Etsy is in talks with investors over a new round of funding, according to sources familiar with the situation. The round is in very early stages.

The Brooklyn-based craft marketplace responsible for bringing us such joys as cat haberdasheries and crocheted toilet paper, is playing this round close to the vest. Etsy is requesting investors fly to Brooklyn for meetings and hasn’t yet finalized the size of the round or valuation.

One source said the round would be similar to Etsy’s last round, $20 million. But two sources who have had preliminary conversations with the company said the round would end up closer to $40 million or $50 million. Etsy’s $20 million Series E funding in 2010 valued the company at $300 million. Existing investors include Union Square Ventures, Accel Partners, Index Ventures, and German companies Hubert Burda Media and Action Capital Partners.

Etsy’s marketplace apparently did $537 million worth of transactions last year; that number is expected to hit $750 million or $800 million this year. Revenue figures for the company are not available but an analyst from GreenCrest Capital estimated the company earned $72 million in 2011. One source suggested an even higher figure.

Etsy’s growth, while stellar, has slowed some. The company’s year-over-year monthly growth rate was 100% or higher in 2008 and 2009; that figure has been at 71% and 74% in 2011 and 2010. Etsy’s founder troubles, documented best by Inc. magazine last year, have not helped.

Etsy founder Rob Kalin had ceded his role as CEO in 2009, only to reclaim it in 2010 and then step aside once again in July of 2011. Chad Dickerson, the company’s CTO, is now leading the charge, and he reported that December marked the first month that Etsy had ever increased its year over year growth rate.

The company has grown thus far on the sheer momentum of its community, and one could argue that Etsy’s growth could be amplified by a marketing head or CRM department, comparable to the way that Meg Whitman brought eBay to the mainstream. While those aspects of the grassroots-focused business would likely never have existed under Kalin’s watch, as the company scales up, perhaps Dickerson will see otherwise.

A persistent complaint about the company, also documented in Inc.’s profile, is that many of its sellers do not make a profit from their hand-crafted goods. A seller of a hand-knit sweater, for example, makes a profit off her yarn costs, but not on the 24 hours of labor it took her to make it. Etsy has introduced some tools to help the sellers, such as analytics reports, so they can track the traffic in their shops.

There’s also the complaint that the site isn’t easily searchable or generally as user-friendly as other online marketplaces, resulting in lower “basket sizes,” or transaction amounts. Etsy employs an army of engineers, including some recent high profile hires, and seems to be rolling out improvements to its user experience every month, like its newly streamlined checkout process.

There are plenty more bright spots. The company’s iPhone app recently hit a million downloads in just four months. The explosion of Pinterest has boosted traffic and the site recently added a “pin it” button next to its other social tools.

In addition to mobile, partnerships, and payments, international expansion is an important growth area. The company has a big presence in Germany; it’s also in France, England and Australia.

Investors see the company as a solid IPO candidate. With changes from the new leadership taking effect and new money to implement those changes even faster, the roadmap could be shorter than we thought.

The company did not respond to a request for comment.

Image via CatAtelier