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The Story of Etsy's Distinctly 21st-Century Management Challenge

Etsy is growing rapidly, has hundreds of happy employees, and is worth hundreds of millions of dollars--but is still deeply troubled. Now comes the hard part for CEO Chad Dickerson.
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In his first week as chief technology officer of the e-commerce company Etsy, Chad Dickerson took a promising engineering candidate to a café near the company’s office in the Dumbo section of Brooklyn, New York, to conduct an interview. While the two were sitting at the bar, the new CTO got a text message from Etsy’s founder, Rob Kalin, saying the site was down and nobody knew why. Trying to remain calm and not give away the bush-league crisis, Dickerson excused himself and headed to the restroom to respond. In a series of texts and calls, while his candidate sat nursing a drink in the other room, he learned to his horror that the site didn’t even have a way to tell visitors it was experiencing technical difficulties. “You’d go to Etsy.com, and it was like dead air,” Dickerson says. In the scramble that ensued, someone remembered, “Oh, yeah; we used to have this blog. Let’s get that going again, so we can at least redirect people there.”

Etsy had launched in 2005 as a marketplace of handmade goods, and by the time Dickerson arrived, in 2008, the craze for artisanal products was well established in popular culture. Kalin’s company was perfectly positioned at the center of it all (and Kalin himself would be on the cover of Inc. twice). Individual crafters would crochet beanies and whittle baby toys in their garages, and Etsy would provide them online storefronts and access to a vast customer base. Kalin had recruited Dickerson to join Etsy with a passionate narrative about how the site was trying to change the world through the sheer power of craftsmanship. Dickerson had long harbored something of a hippie streak, and he was restless in his job running the advanced-products team at Yahoo, so he took a chance and moved with his wife across the country from Silicon Valley to Brooklyn.

Now, just a few days into his job, he began to wonder if he had made a terrible mistake.

It wasn’t just the technology that was a disaster. Kalin had started the company, along with two friends, when he was a 24-year-old recent graduate armed with a classics major and a passion for furniture making but little to no technology or business acumen. His lack of experience didn’t limit the company at first, but as Etsy grew and took on tens of millions of dollars in venture capital financing, it began buckling under the weight of its success. Customer service was a joke, for instance; sellers who had problems often waited a week to get a response to an email. Kalin’s co-founders left the company in 2008 and said the experience had been like “an abusive relationship.”

That’s the company Dickerson took responsibility for in 2011, when Etsy’s board removed Kalin and named Dickerson CEO. Since then, head count has more than doubled, to more than 450. Gross merchandise sales have roughly tripled and are on track to approach $1.5 billion this year. There are more than a million shops on Etsy, 18 million items for sale, and 60 million monthly unique visitors, up from 25 million when Dickerson took over.

Not only is Etsy moving fast, but under the hood, things are running smoothly. The site is stable and fast, mobile traffic has surged, and a custom payment platform has streamlined the buying process and added a new revenue stream. Transactions happen in nine languages across more than 200 countries. Within the company, Dickerson has created a culture in which employees have a high degree of creative freedom and, when things go wrong, accountability without blame. “We actually trust people,” Dickerson says. He calls the approach a “radical decentralization of authority.”

It’s a remarkable success story: A leader takes over a troubled operation intimately tied to its founder and earns the trust and admiration of his staff members by, in large part, trusting them. Spend a few days hanging around Etsy headquarters, lunching at picnic tables and tearing up paper plates so they’ll break down more easily in a compost pile, and you come away with the impression of a confident and enlightened company. An IPO is widely anticipated.

And yet, spend just a few minutes scanning the Etsy forums, where sellers trade tips and discuss Etsy-related issues, and another story quickly emerges, one in which Etsy faces nothing short of an existential crisis. On the forums, a highly vocal faction of members accuses Dickerson of selling out the company’s mission. In this narrative, Dickerson was brought on as a tool of the investors, who want the company to grow at all costs. Etsy is just a step away from becoming eBay, these people say.

At issue is what belongs in the Etsy marketplace. The individual artisans who helped build the company from scratch believe handmade goods should be just that, nothing more. This sounds reasonable enough--until a successful seller finds herself unable to meet demand and has no choice but to leave Etsy if she wants to expand her business. There are countless examples of exactly that happening.

Etsy, which makes most of its money by charging a 20-cent listing fee for each product and taking a 3.5 percent commission on each sale, clearly needs to keep its best sellers around. At the same time, the company can’t afford to alienate its passionate core. It adds up to a distinctly 21st-century dilemma for Dickerson. It’s not enough for the CEO of Etsy to build great shopping technology, post big sales numbers, and inspire his work force. He’s the leader of a community as much as a company, and that means balancing wildly divergent priorities. That his particular community includes a million-plus artist types with, in many cases, anticommercial tendencies, makes it all the harder. Only if he can earn the community’s trust, as he earned the trust of his staff, can he prove himself a visionary CEO.

To understand the conflict that’s roiling Etsy’s community and the challenge facing Dickerson, consider the case of Tielor McBride. A bearded 28-year-old Brooklyn-based leather-goods maker, McBride joined Etsy in 2010. He was designing window displays and interiors for Ralph Lauren stores, but after he got promoted into the advertising department and the work left him creatively unfulfilled, he decided to turn his hobby of making rugged leather and canvas bags into a profession. He made his first sale on Etsy in late 2010, under the shop name TM1985, and business took off a few months later when he was highlighted on Etsy’s homepage as a Featured Seller; he had 200 orders in one day.

As sales picked up on Etsy, McBride’s connections in the fashion world also started paying off, and he began selling bags to independent boutiques in Brooklyn and beyond. His business quickly exceeded his capacity to turn out bags in his workshop, so he decided to expand his production operations, as any budding entrepreneur would.

Today, 12 skilled workers make TM1985 bags and wallets and other accessories in a small family-owned leather-goods factory in New Jersey. McBride visits the factory two or three times a week to make sure the foreman knows what’s coming down the line, to keep an eye on quality, and occasionally to help punch out leather or rivet pieces. He designs all his products himself and still makes prototypes in his own workshop, but increasingly, he spends time on operational matters. He will sell half a million dollars’ worth of bags this year, about 90 percent of that through his wholesale channels and just a few percent through Etsy.

“I’ve benefited a lot from Etsy--I got my start there,” McBride says. On one level, his success is a testament to the cultural movement that made Etsy possible. His brand’s entire reason for being is a rebuke to big business and a return to personal attention to detail. And yet, as he’s grown, the amount that his hands touch any individual piece has shrunk to nearly zero.

For Dickerson, supporting successful shops like TM1985 has been a high priority. Historically, the company has done this by amending the guidelines for what does and doesn’t belong in the marketplace. What began as a 4,000-word rules document ballooned to 14,000 words by 2012, as various exceptions and fine distinctions were accounted for. McBride was able to continue on Etsy because his manufacturing partner qualified as “partial production assistance” under the rules.

The problem was, nobody was quite sure what partial production meant, and many of the other rules were similarly unclear. Rather than settle debates, the complex thicket of regulations created new debates and an ever-larger enforcement burden for the company. If a wedding-dress maker enlisted her sister to work with her in her studio, that would be an acceptable labor arrangement, but if her sister worked in another state, it would not. Why? Technology changes have complicated matters further: What if someone designed a toy on a computer and produced it with a 3-D printer? Would that be handmade? Why is it any better or worse than Tielor McBride’s bag factory?

Just as important as finding ways to keep sellers like McBride within the rules is providing them with a different class of customers. Rather than letting McBride make 90 percent of his sales to other retailers, for instance, Dickerson has created a wholesale market on Etsy. It allows Etsy members to connect with retailer partners such as West Elm and Nordstrom, as well as independent boutiques around the country.

The wholesale program is one step in a wider effort to professionalize Etsy’s sellers. A tool called Shop Stats provides a dashboard of store-performance metrics. A Seller Education Program teaches members business skills such as how to merchandise for the holidays and how to generate traffic through social media. One goal of the professionalization of Etsy, Dickerson says, is to give sellers more time to focus on designing and making their products. The other goal, of course, is to increase sales for everybody.

Dickerson, 41, is an unlikely tech CEO, a former English major at Duke who started his career as a ponytailed aspiring journalist and fell into Internet technology somewhat by accident. Eventually, he became a pioneer of modern Silicon Valley-style tech culture, the man who made the hack day a staple of the start-up world when he was at Yahoo. A little bit round and rumpled, with salt-and-pepper hair, he radiates a basic decency that makes it entirely believable when he talks about his underlying idealism.

It’s a profile that doesn’t fit the craven-capitalist picture you’d get of Dickerson if all you knew of him was what appears on Etsy’s user forums. The disconnect comes down to trust. Dickerson has earned it among staff members because he delivered them from a demoralizing situation and because of the open, honest culture he created. Oddly, those same core cultural principles have been absent in much of Etsy’s management of its community. When Dickerson talks about creating opportunity for sellers, many interpret that as code for him wanting to court big business and move away from the craft movement. They call Dickerson’s company Etsy-bay.

Nowhere has the lack of trust played out more clearly than in the debate around so-called resellers, distributors of mass-produced goods that masquerade as handmade on Etsy. Nobody denies that resellers exist--because Etsy is an open platform, anyone can sign up, so a certain level of spam is inevitable--but many Etsy members suspect the company of quietly tolerating them to collect the revenue they generate.

In early 2013, Dickerson sat down with Heather Jassy, Etsy’s vice president of member operations, and gave her the task of reimagining the company’s marketplace guidelines. “I want you to write a new set of policies,” he said to her, “and my only requirement is that you do it in a sensory deprivation chamber, without referring to the current ones.”

The project became known internally by the code name Humanscale. “We wanted to emphasize the idea that this was about people,” Dickerson says. The previous rules centered on trying to define what is handmade and what is not. The new rules wouldn’t even bother to define handmade, and instead took shape around three broad principles that Dickerson has encoded throughout the company’s culture: authorship, responsibility, and transparency. Now he would try to encode those cultural values in the selling community.

In Dickerson’s words, authorship means that “the items you sell begin with you; Etsy is not a place to sell items that you had no role in making.” Responsibility means “you take responsibility for the way your items are made from beginning to end.” And transparency means “you should be open and honest about all the people and partners involved in what you are selling on Etsy.”

More practically, the new guidelines allow sellers to hire as many people as they want, in any place they want. Sellers can enlist manufacturing partners to produce all or part of the goods they’ve designed. “Partial production assistance” is gone, as are other, similarly complicated conceptions. The only requirements are that sellers submit applications to use mass production--an in-house team will review them--and that approved manufacturing partners be disclosed on the shops’ About pages.

It’s a radical departure from the past, and for the first time a decentralization of authority when it comes to the community. “We are trusting the sellers to make the right decisions,” Dickerson says, “and do it in a marketplace that’s open and honest.”

A  few dozen Etsy sellers have gathered at Etsy headquarters for a town hall meeting in which Dickerson will announce the new production guidelines. Around the world, more than 5,000 Etsy members are tuning in via webcast.

“The sellers here and those of you on the webcast are really who helped build this company, and as we grow, I want Etsy to commit to getting closer to the community, not growing apart,” Dickerson begins, pacing in front of the audience with a vintage sewing machine and a few spools of fabric arrayed on a table behind him. “We all know that Etsy can only do well when our seller community does well-;when you do well.” He announces that the company plans to launch a new era of transparency and open communication with sellers.

From now on, Dickerson says, Etsy will release a detailed quarterly summary of its performance and strategic goals, so sellers can have a better understanding of why the company makes the decisions it does. Beginning today, the company will unveil a new section of its website that offers much more detail than previously available about its market-integrity efforts. The new section will detail how many shops are being flagged as potential violators, how many investigations are opened by the company, and how many shops end up getting booted. A few people applaud when he announces that Etsy will now offer phone support for its sellers, something the community has long begged for.

Things are going well so far, and the audience remains polite as Dickerson launches into the real reason for the meeting--the Humanscale production guidelines, which are now 900 words, down from the previous 14,000. When he opens the floor for questions, some are easily dismissed (Is Etsy selling out? No. Why are there so many resellers? We’re constantly fighting it), but others prove trickier.

One seller in the room points out that, under the new rules, it’s possible that Ikea could qualify to sell on Etsy. As long as there were a person at Ikea designing a product and vouching for the sustainability of its production process, why couldn’t that product now qualify? Dickerson’s response: “If Ikea called today and said they want to be on Etsy, I’d hang up. They should buy from Etsy.” It’s not an entirely satisfying answer, because there’s nothing in the rules that explicitly prevents established brands from listing their products, other than a subjective application-approval process. Saying no to Ikea is an easy call, but what about a smaller but established company that’s serious about sustainable production? How big is too big? Etsy doesn’t have clear answers to those questions yet.

The most important aspect of the Ikea question is simply that it was asked. To Dickerson, of course Ikea would never be able to sell on Etsy. But to a community that doesn’t yet trust him, that’s not obvious. The risk of knocking down the confusing old rules is that people can interpret it as a flinging open of the doors to bad actors. Which is exactly what happens on the Etsy forums as people watch the town hall webcast.

“Oh noooooo... this is not sounding good AT ALL :(”

“Well handmade just died. Etsy just voluntarily self-imploded.”

Dickerson and every other Etsy executive I spoke to said the company ran no financial projections when developing the Humanscale project; every decision was just about responsibility, transparency, and authorship. That’s a highly principled move for an e-commerce company that’s normally driven by data. But the fact remains that empowering sellers to grow more easily can only help Etsy continue to grow--which is, of course, the point.

Dickerson sees the Etsy of the future as a market not of handmade goods but of what he calls “person-to-person” commerce. “It’s all about creative people building businesses, connecting people through commerce, and making items that have stories behind them,” he says. He envisions Etsy sellers mobilizing skilled workers in struggling former industrial communities like Detroit. Manufacturing isn’t a bad word in this vision of Etsy; it’s essential. If Etsy is going to change the world, it’s going to do it by opening a vast market of humanely and sustainably produced goods dreamed up by real people who really care about quality. It’s no less soulful a vision than Rob Kalin’s ideal of individual crafters crafting for a living. And Dickerson sees no reason handmade goods can’t coexist in a person-to-person market with goods made in small factories.

In the days and weeks after the town hall, a few supportive threads in the forums vie for attention with the doomsday predictions. Dickerson hopes that time will prove him right, as the company approves the right kind of manufacturers, drives out the wrong ones, and devises new tools to help everyone sell. “At the risk of sounding quite self-aggrandizing, I just have like a really deep sense of responsibility,” he says. “I know that there’s a lot of conflict and protest in the community, but I really want the community to be successful. When I think about the changes we’ve made, it’s always been in the name of that.” If only the community would believe him.

From the Dec. 2013/Jan. 2014 issue of Inc. magazine

TOM FOSTER

Tom Foster is an Inc. editor-at-large. His work has also appeared in Popular Science, Fast Company, Details, and Men's Journal, among others. A longtime New Yorker, he is a recent transplant to Austin.




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