazon and Ebay, and then later by more specialty players like Gilt, Fab, NastyGal, and BirchBox. The jobs industry has evolved similarly through multiple phases, according to the Elance CEO, the first of which was digitizing job advertising through job boards like Monster and CareerBuilder. Next came LinkedIn which improved access to resumes. The final step in this puzzle, according to Rosati, is Elance and oDesk enabling meaningful work to be completed online.

As for what’s next for the combined company, Rosati isn’t ready to lay out a roadmap. This is clearly not an exit for either company or its investors, but it appears to be a step toward a potential IPO. ODesk is backed by Benchmark, Globespan Capital Partners, Sigma Partners, T. Rowe Price, and SV Angel, while Elance has received investments from Stripes Group, New Enterprise Associates (NEA), Kleiner Perkins Caufield & Byers, Pequot Capital, Focus Ventures, and Citigroup.

“Every great company with great momentum and traction and a huge market opportunity has no trouble accessing capital,” Rosati says. “The Facebooks and LinkedIns of the world don’t rush to the market and we won’t either. We have a very clear blueprint and things we want to accomplish.”

Combined, ODesk and Elance should be stronger and better positioned to invest in the next-gen technology solutions and to drag the staffing industry out of the stone age. But mergers, like marriages, are a bet on happily ever after.

The trouble is, you never know how they’ll work out until there’s no turning back.

[Image via Comicvine]