What does Fiver do?

Fiverr is a digital marketplace that connects buyers and sellers of digital services such as website development, video editing and creation, logo designs and etc…

On their core platform, Fiverr.com, Fiverr aggregates freelancers (sellers of digital services) and enables buyers of digital services to search, find, and order digital services. As of now, The platform has over 500 categories of service listing. These digital services can cost from as little as 5 dollars to thousands of dollars. In 2020, Fiverr facilitated a GMV of $699.3mil from 3.4 million buyers

Problems that Fiverr Solves

Due to the fragmented nature of the freelancing economy, the matching process between buyers and sellers was grossly time consuming and inefficient. Sellers had to be present on a variety of platforms, Buyers had to arduously search on various platforms for a freelancer that fulfilled their requirements. The lack of distinct service categorization made the search process even harder. Subsequently, the buyer and seller enter into a negotiation process that might end up in naught. If all goes smoothly, the buyer has to take a leap of faith in the quality of the service.

  1. Commoditize Buyers, Integrate gigs and trust

Fiverr commoditized buyers while integrating freelancing gigs and trust, improving the search, negotiate, and order process by leaps and bounds.

As a result, with this new model,

Buyers find it easier to find and purchase the digital services without time-consuming negotiations, uncertainty of pricing and quality (since sellers are reviewed)

Sellers are able to reach a large buyer universe, allowing them to focus on their core work, rather than on demand generation, contract negotiation, payment collection and other hassle of running a digital services business

“Law of conservation of attractive profits states that in the value chain there is a requisite juxtaposition of modular and interdependent architectures, and of reciprocal processes of commoditization and de-commoditization, that exists in order to optimize the performance of what is not good enough. The law states that when modularity and commoditization cause attractive profits to disappear at one stage in the value chain, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage

More broadly – breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.”

Ben Thompson, 2015

2. How does Fiverr make money?

Transaction and service fees

Fiverr generates revenue primarily through transaction fees(paid by seller) and service fees (paid by buyer). For each transaction ordered through Fiverr, Fiverr collects the total transaction value plus the service fee from the buyer. Upon completion of the order, Fiverr then transfer the transaction value less the transaction fee to the seller.

Consider the simple illustration below

In this sense, Fiverr does generate some sort of “mini float” as transaction amount is paid upfront but only released when the service obligations are satisfied. While the float is not as extensive and powerful as insurance companies, this effectively means that users are partially funding Fiverr’s daily operations.

How much does Fiverr earn on each transaction?

Fiverr take rate, or revenue as a percentage of GMV, was 27.1% for the years ended December 31, 2020. This is a ridiculously high take rate! For every $100 that is transacted on Fiverr platform, Fiverr earns $27 as revenue!

Fiverr believes they can command such a high take rate because of the value they provide to their buyers and sellers in an otherwise fragmented, unstandardized, and high-friction industry.

Fiverr take rate has modestly increased since inception, as they provide more value to buyers and sellers. The introduction of products such as And.Co paid subscriptions, Fiverr Learn, and ClearVoice have also contributed to the increase of their take rate.

3. Investment Thesis

Fiverr’s moat

The design of Fiverr’s business model awards it with an incredibly powerful moat. As a digital marketplace, Fiverr benefits from a 2-sided network effect, wherein the network is continuously expanding over time as an increase in users on one side drive the influx of users from the other side. In Fiverr’s case, buyers derive more value as more sellers (freelancers) list their services while sellers benefit when more buyers are attracted to the marketplace, creating strong flywheel effects. This is further augmented by a fragmented, unstandardized, and high friction freelance economy

A unique aspect of P2P marketplaces is the overlap between sellers and buyers. In other words, buyers can become sellers and sellers can become buyers! Even Fiverr utilizes its own marketplace for marketing campaigns.

The strength of Fiverr’s network effect is evidenced by Fiverr ability to scale despite the lack of a direct sales force.

“We engage and grow our buyer base organically and through thoughtful performance and brand marketing, all without a direct sales force.”

  • Fiverr’s 10k

New entrants looking to enter the fray must overcome the debilitating cold start problem

Future plans

  1. Moving upmarket
    • High-value buyers, those with annual spend per buyer of over $500, continued to grow from the previous quarter and now represent over 59% of core marketplace revenues, up from 58% in Q4’20
    • In recent quarters, Fiverr increased the maximum Gig price for non-Pro services to $10,000 from $995. This resulted in a large growth in the number of Gigs priced $1,000 and above, and will help drive Fiverr’s upmarket initiatives as they scale
    • Fiverr Business to encourage integration with SMB
    • Acquisition of Working not working, a high-end creative talent agency
  2. International Expansion
    • Geographically, majority of Fiverr’s revenue is generated from buyers in English speaking countries. Fiverr looks to expand the platform to include additional languages, deepening their penetration into Western Europe, Asia Pacific, and Latin America
  3. Invest in Brand and Marketing
    • Bottom up Marketing approach
  4. Building value added products and services on top of core platform
    • Helping sellers to run their operational aspect of their business on the platform – And.Co, a platform for online back-office services to assist freelancers with invoicing, contracts and task management,
    • Providing skills upgrading for sellers – Fiverr Learn, an online learning platform with original course content in categories such as graphic design, branding, digital marketing and copywriting. Higher quality sellers leads to satisfied buyers & higher retention + flywheel effect
    • ClearVoice –  Subscription based content marketing platform for medium to large businesses
    • Promoted Gigs – an advertising product that allows sellers to pay for additional exposure on our website.

4. Financials and Performance Metrics

FY20FY19FY18
Revenue (USD mn)189.50107.1075.60
 Growth (YoY)76.90%41.70%45.10%
Gross Margin (% of Rev)82.50%79.20%79.20%
S&M (% of Rev)49.80%58.60%65.80%
R&D (% of Rev)24.10%32.20%27.00%
G&A (% of Rev)14.80%20.90%27.30%
Operating Income / Loss (% of Rev)-6.30%-32.40%-48.30%
Cash + Marketable Securities +
Bank Depo (USD mn)
487.40112.7056.00
Total Debt (USD mn)365.90
FCF (USD mn)14.00-14.70-51.60
Business MetricsFY20FY19*FY18
Active Buyers(mn)3.402.402.00
 Growth (YoY)41.70%20.0%
GMV699.3401.0

In 2020, Fiverr chalked up $189.5mn in revenue, representing a 77% YoY growth from 2019 number of $107mn. Already impressive gross margins improved even further from ~79% in 2019 to 82.5% in 2020, indicative of the incredibly high operating leverage that Fiverr enjoys.

Fiverr remains unprofitable on an EBIT basis, posting an operating loss of 11.81mn in 2020. Nonetheless, as Fiverr scales and reaps economies of scale, I would expect operating loss as a percentage of revenue to continue to shrink and eventually turn green. In fact, operating loss as a percentage of revenue shrunk from 32.5% in 2019 to 7.7% in 2020.

Fiverr owns a relatively boring balance sheet and it’s a great thing to have a boring balance sheet. With ~480mn of cash and liquid assets, Fiverr should have sufficient liquidity to meet their business needs for the foreseeable future (Current ratio of 4.1x). In what I believe was an attempt to take advantage of the low interest rate environment, Fiverr issued $460mn of 0% coupon Convertible Notes to further bolster their liquidity position, serving as an insurance policy or if any compelling M&A opportunities come knocking.

Cashflow wise, Fiverr turned free cash flow positive in 2020, generating roughly USD 14mn. As Fiverr continues to scale, I would expect Fiverr to remain FCF positive.

Performance Metrics – 2020

Gross Merchandize Value (“GMV”) – $699.3mn

Active buyers* – 3.4mn

Spend per active buyer – $205

Take Rate – 27.1%

*“Active buyers” as of any given date means buyers who have ordered a Gig or other services on our platform within the last 12-month period, irrespective of cancellations

5. Competition

In the Top right quadrant, G2 grid identifies Fiverr’s main competitors as Upwork and Freelancer.com

Upwork currently commands a larger presence and competes directly with Fiverr in the digital labour arena. However, it operates with a radically different gig matching model wherein sellers bid for gigs that are posted by buyers, a time-consuming endeavour for both buyers and sellers. Buyers have to write up a detailed gig description while sellers have to actively search for gigs, and subsequently sellers submit a proposal to bid for gigs.

Fiverr on the other hand, lubricates the job matching process by bringing demand to sellers, and empowering buyers to search across a catalogue of service. This act of demand generation is a key reason why Fiverr is able to command such an impressive take rate and why I believe Fiverr to have a superior model relative to Upwork. Nonetheless, Upwork remains as a respectable competitor in this space and is critical to monitor

Freelancer.com started in Australia. Freelancer.com operates nearly the same way as Upwork in terms of gig matching but it limits the number of free bids to just 8 bids per month. If a seller is looking to bid more than 8 times, they have to pay a monthly rate. It has a smaller market presence compared to Fiverr, generating only USD 45mn in 2020. Despite an uptick in demand for digital labour fuelled by the pandemic, Freelancer.com only managed to grow revenues 1.50% YoY from 2019 to 2020. It also ranks lowly in terms of satisfaction score.

There are numerous other competitors in place as well. Linkedin for example announced the launch of freelancing marketplace.

While new up starts face the debilitating cold start problem, they should not be readily dismissed. Especially if they offer a cheaper and frictionless alternative.

6.Management Team

Fiverr was cofounded by Micha Kaufman( No link to Paul Kaufman) and Shai Winniger(co-founder of Lemonade), and is headquartered in Israel. While Shai is no longer active in the business, Micha still serves as the CEO of Fiverr in running the business.

As with most founder led businesses, Micha has significant skin in the game, owning 5.9% of Fiverr. Total executive ownership and director ownership stands at 15%, which is significantly higher than most companies and an indication that the management is aligned with shareholders.

7.TAM & Valuations

In their investor presentation, Fiverr estimates their TAM to be $115bn

Footnotes:

1 Derived based on the latest US Census Bureau Nonemployer Statistics data, which includes income data of all US businesses that have no paid employees and are subject to federal income tax. Most U.S. businesses that have no paid employees but are subject to federal income tax are self-employed individuals operating unincorporated businesses. We believe this provides a good proxy for total freelancer income in the US
2 Includes occupations most relevant to Fiverr

In my opinion, this might not be the best representation of the Fiverr’s addressable market for 2 good reasons.

  1. Fiverr serves as a global marketplace (albeit constrained by language barriers at the moment) and using US businesses with no paid employees does not serve as a good proxy
  2. Take a cursory glance at Fiverr’s marketplace and you quickly realize that majority of sellers are from developing nations such as India or Pakistan. In fact, this is substantiated by data from the International Labour Organization (ILO) that majority of buyers originate from developed countries while sellers mostly are based in developing countries. Again, using income of US businesses with no paid employees is likely to overstate the TAM

“The clients who demand such work are largely based in developed countries, with four of the top five countries belonging to this group (see figure 1.8a). Globally, in 2020 about 40 per cent of the demand for such work was from clients based in the United States

In contrast to the demand for work, the supply of labour on these platforms originates mainly from a number of developing countries, in particular Bangladesh, India, Pakistan, the Philippines and Ukraine, apart from the United Kingdom and the United States”

-International Labour Organization Report, 2020

https://www.ilo.org/global/research/global-reports/weso/2021/lang–en/index.htm

As such, I endeavoured to determine an appropriate TAM for Fiverr – a process that was much more arduous than I imagined given that freelancing definition is inconsistent across sources, and data was sporadic. Even the ILO acknowledged this challenge.

Here is my highly conservative and feeble att-TAM(pun intended) to determine the TAM for Fiverr

  1. Distinguish the type of freelancing that Fiverr serves.

There are two broad definitions to digital labour. First, are workers who are directly hired by digital labour platforms (Grab /Uber) and the second is workers whose work are mediated by digital labour platforms. Fiverr, a web-based platform serving workers whose work are mediated by the platform, falls into the latter category

  1. Determine number of full-time digital workers

Establishing that Fiverr targets digital workers, I chanced upon a source from oxford university that estimates there to be 163 million digital workers globally. Of which, 3% are FT digital workers which translates to a roughly of 5milion.

Because income distribution across digital workers is heavily skewed towards FT workers, I considered only FT digital workers in this analysis.

  1. Determine how much does each full-time digital workers make on an annualized basis

Since majority of digital labour comes from Pakistan, India, Bangladesh etc…, a conservative approach will be to take the average annualized income of these countries. A quick search on google reveals that India has a monthly average wage of USD437, which translates to USD 5.2k annually. Assuming that the average digital freelancer takes home twice the average wage,

Total estimated TAM : 2 x 5,200 x 5mil online workers = USD 52bn

Again, I have to emphasize that the TAM figure presented above is more of a guesstimate but one that I believe to be conservative enough for my analysis

Valuation

With the high operating leverage that Fiverr enjoys, Fiverr is well positioned to generate FCF as it continues to scale

Assumptions:

  1. Fiverr captures 30% of market share  ~USD 15.6bn in GMV
  2. Take rate of 20% ~USD 3.12mn in revenue
  3. Baseline scenario of 20x P/S to derive terminal P/S multiple. For comparison, Adobe, with 85% gross margins, grows revenues at 15-20% and trades at an current P/S multiple of 20.0x

While not completely precise, a quick and dirty valuation brings me to a target price of USD 180 – 200

8.Risks

  1. High take rate could backfire on Fiverr – Disintermediation / new platform

Fiverr operates as a royalty on each transaction that it mediates between sellers and buyers of digital services. The ongoing battle between Epic and App store’s 30% take rate clearly resonates the unhappiness of creators with marketplaces’ take rate. High take rate directly eats into the income of creators / freelancers and could stifle the volume of creative juices / transactions. Undoubtedly, there have been calls of injustice over Fiverr’s take rate. With a high take rate of 27% but without the clout of Apple, will online digital workers look for ways to disintermediate the platform?

While most freelancers are willing to pay that take rate today, can Fiverr continue to justify such high take rates without incurring the wrath of its freelancers? The gravity of this question looms as Fiverr continues to move upstream.

  1. Adoption of smart contracts and blockchain technology could disintermediate Fiverr as a facilitator

Power to the people! Smart contracts & blockchains, a novel and emergent technology. Will the technology supply eventually intersect with market demand? The front page alone should scare a Fiverr investor. Critical to keep abreast of developments in this space given the technological potential to disintermediate the mediator.

https://www.canwork.io/
  1. Geopolitical Risk

Fiverr is headquartered in Israel. In recent years, Israel has been engaged in sporadic armed conflicts with Hamas, an Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large portions of southern Lebanon, and with Iranian-backed military forces in Syria. In addition, Iran has threatened to attack Israel, may be developing nuclear weapons and has targeted cyber attacks against Israeli entities.

A campaign of boycotts, divestment, and sanctions has been undertaken against Israel, which could also adversely affect Fiverr business. Actual or perceived political instability in Israel or any negative changes in the political environment, may individually or in the aggregate adversely affect the Israeli economy and, in turn, Fiverr, financial condition, results of operations, and prospects.

9.Conclusion

There are many things to like about Fiverr

  • Secular Tailwind of Digitization
  • High operating leverage as cost scales sublinearly
  • Widening moat due to network effects
  • A product roadmap to capitalize on the long growth runway
  • Management team with high percentage of insider ownership

Execution remains the key to Fiverr growth and thus, it is important to continue to monitor performance metrics and identify signs of early trouble. Disintermediation and cheaper alternatives are highly plausible risks that derail this investment thesis. A good indicator to monitor for warning signs are GMV and total number of transactions (currently not provided).


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