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Etsy Weaves Delicate Quilt With Users In Upcoming IPO

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I n 2005, while making a living as a carpenter, painter and photographer, Robert Kalin, then 25, was looking for a place to sell his handmade creations online. He hired some techies and began creating a website where artisans could buy and sell their crafts.

The result was Etsy, an e-commerce marketplace for handmade goods, vintage items and craft supplies that quickly attracted a loyal audience.

Founded in Brooklyn, N.Y., Etsy is now set to launch an initial public offering that aims to raise $250 million and give it a $1.8 billion market value.

It plans to offer 16.7 million shares (3.3 million from selling stockholders), with an estimated price range of 14 to 16. Underwriters have an option to buy an additional 2.5 million shares.

Kalin stepped down as CEO in 2011, succeeded by Chad Dickerson, who was the company's chief technical officer and formerly served in various management positions atYahoo ( YHOO ) .

THE COMPANY

Etsy has evolved into a marketplace with 54 million members worldwide. Product categories include jewelry, clothing, home goods, beauty products, craft supplies, quilts, knickknacks, toys and vintage items.

At the end of 2014, Etsy reports, it had 1.4 million active sellers and 19.8 million active buyers, described as people who have sold or made a purchase in the past year.

From the start, Etsy has tried to maintain a folksy image embracing individualism and creativity.

"We have built an authentic, trusted marketplace that embodies our values-based culture, emphasizing respect, direct communication and fun," Etsy said in its IPO prospectus. "We deepen connections among our members, making a personal relationship central to the member experience."

Maintaining that image hasn't been easy.

Etsy faced a user revolt in 2013 when it let sellers outsource manufacturing of their designs; sellers raised concerns about cheaply made, mass-produced knockoffs flooding the marketplace. The issue eventually cooled off.

When IPO plans were announced, users in its online forums complained that Etsy going public could hurt their businesses. Among the concerns is that the IPO will lead to more policy changes, diluting Etsy's core culture and making it more likeeBay ( EBAY ).

Dickerson strove to alleviate those concerns in comments in the IPO prospectus.

"I believe that Etsy can be a public company that holistically integrates the concerns of people and the planet, the present and the future, profitability and accountability," the CEO wrote.

It will be a delicate balance for Etsy, striving on the one hand to maintain its unique culture and on the other to please shareholders.

RISK/CHALLENGES

Etsy listsAmazon.com ( AMZN ), eBay andAlibaba ( BABA ) among its competitors, but there are many more privately held websites vying in the same market. "A lot of buyers and sellers like Etsy, and it has first-mover advantage in its niche, but it's not an easily defendable competitive advantage," said James Gellert, CEO of Rapid Ratings, which provides detailed financial research on companies, using 70 measures.

"I see it more of being in an acquisition category," he said.

In its review of Etsy, Rapid Ratings reports that the company's overall financial position remains "very weak," and gives it a score of 23 on a scale of 100.

It said Etsy's rating depicts a high-risk credit profile -- as net profit, operating profit and capital structure efficiency are at low levels relative to the global data set.

"They have a long way to go to show an efficient, long-term sustainable business," Gellert said.

Wedbush analyst Gil Luria initiated coverage on Etsy with a neutral rating and a price target of 14, the low end of its estimated IPO price range.

"We expect Etsy to enjoy rapid near-term growth rates within its niche as marketing spend helps drive penetration," Luria wrote.

He added that some seller practices may draw scrutiny, eventually limiting the marketplace's volume growth:

"We believe the company will need to add new seller services in order to sustain current growth rates," he wrote.

THE RESULTS

About $1.93 billion in merchandise was sold on the Etsy platform in 2014, up 44% from the prior year. About 36% of that came from purchases made on mobile devices. About 78% of gross merchandise sales were repeat customers, according to the filing. Women account for 86% of the sellers.

The company makes money from product listing fees, transaction fees, seller fees for promoted listings and payment processing.

Etsy reported revenue of $195.6 million last year, up 56% from 2013. It reported a net loss of $15.2 million. The losses are primarily a result of the company spending heavily on marketing and product development.

"We expect that our operating expenses will increase substantially as we hire additional employees, increase our marketing efforts, expand our operations and continue to invest in the development of our platform," the company said.

In the fourth quarter, Etsy reported revenue of $64.9 million, up 56%, and a net loss of $5.36 million; 31% of merchandise sales on its platform come from outside the U.S.

PROCEEDS

Etsy estimates net proceeds from the sale of common stock of $181.8 million, assuming an IPO price of 15 per share, the midpoint of the offering price range, after deducting estimated underwriting discounts and commissions. It intends to use the net proceeds from the IPO for working capital and general corporate purposes.

MANAGEMENT

Chad Dickerson

President and CEO

Dickerson, 42, has served as president and chief executive since July 2011. Prior to that, he was Etsy's chief technology officer. Dickerson previously served in various management positions at Yahoo, from 2005 to August 2008. Dickerson holds a bachelor's degree in English literature from Duke University.

Kristina Salen

Chief financial officer

Salen, 43, has been Etsy CFO since January 2013. Prior to Etsy, Salen led the media, Internet and telecommunications research group of Fidelity Investments, beginning in 2006. Salen has also held executive positions at Oppenheimer Capital and Merrill Lynch. She holds a bachelor's degree in political science from Vassar College and has an MBA from Columbia University.

Kellan Elliott-McCrea

Chief technology officer

Elliott-McCrea, 37, has served as chief technology officer since July 2011 and was previously the vice president of engineering. He worked as the design architect of Flickr at Yahoo from 2006 to 2010.

E tsy Inc.

Brooklyn, New York 11201

(718) 855-7955

Lead underwriters:

Goldman Sachs and Morgan Stanley

Offering price: $14-$16

Ticker: ETSY

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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