Will Success Ruin Etsy?

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Like many women who have gotten married in the last eight years, I ended up buying a bunch of stuff for my wedding on Etsy. A lovely Irish linen ring-bearer pillow. A simple veil for the reception, to replace the cathedral-length lace heirloom I wore for the ceremony. The vintage decanter set, filled with whiskey, that I sent over to the groomsmen. (Whiskey was purchased separately.) Virtually every bride I know has ended up there for something or other; nowhere else has such a broad selection of nice handmade and vintage items at such good prices. Plus, you don't have to go through the stress of eBay or a local wedding show.

(If you're starting to notice that the blog has gotten a little wedding-and-home heavy, apologies, but . . . well, it's August. The only thing that's happening is that we might attack Syria, and that's way outside my ambit. So, how about those garden shows?)

That value proposition has been good business for Etsy, which has raised tens of millions in venture-capital financing and provided hundreds of thousands of crafters and vintage collectors a place to sell their wares. But an intriguing article in the Daily Dot argues that Etsy's model is reaching a crisis point. The core of Etsy's trade is the successful crafters who have made a full-time business out of their beloved hobbies. Unfortunately, once those people hit the limits of their own production, they want to scale -- which threatens to violate the whole idea of Etsy as a place where you can get homespun crafts.

Of course, I'd have been perfectly happy buying my handmade ring-bearer pillow from a small shop that turned them out in batches. Probably many of Etsy's buyers are more attached to the idea of handmade than I was, but I doubt many of them care whether three women were involved in the cutting and sewing, rather than one. The problem is that if you relax the rules, you risk letting in folks who buy mass-produced factory goods in China or another emerging market and then pass them off as homemade. This is not only a fraud on the buyer but also alienates legitimate sellers, who lose business when they're undercut by factory-made goods.

Then again, if you don't relax the rules, your biggest sellers may leave rather than work themselves into exhaustion to cope with the flood of orders. Sellers might try raising their prices until demand hits a level they can cope with, but ultimately, even many avid crafters want a business that they can occasionally walk away from, in which their income is not capped by the number of hours they can work.

Perhaps Etsy's natural role in the crafting ecosystem is as an incubator of businesses that eventually leave when demand gets too high -- in fact, there's probably room for a curated sister site where vetted Etsy veterans can go pro. But that's likely hard to accept if you're the chief executive officer. If Etsy is anything like most businesses, a vastly disproportionate share of its revenue will come from a relatively small fraction of high-volume businesses, while the majority of its sellers sell one or two things every now and again. Letting sellers go when they get too big would be pretty painful. On the other hand, if Etsy gets too polluted with Chinese knockoffs, it could lose major segments of its business, like jewelry, entirely.

This problem is particularly pressing because Etsy needs to keep growing. It's a network of buyer and sellers, and like most networks, it gets more valuable to both by adding nodes. And since those venture capitalists are eventually going to want their money back, the business has strong incentives to keep expanding.

Don't get me wrong: I don't think Etsy is facing a life or death threat. It's a very successful business that I still use from time to time. (Meet our newdining-room curtain tiebacks.) But it does look like Etsy still has to figure out how to keep its homegrown successes without opening the network to foreign frauds.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net