Hello Etsy IPO, Goodbye Crocheted Shorts
Let's cherish the memory of Etsy as it was on its last day as a nonpublic company: A website for people who sell handmade crafts that has vowed not to let greed get in the way of doing good.
It seems unlikely that we will still be able to describe Etsy that way five years from now. The company priced at $16 a share tonight and trading begins Thursday. The Wall Street machine -- bankers, analysts and big institutional investors who only care about the stock price going higher -- has a funny way of smoothing away a business’ quirks. Over time, most companies are forced to adopt the same playbook, which involves increasing shareholder returns at all costs.
Generally speaking, companies that deliver earnings and revenue growth can retain their ideals. But once growth wavers, or seems insufficient, then the pressure is on for a company to grow. Investors are like waves beating on the shore: Eventually, they make all the rocks basically look the same.
You needn't look any further than Google for proof. When the company filed for its IPO in 2004, it used a “Dutch auction” strategy to get more stock into the hands of retail investors. It also published an owner's manual for shareholders that explained how the company would defy convention. The founders said they wouldn’t bow to pressure to meet short-term earnings forecasts. And, most famously, they said their “don’t be evil” philosophy would continue to be the ethos of the publicly traded company.
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Google has held onto some of its ideals: Project Loon or the self-driving car could improve the lives of lots of people. And Google is investing lots of money in other experimental projects with no certain benefit.
Whether it is sticking to “don’t be evil” is open to debate, as shown by the European Union’s decision to file a formal anti-trust complaint against Google for manipulating search results. And if you listen to Google's earnings calls, they sound just like those of any other company. Executives take investor estimates seriously and work hard to manage those expectations.
Etsy has some Google-like characteristics. For example, it set aside 5 percent of its shares for suppliers and the loyal vendors on its platform. Kathleen Smith, who runs the IPO research firm Renaissance Capital, told Reuters that this plan created some angst among institutional investors who worried that the little guys wouldn’t understand stock volatility.
Etsy affirmed its do-gooder commitment when it became a B corporation in 2012. That means it has best practices for treating its employees, suppliers, community and the environment. For example, employees are paid 40 percent more than the local living wage and get better-than-average benefits. The company composts, and it encourages employees to bike to work.
Etsy is the largest B corporation to go public. (A much smaller one, Rally Software, went public in 2013.) My Bloomberg colleague Alex Barinka noted that when Etsy's B corp certification runs out, it can either let it expire or it can become a public benefit corporation. Such a move "would codify its responsibility to 'stakeholders' (employees, community members and other noninvestors) alongside its fiduciary responsibility to shareholders.”
If Etsy is thriving, investors probably won’t make too much of a fuss if the company wants to become a public benefit corporation. Investors have been relatively unfazed by Google’s forays into cars and failed projects such as mystery barges and face computers because the company has long been a cash-generating machine.
But Etsy isn’t profitable and, as it notes in its prospectus, “We have a history of operating losses and we may not achieve or maintain profitability in the future.” So even if Etsy maintains some of its “don’t be evil” tendencies, it may not always be a supportive platform for quirky, handmade goods that aren't necessarily huge sellers.
At the moment, you can buy a necklace made of cat hair and a one-of-a-kind $400 “Deer John” fake taxidermy rendering of John Lennon as a deer, made from mostly found objects. But those sellers might not always be the norm on the site. Etsy has mostly been a place for people who make handicrafts, but my Bloomberg colleague Leslie Picker pointed out that the company started letting sellers outsource manufacturing and fulfillment services. This, essentially, allows sellers to churn out goods at a higher volume. It’s not quite mass production, but the items aren't necessarily made by hand in someone’s craft room.
Etsy has been sensitive to fears that people who outsource production could squeeze out smaller sellers who can't compete on volume and price. The company has been careful to vet vendors who use outside help, approving less than 50 percent of applicants to sell wares on the platform.
As a result, some vendors have developed into huge businesses thanks to Etsy, boosting the site's revenue. That’s the sort of growth Wall Street likes and wants to encourage. Etsy could grow and finally achieve profitability, but it may move away from its crafty roots to do so.
I love that Etsy gives a platform to someone who can crochet these shorts and sell them to men who love pants made of yarn. I’m probably going to buy this glowing owl necklace right after I publish this story. I need this coffee mug. I like Etsy just the way it is. And that’s why I’m taking time to soak in the company as it exists today, before Wall Street forces it to change.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Max Berley at email@example.com