Engine Capital Sends Letter to Upwork’s Board of Directors Regarding Opportunities to Substantially Increase Shareholder Value
Believes Management’s Lack of Strategic Clarity and Focus, Poor Execution, Excessive Spending, and Significant Turnover Have Led to Poor Performance
Underscores that
Calls on Upwork to Refresh Board to Improve Marketplace Functionality, Grow Enterprise Opportunity, Repurchase Shares, and Optimize Costs to Capture Significant Upside Potential
***
Attention: The Board of Directors (the “Board”)
Members of the Board:
We are writing to you today because we believe the Company has a great deal of potential that is unfortunately not being realized. This is due to Upwork’s lack of strategic clarity and focus, ineffective execution, poor capital allocation, and revolving management team under CEO
Despite its leadership position and significant growth potential, Upwork has failed to create shareholder value over any relevant measurable period, as shown in the below table.1 Upwork has also underperformed relevant indexes and its closest public peer,
Total shareholder returns over time | |||||||||
Total shareholder return (YTD) |
Total shareholder return (1- year) |
Total shareholder return (3- year) |
Total shareholder return (since |
Total shareholder return (since IPO in |
|||||
UPWK |
-38.1% |
-35.5% |
-79.6% |
-13.8% |
-56.6% |
||||
Russell 2000 |
4.1% |
13.3% |
-5.7% |
26.1% |
25.9% |
||||
NASDAQ |
14.4% |
24.3% |
24.4% |
120.4% |
152.0% |
||||
FVRR |
-8.9% |
-12.8% |
-86.3% |
5.6% |
NA |
||||
|
-12.7% |
0.1% |
-21.6% |
9.1% |
17.9% |
||||
|
-14.2% |
-5.9% |
-26.3% |
3.7% |
9.4% |
||||
UPWK vs. Russell 2000 |
-42.2% |
-48.9% |
-73.9% |
-39.9% |
-82.4% |
||||
UPWK vs. NASDAQ |
-52.6% |
-59.8% |
-104.1% |
-134.2% |
-208.6% |
||||
UPWK vs. FVRR |
-29.3% |
-22.8% |
6.6% |
-19.4% |
NA |
||||
UPWK vs. |
-25.5% |
-35.7% |
-58.1% |
-22.9% |
-74.5% |
||||
UPWK vs. |
-24.0% |
-29.7% |
-53.3% |
-17.4% |
-65.9% |
Former Employees Say Upwork’s Issues Originate at the Top
To better understand Upwork’s subpar performance, we spoke with more than 20 former senior employees. These discussions made clear that many of the Company’s issues are self-inflicted and attributable to senior management. Below are the key issues the Company faces today, based on our extensive due diligence:
Lack of Strategic Clarity and Focus
Instead of pursuing a clear, consistent strategy and committing the necessary resources behind it, the Company appears unfocused and unable to prioritize initiatives. Former employees spoke about a scattershot approach to product development, with engineering resources spread too thin because too many projects are being pursued simultaneously.3 New products are frequently introduced with great fanfare on earnings calls only to never be heard of again, a likely sign of insufficient traction.
Just two years after highlighting the tremendous opportunity to expand its Enterprise business at its 2021 Investor Day, the Company significantly downsized the Enterprise team in a strategic U-turn.4 Enterprise’s latest results are a fraction of the Company’s initial expectations and nowhere near the
The Company’s failure to maximize this opportunity is a direct result of its lack of focus combined with poor execution. Instead of fully committing to the Enterprise strategy, Upwork distracted itself with numerous other products and initiatives, including Project Catalog, which focused on the smallest gigs at the opposite end of the spectrum from Enterprise. After discussing Project Catalog for years, management has not mentioned it since the 1Q 2023 earnings call. While there will always be a new “shiny object” for senior management to pursue, we believe there are important foundational issues that need to be prioritized.
Poor Execution
Despite spending north of
The Enterprise features don’t provide enough differentiation and value to justify an upgrade from the Marketplace. Additionally, from an organizational point of view, the Enterprise and Marketplace divisions compete against each other and are not incentivized to cooperate, resulting in significant missed opportunities for the Enterprise division. Enterprise and Marketplace run on two different platforms with two different product heads, which leads to inefficiencies.
Poor Capital Allocation
Former employees spoke to us about a culture of waste and poor financial discipline under
Significant Management Turnover
A lack of stability among the Company’s senior management team raises additional questions regarding Ms. Brown’s leadership.
The Board may be tempted to dismiss our assessment as the result of discussions with a few disgruntled employees. This would be wrong. Since Engine’s founding 11 years ago, we have never heard such consistent frustration from so many employees regarding senior management, its inability to prioritize key strategic initiatives, and the many execution issues plaguing the Company. It’s important to note that many of these former senior employees have remained shareholders of Upwork because they believe in the tremendous potential of the Company under the right strategy and leadership. They, like us, are rooting for Upwork to succeed.
We Believe Several Opportunities Exist for the Board to Right the Ship
Upwork is now at a crossroads. The Board needs to rapidly make important changes to give Upwork a chance at succeeding – or the platform risks becoming increasingly irrelevant. The 4Q 2024 forecasted double-digit negative growth in gross services volume should sound the alarm that time is of the essence. At this juncture, we believe the Board needs to prioritize the following to turn the business around:
1. Improve the Basic Functionality of Upwork’s Marketplace
Instead of developing dozens of new products and features, we believe Upwork needs to first fix the foundational issues that have been plaguing its platform for years. The Company needs to dedicate more resources to attract and retain higher quality freelancers, improve their vetting process, verify their skills, and allow them to demonstrate those skills in more efficient ways, such as through certifications.
The Company also needs to make its platform less confusing and more intuitive. Too many freelancers and employers leave the platform because they get frustrated by its complexity. Ironically, many former Upwork employees told us they find Fiverr’s experience more intuitive and straightforward. Upwork also needs to vet jobs; too many jobs are posted without a credit card on file, indicating no expectation of payment. Finally, the Company needs to enhance its search functionality by improving how its talent is categorized.
While these efforts may be less exciting than announcing Uma, Upwork’s mindful AI, this foundational work is critical to the Company’s future success and needs to be done.
2. Focus on the Enterprise Opportunity
As noted above, there is a tremendous opportunity for the Company to grow its Enterprise business, with the right execution. We believe the Company should:
- Offer more gated features to Enterprise clients. There is currently not enough product differentiation for companies to become and stay Enterprise clients. Many larger corporations simply use the Marketplace offering or sign up for Enterprise but don’t use it. For Enterprise to succeed, there needs to be a compelling value proposition that attracts and retains large employers.
- Collapse the Enterprise and Marketplace divisions. There are currently thousands of companies that use the Marketplace and could be nurtured to become Enterprise clients. However, under the current organizational structure, the Enterprise and Marketplace teams compete against each other, operate separately, have different product heads, and maintain separate profit and loss statements. Collapsing the two divisions would create cost efficiencies, as well as establish a unified product team that could look across divisions and create product differentiation for different pricing tiers. Such a structure would eliminate conflicts and better incentivize everyone to work together to maximize the lifetime value of each customer, from individuals to large corporations looking for freelancers.
-
Hire a sales force with experience selling to C-suite executives. While Upwork has floundered,
Toptal has achieved significant success in Enterprise by hiring experienced sales representatives. We believe Upwork can be successful by hiring fewer of these more experienced representatives, which would limit the expenses that typically come with investing in senior sales employees.
Given the current go-to-market strategy and product offering of the Enterprise division, it is no surprise it has been such a disappointment.
3. Further Optimize the Company’s Cost Structure and Reduce Dilution From Stock-Based Compensation
Since 2019, Upwork’s operating expenses have ballooned from
There are still too many layers of management and too many Vice Presidents making more than
Since Upwork’s initial public offering, the number of common shares outstanding has grown 36%, from ~104 million to ~141 million, causing material dilution to the equity owners of the business. The Company needs to immediately and significantly reduce this dilution. This is achievable if the Company further streamlines the business, cuts costs, collapses divisions, and simplifies its product teams. Culturally, we also believe the Company should stop competing for talent with the world’s largest technology companies as this is a war it cannot win. Upwork would be better served by hiring at least some senior executives from the staffing industry it is trying to disrupt.
4. Utilize Upwork’s Strong Capital Position to Aggressively Buy Back Undervalued Shares
If the Company is willing to make the changes detailed in this letter, it can unleash Upwork’s significant potential. In this scenario, we believe the shares are extremely undervalued and the Board should use Upwork’s cash position (net of the convertible debt) as well as its future free cash flow to aggressively repurchase shares. We acknowledge the Board has repurchased
5. Strengthen the Board and Adhere to Best Corporate Governance Practices
The Company maintains a staggered Board, which prevents the annual election of all directors and therefore insulates them. This is one of the key reasons why leading proxy advisory firms and academics view staggered boards as a problematic governance structure. We urge the Board to declassify itself to provide shareholders the opportunity to elect directors on an annual basis.
We also believe the Company would benefit from a significant Board refresh. While we have the utmost respect for the successful venture capital investors currently serving on the Board, their funds (
We also note the numerous business relationships between various directors, which diminish their independence.
We also note there is not a single director with relevant staffing industry experience and little relevant experience in enterprise sales, two backgrounds critical for Upwork’s success. Given these dynamics, we believe the Board should be refreshed and strengthened by the addition of new independent directors with relevant experience as well as the appointment of a shareholder-designated director with a public investing background and relevant capital allocation expertise at mature companies.
6. Align Executive Compensation to Shareholder Value Creation
Management must be incentivized effectively. Prior to last year, Upwork operated a “growth at all costs” playbook, as evidenced by management’s incentives being exclusively tied to revenue growth. This compensation structure encouraged poor behavior and is behind many of the inefficiencies that exist today. While the compensation framework was changed in 2024 to now incentivize both profitability and revenue, we believe the current structure still fails to align executive compensation with the most relevant levers of shareholder value creation. Management’s annual bonus and long-term equity incentives are still tied to revenue, a poor metric to use as it does not necessarily correlate with value creation and can incentivize poor capital allocation decisions. Furthermore, the current structure fails to properly account for the significant shareholder dilution as a result of stock-based compensation. We strongly encourage the Board to de-emphasize revenue targets and instead compensate management primarily based on EBITDA and free cash flow per share targets going forward.
Upwork has the capabilities to compete and disrupt the staffing industry with a unique value proposition: faster hiring, greater access to quality talent, and meaningful cost savings. We firmly believe a tremendous amount of shareholder value can be unlocked if the Board acts with urgency to make necessary changes. We request a meeting with members of the Board at your earliest convenience to discuss the matters and initiatives we have set forth in this letter. On behalf of Engine, we look forward to working with you to increase long-term shareholder value.
Sincerely,
Managing Member
About
1 Total shareholder return calculated as of the close on
2 2025 consensus EBITDA.
3 As an example, in a recent video,
4 Company’s 2021 Investor Day transcript.
5 Company’s 4Q 2021 earnings call transcript.
6 Represents cumulative R&D spend from 2019 through the estimated spend in 2024.
7 These tenures include time spent on the board of oDesk, Upwork’s predecessor.
8 Upwork was formed after oDesk & Elance merged in
View source version on businesswire.com: https://www.businesswire.com/news/home/20240913562397/en/
For Investors:
212-321-0048
info@enginecap.com
For Media:
ckiaie@longacresquare.com / bkirpalani@longacresquare.com
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