Etsy sent out an email to all sellers on Wednesday stating that the company is going public. The Etsy Initial Public Offering (IPO) could take place as early as April, but we won’t know in advance the exact date or share price.
I thought I’d take a look at what an IPO really is, how it works, and what might be motivating Etsy to go public. I’m always interested in the “why” behind these things.
An IPO is an indicator that a company is ready to grow and needs a lot of money to do so. It’s often the only way that a company can fund a huge expansion. Etsy is hoping to raise $100 million in the IPO.
Let’s look at how Etsy has been funded up until now. Since its founding in 2005 Etsy has been a private company. Private companies have just a few shareholders, since figuring out how to buy shares for beginners is an arduous process. Right now Etsy has 312. These shareholders help fund Etsy’s operations and in exchange have voting rights. The main shareholders now are four venture capital firms:
- Accel Partners controls 27% of Etsy
- Index Ventures controls 12.8%
- Tiger Global Management controls 7.3%
- Union Square Ventures controls 15.2%
Venture capital firms and individuals, like those who purchased a crypto trading bot, invest in a private company like Etsy because they are hoping that the company will grow, go public, and eventually they’ll be able to sell their shares and make a large profit. They offer their guidance and expertise along the way.
Now, Etsy is ready to expand. To do so they need to raise money. One way to do that is to borrow it. Another is to bring on more investors. A third way is to go public.
When you go public you sell off tiny shares of the company to the general public. In order for shareholders to have a say in the company’s management they would need to buy as many or more shares than the company’s management and largest investors. This typically means owning at least 5%-10% of the company’s stock. So people don’t tend to invest in public companies solely or primarily to influence their management or change their way of doing business. People buy shares in a public company for the same reasons investors invest in any company – they believe that the company will become more profitable at some point in the future at which point they could sell their shares and make money. (Read more: ob Bitcoin Code seriös ist)
A few months after the IPO the venture capitalists will be able to sell their shares to the public and realize (meaning make money from) their original investment in Etsy. In all likelihood they will make an enormous profit on these sales.
Once a company goes public they are held to strict rules and regulations. They have to have a board of directors, for example, and they have to submit detailed quarterly financial reporting to the public. They also have to have their financial results and operational procedures audited and certified by a major public accounting firm. These audited financial statements are in turn made public and have a lot of detailed information about the company, but can be challenging to understand if you don’t have an accounting background.
Once the company is public they’ll be better able to raise capital for future growth and to repay debt by issuing more stock.
It’s also easier for public companies to buy other companies, public or private, because they can offer stock as part of the deal. Etsy has bought four companies over the past few years:
- in 2012 they bought Trunkt for $200,000
- in 2013 they bought Lascaux (an iOS app) for $750,000
- in 2014 they bought Jarvis Labs for $3.2 million
- also in 2014 they bought Incubart (which owned the French online marketplace A Little Market) for $30.8 million
If Etsy wants to buy more companies in the future it will be easier to pull together a deal because they’ll be able to use their publicly traded stock as currency to exchange for control of the companies.
The increased reporting and financial scrutiny that is required of a public company can also allow them to get better interest rates if they need to borrow money in the future.
A final advantage of going public is the ability to attract top talent to work for you. Being public means you can offer stock ownership to your employees through stock options that they can sell in the public markets. Right now Etsy’s employees own private stock and options to acquire private stock, but have very limited ability to turn it into cash.
Taking a company public is a long and involved process.
The company works with several investment banks who help assess the value of the company and handle the sale of the first stock offered. In Etsy’s case they’re working with Goldman Sachs, Morgan Stanley, and Allen & Company. Once the shares sell the banks keep a portion of the proceeds as their fee. When buying stocks you’ll typically need the assistance of a stockbroker, since you cannot simply call up a stock exchange شراء الاسهم and ask to buy stocks directly.
The banks look over the financials and help Etsy put together a prospectus that they file with the Securities and Exchange Commission (SEC). Etsy filed their initial prospectus on Wednesday. In the prospectus Etsy explains it’s strengths and weaknesses. They also file a registration statement indicating their plans to go public. As the IPO gets closer, these filings will be updated and additional details disclosed as they are finalized or at the direction of the SEC.
Now it’s the banks’ job to find some big investors. The banks go on what’s called a “road show” traveling all over the country talking with potential investors and trying to convince them that they should invest in Etsy. These investors are typically institutional investors such as mutual fund managers and hedge funds. Occasionally very wealthy private investors are invited to the presentations as well. During the road show Etsy goes into a “quiet period” in which they can’t comment on anything related to the IPO just in case they say something that affects the stock price. If they break this rule there can be enormous fines and criminal penalties.
There are significant legal fees, accounting fees, and marketing costs involved in going public that often add up to millions of dollars. It’s also incredibly time-consuming for the top management, taking about a year to complete in total.
Public companies have to disclose detailed information that competitors might use to their advantage. For example, we now know that “seller services” (promoted listings, direct checkout, and shipping labels) is Etsy’s fastest growing revenue source, growing from $43 million in 2013 to $83 million in 2014.
How will being a public company affect Etsy’s behavior? I think this is the key question for those of us who sell on Etsy now. Reading the Etsy forums and looking at responses to the announcement on Facebook people are really worried that shareholders won’t care about values, they’ll only care about profits which means Etsy will be overtaken by resellers, or that we’ll start seeing pop-up ads or other aggressive marketing tactics used to try to increase profitability
While it’s impossible to predict how Etsy might change once it’s public, there’s no reason to think that the business model will shift fundamentally. In fact Etsy’s shareholders will be eager to see them sustain their current business and business model which has been so successful. If they want to buy shares in a company that is a platform for resellers they can buy shares in Alibaba.
But that said, going public makes a company’s management focus on the share price and on their quarterly financial reports to the shareholders and the public in a way that a private company doesn’t. This can be distracting and in some circumstances leads companies to make huge mistakes and bad decisions.
There’s no way to know exactly how Etsy will look a year after the IPO, or three years out, but at least we can get a better understanding of what’s going to happen over the next few months. Etsy has always had investors. Soon it will have exponentially more.
Thank you , Abby, for doing this research. Prior to getting serious about my [Etsy] business, reading this kind of news made me want to stab my eyes out. It kind of still does, but thank you for taking the time to write about it in a way that helps me understand. Now I feel like I have the confidence to be part of the conversation.
“In the prospectus Etsy explains it’s strengths and weaknesses.” This is immensely interesting to me. I always hear Etsy shop owners (current and former) complain that Etsy doesn’t listen to them. I’m very interested in whether or not Etsy considers their current communication methods (or lack thereof) with shop owners a weakness, or if they’ve acknowledged any of the other issues that cause sellers to leave or complain. I’ll have to see if I can handle looking through that prospectus.
As of right now, I feel optimistic about this news. Might be because I am a relatively new shop owner (since June ’14) and haven’t experienced the grievances many others have. Etsy propelled my business from very few sales with a Shopify shop to steady sales when I moved to their platform and I’ve been happy ever since.
I’m eager to come back later to read the great discussion that I know will unfold here in the comments section. Thanks again, Abby.
In the prospectus they do state that having a good reputation and a trusting relationship with the community of sellers is important. I recommend reading that part.
I agree with you that before I started a business I didn’t find business information to be very interesting because it wasn’t relevant to me and my life. Now, though, I find it to be totally fascinating!
Wonderful explanation! A lot of research went into this and it was very informative. Etsy has been an amazing job creation engine for us. For the past 6 years we’ve been a vendor on Etsy and during that time we have had the opportunity to turn a passion into a dream. We’ve improved our craftsmanship, gained exposure to customers outside of our local market, and hired few full-time employees. These craftsmanship jobs might not be available in our area otherwise. This seems to be just another step in Etsy’s evolution not a revolution. We’re glad to see them grow as they’ve helped us grow. We are incredibly grateful for all that Etsy has done for us and are excited about what great things can come after the IPO. Congratulations Etsy!
Stacey (FreshStitches) says
Thanks for this post!
I’ve been reading so much uproar about Etsy ‘selling out’… and I honestly don’t understand why the IPO is such a big deal. It doesn’t seem (to me, at least) that the company will change much more dramatically once it’s publicly traded. I think a lot of folks have fantasy ideas about what Etsy is, and are offended that they’re ‘about profits’… but it’s a company! It’s always been about profits! 🙂
I think that it’s easy to say Etsy is selling out when you read the IPO headlines, without really understanding how Etsy has been funded up until now and what the goals for the IPO are. Assuming an IPO means selling out without evaluating the historical funding sources is sorta sloppy.
Stormy Peterson says
Assuming the term “sellout” is being used by fantasists with little understanding of Etsy’s history of initial investors, and funding to describe Etsy only as it relates to its most recent IPO announcement can be equally as sloppy.
I want to understand your comment, but I’m not sure that I do. Could you rephrase it for me?
Jane Skoch says
Thank you for the explanation. I would like to invest in Etsy. I sell there – I still get a lot of traffic there. To really grow and expand on Etsy, I think you have to transform yourself to a designer rather than just a hand-maker. I’m not sure I’m ready or capable of that and I certainly think there’s some gray area despite how Etsy describes itself.
I am not an investment adviser (by any means!), but I think there’s more to the process of evaluating Etsy stock than just being an Etsy seller. Buying a small amount of stock isn’t going to give you voting rights in the company so you really should look at it in terms of Etsy’s financial health in comparison to other stocks on the market before making a decision.
Teresa Ascone says
Thank you for your research and clear explanation of an IPO.
Regardless the IPO, for me the sad bit was Etsy’s self description at the end – no mention of handmade, they only talk about “unique goods”. McDonalds burgers are unique to the company… I’m afraid the focus will shift even more towards big money makers (aka resellers) and small crafters will be accommodated only to keep a handmade façade.
Thank you for researching and writing about this. It opens my eyes. After reading this article and your tweets about the topic; my first thought was, no wonder Etsy never took a strong stance against resellers. They needed the money. I am not surprised they are going public. I am not sure that the IPO will drastically change Etsy. I think any changes in the direction of Etsy have already been happening for a while. I don’t blame them for wanting to be profitable. I do blame them for changing direction and not being more direct about it. They are alienating the people who helped make them big. I see Etsy becoming more of a creative version of Ebay or Amazon and handmade gradually getting edged out of the equation. If that hasn’t happened already.
Lisa Smallridge says
I’m an Etsy seller, and did not receive any communication. This is not a good start.
I see it as a sign that etsy is failing as according to article here they have been making a loss for the last three years. They are going public because they really need more money. http://www.npr.org/blogs/alltechconsidered/2015/03/05/390979529/mass-market-stocks-in-hand-crafted-goods-etsy-preps-to-go-public
Whatever the accuracy of that, it certainly has failed at its original model of selling only handmade. Despite its recent desperate measures allowing manufacturing and resellers (trampling on handmade in the process), it is still failing. It is a shame that handmade has not succeeded on the that was tailor made for it. It does not bode well for another venue to take up the challenge. It is not somewhere that I would invest in if I cared about handmade. If I don’t, then unless I have money to risk, I don’t see it as a viable option either, not right now, but then I guess that is the point of buying shares there is a gamble that it might pay off at some point in the future. I’m getting ready for another eBay – it’s half way there, which some people might enjoy. Just not me.
I am not sure why I as a member of etsy, do not warrant an email too. After all what is it without buyers? Is that the plan, to keep us in the dark as much as possible? Mind you etsy is not big on customer service (I mean the company, not its sellers). Are we meant to be sitting ducks, blithely putting manufactured and resold goods in our baskets assuming they are handmade? Unfortunately I rather think we are.
Thanks Abby, for taking the time to research and share this process of Etsy going public. I know if I asked my HBS husband to explain it to me, I’d start to glaze over half way through. Your contextual, clear and understandable explanation was very helpful!
Thanks for taking the time to research and deliver a plain spoken explanation that even I can understand. 🙂
Abby your teaching background really shines through in how well you present relevant information. This article and your previous article about Three Bird Nest are so well researched and written. Thanks for putting in the time.
As a buyer on Etsy the changes I’ve experienced have not been for the better. I’m not sure other people have touched on this, but I’ve been driven to buy directly from sellers through social media (mainly found through Instagram). I’ve found it too time consuming to slog through real makers mixed with mass production, and the lines are so murky now.
Though I understand the Etsy move, I think the money raising route of going for IPOs is losing favor. Many founders are opting for alternative methods of raising cash and getting more creative about it, crowd funding being one source.
I do see the changes brought about as an opportunity for a new kind of Etsy. A saavy entrepreneur could partner with top developers and create a new platform. It would be very easy to connect with top Etsy sellers and Etsy buyers to tease out the best of what Etsy does and what they don’t do so well, improve upon it and create a better marketplace. I have a lot of ideas about how Etsy could be better and I’m sure a lot of other Etsy users do too.
Just because other “handmade” marketplaces have failed to gain steam doesn’t mean it’s not possible to build a better site. Often improvements to a digital platform are difficult to implement which is why starting fresh is an opportunity waiting to happen, in fact, maybe someone is already working on one. I hope so.
There are definitely several in the works. I think one of the things that Etsy has that can’t be denied is traffic. Traffic in so incredibly valuable and they’ve got it in a way that is unmatched by any other marketplace. Building a site that gets the kind of traffic that Etsy gets now will be difficult. Not impossible, but hard.
Thank you Abby, for explaining all this!
Rebecca English says
Excellent explanation Abby!
Hello Abby, wanted to let you know I included a link to your excellent Etsy Goes IPO explanation here, it’s definitely one of the better articles available on the net. Thank you 😉
Thank you so much. I really appreciate that.
Great analysis of the Etsy IPO. Can’t believe this “quaint” company is worth $1.77 billion. EquityZen published an infographic tracking returns investors made on their early investment in Etsy: https://equityzen.com/blog/7170070495451217090/