As a startup founder, I’ve considered using both Elance and Odesk in my early beginnings. I come from a business and marketing background, so somebody’s got to be the programmer. I didn’t have a co-founder at the time and needed something super cheap, so I saw what Elance and Odesk had to offer.

Before I begin, it’s quite evident that Elance failed. They took $65,000,000 in venture funding and got absolutely nowhere. They released their beta during the dot com crash and still decided to stick with tech and business related services. Several important factors involved with their failure include: Too much competition, little service provider differentiation besides price, high service provider fees, no locality of services, ambiguous project descriptions, cheap Indians, as well as cheap Indians, and last but not least, cheap Indians.

Lets start from the buyer’s perspective. I think I made a pretty decent example. I’m a company CEO (or to dumb me down, startup founder) and I needed a business plan made and my website programmed from the ground up. I go to Elance.com, I submit a project that says I need these things done and I want to work directly with the service provider to make it happen. 50 Indians bid on my project, each going cheaper than the one before him, and I realize that they all suck. They don’t know what I’m looking for, so how can they adequately do my project? I want them in front of me so that we can plan the process out easier, but they’re in India and have a language barrier. Great. Now that I’m frustrated, I leave Elance and wasted over $200 in bidding fees for the service providers who bid on my project.

From the service provider’s perspective, let’s say that I’m an Indian. I know that I’m good at programming, I know that I’m good at business, and I know that I speak perfect English. Mr. American goes ahead to post his business plan and programming project request for a really stupid idea. I look at it, nod, and make my bid. 49 other Indians bid with me. Mr. American is thinking, where the hell do I even start? How do I know that Mr. Indian can speak perfect english when I have to interview all 50 of these guys to know which one is right. Too many choices isn’t a good thing. Mr. American doesn’t buy from me, I wasted a lot of time and some money on a lost lead.

Of course, all of this is a problem for both the buyer and seller. The lack of quality service providers steers away the quality leads and buyers. Few buyers means fewer qualified service providers. At this point, the marketplace has failed. Elance has been treading water for the past 7 years and haven’t changed their model at all. They went into enterprise software for a few years, but that didn’t go very far.

In 2004, a new company was born - Odesk.com. At first, we think that it’s another crappy eBay for outsourcing, but it actually addresses most problems and flaws that Elance seems to have. The primary bonus here is project management tools. Normally, you work with an Indian by email and phone and really have no idea what he’s doing or if he’s taking your project seriously. Through Odesk, the programmers are monitored by camera and random screen shots to make sure that they’re constantly working as promised.

Service providers are differentiated. They have a comprehensive work and education history, a list of diplomas, certifications, etc… A really nice reputation system, # of hours worked, and Odesk even has a suggested price for how much a programmer is worth depending on his or her reputation.

Business model is pretty solid. Sure, you can work outside of Odesk, but the seller is going to want positive reputation and the buyer is going to want to know that the programmer is working as promised. Hourly payments eliminates the problem of ambiguous project descriptions. And as a result, both buyer and service provider are happy in a marketplace that functions quite well.

Picture of Odesk developer on left, Odesk CEO on right, taken by my Sony Cybershot

I was at the Web 2.0 expo and met the CEO of Odesk and they seem to be doing quite well. Obviously, like all other startups, Odesk has had some developmental flaws and speed issues that have been addressed in recent months. Millions of dollars have been going through the website and it’s on its way to profitability / exit.

(Added at 6/25/07, 810PM PDT) - Rentacoder.com is another private company in this space. The UI sucks, but the support and business model seems to work quite decently for them. Unlike elance or guru, service providers aren’t charged for each bid they make on a project.