The Fall of the House of Etsy
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A Harry Potter T-shirt was maybe never going to sustain an empire. Or coasters shaped like national landmarks, or Christmas ornaments with your dog’s face on them.
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Empires are built on unlikely foundations. Romulus built Rome on shards of Etruscan pottery and wolf milk. Cecrops built Athens on a hill and a lot of goat meat. And between 2005 and the fall of 2021, Etsy built a $37 billion empire on personalized coasters, dog-themed Christmas ornaments, and bootleg Taylor Swift merch. On November 23, 2021 – in the midst of a pandemic that saw the re-emergence of the kind of craft-driven “cottage industry” the company had aggregated onto its platform – share prices sat at an all-time high of $296.91 and the biggest concern for many investors was that the employee perks were too good.
Today, share prices sit below $80 having fallen 30 percent in November. Concerns run toward seller revolts due to changing Etsy rules and the financial hole left by the $217 million acquisition of Elo7 and the $1.625 billion acquisition of Depop in 2021, both of which were viewed by many as overpriced. But Etsy has a solid operating margin and generated north of $650 million in cash over the previous 12 months, so what’s the real problem? Why does it feel like the end of an empire?
The answer is simple: Etsy kind of sucks. Phrased with a touch more subtlety: Etsy no longer feels like a differentiated and buyer-friendly environment. There are roughly five reasons for this:
Dropshippers, ubiquitous on the internet, are all over the platform. Rather than selling handcrafted products, these vendors act as middlemen, which is precisely the kind of person Etsy was designed to cut out of the market. (The kind of person that really messes up a flea market.)
Counterfeit goods constitute an increasing percentage of products offered. Earlier this year, the firm Citron Research claimed Etsy was one of the biggest counterfeit distributors. Etsy has only exacerbated the problem by allowing vendors to buy “ad words” of brands. This skews on-platform search toward those focused on arbitrage rather than value creation.
Small sellers are leaving. This may actually not be Etsy’s fault. The conditions of the pandemic were singular and many of the folks who decided they really wanted to spend their lives crocheting portraits of other people’s cats have subsequently changed their minds.
Large sellers are leaving. Mandatory opt-ins to advertisements led to an exodus of bigger sellers. In 2020, Etsy started automatically advertising on sellers’ behalf, with most shops obligated to pay Etsy a cut. Vendors making more than $10,000 annually were not allowed to opt out. People got pissed.
Etsy is no longer a unique platform. What makes Etsy unique – the “moat” in VC terms – is its scale and the network effects that scale provides, but the actual two-sided marketplace element of the business (all that code) is now easily replicable and can be basically bought off a shelf by new challengers and niche operators in the space.
The problems need to be understood in the context of the solution Etsy first provided. Back in the early aughts, there was really no easy way for a maker to reach an audience beyond the local farmer’s market. Yes, eBay existed, but it was impractical. High barrier to entry. Low return on investment. (Craigslist was low barrier, unreliable return.) Etsy changed that and, in so doing, created a bigger market for handmade and custom-made goods. And Etsy was – arguably still is – the real deal: the company only allows homemade, vintage, or craft items, rulebreakers notwithstanding. The overarching issue now seems to be perverse incentives. Etsy gets a percentage of the profits of the sellers undermining its mission. One investigation from the consumer testing site Which? this year found that Etsy sellers were passing off items as homemade, but sourcing them from Amazon, Asda, and the discount chain B&M.
“There are a lot of aspirational sellers who come to Etsy and realize that after a few months, they’re losing money selling a bunch of products for cheaper than they need to,” Matt Chancey, a private equity consultant, tells SPY. “When you start charging $30 for things, you start to go head-to-head with real retailers: You need quality, a return policy, warranties, reward systems, customer service departments – that’s not what the mom-and-pop seller was intended to do, and people make the swap to the quality vendor.”
Basically, it’s hard for small Etsy sellers to compete with large retail operations, especially at the price points that smaller sellers need to keep their businesses viable.
And Etsy hasn’t helped sellers by eroding trust through delayed payments, an unfortunate collateral of the Silicon Valley Bank collapse earlier this year. Etsy was using SVB to distribute payments to some sellers, who reported that they weren’t getting payments after the bank filed for bankruptcy in March.
In other words, Etsy is currently (things change!) driving away the sellers that actually make quality products. The dynamic is not dissimilar to the dynamic around Facebook content. The handmade stuff – hot takes on family reunions and commentary on PTA meetings – started to disappear as the internal ad sales business became a key profit driver1. A vicious cycle is created. Etsy consumers buy from lower quality vendors, get bad products, and become skeptical of the whole enterprise. Because Etsy products are, as Chancey puts it skeptically2, “cute” but not the sort of “durable goods” that belong in a household budget, consumers just leave. Vendors on Etsy forums say sales are tanking. Many seem baffled.
The venn diagram of people who sell on Etsy and people who understand the dynamics of public markets is not, one might conclude, a perfect circle.
“Etsy’s listing on the stock exchange transformed it into a company that needed to grow and grow fast so as to be able to satisfy its shareholders and their expected returns on investment,” Thomaï Serdari, a marketing professor at NYU specializing in luxury marketing and branding, tells SPY. “When there is a push for growth that is not commensurate with the initial values of the company, misalignment is bound to appear.”
She adds that in order to scale, “Etsy allowed in sellers that had nothing to do with its original community and the values that bound them together.” That would be the small nation of print-to-order sellers. “Makers will look for alternatives,” she adds. “I imagine these must be smaller, still private, and functioning based on authenticity and trust as Etsy used to do.”
Correct. There has been a sharp increase in the number of e-commerce marketplaces over the last few years and those marketplaces have attracted a lot of sellers. The problem is that they haven’t all attracted a lot of buyers. The Artisans Co-Operative, which updates an ongoing list of Etsy alternatives, endorses marketplaces that hit a “critical mass” of consumers. Critical mass equals a viable consumer base. It’s an indicator that a site can attract serious businesses, but as Chancey emphasizes, a large number of sellers isn’t important.
If the number of buyers is what ultimately matters – and it is – Etsy will almost certainly have to change course. Chancey imagines a future in which Etsy intentionally downscales, rightsizing its seller network in order to bring back loyal buyers. The question is whether Etsy can do this before smaller marketplaces get their hooks into all those knitwear enthusiasts.
1 This pattern of scale > internal ad products > clusterfuckery > user exodus is generally referred to as “Enshittification,” a very fun term coined by Cory Doctorow in 2022 to explain why, broadly speaking, everything on the internet now seems way worse.
2 He’s never used Etsy, and shopped on Amazon for the first time six months ago. Equity consulting leaves little time for materialism, apparently.
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