For all the hype, the Australian online sector is relatively sparsely populated. Unlike the United States, our ecosystem is dominated by a handful of brilliantly executed marketplaces like Seek, Carsales and Realestate.com.au. However, a new generation of titans is also emerging — with the media giving increasing attention to businesses like Atlassian, Bigcommerce, 99Designs, Xero (technically a New Zealand company, but like Phar Lap, we’ll claim it) and Freelancer.

For the most part, the new marketplaces have excellent prospects. While none are hugely profitable yet, most dominate their sector globally — in particular Atlassian, whose Jira software is the most widely used project management software globally, despite the business not having a sales team. Xero and 99Designs are also market leaders with exceptional growth. But there is an odd one in this group. Despite the hype that founder Matt Barrie is able to generate for himself and his business, Freelancer appears to be far more sizzle than steak.

Barrie became an internet folk hero last year after rejecting a $400 million bid from mysterious Japanese recruitment firm Recruit Co to float on the ASX. Freelancer offered a very small number of shares in its float, which initially sought to value the business at $200 million — but Barrie appeared to have the last laugh, as Freelancer’s share price shot up to $1.50 (from a listing price of only 50 cents), valuing the business at $600 million. Barrie was instantly catapulted into the BRW Rich List, with an estimated net worth of $255 million this year.

Some remained sceptical of Barrie’s heroics. For a start, there was never any actual evidence of Recruit Co’s $400 million offer (Recruit Co never confirmed the offer was even made, and Freelancer was vague about the specifics). But the bigger problem with Freelancer is its claim that it is “the world’s largest online marketplace for outsourcing, freelancing and crowdsourcing services”.

The claim to be the largest marketplace is critical for valuation. Investors (justifiably) place a significant premium on the No. 1 marketplace (like Seek, Carsales and REA). In some instances, a second or third player can also create real value, but a stiff premium is attached to the largest operator. This is probably why Freelancer have been so keen to make such a statement to the market in its prospectus and public statements.

Not long after Freelancer listed, two of the biggest players in the outsourcing space, oDesk and Elance, announced they were merging. This was quite big news, as the combined businesses generated US$750 million in payment volume in 2013. By contrast, Freelancer’s annual report noted that despite growth of 66% during the year, it had generated only AUD$84.4 million in sales during 2013. Not only is Freelancer not the largest marketplace globally, it is around one-tenth of the size of the dominant player.

Last week Freelancer released a quarterly cashflow update, noting that (on an operating business) the company suffered negative cash flow for the June quarter. The operating cash flow situation would have been worse but for Freelancer receiving a $150,000 government grant from taxpayers. Worryingly, it appears that Freelancer’s growth has slowed significantly. In 2012, Freelancer generated operating cash flows of $9.4 million; in 2013, cash flows increased to $18.8 million (and strong rise of 100%); in this year’s June half, cash flows were $11.8 million — meaning growth appears to have slowed to around 25%.

It appears that Freelancer is a distant No. 2 marketplace, whose growth has slumped and which isn’t able to generate much, if any, surplus cash flows from operations. The market it seems, has noticed, with Freelancer’s share price slumping from $1.54 in April to only 79 cents now — a drop of almost 50% in less than four months. The company, which briefly had a market capitalisation of $1.09 billion, is worth around $345 million now (less than the Recruit Co offer). Barrie, to his credit, hasn’t sold any of his Freelancer shares, but has seen the value of his stake drop from $520 million to $158 million.

Barrie has done a remarkable job rolling up a number of freelance businesses to form and float Freelancer at the perfect time, but it seems like the market is becoming far more sceptical to the spin and looking to the substance. Unless Freelancer can start generating significant growth, or extract some real earnings, even its discounted valuation of $345 million will appear generous.