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Business History.
Founding History.
Born in Boston in 1980, Robert Kalin had a rough upbringing between his parents’ divorce and high school bullying. He left home at just 16 to move into a small “artist squat”. After graduating high school, he ping ponged between five different colleges, starting with the Museum of Fine Arts, Boston and culminating at NYU with a bachelor’s degree from the Gallatin School of Individualized Study in 2003. To support himself, he worked a motley of odd jobs including camera shop stock boy, Marshalls department store cashier, carpenter, floor help at a bookstore, an amanuensis for a philosopher, and hired help at a demolitions company.
A few years after graduating, in 2005, he and two friends (Haim Schoppik and Chris Maguire) did some work for a wife of an NYU professor. She needed design help for “getcrafty.com”, which was an online bulletin board for crafters. At the time, Kalin was utilizing his carpentry skills in his free time to make “inside-out computers”, which were functional computers encased in wood with transparent tops. However, he never had much success finding buyers. Working on that online bulletin allowed him to see how many other craftsmen similarly struggled to sell their products, which made him think there was an opportunity for a website that catered to artisans. After 10 weeks in a Brooklyn apartment, the three of them coded up an ecommerce website and raised some initial funding from a couple of local real estate developers for whom Kalin did carpentry work.
They would explain their site with vaguely Marxist terms, noting that “The industrial revolution and consolidation of corporations are making it hard for independent artisans to distribute their goods. We want to change this.” and that “This is a lot more than a movement, it’s a necessary and fundamental shift in the way commerce works”. He would eschew the word “user” because he didn’t want to use anyone.
Robert Kalin wanted to build the brand from scratch, so when trying to name the company, he looked for a nonsense word that didn’t have any preconceived notions. One day, as he was scribbling in his notebook ideas, the 1963 Italian movie 8 ½ came on tv. “Oh yes” in Italian sounds like “Et see”.
In June 2005, Etsy was launched.
Business History.
To promote their new craftsman-focused marketplace, they went to local crafts fairs with fliers explaining to small artisans the virtues of listing their products on Etsy. Benefiting Etsy was the fact that many local artisans felt that eBay was an inappropriate venue to sell their wares. The auction format may have felt natural for rare collectibles and unwanted items sitting in the garage, but the artists who spent hours making something wanted the buyer to appreciate it, not just feel like they were getting a deal from a lowball bid. Besides, eBay’s overflowing listings would crowd out the homemade items, and most consumers weren’t thinking of eBay as a homemade marketplace anyway.
Kalin’s intuition about needing a brand with a strong ethos to attract sellers was right. He considered eBay to be a faceless corporation, whereas he wanted Etsy to connote handmade, community, sustainability, and supporting small artists. In describing Etsy, he would hit on themes of excessive consumerism, wasteful shoddy goods, and lifeless commerce, suggesting that Etsy was the panacea. eBay was a marketplace; Etsy was a movement.
Enticing early sellers was their very low fee structure: it cost just 10 cents to list an item and if it sold successfully, Etsy would take only a 3.5% commission. A seller’s downside was limited and since most were in the same position as Kalin when he was struggling to sell his handmade, wooden computers, they were open to trying new sales channels. Their first publicity came in the form of a short 2005 TechCrunch article that leaned heavily on eBay comparisons. By the middle of 2006, through craft fairs, word of mouth, and some internet buzz, Etsy grew to 10k sellers and 40k listings. A year later, that would grow to 100k sellers with 500k buyers. To support the growing hosting costs, they increased listing fees to 20 cents per item.
Etsy was experiencing success selling a myriad of products, but jewelry, art, and craft supplies were particularly strong categories for them. However, there was also a huge number of eclectic items: think cufflinks made from 19th century shotgun shells, Stephen King Russian nesting dolls, and a hairclip made from a barbie doll. There were so many odd items that could be found on Etsy that a website called “regretsy.com” popped up to catalog some of the weirder items. The average Etsy buyer around this time was spending just $15 on average per order.
At the beginning of 2008 they raised $27mn from Accel Partners and Jim Breyer (who helped lead an early Facebook investment) joined the board. The rumored implied valuation was just under $100mn. While no official financials exist from this time, Etsy noted they were close to breakeven, and Kalin would later say in an interview that they sold over $100mn of goods in 2008.
Growth was strong with an increasing number of buyers and sellers that were learning about Etsy from local craft fairs, friends, and increasingly Twitter. With 15k to 20k items sold each day, their growing technical needs and customer issues were overwhelming Rober Kalin. He felt Etsy needed a professional manager to handle the level of growth they were experiencing, so just over half a year after the Accel investment, Maria Thomas, the recently hired COO, was promoted to CEO.
To inform the employees of the change, Rober Kalin called an all hands meeting while wearing “bright coral nail polish”. He told his employees that “everyone knows male CEOs can’t wear nail polish, so I’m not CEO anymore”. Rob instead became CCO, or Chief Creative Officer and focused on a non-profit called Parachute that focused on helping artists navigate operating a small business.
However, there was likely more happening behind the scenes that lead to Kalin stepping down. At the same time, both cofounders, Haim Schoppik and Chris Maguire, left the company. They griped that Kalin would come up with crazy ideas that didn’t make much sense for their core business (among which included teaching Blacksmithing, creating modern day Guilds, and broadcasting live video from workshops) when they were already overworked and just trying to keep the website from constantly crashing. In later interviews they were quoted saying it was “like being an abusive relationship”. (It also seems likely that they did not like the more corporate environment that was being implemented).
While Rob worked with sellers in an Etsy office space made available for artists to work together, Maria Thomas set about professionalizing the company. She hired a new CTO, Chad Dickerson from Yahoo, who would focus on the key infrastructure that needed to be revamped. He would improve webpage load times and build out tools to monitor the site. This allowed them to identify issues with the website before a torrent of complaints came in.
During Maria Thomas’ tenure, Etsy grew revenues seven-fold, which was largely from the push to focus on search and promoted listings that showcased sellers’ products on prime web real estate. A 2009 acquisition of Adtuitive helped them further hone this capability. However, despite strong revenue growth, achieving profitability, and website visits hitting 11mn, Kalin was unimpressed. He argued to the board that they were growing at the expense of their sellers, as services for sellers were severely lacking and company responses took days, if they came at all. And while the website performance was being improved, slow search load times and general lag was still a common complaint.
The board allowed Kalin to reassert his founder’s authority one last time, and he removed Maria from the role of CEO and stepped in himself. Kalin announced his re-appointment to his employees by smashing a coffee mug and reciting a poem. Instead of focusing on the issues plaguing Etsy, he rolled out social networking functions similar to Facebook to make it more community-like. In an interview, he elaborated on the social networking features, saying: “If a person who has different religious or political views is making me a custom sweater, I'm going to have this long conversation that I would have never had. To me, that's a beautiful thing.” Why he thought someone would want to enter into a long conversation about politics or religion when buying a sweater was unclear, but what was clear was Rob was back to coming up with far out ideas instead of addressing the practical problems buyers and sellers were facing. To seemingly boost engagement on the poorly adopted social features, he removed a popular Chat Room feature, which drew ire from users.
Sellers were still complaining about the same issues—poor customer service and slow web pages—and newer issues like cheap, mass-produced products surfacing on the site. And buyers still had the same troubles with Etsy search. At the time, a survey was gaining traction in the media that reported 80% of sellers had concerns with the Etsy service.
Kalin added more engineers and customer service reps, but seemed unable to make meaningful progress on the root problems. While GMS was a little over $300mn for 2010 compared to ~$200mn in 2009, that was a starkly slower growth rate from the triple digit y/y growth they had the year prior. The board was becoming worried that inability to solve these issues would mean Etsy’s growth would stagnate and it would be near impossible to reaccelerate. Comparisons to eBay’s missed opportunity and years of anemic growth were percolating.
In mid-2011, about a year and a half after being reinstated as CEO, Rob Kalin was once again replaced, this time by CTO Chad Dickerson. It was not clear whether he stepped down willingly or was forced out. Either way, the decision was made that a technically savvy CEO would be best capable of addressing the many infrastructure related issues, as well as a new concern: the shift to mobile meant users were spending more time in a mobile web environment that was converting 50% less than desktop.
Dickerson would keep moving to improve site stability, roll out their first Etsy phone app, and help sellers with a dashboard and other tools. He would also oversee the launch of the much-requested seller phone support as well as “Direct Checkout”, which streamlined the payment process. These moves staved off a slowdown in growth and they ended 2011 with GMS of ~$525mn and 2012 with ~$900mn. However, while sales were growing, there was an increasingly loud choir of sellers who felt the site was becoming flooded with cheap manufactured goods. These sellers started accusing Etsy of the worse offense: becoming eBay-like.
This partly stemmed from Etsy loosening its strict seller guidelines. This was done in part because successful sellers were in violation of Etsy’s policies when they moved from personally handmaking all items to hiring someone to make them. While the instances weren’t entirely common, Etsy didn’t want to force its most popular sellers off. At the same time though, as Etsy grew in popularity, an ever-growing slate of resellers and manufacturers tried to hock their low-quality goods on the site to access Etsy’s buyers that now numbered in the millions.
Figuring out when a small business crossed the line from “handmade” to commercial manufacturer wasn’t clear though. If a Brooklyn seller individually hand-sews backpacks, they are clearly handmade. But if she gets 50 orders a day and needs to hire 2 seamstresses to meet the demand, are they still handmade? What if she decides to hire the workers out of state because it is cheaper than Brooklyn-based labor? What if she decides to hire them out of country? What if she decides to add graphic printing to fabric that is done by a larger company? These were not theoretical questions. A growing crop of successful Etsy sellers’ livelihoods depended on their ability to sell on the platform. Etsy needed to address what exactly it meant to be “handmade”.
Their guidelines would significantly expand the definition of “handmade”, to the chagrin of many sellers. In a small town hall with Chad Dickerson and a select group of sellers, one of them pointed out that Ikea could technically be allowed to sell on the platform under these new guidelines. Dickerson responded that he would “hang up” on them if they asked to sell on the platform. However, it was still true that the law of what would be allowed on the platform was far broader than the spirit of what they wanted.
While these changes frustrated sellers and they decried that Etsy was losing its soul, the truth is that with over a million sellers now, it didn’t really matter how much they hated it. As far as Etsy was concerned, they had enough sellers that losing several thousand wouldn’t materially impact the vibrancy of the marketplace. In fact, with over 20mn items at the time, the biggest buying friction Etsy faced was that there were too many items on the site and buyers would get lost in them before finding what they wanted.
At the same time though, Etsy wanted to make clear that they were not pivoting away from making commerce human and supporting craftsmen. In 2012, they became a certified B Corp, making a certified commitment to social sustainability. While this failed to quell the most ardent sellers who joined the platform in the Kalin era, sales were’t impacted. 2013 GMS surpassed a billion for the first time at ~$1.4bn, and the following year they grew +44% to just shy of ~$2bn. Active buyers, which are customers who had purchased an item in the past twelve months, reached 19.8mn by the end of the year, with almost one seller for every 14 buyers (1.4mn sellers). They had the scale to go public.
From Brooklyn to Wallstreet.
A decade after its founding, Etsy went public to allow early investors to cash out, help raise funding to continue to grow, and increase their public profile.
Of the roughly ~17 million shares of Etsy being offered to the public, about 3.3mn were secondary. At the $16 offering price, this meant Etsy would raise about $200mn.
The business had many positive attributes. Over 90% of Etsy’s traffic was organic, revenues grew +56% y/y in 2014, they had positive cash flow even after SBC (albeit barely), and they also seemed to be on the right side of a lot of emerging trends. Not only were they an ecommerce platform when online commerce penetration was in early innings, they also were second to none in terms of sustainability and ethically sourced, environmentally friendly products—something a growing portion of buyers valued. Etsy closed +86% the day of their IPO, valuing the company over $3bn.
The strong stock price was short lived though, and by the end of the year, it would hover around half of its original IPO price (or down ~75% from peak). While attributing a stock market move to specific variables is fraught with imprecision, it was clear that virtually every quarter, GMS and revenue growth were falling.
While investors would be understanding that growth would slow as their base was much larger now, what was perplexing was their corresponding abysmal profitability profile. Etsy was now a decade old company and was supposed to benefit from high incremental margins as it scaled. Few investors have high opinions on how eBay was run, but they still had 5% net profit margins just 3 years after founding. Whereas Etsy was swinging between loss and worse loss, when eBay was a decade-old, they had managed consistent ~25% net profit margins.
To management’s credit though, they did seem to identify many of the key issues such as helping a buyer find what they want quickly, supporting sellers with shipping and other business tools, and improving the mobile app experience to match desktop conversions.
They would focus on seller services to alleviate the seller’s burden of administrative tasks. As Chad Dickerson noted on the 1Q15 earnings call, “for every hour our seller spends on creative tasks, they spend an hour on business tasks”. Etsy worked on making a shipping label product easy to use to help sellers ship quicker, as well as save money. And a sellers-only app allowed them to manage orders easier and reply to customer messages faster.
Chad Dickerson can also be credited with sewing the seeds of a culture of engineering and experimentation that allowed them to update their site thousands of times a year. This was a far cry from the tech stack when Dickerson joined as CTO, which was constantly at risk of going offline. The next, and hardest, engineering push though would only be started by Dickerson.
One of the largest pain points for buyers was simply finding items that they wanted. Etsy’s catalog of items has always outstripped what a buyer would reasonably look through in a single sitting and so surfacing the right item list to the potential buyer was critical to close a sale. A 2008 review from The Guardian aptly captured this issue well:
“The main drawback is that it's very hard to find things. Like eBay, Etsy does have categories, but you can also search by color, check out the gift guides, and look in the Treasury section where users have made their own little collections of attractive objects. Starting this month, you can search by price range, too. But the site feels slow, and it takes hours of meandering about just to scratch the surface of what's on offer”.
While their search capabilities have progressed since then, so have the number of items listed on the site, as well as buyer expectations of how quickly they should be able to find an item. Amazon (and Google) has trained a generation of internet shoppers that you should be able to type in a few words and find what you are looking for on the top of the first page of results. This was trickier with Etsy though since all items were unique and there was no structured data to aid search. Most buyers would have trouble even describing what they are looking for as they lacked the vocabulary to refer to the many different design styles. Dickerson acquired a small start-up, Blackbird Technologies, focused on natural language processing and image recognition, to aid search in 2016.
The other large initiatives were advertising. While they had promoted listings where sellers could advertise on the Etsy platform since 2011, they would now help sellers advertise off-platform through Google. With Google Product Listing Ads, sellers can set a daily budget through their Etsy dashboard to advertise through Google. The ease of which a seller can do this, in addition to a low daily minimum budget, meant that a whole new swath of sellers could now generate demand through a new channel. Etsy, in turn, would benefit as sellers paid to draw traffic to their platform.
The focus on seller services, search, and Google advertising would be main focuses for Etsy for years to come. While management correctly identified the areas of the business that needed improvement, they also got distracted by many poorly thought through initiatives. A few years back in 2011, Dickerson bought a small start-up called Trunkt and was going to use that to launch an Etsy wholesale platform.
On the 1Q15 call, Dickerson talks about how he is “really excited” for a Whole Foods partnership where they will display some seller items instore. This perhaps makes sense as a cost-effective means to advertise to potential buyers in-store, but is perplexing when mentioned in the context of their wholesale efforts. Was the plan really to get Etsy sellers to sell wholesale to chain retail stores (they also had partnerships with West Elm, Macy’s, and Nordstroms)? Amazon’s Jeff Bezos vocalized the benefits of an internet store that could sell unlimited items since they weren’t constrained by physical space and internet marketplaces were seen as a highly desirable financial model because of the lack of needing to manage inventory, and yet Chad Dickerson was hard at work undoing both of those advantages. Additionally, he was pushing to associate the Etsy brand with exactly the sort of mass produced, chain-store commerce Etsy was trying to subvert. Would a buyer really believe they had something unique and one-of-a-kind if they bought it at a Macy’s?
Beyond the bad brand association, the Wholesale initiative meant supporting a separate platform where retailers could contract for special pricing and bulk. Pushing sellers to mass produce clearly negated the main reasons why people liked Etsy in the first place—they had unique items that you couldn’t find elsewhere. Alongside the wholesale initiative (and to help support it), they launched Etsy Manufacturing to help sellers find manufacturing partners. In 2Q15, Chad Dickerson noted that they have 4,700 sellers and 7,900 manufacturers in this initiative. While he calls the manufacturing a “largely local phenomenon” in order to address the obvious critique that contracting out manufacturers is anti-Etsy, he was undoubtedly pushing the platform away from what most people wanted from Etsy—buyers and sellers included.
Most sellers’ intentions are not to make a huge business out of the platform, but rather make enough for a living or to supplement the household income while doing something they love. They typically weren’t interested in running a large business with manufacturing partners and they certainly didn’t want to see anything that they didn’t consider “handmade” on the platform. Ever since the expansion of the definition of handmade, there had been a steady stream of complaints that Etsy was losing its craftsmen/artist roots to cheap, mass-produced goods. While the large and fragmented seller base ensured that no protest was likely to ever materially impact their listings, it does suggest tone deafness on management’s behalf to push these initiatives and a lack of understanding of why people liked Etsy in the first place.
The Wholesale initiative didn’t even need to be a standalone platform; anyone can freely connect with a seller they like and message them for customization (or solicit specialized pricing for a bulk order). They made a similar strategic error when they launched another new platform: Etsy Studios. Management noticed that a lot of sellers were buying supplies on the platform that they would use for their crafts, and so management wanted to open a separate platform to serve those transactions and go after the “$44 billion dollar” craft supplies market (despite the fact that they were already being served fine on the Etsy platform).
Lastly, around the same time, they also rolled out “Pattern”, which was a website builder that synched with the seller’s Etsy store. This would allow sellers to host their items on their own branded website with their own domain with automatic linking of listings between Etsy Marketplace and their Pattern site. Sellers were charged $15 a month for a Pattern web site. While this wasn’t a bad idea, it was not the right focus at the time as the vast majority of sellers already had enough trouble getting sales through Etsy, and the last thing they needed was a desolate website where they would have to generate traffic on their own.
While buyers’ contention with Etsy was poor search and sellers just wanted more traffic and easier to use tools, management instead focused on creating three separate platforms for wholesale, manufacturing, and craft supplies. This of course all came at a cost and instead of being a high margin internet marketplace, they failed to turn any of their revenue growth into incremental profits.
GMS was slowing despite management boasting of a $1.5 trillion market opportunity at every Wall Street conference. Management’s desires to extend Etsy beyond the core Etsy marketplace seemed to suggest they thought the market was nearing full penetration. As growth continued to slow, it became more and more unforgivable that profitability was so lacking. As an activist investor (Black-and-White Capital) put it at the time, “The company’s historical pattern of ill-advised spending has completely obfuscated the extremely attractive underlying marketplace business model”.
When a moribund stock price and activist pressure to improve profitability after several consecutive quarters of no progress was met with 1Q17’s stark deceleration of GMS growth, Chad Dickerson was asked by the Board to step down.
The Silverman Turnaround.
Josh Silverman had a long career working in tech. First, in 1998, he founded and ran evite until selling it to Ticketmaster. Afterwards he worked at eBay in several roles, including VP and General Manager of eBay Netherlands, helping launch eBay classifieds in Europe, and also as CEO of eBay’s Shopping.com, which was a price comparison site. He then moved to become CEO of Skype (partially owned by eBay) in 2008.
While Skype may be an unrelated business to Etsy, we can see evidence of his business acumen when he talks about the Skype product. He notes that when he joined Skype, the tagline was “the whole world can talk for free”, positioning it as a direct competitor to telecommunication providers, but also not exhibiting a unique “job”. After talking to customers, he realized the real magic of Skype was about “being together when you can’t be in the same room”. This helped position Skype toward video rather than audio. We will see later a similar ability to hone in on customer preferences rather than rely on a high level and vague understanding like legacy management.
After Skype, he moved to American Express to become president of consumer products and services. At the end of 2016, he joined the Etsy board. Just half a year later, he was asked to take the reins as CEO.
When Silverman took over just a month before 2Q17 ended, growth was on a multi-quarter decline. GMS growth was on par for just +12% y/y growth in the quarter he took over, down from +21% y/y just a year prior. With a sub-$1.5bn market cap, there was a fear that Etsy was a potential acquisition target that could be bought cheaply, giving urgency to a turnaround.
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See full report table of content below. See the full list of other companies we covered here.
Table of Contents
Founding History.
Business History.
From Brooklyn to Wall Street.
The Silverman Turnaround.
Business.
Marketplace Revenue.
Services Revenues.
The Etsy Value Prop and Frictions.
Marketplace Frictions.
Competition.
Seller Competition.
Buyer Competition.
House of Brands.
Reverb.
Depop.
Elo7.
ROIC and Capital Allocation.
Revenue Build and Valuation.
Risks.
Summary Model.
Historical Model.
Financial Model.
Conclusion.
The Synopsis Podcast.
Follow our Podcast below. We have in-depth “company” episodes that breakdown each company we write a report on, in addition to other “dialogue” episodes that cover various business and investing topics and “article” episodes where we read our weekly memos.
We have an in-depth company episode on Etsy that covers everything from Etsy’s founding history and early strategic errors to how Josh Silverman quickly reaccelerated growth and improved profitability after several years of sagging performance. We dovetail into what makes the platform unique and how Etsy has been able to succeed where both eBay and Amazon failed. We draw on Speedwell’s 79 page report to teach not just about Etsy, but also help investors learn about how great CEOs run a business.