Pando

Etsy looks to mix community and capitalism as IPO looms. What changed?

By Michael Carney , written on March 5, 2015

From The News Desk

“I want Etsy to be an independent company for as long as it can be independent.”

Sitting on the PandoMonthly stage in New York two years ago in January, Etsy CEO Chad Dickerson left no room for confusion about his desire to keep Etsy true to the quirky and irreverent attitude that had made it one of the most successful ecommerce companies launched in more than a decade. 

Although not the founder – he joined the company as CTO five years earlier before being promoted to the top role amid a contentious ouster of the company’s founders – Dickerson seemed to possess an innate understanding that Etsy was a community-first platform, and one dedicated to craftsmanship and creativity before commercialism.

Dickerson was clear that selling was a good way to crush all that. But he wasn't that sold on an IPO either, despite Etsy's heady valuation and growing revenues. During that chat, he pointed admiringly to a recent recapitalization by SurveyMonkey that saw the company cash out early investors while still remaining private. Etsy had just hired former Fidelity star Kristina Salen as its first ever CFO. It’s the sort of move that would typically be seen as a signal that an IPO was imminent, but Dickerson at the time insisted it was meant to give the company options and flexibility beyond those typically pursued by venture-backed tech companies.

And yet, yesterday Dickerson revealed to the world – and the company’s community of buyers and sellers – that Etsy has filed a registration statement with the SEC ahead of a planned initial public offering. 

So what changed? The answer seems to be a combination of nothing and everything.

The first hint that Etsy was evolving came in the fall of 2013, when the company removed its previously unassailable policy that all items sold via its marketplace be handmade, rather than mass-manufactured. The backlash among power users was swift and fierce, with many leaving the community rather than participating in what they viewed as a bastardized version of the platform they’d helped build and grown to love. But Etsy’s revenue kept rising, increasing from $75 million in 2012 to $125 million in 2013, and more than $195 million in 2014, and so the company charged on.

It's reminiscent to the shift in eBay's community when it launched "Buy It Now"-- and the site moved from it's fun auction roots. Sure, it grew, but it lost something.

Dickerson has offered little in the way of explanation of why he and his board ultimately decided that an IPO was the right path for Etsy to pursue. Perhaps the company drew confidence from not only surviving, but thriving after making the risky decision to move beyond handmade goods. Perhaps the decision is driven by fear that if Etsy doesn’t strike now while the public markets are healthy and the global economy strong, then its window could close thanks to a widely anticipated market correction. Perhaps the company has spent too much time looking across town at once-hot Gilt Groupe, which has been the subject of IPO rumors for nearly a decade, all the while its brand losing luster among investors and consumers alike. It's certainly no fun being public already when a market corrects, but it may be better than not ever getting out and having the option of a tradable stock that being public allows.

Whatever the reason, Etsy has set in motion a process that will change its character forever-- even moreso than the move away from handmade goods only. It's still trying to do it on it's own terms, hanging onto as much of its unique charm and community-mindedness as possible.

The company has allocated up to 5 percent of its offering, under what it’s calling its IPO Participation Program (IPP) for sale at the IPO price to individual investors, many of which it hopes will be members of its community. It’s rare that so-called “retail investors” get access to pre-IPO stock in hot companies. Etsy is capping individual purchases at $2,500, meaning that 6,000 or more individual investors could stand to benefit should the company’s stock realize the coveted post-IPO pop. At the same time, it’s a risky strategy that could see the company alienate some of its most loyal supporters if the stock ultimately underperforms – something that the cratering value of once-hot Zulily has proven is entirely possible. 

“Our community is the heart and soul of Etsy,” the company writes in its Prospectus, underscoring the risks of its newly charted path as a public company.

Additionally, Etsy has allocated (a modest) $300,000 from the proceeds of its IPO to fund its women’s education and community empowerment-focused non-profit, Etsy.org. It’s a move that is bound to please even the most cynical critics of its capitalist evolutions. Whether its new Wall Street overlords will be thrilled with this non-revenue generating activity remains to be seen. 

Etsy is also breaking ground by being the first registered B Corporation (or benefit corporation) to go public. Others, like Alterrus have become B Corps while already public, and high profile brands like Patagonia, New Belgium Brewing Company and Ben & Jerry’s hold the same designation privately. But no company to date has asked IPO investors to weigh the risks and benefits of this double-bottom-line structure by which Etsy has committed to prioritizing society at large on equal footing as its immediate shareholders. The company writes in its IPO prospectus:

“Our values are integral to everything we do, and accordingly, we intend to focus on the long-term sustainability of our business and our ecosystem. We may take actions that we believe will benefit our business and our ecosystem and, therefore, our stockholders over a period of time, even if those actions do not maximize short- or medium-term financial results. However, these longer-term benefits may not materialize within the timeframe we expect or at all.”

All the usual indicators point to Etsy being a strong IPO candidate. The company has demonstrated healthy revenue growth year-over-year while avoiding the types of deep losses typically associated with high-growth tech companies. Etsy posted a net loss of just $15.24 million in 2014, while delivering positive free cashflow before considering the stock-based compensation paid to its employees. The company has grown to 685 employees – notably, 51 percent of which are female – and has 1.4 million active sellers and 19.8 million active buyers within its community.

Etsy also has more than $88 million of cash and cash equivalents on hand, meaning that it has several years of runway remaining at current performance levels. The company’s preliminary prospectus says that it plans to raise $100 million, but that figure is likely a placeholder that will be updated as the company progresses in its roadshow and more fully assesses market demand. Similarly, only then will we get a true indication of the valuation it will pursue, although rumors suggest that a $2 billion market cap may be in the cards. We haven't seen many ecommerce companies go out in that range since the late 1990s, but we've been seeing more in the last few years, and many more are in the wings closely watching. 

Etsy buyers and sellers tend to be more socially-minded than average consumers, a fact that makes the company more vulnerable to any perception that its more about capitalism than community. The upcoming IPO will be a test of whether the company can appease these two opposing masters simultaneously. Whatever the outcome, the plucky craft market that was born in Brooklyn is growing up. For Etsy’s own sake, here’s hoping it always remembers the little people that helped it get to this point.

[Image via Motly Makery]