How to build a tech company without being techy! No seriously, Rob Kalin, an artist, started Etsy and then polled more artists to make it awesome.

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Dave Young:
Welcome back to the Empire Builders Podcast. I’m Dave Young. Stephen Semple is here with another fascinating story about building an empire, and we’re looking at a tech empire today. We’re going to talk about Etsy.

Stephen Semple:
Yes.

Dave Young:
And so all I know about Etsy is you can buy all kinds of weird stuff on Etsy.

Stephen Semple:
Etsy is very much a technology company. In other ways, Etsy is very much an arts and crafts company when you really think about it, right?

Dave Young:
Yeah, yeah. A community of arts and craftspeople.

Stephen Semple:
Yes, very much so. Etsy was started by Rob Kalin and was founded on June 18th, 2005, it went public 10 years later in March 2015, raising 237 million and giving it an evaluation of 1.8 billion at that time. They do about two and a half billion in sales. They’ve got 2,800 employees. So you know what? A pretty big deal.

Dave Young:
Yeah.

Stephen Semple:
And Rob Kalin, he’s like this artistic hands-on kind of guy. He’s not involved with Etsy any longer, but the home he lives in today, he built the entire thing from the ground up, including all the furniture. Today he’s got this thing where he makes these custom-made speakers that are these $50,000 speakers. And he’s constantly looking at this whole idea of trying to match technology with old-school tools and craftsmanship, and he really thinks about himself as being a creator. And Etsy started because of a need that he had. Like a lot of these empires we covered, it came from filling his own need, because he would make stuff and he’d want to try to find a place to sell it.

Dave Young:
And I just know from being in the art glass and that kind of world, before the internet, if you’re a crafts person or an artist, however, you want to put it, well, you’ve got to find a show somewhere, right? You’ve got to go to a craft show, you’ve got to go to a fair, a Renaissance Fair or something and set up a booth, drag all your stuff there, and hope that you sell some.

Stephen Semple:
Yeah,

Dave Young:
And Etsy became that online.

Stephen Semple:
It did, very much so. Very, very much so.

Dave Young:
Yeah.

Stephen Semple:
So he grew up outside of Boston. His mom was a teacher, his dad was an architect. Rob was one of those kids who couldn’t sit still in school and he stopped going to school. He wouldn’t go to school and he didn’t tell his parents. He got a job at a camera store and he had to figure out what he wanted to do. And he graduated from high school, barely.

Dave Young:
Started wearing suits and carrying his lunch in a briefcase. The parents didn’t notice.

Stephen Semple:
Exactly. So he graduates from high school, barely. He did the GED approach and he became a cashier at Marshalls, and he said it was a good learning experience, but not a lot of money in it. He decided he wanted to go to art school and he had to get to New York City. So he gets to New York City and he is working at a bookstore, and he starts to do construction at night to make money because what we know is not a lot of money in retail, right?

Eventually, that construction at night turned into full-time and he was then taking classes at night. It sort of flipped around, and he was doing classics and languages and things along those lines. And a buddy of his moves to Paris and he decides I should go live in Paris for a little while. So he goes and lives in Paris for a little while. He returns to New York and his landlord, when he returns to New York needs a website. So his landlord somehow gets talking to him about this website and he says, “Hey, I need this website.” And he looks at him and says, “You’re an artistic guy. Can you do a website?”

Dave Young:
Yeah.

Stephen Semple:
And can you beat this price? Can you do it for less than this? He is like, “Sure, I could do it for less than that.”

Dave Young:
Sure. That’s a race that nobody wins.

Stephen Semple:
Yeah, exactly. But not only did he say he could do it for better, he said I could do it for half.

Dave Young:
Oh gosh. Okay.

Stephen Semple:
So he’s now making a website. He has no idea how to do that, but he’s fascinated by the process. And this is the early 2000s when building websites was freaking hard.

Dave Young:
I want to give credit to his landlord though, for asking the creative guy to build the website instead of the IT guy.

Stephen Semple:
You know what? That’s a good point. I hadn’t thought about that.

Dave Young:
In 2000, most websites were built by tech geeks.

Stephen Semple:
Yes.

Dave Young:
And okay, I mean they probably worked, but that’s why they didn’t convert because they made them techie instead of creative.

Stephen Semple:
Yes.

Dave Young:
There I’ve given my rant.

Stephen Semple:
No, and that’s a great point and I had not thought of that, because you’re absolutely right. The artistic side, especially still even today on websites is highly overlooked. But he got fascinated by the process and basically within a few years he got kind of known for doing sites. So Rob started actually doing a fair number of sites, and along the lines, he met Chris McGuire and they started doing more websites together. But what they wanted to do was build something that was there for their own, because Rob had been making furniture and he wanted to sell it himself online.

And really at that point, the only option was eBay. Then he met another buddy who was making furniture and wanted a site as well, and it was 2005. So instead of a site for Rob and a site for his buddy, they thought, well, let’s build one together and we’ll sell both your stuff and my stuff on this site. And they needed a name, and they came up with the name Etsy. And they liked the name because it kind of had this emotional feeling to them. It had no baggage. And where the idea came from is they had misheard something in a foreign film.

Dave Young:
Really?

Stephen Semple:
Yep.

Dave Young:
Oh, I love that.

Stephen Semple:
So they started to build up Etsy and the more they looked at it became clear it could be pretty big. And so they decided they needed to go out and do some fundraising. And so they were doing construction work for this one real estate guy, and they managed to convince him to invest 50K into starting Etsy. They went to their grandfather who was quite a business person and told him what they were thinking about doing, and he gave them some ideas in terms of how to raise money, and they got another couple of investors to kick in. And so now it’s 2005.

So why don’t you think about 2005, here’s where most of the money went in terms of building this infrastructure out in 2005. There was no internet infrastructure in 2005. The software in 2005 was terrible. There’s none of this idea of cloud computing. So they actually ended up putting a ton of money into hardware because typically what you had to do is host these sites yourself.

Dave Young:
You had to build all that.

Stephen Semple:
You had to build all of it, you had to host it yourself. So basically they managed to put all that together. But one of the things that they did have going for them was eBay. And the reason is that eBay had already established the business model, listing fee, and sales fee.

Dave Young:
Right.

Stephen Semple:
And on top of that, eBay had also built a lot of the payment infrastructure. And what they decided to do was just leverage that payment infrastructure, right? Because remember, PayPal came out of eBay.

Dave Young:
Right, right.

Stephen Semple:
Right? Rob talks about how without eBay, they would never have been able to make any of this work. They stood on the shoulders of eBay. And the other thing a lot of people forget is a lot of the technology that eBay built was public domain. They allowed it to be public domain because they wanted to allow this infrastructure to be built. It would’ve been way harder without eBay to overcome all of this.

So they took about two and a half months to create the site, they launched the site, they hit the go button, they went to dinner, and a few people found it. And in the first year, they do a massive amount. This is the amount of sales that the site did in the first year. How much do you think the site sold in the first year? How much do you think?

Dave Young:
Based on sort of the tongue-in-cheek approach you’re taking, I’m going to say $25,000.

Stephen Semple:
Oh, they did better than that. They did a million dollars of sales in the first year, but keep in mind they got 3% of that million dollars.

Dave Young:
Yeah, so about 25,000.

Stephen Semple:
There you go. You weren’t far off. And it was found through organic blogs. It’s the early days of the web. And what they found was the sellers were mainly women, and they brought in a fourth founder who contributed really to the early look and feel, of how to look at items and shop in different ways. One of the things that they found was a really popular way to shop was actually to shop by color. They got in touch with the founders of Flickr and asked their advice and met a few other Ven Cap folks, and then they went on and raised another $250,000. And in the first couple of years, there’s no office and things along those lines. But here’s where it’s interesting to me. I find way too often people who are developing things in the technology space don’t get out of the space. And I think this is where, again, you pointed out early on, he wasn’t a tech guy, he was an artist, he was a craftsperson.

Dave Young:
So you got to get out and talk to other artists.

Stephen Semple:
Bingo. So what did he do? He went and visited every craft fair he could think of. He traveled the world going to craft fairs and handing out his cards, not only to connect with the community, but guess what? It was also a great way for him to promote. “Hey, here’s this other forum that you can use to sell your crafts.” But he traveled the world going to craft fairs, and I wonder if he was a technology person, whether he would’ve thought that way. It’s like the early days of Airbnb, and we talked about Airbnb. Gosh, I can’t even remember which episode Airbnb was.

Dave Young:
Way back.

Stephen Semple:
Way back.

Dave Young:
Yeah.

Stephen Semple:
One of the things that they were told to do was go to some of the early people using Airbnb for listing and meet with them and talk to them. And they found they learned so much in terms of how the technology was being used differently. But I think one of the advantages Rob had was, yeah, what we need to do is get out there and talk to craftspeople. So he traveled the world going to crafts fairs, connecting with the community, learning about what the community wanted, and handing out his business cards.

PayPal was the method of payment, and they’ll tell you PayPal built a lot of stuff that it did not pack. There was a lot of payment that they were able to leverage, including things like the PayPal resolution procedures. If there was a problem, they just kicked it over to PayPal. Now, initially, things had to be handmade to be on Etsy, and in the beginning there was this list of categories and if it didn’t fit, it couldn’t be on the site. And then they opened it up and then when they opened it up, they had someone who tried to list a Ferrari once to sell it on Etsy. But what they really decided to do is really let the community police things, because everything was new. And they’ll tell you, they made a ton of first-timer mistakes. But what they really tried to do was just stay very tied to that community.

Dave Young:
The technology that they used. I remember this is probably 10 years ago, I had a good friend in Tucson whose wife made pillowcases and drapes and things and sold them on Etsy, and he was doing vinyl wall stickers. He had a machine that would cut out palm trees that you could stick on your kids’ walls and that stuff.

Stephen Semple:
Okay, yeah.

Dave Young:
Or a big sign that says Home Sweet Home. He was cracking the Etsy search algorithm. That was his day-to-day challenge, how do we get our items to show up higher in Etsy searches? So it’s like people that try to do SEO for Google, he was doing internal SEO on Etsy. So as they evolved and changed, they’re changing that algorithm all the time to make sure that they get good sales and that they were helping their customers be successful.

Stephen Semple:
It’s definitely one of the big challenges. Yeah? Now, one of the things that’s really unfortunate is a couple of years in, because they’re making all of these mistakes, they hire a COO, right? So Rob goes out and hires a COO, and one of the mistakes he makes when he hires a COO is that he doesn’t really fit the culture well. And there’s one point where Rob and the COO come to some loggerheads and Rob ended up getting kicked out of Etsy. Was bought out and things along that line. He did fine by all of it, but when we look at Etsy today, is it as much of that craft business as how it started? I don’t know.

But the part that I think is the lesson to learn here is what I really liked that he did a couple of things. One is leveraging the technology that’s already there where he could. But I thought the thing that was really inspiring to me was getting out of the office, meeting with the customer, and getting out into the community.

Dave Young:
Absolutely.

Stephen Semple:
And not sitting there. Because I think too often, especially people who are startups, get caught in this situation where they don’t go out and talk to their customers enough.

Dave Young:
Yeah, absolutely. I think that’s so true.

Stephen Semple:
He was traveling the world. He would talk about how he would be at crafts shows in Germany and France, and traveled the world visiting these shows and learning what people were looking for and helping them put it on. And then in terms of the changes in the algorithm, Dave, one of the things I found interesting was they would then also heavily study how people were buying things. And, yeah, what they found was people wanted to search things by color, for example.

Dave Young:
If I’m decorating a room in my house and I have some theme colors I just want to look for artsy stuff to put on the shelves and hang on the walls. Right?

Stephen Semple:
Yeah, and I want it to be green.

Dave Young:
Or find things to go together.

Stephen Semple:
Yeah, absolutely. Absolutely.

Dave Young:
The other lesson that he learned obviously from hiring that COO is this is a capitalist society and you don’t get to hold onto your dream. I shouldn’t go down that path, but it’s like there’s a part of me that always gets sad when a founder gets ousted like that.

Stephen Semple:
We’ve seen this more than once on the podcast in terms of ones we’ve covered, where the founders have been ousted, and then sometimes even brought back later. When you sell the business and you are no longer the controlling interest, other people now own the business. And look, sometimes it works out great. Not always. I have a new client that I’m working with right now who recently sold a portion of the business to private equity, and yeah, you don’t have free rein to do whatever it is that you want to do like you did when you were a hundred percent owner. That’s part of the deal. You take that check, right?

Dave Young:
Absolutely.

Stephen Semple:
Sometimes you have to because you need that injection of capital to make the dream happen. But there’s a balancing act there.

Dave Young:
Yeah. I’m the bleeding heart. My heart goes out to the guy that had the dream to start it.

Stephen Semple:
Yeah.

Dave Young:
I always find that a little sad.

Stephen Semple:
But you know what? There’s also lots where it’s worked out well, but I think one of the things is…

Dave Young:
Yeah, he’s probably doing fine.

Stephen Semple:
He’s doing fine. But there are also even other businesses that do that, and the founders still stay very involved. But I think part of the lesson there is when you’re bringing those outside people in, don’t just look at the skillsets, look at the fit.

Dave Young:
Yeah. You have to find somebody who has a heart for the creative.

Stephen Semple:
Yes.

Dave Young:
If you’re an Etsy, you’ve got to find somebody who has a heart for creators.

Stephen Semple:
Yes.

Dave Young:
That’s their core. Like a lot of websites, you’ve got two customers really. You’ve got your users, your people that have set up their stores and are counting on Etsy for their living, or at least to fund their hobbies. And you’ve got the customers that are actually their customers, but they’re ultimately Etsy’s customers who are buying things from you.

So you own this marketplace and you’ve got people that are creators and people that are looking for things that creators make. Maybe they wish they were creators, but they’re looking at Etsy because they want something that’s handmade. They don’t want to go down to Walmart.

Stephen Semple:
They want something a little bit different. I go and I buy things periodically from Etsy because I want something that’s just a little bit different. But they are that intermediary in the middle and are serving that role, and it grew out of the need that he had because he was making furniture and wanted to find a place to sell it.

Dave Young:
Yeah.

Stephen Semple:
Yeah. So it was cool.

Dave Young:
Cool story. Glad I know more about Etsy now.

Stephen Semple:
Thanks, David.

Dave Young:
Thank you. Thanks for listening to the podcast. Please share with us, subscribe on your favorite podcast app, and leave us a big fat juicy five-star rating and review. And if you have any questions about this or any other podcast episode, email to questions the empirebuilderspodcast.com.

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