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Reuters/Mike Segar
Etsy.
OPINION

Etsy made mistakes, but its commitment to social responsibility wasn’t one of them

Nikita T. Mitchell
By Nikita T. Mitchell

Founder, Above the Bottom Line

On April 16, 2015 the CEO of Etsy rang the opening bell at Nasdaq’s headquarters in Times Square. The date marked a momentous occasion, one in which many believers in the social responsibility of business viewed as a promising turning point for capitalism.

The online marketplace for handmade goods was one of the first companies to IPO with a B Corp certification, a third-party validation of its commitment to social responsibility. More than 2,300 companies in over 50 countries are certified B Corps, including well known privately-held companies Patagonia, Warby Parker, Method and Kickstarter. Etsy was the trailblazer among them.

The CEO at the time, Chad Dickerson, expressed his confidence in the company’s future and social mission. “The success of our business model is based on the success of our sellers,” he told the New York Times. “That means we don’t have to make a choice between people and profit.”

Milton Friedman famously said in 1962 that, “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” But for those who believe companies have far more responsibility to society than generating profit, Etsy’s IPO as a certified B Corp was viewed as support for the argument that valuing social and environmental issues above profit is, in fact, in shareholders’ best interests. The company’s success, they hoped, would open the floodgate of investors for other socially responsible companies.

Three years later, however, the company is not quite the beacon of hope it once was. Its valuation quickly plummeted from its peak on April 17th, 2015. It has experienced culture-shocking layoffs and leadership shakeups and, most recently, allowed its B Corp certification to expire.

The purpose of a company

When Etsy’s troubles as a public company became apparent, it left evangelists for mission-driven companies, like me, wondering if it’s even possible for Etsy to be successful without completely losing sight of its mission-driven roots.

But though investors blamed leadership’s lack of focus on shareholder value for slowing revenue growth and steadily increasing expenses over subsequent quarters, this isn’t the entire story. Etsy’s underlying business model was flawed, and its problems were exacerbated by poor financial management.

The underlying issue of Etsy’s post-IPO devaluation is that its original model of serving as a marketplace for handcrafted goods didn’t align with the growth demands placed on publicly traded companies. Even pre-IPO, Etsy struggled to balance its handmade ethos, embodied in a 14,000-word seller policy, with the potential growth opportunity of selling mass-produced goods. Over time the company eased up its restrictions, allowing sellers to hire support to grow their businesses.

As more manufactured items started to be sold on the platform, Etsy’s most loyal sellers became disgruntled. Many of them said it was becoming more difficult for handmade products to stand out.

While Etsy’s handmade-only restrictions created the loyal seller community, unconventional workplace culture, and thriving marketplace they were able to build, scaling could only come at the expense of those very things.

On top of concerns with growth, investors became increasingly weary of the company’s lack of financial discipline. To attract the best talent, Etsy’s leadership understandably prioritized premium benefits in line with the company’s values such as 6 months parental leave, catered meals by socially conscious restaurants, free craft classes and even composting. However, the company’s spending arguably became lavish for a company yet to reach profitability, best exemplified by the $40 million it spent building out its new office with “green walls fed by rainwater, solar panels on the roof, and numerous spaces dedicated to yoga, meditation, printmaking, and cooking, among other modes of employee self-actualization.”

A cautionary tale

Etsy’s tumultuous journey serves as a cautionary tale for socially conscious entrepreneurs and corporate leaders. It’s clear in hindsight that Etsy’s original model had to evolve in order to hold up under the demands for continuous growth. When backed into a corner, the board chose to prioritize shareholder value by cutting away at the very core of the company’s culture. It suggests that socially responsible business models may not be built to to withstand the brutal short-termism of the capital markets .Entrepreneurs and investors, alike, need to be honest when this is the case, ideally identifying and addressing the tension before it’s too late. For most socially responsible business, an IPO simply may not be the best option.

However, I do not think that Etsy’s struggles should be used as evidence that it is impossible to build a socially responsible public company. Whether Etsy ultimately thrives as a model for socially responsible business, the company set a precedent that should not be taken for granted.

Its successful debut as a publicly traded company provides some powerful examples to emulate—from explicitly articulating its purpose-driven ethos in its prospectus to providing vendors and small investors access to the IPO.

Etsy clearly demonstrated investor appetite for a new kind of company. Now it will be up to the next wave of socially responsible startups to demonstrate—through scalable business models and solid business fundamentals—that a commitment to long-term sustainability can truly drive shareholder value. 

Correction: A previous version of this article stated that Etsy was the first B Corp to IPO. It was one of the first.

Nikita T. Mitchell is the founder of Above the Bottom Line.