A History of the Bazaar of Digital Commerce
(The History of Etsy)
Morning folks,
Here is a snippet of the introductory segment to the Etsy deep dive that I shared yesterday for paid subscribers. Here, we walk through the brief history of Etsy.
If you would like to read the entire piece, then you can do so by subscribing to get something like this, as well as other research, every month.
The Brief History of Etsy
Before we seek to understand the Etsy that exists today, it is necessary for the reader to understand the origins of how they were able to grow to the heights they reached by 2021. Thus, in this segment, we shall take a walk through the history of Etsy.
Etsy was founded by Robert Kalin (left), Chris Maguire (middle), and Haim Schoppik (right), as a marketplace for handmade goods and craft supplies. These three young men, then in their early to mid-twenties, each attended New York University and went on to launch Etsy on June 18th 2005.
By 2011, each of the three founders was absent from the company, in a story that is equal parts riveting and absurd. The reality, and logistics, of growing a company that began to extend its reach across the world, evidently became too much for the young entrepreneurs. Chris and Haim eventually left the company to pursue other goals, whilst Robert Kalin, the somewhat eccentric “visionary”, endured a couple of bouts as CEO, before being fired.
In the end, it was clear that Kalin’s personality was more aligned with creation than that of someone who would be able to effectively manage a large corporation.
“I think an innovator is someone who is unreasonable, wears overalls, and doesn’t sleep that much” - Robert Kalin
In order that we may get the true sense of how this unfolded, let us now start from the beginning.
2005
“In early April of 2005, I sat in an orange chair facing an open window. It was nighttime and the lights were off. I was back in Brooklyn after a brief residence in Paris, and I was about to sketch the initial ideas that would become Etsy. Working with three friends – Chris, Haim and Jared – Etsy went from these ideas to a site live on the Web in about two months.” - Robert Kalin
The year is 2005, and each of the three co-founders had concluded their time at NYU in the previous year. Robert Kalin was awarded a BA from NYU’s school of individualised studies, Chris Maguire was awarded a BA in Art, Computer Science & Animation, and Haim Schoppik never graduated, opting to leave before the completion of his course to build Etsy instead. The company were originally funded by angel investors, based in Brooklyn to the tune of ~$193,000, and sustained the cost of the platform by charging a flat $0.10 listing fee, as well as a 3.5% sales fee. This listing fee was later revised to $0.20.
The original thesis that drove the team to create Etsy was born from the aversion to the larger corporations that possessed considerable muscle power over smaller businesses. These ‘big tunas’ as Kalin put it, were seen as holdovers from the pre-web era. Etsy, born on the internet, was an attempt to give power to the smaller seller.
“We want to create new ways to shop that are only possible using the Web as a medium. The industrial revolution and consolidation of corporations are making it hard for independent artisans to distribute their goods. We want to change this.” - Robert Kalin
Each of the three original founders were creators. It is said that part of the inspiration for Etsy came from the difficulty that Robert Kalin encountered when attempting to sell the homemade wooden computers he was creating as a way to earn extra income.
Growing frustrated at the lack of support that legacy platforms, such as eBay, exhibited for creative sellers, Kalin and his small team set to work on building their own marketplace.
Kalin suggested that it took the trio just two and a half months to construct the original Etsy platform, through a mixture of PHP, Python, PostgreSQL, OpenBSD and Gentoo Linux. Despite what appeared to be a quick launch, Kalin later noted that the original launch was progressing slowly and that Maguire and Schoppik:
“ended up basically moving into my apartment and we spent a solid six weeks working on it day and night.” - Robert Kalin
The trio was then joined by fellow co-founder, Jared Tarbell, shown below, who left a large salaried position as a contract programmer to join a Brooklyn based start-up with three young co-founders.
In light of the fact he would now be earning a start-up salary, Tarbell assisted the co-founding trio from his home in Albuquerque, where the cost of living was more cost-effective. He rented an apartment near the University of New Mexico for $600 per month and stated that his “counterparts in New York were living in shoeboxes”.
By the end of the year, EquityZen suggest Etsy were valued at ~$3.1 million.
2006 to 2007
At the beginning of 2006, Etsy was still a four-man team in Robert, Chris, Haim, and Jared. The team essentially worked for free, during both the day and night, and kept followers, investors, buyers, and seller updated through countless blog post entries.
Within 10 months, Etsy grew to over 10,000 listed sellers, with over 40,000 listed buyers by June 2006. This included over 100,000 listings and a record of 70,000 items sold on the platform over this period. This all came with no advertising spend, and the power of word-of-mouth advertising. The term ‘Etsians’ was coined to represent the Etsy userbase.
Catching the attention of private investors, Etsy initiated its second funding round in 2016, after the original angel investment, led by Union Square Ventures, and raised ~$615,000 pitting Etsy’s valuation at ~$10.7 million by November of 2016.
Fred Wilson, a member of Union Square Ventures who joined the Etsy board of directors in 2007, stated:
“What we like about Etsy is its marketplace model, the vibrant community, and a truly unique shopping experience that is ideally suited to artistic goods. Etsy feels so right for the market it is serving. We also like Etsy’s global reach.
This is a low friction marketplace where buyers and sellers can transact without overhead. But it’s also a fanatic community where users flag goods that aren’t handmade and get them taken down quickly. It’s the kind of place where one artist seller will build a logo for another’s store just because they want to help build the marketplace” - Fred Wilson
By July 2007, Etsy had amassed 300,000 users and recorded its one-millionth sale.
The Etsy team, now 42 members in total, also shipped a new billing system during the latter portion of the year, allowing sellers to check out their monthly statements and make payments towards their balances due.
The company had surpassed $1.7 million in sales by the third quarter, attracting further attention from private buyers.
During 2007, Etsy embarked upon two separate funding rounds, both led by Union Square Ventures, in a Series B in January, and a Series C in July.
Series B raised ~$903,000, with the Series C raising a further $3.3 million, placing the valuation at close to $40 million by mid-2017.
2008
The demand for Etsy appeared to be strong, as the company participated in another funding round in January 2008, this time led by Jim Breyer at Accel Partners.
The Series D raised ~$28 million, valuing Etsy’s business at $117 million after just three short years. At this time, in January 2008, Etsy boasted 50 employees, 650,000 users, 120,000 of which were sellers, and a footprint that stretched across 127 countries.
2008 marked a pivotal shift in upper-management, with two of the founders departing, and some external management being brought in to replace them.
Maria Thomas (right) joined Etsy in 2008, originally as the Chief Operating Officer (COO), later taking the Chief Operating Officer (CEO) position in July of that year after Robert Kalin ceded his position to Maria to become the Chief Creative Officer (CCO).
This new role would act as “a nice loose moniker that will allow [Kalin] to focus on what [he is] best at: product work and long-term, big-picture thinking”.
By July 2008, Etsy’s team had grown to 68 employees, and Kalin felt the organisation required additional, and experienced, leadership to take them to the next level. Etsy had grown so large, in such a short space of time. With the work culture still like that of a college dorm room start-up, there required an infusion of experienced professionals who had experience in building what Etsy wanted to build. The existing management style was reported to be chaotic at the time.
Maria had previously served for six years as the SVP and GM at NPR, as well as Director of Product at Amazon for three years. Prior to those roles, she was the principal investment officer at International Finance Corporation, led by the World Bank. Grabbing such an experienced executive, seemed like a coy move for the Etsy team.
“Etsy needs to change. Some of what worked for us two or three years ago doesn’t work now, and we need to shift how we do things. This seems obvious, but it’s easy to overlook that you can’t get to where we are now without the past three years.
I remember when Etsy reached 10 employees: it was the first big shift in our workflow. When you’re starting a company, you do what works. It’s tautological: how do you know what works? It works. This meant working seven days a week, around the clock. It meant skipping out on rent, foregoing regular meals, not seeing family or friends. (There’s a reason that small groups of people are able to launch things that large companies can’t.)” - Robert Kalin
Maria was tasked with expanding and improving the value proposition to the people, process, and product within Etsy. In Maria’s own words, these goals were:
• People: seek deeper experience to lead Etsy through things we’ve never done before.
• Process: create a disciplined approach to planning and execution.
• Product: build the best marketplace for connecting makers and buyers.
“What do I bring with me to Etsy? Nearly ten years of experience operating consumer-oriented Web-based businesses at Amazon.com and NPR.org. I have learned that building a great company requires more than just a great idea. It requires an organization that knows what it wants to achieve and is staffed properly to reach those goals. It requires a relentless, detailed focus on execution informed by constantly listening to customers.” - Maria Thomas
Despite the impressive business expansion and strong new recruits, there were tensions boiling within the original founder trio. The apparent disgust exhibited by Schoppik and Maguire in Kalin’s Laissez-faire approach to management eventually resulted in their departures in August of 2008.
Maguire and Schoppik were reportedly working day and night on the company’s platform, whereas Kalin was more of an ideas man, often somewhat fleeting with regards to his output. Maguire later stated that Kalin would drum up a new idea almost every day, usually, something which made little sense with respect to the current status of the company. He went as far as to say that working at Etsy was akin to an abusive relationship.
Maguire, who had originally built the Etsy website alongside Schoppik, went on to found Waffl, a community and marketplace that provides a platform for innkeepers to connect with each other and travellers, as well as Postling, a social market service provider that allows users to publish on multiple networking sites through one centralized location. Schoppik, who served as Etsy’s CTO, joined Maguire at Waffl, as CTO.
In a 2008 post on Etsy’s blog page, the pair left one last message to their colleagues:
“The last three years have undoubtedly been the longest and most eventful of our lives. We’d like to thank each and every one of you for enabling us to build Etsy into what it is today. Through many sleepless nights your kind words and commitment to the marketplace kept us going gladly forward. The cookies didn’t hurt, either.
With a heavy heart now we move onto other ventures. We hope to stay in touch with many of you, and we wish the best of luck to our fellow Etsy employees.” - Chris Magure and Haim Schoppik
During a 2015 interview, with Piqued, Chris was asked if he ever missed working at Etsy, to which he replied:
“No. Etsy was a fascinating community to build for and grow alongside, but the working environment was not something I’ve ever felt wistful about.” - Chris Maguire
With Haim out of the picture, the company needed a new CTO, and ended up recruiting Chad Dickerson (below), who turned out to be a member of the team for years to come after he departed Yahoo! to join Etsy in September of 2008.
Chad would be placed in charge of leading the engineering team for Etsy, including site operations and software engineering, through a period of intense growth and change. He remained within the company for almost 9 years and left a legacy of ‘Notes from Chad’ on the Etsy blog, where he frequently wrote.
2009
After a few months at the helm of the CTO role, Chad Dickerson had already cracked down on some of Etsy’s largest misgivings across communication, performance & scalability, and search & developer API.
After arriving at Etsy, Chad noted that the system for monitoring the site was limited, which result in reactive solutions, as opposed to proactive. Chad and his team then rolled out a more sophisticated monitoring system in 2009 that enabled Etsy engineers to monitor over 700 services running on over 170 pieces of hardware, including servers, network gear and storage systems. When issues arose, engineers were now proactively alerted.
By adopting Akamai, a web infrastructure tool, Chad managed to significantly reduce the lag that Etsy was experiencing across their site during high volume periods. Home page loads were now 2-3 times faster in most locations around the world compared to October and as much as nine times faster in other locations. Average load times for the home page, in the US, shrunk from 4.6 seconds to 1.5 seconds, and in Singapore declined from 18.6 seconds to 2.2 seconds. This helped alleviate the inconsistencies in load times, whereby a user in France, for instance, would experience significant lag when loading up the homepage compared to, say, a user in the United Kingdom.
Etsy’s website was now faster, and more scalable.
Through improving the search and developer APIs, Chad improved the simplistic search capabilities, which would take as long as one minute to return results in some cases to a point where search response times increased by up to 30 times. In addition to this, the Etsy API was released to a small group of developers in a public beta, which would allow these developers to access the Etsy infrastructure in an attempt to crowdsource improvements.
In August of that year, Etsy moved its offices to downtown Brooklyn, by acquiring a new office in Dumbo.
The company then embarked upon their first acquisition in December, through their purchase of Adtuition, a contextual advertising service company, for an undisclosed fee. In this deal, Etsy acquired five developers with extensive knowledge on algorithmic search, data analysis, advertising infrastructure, and machine learning. They were set to immediately begin work on the search functionality at Etsy.
The final month of 2009 played witness to Robert Kalin, former CEO and founder, urging the Etsy board to remove current CEO, Maria Thomas, and reinstate himself as CEO. He believed that the company had strayed from its core values under Maria, whilst reinforcing the notion that the importance should be laid upon the sellers, customer service, and the website.
The Etsy board eventually voted in favour of Robert’s proposals, with Kalin announcing his reinstation as CEO in late December, with Maria expected to leave after the new year.
This was despite an impressive performance under Thomas, where GMS expanded significantly, and the company reportedly became profitable over her tenure. However, the complaints from sellers about the lack of customer support, in addition to the performance of the site as usage grew, proved to be the final nail in the coffin for Maria.
Kalin immediately began to add more engineers and customer services employees, more than doubling Etsy’s workforce within a year.
Fred Wilson, Etsy board member from 2007 and board chairman from 2017, recounted that Kalin told employees he had returned to restore a sense of wonder, a sense of poetry, and a sense of foolishness to Etsy once again. Following this, he recited a poem in an Irish accent, before smashing a coffee mug and reading from the Cluetrain Manifesto.
“The message was that things were going to get messier but that that was OK. It was very powerful." - Fred Wilson
2010 - 2011
Five years after Etsy’s launch, in 2010, it is reported the company now possesses over 5 million users, which would grow a further 2 million by the end of the year. 2010 also marked the year that Kalin revealed the elusive backstory for the company’s name.
The mystery behind Etsy’s name remained just that for many years, before Robert Kalin broke the silence in 2010, during an interview with Reader’s Digest. It turns out, that the name was somewhat random in its discovery.
“I wanted a nonsense word because I wanted to build the brand from scratch. I was watching Fellini's 8 ½and writing down what I was hearing. In Italian, you say 'etsi' a lot. It means 'oh, yes.' And in Latin, it means 'and if.” - Robert Kalin
After almost three years without additional funding, the company raised $20 million in a Series E funding round, led by Index Ventures in August 2010, pitting the valuation of the company at close to $300 million, almost 3 times the valuation raised in 2008.
Etsy then hired former Googler, Adam Freed (below), who left Google as their Director of Policy & Global Consumer Operations, in August, to join the Etsy team.
He would go on to stay with the company for four years, dropping his COO title in 2013, and becoming an advisor to the company until his departure in 2014.
Then, in March of 2011, Etsy launched a social networking function on their site called People Search which allowed Etsy members to add friends, as well as keep track of their friend’s favourite shops, and purchases. They also added a bolt-on gift service to this roll-out, where users could be sent gift ideas, for their friends, based on the items they frequently purchased, as well as other data points.
More management musical chairs were on the horizon for Etsy in 2011, as Robert Kalin was ousted from the company for the final time, replaced by Chad Dickerson in July , who had served as CTO since 2008. Later that year, in November 2011, Jared Tarbell left the company to pursue other goals, citing a desire to focus more on his health and relationships.
At this stage in Etsy’s story, the company employed ~165 people, with over 800,000 active online stores, with annual revenues exceeding $40 million, after growing 70% from the prior year. All the original three founders, plus Jared Tarbell, had left the company.
Kalin had experienced backlash since he regained the CEO position from Maria Thomas in 2009 after a spate of negatively perceived alterations to the platform, such as removing the chat room feature in 2011, with no replacement.
As well as his growingly concerning behaviours, both in a social and managerial sense, he displayed a tangible distaste for the concept of shareholder value, later stating that he “couldn't run a company where you had to use that as an excuse for why it was doing things”.
The roll-outs came fast, with Etsy introducing search ads on Etsy in September, which would introduce a new way for sellers to promote their listings. With an ever-growing number of live listings on the marketplace, over 10 million by September 2011, the search relevancy and discovery was becoming less potent. With search ads, the seller would now be able to pay to appear in the highlighted section of the Etsy search results pages when buyers were searching for relevant items that match certain keywords.
In November, Etsy unveiled its first iteration of the Etsy app on the Appstore, making it easier for buyers to search for goods, whilst they were not fixed to their desktops. For sellers, it allows them to manage their stores, whilst out and about. Remember, that in 2011, the iPhone 4 was the latest edition of the Apple line-up, so mobiles were still somewhat primitive compared to today’s standards.
This proved to be a rampant success for Etsy, as within four months of launch, the app generated over one million downloads. By May of 2012, they reached 1.5 million downloads and reported that 20% of all visits to Etsy came from a mobile device. To put that into context, for the full year 2020, around 61% of Etsy’s total GMS was created from sales made on a mobile device.
The success that Etsy was creating had begun to stir up the rumour mill for a potential IPO.
2012 - 2014
The year is 2012, and Etsy embarks upon its final funding round, through a Series F which, led by Index Ventures, raised $40 million, and valued the company at ~$700 million. With the proceeds from the inflow of capital, Etsy launched in several new markets, including France, Germany and Australia, as well as making their second acquisition in Trunkt, an online wholesale marketplace that sold artisanal goods.
The acquisition fee was never disclosed and was more so seen as a talent-grab in Trunkt founder, Dev Tandon.
In June, the company launched Direct Checkout, which would later pave the wave for Etsy Payments in 2017. Direct checkout was an optional way for shop owners to accept and manage credit card payments from buyers directly on Etsy.
Sellers utilising Etsy checkout would enable buyers to use a Visa, MasterCard, American Express, or Discover card during checkout from individual shops, online, on mobile, or on Etsy for iPhone, without being redirected from Etsy. Sellers adopting the service were charges a 3% + $0.25 payment processing fee for each sale and were extended the use of the new Shop Payment Account area to manage their money.
In September of 2012, Etsy announced Gift Cards, a long-requested feature, which would help attract new buyers to the platform, and was facilitated through the Direct Deposit service.
By year-end, 2012, Etsy had produced $74.6 million in revenues, split across $55.3 million in the marketplace, $15.8 million in seller services, and $3.4 million in other sales. Gross profits stood at $50.1 million, and the company reported a $1.1 million loss from operations, with a $2.4 million net loss. Mobile visits on Etsy grew 244% over the previous 12 months, and represented 25% of all traffic, up from 20% in November of 2011.
The following year, Etsy acquired Lascaux, a social networking applications developer for mobile devices, as well as Mixel, a small photo-sharing app. Both acquisitions were undoubtedly pursued to strengthen Etsy’s mobile application offerings.
Perhaps one of the most significant alterations to Etsy’s terms of service came in 2013 when they dropped the requirement for the seller’s products to be hand-made. Sellers could now list manufactured goods, which sent out a strong message at the time, given how craft-centric Etsy appeared to be. This caused some fans to leave but did not stop Etsy’s parabolic rise.
By the end of 2013, sales had grown to $125 million, gross profits reached $77.2 million and the company reported operating incomes of $733,000, with a narrow $796,000 net loss.
GMS had grown to reach $1.34 billion, with 29.5% of that originating from a mobile device. Perhaps most impressive, was the fact that in just two years after the mobile app launch, the percentage of mobile visits had grown from 20% to 41.3%.
2014 proved to be an important year for Etsy, as the company geared up for an eventual IPO in the following year.
In April of 2014, after the success of the Etsy app, Chad and the team launched the Etsy Seller app, a separate app designed just for sellers.
Prior to the Seller app, the Etsy app combined shopping and selling experiences. Seller tools were a small component of the overall experience. By launching Sell on Etsy, the company provided sellers with a higher quality experience that’s straightforward to use and tailored to their store.
This included features such as an activity feed, order management, listings manager, conversations, shop statistics, and notification for orders.
Later that year, in June, Etsy acquired a small online handmade retailer named ‘A Little Market’ for $30.8 million, mostly with stock, and $5.3 million in cash. This represented the largest acquisition to date for Etsy.
Beyond the product enhancements, Chad Dickerson was also busy making strategic human capital acquisitions that year after poaching Mike Grishaver from Pandora and giving him the title of Senior VP of Product.
This further demonstrated Etsy’s desire to penetrate the mobile tailwinds, as Mike had extensive experience in mobile user experience through his work at Pandora, a music streaming service. Mobile visits on Etsy had grown from 20% to 53% by 2014, demonstrating the need to build out their competencies on their mobile offerings.
By the year-end, 2014, Etsy had grown sales to $195 million and gross profits to $121 million. After a 67% increase in operating expenses, the company reported operating losses of $6.2 million and net losses of $15 million.
GMS had grown to $1.93 billion, and over 53% of Etsy visits now originated from a mobile device, which accounted for 36% of total GMS.
Active buyers and sellers are those who have incurred a payment or charge over the trailing 12 month period. From 2012, active sellers grew from 830,000 to 1.35 million, or 62%, and active buyers grew from 9.31 million to 19.8 million, up 112% over the period.
The following year, Etsy would go public.
2015, The Year of the IPO
The year had come for Etsy to file for an IPO, with the company going public in April 2015. Etsy raised $194.4 million from the offering with an offering price of $16 per share, after deducting underwriting fees and other expenses.
This placed their valuation at $3.77 billion, after a decade of operating.
Etsy’s share price tanked severely over the following year, bottoming-out at ~$6.70 per share by February 2016. Retail investors who purchased shares on the opening day, where prices soared to ~$30, would not be recouped until May of 2018. Of course, this is assuming they purchase the peak, and did no further buying until that point, so take that with a pinch of salt.
However volatile the share price, the returns for private investors turned out to be sumptuous, with early backers now owning a multi-billion dollar, publicly-traded, commerce company for as little as a few cents per share.
In 2016, in an interview with the New York Times, founder and ousted CEO, Robert Kalin recollected on his time at Etsy, stating that he is grateful for what it taught him and that he is glad he is not a CEO of a publicly-traded company.
“I got off the ride not when I thought I would, but I take a very karmic view of things. If the universe gives you a hint and you don’t listen, it gives you a kick.” - Robert Kalin
Elsewhere in 2015, Etsy continued to add value to the platform, launching Etsy Local in August, partnering with Apple Pay, and introducing the Etsy Seller Account Management program.
2016 - 2020
Over the next four years, Etsy hit the ground running and began to print cash. By 2020, sales climbed to $1.7 billion, gross profit climbed to $1.2 billion, the company became profitable, and operational cash flow reached $0.39 on the dollar in terms of sales.
We have now spoken, at length, about the history of Etsy, and I gather the reader may be anxious to move on and hear more about the Etsy that stands before us today. We are going to come back to the performance, a little later on. So, below are some of the highlights from the years 2016 to 2020.
2016
Etsy acquires BlackBird technologies, a start-up focusing on AI.
Introduce Google Shopping Ads for Etsy Sellers.
Partners with Intuit to offer Etsy sellers a self-employed tax tool for UK and US sellers.
Launch Etsy Patterns, a service that enables Etsy sellers to create their own custom websites in minutes, leveraging all the hard work they’ve already put into their Etsy shops.
Launched Shop Videos, a new way for sellers to connect with buyers and showcase their creativity by sharing the story and process behind their shops and the items they create.
2017
Chad Dickerson, CEO, is replaced by Josh Silverman (current CEO).
John Allspaw, CTO, is replaced by Mike Fisher (current CTO).
Kristina Salen, CFO, is replaced by Rachel Glaser (current CFO).
Etsy cut 8% of its workforce, after experiencing losses, in an attempt to cut costs.
Launches Etsy Studio, a new market dedicated to craft supplies.
Direct Deposit is rebranded as Etsy Payments
2018 - 2019
Etsy introduces Etsy Ads, a new platform that helps take the guesswork out of advertising and enables sellers to reach buyers both on and off of Etsy.
Linda Findley Kozlowski Steps Down as Etsy's COO
Etsy raise $300 million through a senior convertible note offering in 2018
Acquires Reverb, a marketplace for new, used and vintage music gear for $275 million in cash
The company raised a further $650 million in 2019, through senior convertible note offering
2020
Etsy raise an additional $650 million through senior convertible note offering
Upon the onset of coronavirus, Etsy urges sellers to start making facemasks to combat the virus. In Q2 and Q3 of FY20, masks sales account for 32% and 23% of total GMS growth.
The company add Buy Now Pay Later, through Klarna on Etsy Payments
Now that we have acquired a flavour for Etsy’s history, let us now move on to discuss the business overview of the company which exists today, in 2021.
Conor,
Lead Analyst at Occasio Capital Ltd