TopTal.com: Growing a new marketplace platform in a competitive space.
Toptal is a two-sided marketplace that matches freelancers who are looking for work on one side, with companies looking to hire temporary workers on the other side. Even though it competed with established large platforms, the company managed to grow faster than the market and establish a successful platform by focusing on the ‘high-end’ part of the market.
Toptal (short for Top Talent) is an Andreessen-Horowitz backed two-sided marketplace that matches freelancers who are looking for work on one side, with companies looking to hire temporary workers on the other side. Even though the company entered a space where other marketplaces where already established with a large scale and strong indirect network effects, Toptal managed to grow faster than the market and establish a successful platform. This blog post explores the dynamics of how TopTal managed to compete effectively.
Competing against established platforms
Online staffing is an industry that has been growing fast in the last decade. The improvements in communication and collaboration technologies combined with the increasing willingness of millennials to work on their own terms has fueled this growth. Companies benefit by getting access to specific specialized skills on demand, and freelancers get the flexibility to manage their own workload and access work opportunities not available in their local geography. By the time Toptal was founded in 2010, competing platforms such as Elance and oDesk were already respectively 11 and 7 years old, which meant that they had already established strong network effects and scale (these two platforms merged in 2013 to create an even larger and stronger platform: Upwork).
Value Creation and Differentiation
Toptal creates value for both sides of the market by addressing a weakness in the established marketplaces. The flip side of oDesk and Elance’s large scale and network effect was that the large pool of supply of freelancers was driving prices down (especially as freelancers were based in wide range of geographies). These low prices would then drive out of the marketplace high-quality freelancers who don’t want to compete on price and require high hourly rates. This created a vicious circle where prices got even lower as these freelancers left, creating a reputation for low-cost outsourcing work on these platforms.
Toptal’s value creation resides in its “curated” aspect. While other platforms are open for all freelancers to sign-up, the company has a rigorous freelancer selection process which includes online exercises and interviews. The company claims that only the top 3% of their applicants are approved to be listed on the platform. This strategy has allowed it to capture the ‘high-end’ segment of the online staffing market through a ‘local’ network effect.
Value Capture
Toptal’s experience is focused on quality. As popposed to other marketplaces, the matching process is human-driven and not automated. Toptal reaches out to companies who want to list a project in order to understand their needs and match them with what they see as the most appropriate freelancer. This model allows Toptal to not only have a high average transaction value but also to capture a higher commission rate than its competitors.
Challenges and Limits of the Toptal Model
Toptal’s model faces several challenges. First, its manual matching processes comes with operational complexity and is not as scalable as the fully automated matching model. Second, a significant part of the online staffing market growth is going to be driven by large enterprise. While large enterprises care about quality, Toptal’s small size due to its focused approach may create a challenge as companies look for large, trusted platforms to find talent.
References
Great post, thank you! Agree with you that TopTal faces significant challenges. I remember hearing about how Catalant (HourlyNerd) has found significant traction identifying *internal* talent for large enterprises. There seems to be significant potential for disintermediation for these temporary project-based worker platforms. How do you think the space will evolve: will free-lancers be pulled off these platforms and work directly with/for their client when they find a good match? Or will most of these workers choose the flexibility of freelancing (and multihoming), and forego the benefits of working at one firm in-house?
Thanks very much Erik for your comment. Great point – disintermediation is a big challenge for these platforms. One interesting approach that Upwork (a competitor) is trying is tiered-pricing: The company takes a higher commission on the first projects than on the later ones. But in general, in order to avoid disintermediation, the platforms need to create value through things like dispute resolution, risk transfer, quality assurance, etc.