Upstack is offering equity at a $80 million valuation for early bird investors and a $100 million valuation after the early bird round. That price is very high in comparison to other growth stage startups that are actively raising capital.  Upstack claims that it generated $6.93 million in revenue last year, but its Form C only shows $2.25 million. Comparing a $100 million valuation with $2.25 million in revenue, Upstack is offering an overly high revenue-to-valuation multiple. Furthermore, the valuation is also very high in comparison to other growth stage startups that are seeking funding currently. Thus, Upstack’s price rating is low.

Upstack sits at the intersection of a couple of key recruiting markets. First, Upstack is competitive with contract job sites like Fiverr and Upwork. The market for freelance platforms was valued at $2.35 billion in 2018. It’s growing at an annual rate of 15.3% and should reach $6.7 billion by 2025. Despite strong growth, it’s not a very large market, particularly given the entrenchment of well-known leaders like Fiverr and Upwork. 

It could also be argued that Upstack is addressing the US online recruitment site industry, which was valued at $13.1 billion in 2021. That industry is expected to grow by 12.7% in 2021 alone. However, Upstack is targeting a small niche of that overall market due to its focus on engineering and developer positions. According to the Bureau of Labor Statistics, software and web developers make up about 1.3% of the US workforce. It’s more difficult to hire developers than it is to hire for other roles, so development likely takes up more than 1.3% of online recruiting budgets. Still, even if developer hiring makes up 10% of the total online recruitment industry, the US market for developer recruiting is only $1.31 billion. 

Because Upstack is at an intersection of these markets, it may be more appropriate to focus on the market potential surrounding freelance developer jobs. There are around 5.4 million freelance developers in the US, and their average hourly wage is $70. In order to keep this estimate reasonable, assume the developers will work 250 hours in the year. Given Upstack’s 37% cut, the company’s total addressable market would be around $35 billion. While that size is much larger than the freelance platform market and the online recruitment market, the growth rate of freelance developers is much lower — only about 2% of new freelance developers enter the market each year. 

While the markets for both freelance development work and for online recruitment are decently sized, the number of new freelance developers is growing very slowly. Due to its limited focus, Upstack’s market score is below average.

Upstack was founded by Yossi Mlynsky, who has more than 15 years of experience in business and product management. Mlynsky started his career after graduating with a degree in computer software engineering from the University of Technology Sydney. He spent several years in various roles like business analyst, product manager, and SCRUM master before founding Upstack in 2010. It’s important to note that Mlynsky only works part-time for Upstack. He recently founded another company, Sellerfy, and also advises various other startups. 

The Upstack leadership team also includes CTO Robert Bojor, COO George Cretu, and Head of Growth Jeremy Guth. Bojor is the most experienced member of the team. He’s worked in software development since the early 2000s, including both in-house and freelance roles. Cretu has a good deal of experience in software development agencies, having served as a co-founder and product manager of another firm for 12 years. Finally, Guth is a paid search expert, with more than 12 years of expertise managing PPC campaigns. Google Adwords is Upstack’s primary source of new leads, so Guth’s role is an important one. 

The four most senior members of the Upstack team have decades of combined experience, and most of it is relevant (in the worlds of software development and managing development agencies). However, Upstack’s founder is not committed to the business full-time, and none of the leaders have particularly impressive credentials or past experience scaling high-growth startups. All in all, the Upstack team’s rating is weak.

It seems that Upstack’s chief sources of differentiation are the strength of its client roster and the tech platform it uses to match clients with developers. Upstack has worked with an impressive array of buzzy tech companies, including MealPal, Juul, TaskRabbit, InVision, and more. Compared to a run-of-the-mill development agency boasting smaller, less recognizable logos, prospective clients might see Upstack as the leading source of developer talent. In addition, the experience of managing a developer contract looks to be easier with Upstack thanks to its proprietary tech platform. Most development agencies probably operate largely over email and calls for project management and invoicing. 

However, neither of these differentiators are quite enough to set Upstack apart from the pack. There are many companies providing marketplaces for software engineering and development talent, and Upstack is also competing with mainstream giants like LinkedIn, AngelList, and Upwork. Plus, there are plenty of boutique software development agencies (and even individual freelancers) out there who can provide almost identical services to Upstack. Upstack’s past clients and tech platform (which doesn’t seem to be any more sophisticated than many standard project management tools) aren’t enough to compose a true competitive moat. Therefore, Upstack’s differentiation rating is low. 

Upstack has been growing steadily since it was founded in 2010. In 2019, revenue was $1.6 million, and revenue doubled in 2020 to hit $2.25 million. It’s worth noting that on its raise page, the company claims it saw $6.9 million in 2020 revenue. However, this figure does not match Upstack’s Form C or financial statements, so KingsCrowd has been unable to verify that number.

The company has relatively low operating expenses and actually turned a profit of roughly $194,000 in 2019. Upstack posted a net loss of approximately $62,000 in 2020, but profitability is clearly still within reach. However, the cost of goods sold is very high for Upstack based on its service model. Upstack keeps just 37% of top-line revenue invoiced from clients, passing the rest on as wages to its developers. Therefore, Upstack’s profit margin is stagnant and can’t really improve over time unless the company begins paying developers less. 

It’s impressive that Upstack has been able to grow without raising any outside capital, and it’s also impressive that the company projects continuing its strong year-over-year growth. However, Upstack will continue at the same level of profit margin if its service model does not become more efficient over time. Given that major caveat, Upstack’s performance rating is below average.

The main risk associated with this investment is the fact that the company’s founder is pursuing several other ventures concurrently to Upstack. Particularly given that intense operational efficiency is key to keeping Upstack sustainable with its low-margin service model, it’s concerning that the company’s leader is simultaneously founding another business. This business also has market risk due to the fact that demand for hiring software engineers is relatively low, especially because Upstack’s business model isn’t that differentiated from mainstream software development agencies. Financials and funding also pose concerns, given that Upstack’s profit margin is narrow and the company is raising at an enormously overpriced valuation that may make it difficult for investors to reap a return. 

Upstack is a surprisingly successful business raking in millions in revenue each year. However, at its core, Upstack appears to be a simple software development agency. The company has worked with major tech companies and offers a tech platform to help clients manage their development contracts. In the end, Upstack is simply the agency middleman between companies and software developers, which doesn’t seem to be a particularly exciting or high-scale business model. It’s also worth asking why Upstack is seeking investment at this time. If the company is growing so steadily and has built such a predictable revenue stream, what will additional capital do to boost the business? 

It’s also concerning that Upstack’s founder is starting another company and advising startups on the side. Granted, it’s been more than 10 years since Yossi Mlynsky founded Upstack, and the company seems to have largely achieved its goals. Perhaps his expertise isn’t needed day-to-day anymore, but that conclusion only reinforces the doubt around the necessity of this fundraise. If Upstack is simply going to continue offering similar services at similar profit margins, what’s the point of this fundraising round — particularly at a valuation that disadvantages investors? Overall, this doesn’t seem to be a particularly attractive opportunity for outside investors. It seems that the Upstack founding team might be better off enjoying the steady stream of profits from Upstack without diluting their equity.

Upstack has been extremely successful over the past several years. It’s no small feat to bring in $2.25 million in revenue from a software development agency and work with household-name brands like IKEA and Juul. Plus, Upstack is flirting with profitability. The company achieved net income in 2019 and was close to doing so in 2020, which proves the straightforward sustainability of its core business model. 

Admittedly, the sheer human capital required to scale a service business will likely be a limiting factor if Upstack seeks to make hundreds of millions in revenue. However, this model is undeniably generating value. Gross profit margins will stay the same, but it might not matter. If Upstack can continue bringing in new clients and expanding its network of contract developer talent, investors may be able to share the wealth as Upstack’s revenue increases. 

Upstack is a tech-enabled software development service business providing skilled software development talent to leading startups and established tech companies like MealPal and InVision. Upstack is generating impressive amounts of revenue each year with strong year-over-year increases projected for coming years. 

On the other hand, Upstack’s profit margin is low compared to more scalable tech businesses. The company also faces stiff competition in the contract talent and recruitment space. Other companies with more of a tech-forward approach might gradually wear down the market available for high-touch software development agencies. Plus, Upstack’s founder is pursuing multiple other projects, and the company is raising at a significantly overpriced valuation. Therefore, Upstack has been rated a Neutral Deal. 

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