My chat with Rachel Renock, Cofounder of Wethos

Many companies are trying to help freelancers run their businesses. When I first came across Wethos, I did think, “oh great, yet another project management tool”. As I dug deeper, I realized how cleverly and intentionally the cofounders have designed the product predicated on ideas not commonly seen in their market. They have had an organic journey from working at agencies to starting their own freelancing business to building a software company to service people like them. I believe in the trend of software companies embedding financial services to broaden the scope of customer needs they serve. More often than not, that strategy feels forced to generate revenue superficial growth and get higher valuations. Wethos has impressively crafted a strategy where financial services and product growth are intimately tied. They discovered the fintech unlock in their pursuit of removing the constraints holding self-employed people back from making more money. I wanted to learn more, so I talked to Rachel Renock, the Cofounder & CEO of Wethos.

Sar: You started in the agency world. You now run your startup trying to help freelancers start and grow their businesses. You help turn one-person service shops into studios by assisting them in finding collaborators to work on complex projects and make more money. You do many clever, interesting things around embedded networks, embedded financial features, and proactive project scoping and pricing recommendations. Your mission is to help more freelancers cross six figures in earnings. I want to unpack it all. Help me connect the dots between going from the agency world to the startup world.

Rachel: I used to be an art director; I shot commercials and did a lot of digital social campaigns for big brands like Covergirl and Hershey's. I met my co-founder Claire at an agency in New York. She was doing client management, scoping, and budgeting. Unfortunately, she saw how we charged clients and how much we got paid.

She and I left to start our freelance studio for two reasons. One, we were looking for meaningful work. We wanted more control over how we were spending our time. And two, we missed out on opportunities because our large agency lost many accounts to small studios, like three guys in a WeWork. And it's because the agency world has still not caught up to the fact that digital media has taken over. Many big agencies are structured for traditional expensive TV production versus digital media.

We realized we were missing out on opportunities because we were inside this bloated infrastructure, and my $75-80k salary was marked up by 600%. So, we started our freelance studio, which grew fast; we did $1.4M in revenue in 18 months. We were scaling by putting together project-based teams for our clients from our network of freelancers. We have a joke that most agencies are three freelancers under a trench coat. So are most dev shops and the smallest accounting and legal firms. A lot of smaller service-based businesses function that way.

Sar: You mean instead of having people full-time on your payroll, it's a bunch of contractors that you work with on a project-by-project basis?

Rachel: Yep, exactly. A traditional agency model has salaried employees and high fixed overhead, so if you lose a big client, you end up laying off half of your staff. We were looking for a lower-risk way to scale—a sustainable model that could bridge the gap between being one individual freelancer and building a full brick-and-mortar agency. Like us, millions of people in that gap are subcontracting with people they’ve worked with to meet their clients’ growing demands. And this is an activity that is not well-known unless you’re in space because it’s a hush-hush secret. After all, clients don't want to hear that people are “double outsourcing”, which is perceived poorly. But at the end of the day, the agency’s business model is to hire people and mark up the rates. So as many people do, we found a better solution with our Virtual Studio where we can flexibly scale up and down based on the opportunity or client.

In growing so quickly, Claire and I discovered how hard it is to scale a service-based business. To scale a service-based business, you need more people to provide more services, which creates more financial complexities. It’s uniquely challenging for two reasons. When you put a scope of work together, you sell something that hasn't happened yet. So you are giving somebody an estimation based on how you think things will go. Then when you bill your client, you are billing based on how things go, and much can change throughout a large, complex project. You have to reconcile after the fact, so you don’t know whether you’re making or losing money until it’s too late to do something about it. And there's little feedback for me to understand; hey, my website projects are typically going over budget, and I'm billing more than I'm scoping. Should I be charging more? It is challenging to track your profitability and your cash flow. And we were managing the chaos of money coming in from various client invoices and the payments going out to all our contractors with tons of tools and spreadsheets. We knew there had to be a better way. That’s when we hired a full-stack developer and built our own internal software.

Sar: So you built some pieces of what you now have just for running your own studio business?

Rachel: Yep, very similar to Shopify’s founding story. We had a whole end-to-end internal system down to the fact that when we marked a service complete, it would trigger a payment out to that contractor. We realized the software we had built was much more powerful than the studio business, so we doubled down on that and raised a $3M round led by Laconia Capital in 2019 to consumerize this platform for release. Then in 2020, the pandemic hit, accelerating everything in our market. There was a cultural shift in clients hiring freelancers in different locations. The giant advertising holding companies laid off 8% of their talent. And we got a lot of phone calls from our friends who were creative directors, the senior level people at these agencies, who were suddenly freelancers and never had to worry about scoping before. And then, over that summer, we redesigned the interfaces and did a private beta with our pilot customers, who absolutely loved it. So we publicly launched at the end of 2020 with our first 100 freelance businesses, quickly becoming our first 1,000. Six months later, we raised an $8M round led by Third Prime and Javelin Ventures, and by the end of 2021, our user base grew by a whopping 1237%. Halfway through 2022 and we have nearly 50,000 businesses using the platform. So the growth has been intense, largely due to our go-to-market strategy with pricing data. We knew that if we wanted other users to share their rates with the community, we had to start by sharing ours. So a big part of our public launch was publishing all of the pricing data from our scopes, which became the foundation for our much larger user-generated scope library. Once we launched the peer-priced templates - growth skyrocketed. People wanted their hands on something that helped eliminate the black hole of “what are other people in the industry charging?”.

Sar: I want to talk through all the exciting pieces of the product but first, talk about the big picture view of what you guys do.

Rachel: Simply put, our software helps you start and scale your freelance business. In the early days of your business, we help you understand how your skills translate into a scope of work and how others are pricing those services so you can confidently charge what you’re worth. Social media and brand strategy are some of our most popular templates because those skills are very tricky to scope. Then, we make it easy to turn that scope of work into an invoice and quickly set up a business bank account so you can start getting paid by clients.

The problem with other platforms is that they simply help you run your one-person business, and they (wrongly) assume that you’ll only ever be a one-person shop. As your business grows, you will likely turn to your network and try to scale up to meet the demand. And when you do that, your financial and operational complexities compound, so you end up outgrowing those platforms or duct-taping a bunch of tools together to make it work. It’s a different level, and many never cross that threshold because scaling up is so inaccessible; it’s expensive and intimidating.

Sar: Right, that’s the graduation problem, and you solve that by introducing collaboration. Do you specifically go after people who want to work with other freelancers and on complex projects instead of being a graphic designer and doing my own thing?

Rachel: No, because many of these businesses aren’t fixed, they’re elastic, and they scale themselves up and down based on the project. So if you're an individual, you can use the platform to grow your own business and work independently, or you can be invited to other people's project-based teams if you want to do that. As your business grows and you’re ready to form a team, we help you scale with our embedded fintech stack. This makes it easy to manage your complex cash flow, and gives you full control over that one-to-one-to-many money movement. You get an invoice payment from the client, hold that money in your Wethos account, then distribute payments to your collaborators for the services they deliver. Without ever switching tabs.

Our market's interesting because, as I said, most of these places are three freelancers under a trench coat. Our core target is full-time freelancers from zero to three years in business; they’re likely starting to grow and need better financial and operational infrastructure. Our goal is to create the next generation of Studios by making it easier to team up and scale.

Sar: Can you expand on how you help with pricing and project scope?

Rachel: If you run a freelance business, chances are you’ve wondered or worried about whether or not you’re charging enough. Imagine seeing how over 50,000 of your peers price their services and then discovering that you’re charging 50% less than you could be. On Wethos, we give you unlimited access to hundreds of peer-priced scope templates, so you never have to question what to charge again. Our huge library of peer-priced scopes and services helps to remove the guesswork; it’s almost like a second brain for your business. We empower freelancers with information and transparency to drive wages up; we have case studies from users who have doubled their income in less than a year on Wethos by gaining the confidence to charge more. In today’s market, 95% of freelancers don’t break 6-figures, but on Wethos, 35% of our users already earn over $100,000 a year. I’d love to see that number climb to 50%.

Sar: Let’s take a step back and discuss the current landscape. The market targeting freelancers specifically and SMBs broadly is quite crowded. There’s one category of all these project management tools. It’s all workflow automation. Then there’s another category of marketplaces where you can find freelancing jobs. You are at the intersection of those two approaches and are making it all multiplayer and collaborative. And there’s the fintech piece. Let’s talk through all of these topics.

Rachel: So, it’s clear across these categories that no one has won this $1.5T freelance market, and I believe that’s because everyone is thinking about these categories separately. Today, the places where freelancers are told to find work are separate from where they find community, which is also separate from where they operate their business. But as a freelancer, your network IS your business and visa versa. 43% of freelancers find work through friends and family, 38% through professional contacts, and 37% through social media. Additionally, 25% of freelancers are already teaming up with others, so your network isn’t just a source of project opportunities; it’s also where you find collaborators and your human resources. And you need the financial and operational tools to win those opportunities and manage those resources.

We’re not a marketplace, but that’s the biggest misconception I hear from investors about our business. Nobody has won the freelance market when it comes to marketplaces because labor marketplaces are built for clients. And you can tell that by just going to fiverr.com or upwork.com. Guess what their homepage says? Find the perfect freelancer. A double-sided marketplace will always be forced to prioritize one side, and historically they prioritize the “buyer”, which is the company looking to hire contractors.

On the other side, in the project management software category, team collaboration is our go-to. Still, our software is project management and budget management having a baby because you're managing not just tasks but also dollars associated with those tasks. So for us, Asana being an extensive to-do list, is less valuable than Asana, with each job having a price point.

Sar: Let’s talk about the network. That isn’t common amongst the companies that are going after your market. You guys decided to set up universal profiles and live outside the relationship between your customers and their customers.

Rachel: Yep, Wethos is a market network; our ultimate goal is to help freelancers unlock business growth through network and community and then provide the financial tools that make it easy to scope larger projects, manage budgets, and bill clients to take home bigger paychecks. With freelancers, it's very similar to being an investor; the bigger and better your network is, the more “deal flow” you get. Last year we took the first step towards that by enabling users to publish profiles so they can get discovered and discover others who can fill roles on their project teams. We knew there was a demand for a system built for collaborative freelance, and the network was already there; they just couldn't see each other yet.

Sar: It’s not just about inviting others to work on your project, but it's also about being discovered to be invited to anyone else's projects. That creates your growth loops, as the nerds call it. That also ties into your business model.

Rachel: Yes, exactly, it’s a win-win-win. Our users have a growth loop when they work with new teammates, and our platform has a growth loop when they invite existing teammates. People sign up and start scoping, invoicing, and paying out other people they collaborate with. To get paid or pay others, you have to have a bank account set up on Wethos. Those who existing users invite are also in our target market, so we nudge them to check out the peer-priced templates and set up their studios. And that's why the software's free. Because if we put a subscription, it puts friction where the growth should be.

Sar: Right, that gets us to the embedded fintech roadmap. You don't want to set up paywalls, but you still have to make money. When did that thinking about the financial features start? Did you try charging the freelancers directly and then were like yeah, this is not working out?

Rachel: So we did a lot of price testing, had a trial period, and tested a subscription model. We wanted people to invite others and team up; that would create product-led growth, right? But when we started exploring the revenue model, a traditional subscription or per-seat model created friction where there should have been growing. We constantly got questions like, “will I have to pay per seat if I’m just inviting this teammate to this one project? Will they have to pay a subscription just to join and get paid?” So the fintech approach was born out of servicing a customer’s needs and responding to their natural behavior. We also understood that they were moving large sums of money around, $10,000+ in a single invoice, so we needed to provide a secure and trustworthy solution.

Sar: Does Unit power it all? How do you make money? What is the bigger vision here?

Rachel: Unit powers embedded banking. We knew that people needed to be able to control the funds coming in and then push the payments out to collaborators. That was late 2020. We were looking for a solution. We were talking to Stripe. Stripe Treasury did not exist; only Stripe Connect did at the time. We got introduced to Itai (CEO of Unit) by one of our investors, Atin from 27 Ventures. We showed them the flow of funds and the user experience, a match made in heaven.

All of our software is free. We also offer free business banking and peer-to-peer payments to make that financial collaboration accessible. We make money from ACH payments, the interest on deposits, and the interchange from the debit cards. But the bigger picture here is financial services specifically for freelance businesses. That includes products like invoice factoring, small business loans, credit lines, etc. All your friends are here, and all your finances are here; why would you ever leave? The bank account is the key to leveraging proprietary data so we can better assess risk and give more people access to money that may not have been previously approved. Traditional banks have difficulty understanding this customer, so they’re underserved and underbanked. We’re in a much better position to underwrite because we’re on the daily frontlines of people’s businesses.

Sar: When you first started exploring, what were the considerations when looking at vendors? What was the implementation work like? What were you doing before working with Unit?

Rachel: The first thing was, from a legal standpoint, we knew we didn't want to be in the flow of funds. If we're in the flow of funds, we're liable for the services sold, which means now we're in the middle of this freelancer and their client. We heard from our customers, “you power my business, but my clients don't need to know you exist, I want it all under my brand”. Very similar to Shopify stores that exist all under the merchants brand. We didn't want to end up intermediating and being caught in the middle whenever the client’s not happy with whatever the freelancer provides. So we knew whatever we do financially must be separate.

The second thing was the payment flow. At the time, we explored Stripe Connect, but that was an instant split. That sounds sexy but was not exactly how people were running their business. When an invoice comes in, it would instantly get split and distributed. Again, sounds sexy but doesn’t solve the user problem because that level of automation can create a cash flow nightmare if a user has many projects. We wanted to give the user full control over when, where, and how that money moves once it's in.

And the third thing was the revenue model. Everybody knows there's no margin on credit card payments. If we wanted to go with giving the software away for free, we had to have a really good margin on the ACH payments. And with Unit, we do. Unit has been a incredible partner to us, and I think we were their third or fourth customer. It’s risky to go with a newer player in the market, but they did a fantastic job with API documentation when it came time to implement. Even in their early days with very few resources, their small team was amazing to work with and hugely responsive to our needs. A real partner to us when none of us had fintech backgrounds. The implementation only took about six weeks; we had three engineers at the time, so that’s an extra wild timeline. They made it easy for a non-fintech company like us to create a custom fintech product that is light years ahead of our competitors. We already knew the experience we were trying to create, and Unit helped us bring that vision to life.

Sar: The entire business model is a win-win situation - to double down on the vision to help your users make more money and your business makes more money through processing fees. You said you don’t want to sit in the flow of funds between your customers and their clients. Can you walk me through the mechanics of what's going on? Can you also talk about the scale of transactions, the type of transactions you make money on, and how you split economics with Unit?

Rachel: When a freelancer invoices their client for, let’s say, ten grand, the client can pay that through a bank transfer (credit card payments coming soon!). When that money transfers over from the client account to the freelancer’s account powered by Unit, we take a cut.

We take that 1%, which you can see in your transaction records on the platform, as a fee for the invoice. So we don't make money until our users start making money. Peer-to-peer payments are free, but they have to be within the network.

The invoice volume per user per month is about $5,000. We make 1% of that and pay Unit a fixed cost underneath. Our margin on ACH payments is over 95%. We also make money on interchange when freelancers use their Wethos debit card and a little bit of interest on money in all accounts. We’ll be rolling out invoice factoring later, exponentially increasing our already high LTV, and our acquisition costs are very low because of the stickiness of our pricing data and our product-led virality. We're acquiring 150-200 new freelance businesses a day right now.

Sar: Couldn't the freelancers just bypass you and get the money wired to different personal accounts?

Rachel: Oh yeah. People not on our platform are doing that right now. It's chaos. They don't want to do that anymore because it adds time to access your money and creates a cash flow nightmare. Now, in my transaction records, I see a lump sum amount from different sources when I’m trying to reconcile. And they're not tied to invoices; they’re not tied to projects. And now I'm trying to do my quarterly taxes, and I can't figure out what this 30 grand is that got automatically pushed into my bank account from Stripe because it was money that came from several different projects or clients. You get the point.

With us, the transactions are tied to projects. It's genuinely an embedded solution. And they rarely transfer out because it creates an accounting nightmare, and why would they? With us, they have that embedded bank account and a debit card to access that money as soon as the invoice payment clears.

Sar: You guys recently announced a new feature that leans more heavily into using your pricing data and scoping to accelerate your growth. Can you talk about it?

Rachel: I’d love to! Earlier this week, we released our library of scope templates, which is now publicly available through our Instagram. The new features include viewing, sharing, and even editing peer-priced scope templates without needing to create an account, all from a browser on your phone. Beyond understanding the growth it brings, we did this because we believe that this information shouldn’t be gate-kept in the freelance community. Wethos is not just a tool; we’re partners to help you raise your rates and grow your business. We’re confident that we can bring enough value to the community at large that distributing this data ungated will drive massive organic awareness of our platform and deeply engaged users in the future.

Sar: Awesome, so I want to switch gears; how are you processing the current funding environment?

Rachel: We're on a long-term trajectory. When there's a recession, our market grows. In 2008, the freelance market grew by 12%. It's because self-employment rises with layoffs. A lot of people end up just never going back to full-time jobs.

So our market's growing like crazy right now. We’re trying to solve a lifelong problem, meaning 95% of freelancers don't break six figures. That's been true forever, essentially. And it will continue to be true unless we do something about it. With half of the workforce projected to be freelance by 2027, it’s more urgent than ever that we fix this problem. Our investors understand that these smaller sways in the market will not deter or distract us from this deeply important mission. When we solve this problem at scale, we will unlock insane economic value, and that's what the investors are buying into.

I often communicate with our investors when things are good or bad. They don't like surprises, so being communicative, calm, and hyper-focused has helped us ensure we are well capitalized as we go into the next 12 to 18 months.

But honestly, I don't know, man. The market conditions have been whiplash, but I'm a female founder. Everyone says, “winter is coming,” and it’s like, damn dude, I live in winter! The market is not for the faint of heart right now. If you are used to getting easy money, you will not make it.

Sar: I love that! My last question is, what are your plans for the future?

Rachel: We are going to eat at this market, so I plan to win by building a global freelance operating system that delivers on our vision of putting more money into independent’s pockets. We will distribute pricing data to rapidly grow the network, expand our partner ecosystem to offer help with taxes, healthcare, and legal, and be the bank for this newly unlocked freelance economy. That includes new financial products like fast payments on invoices and small business loans or credit lines.

Ultimately, we want more and more people breaking that six-figure ceiling. Wages have stagnated, and six figures don’t mean what it used to mean. If there isn’t a path to breaking that six figures, then freelance can’t be a viable and lucrative career for hundreds of millions of people to support their families, and then what? We have an opportunity to build the future we want to see and to create a more prosperous world for independents everywhere. That’s what gets me out of bed in the morning.

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