Can Etsy Keep its Edge Post-IPO? 3 Ways to Defy Capital Market Norms

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The buzz about Etsy's IPO runs something like this... the company that connects artisans and home-based craft makers to a new kind of consumer hungry for unique products -- has met its nemesis: the public equity markets. If you think about corporations that have been successful public companies, words like "artisanal" give way to another set of modifiers and images: mass market, industrial scale, efficient, and command and control protocols and decision rules.

Is there room for Etsy to control its future as a publicly traded company? Or will the company values and mission give way to the demands of pesky shareholders willing to subordinate culture to short-term profit maximization?

My bet is with Etsy. The decision back in 2012 to certify as a B Corp signals the CEO Chad Dickerson's intention, "to use the power of business to create a social good." But much more important than good intentions is the following: the company's business model and culture are intertwined.

Last year, Etsy was reported to connect 1.4 million seller-members to almost 20 million buyers. $200 million changed hands, adding greater economic stability and lifestyle choices to home-based producers of all kinds. And the demand for "maker" goods is growing -- from craft beer and self-publishing to companies that let you customize your own look -- take Vans shoes for example. Etsy is less vulnerable to mission drift because of the close alignment between their vision and their revenue model.

But whether "B Corp" or C Corp, the devil's in the details. The purpose of the enterprise is a choice -- but it needs to be backed up by practices that reinforce the ideals and hoped-for social utility of the business.

What else can Etsy's management team do to assure the vision conforms to reality? Here are three ideas:

  1. Declare your purpose repeatedly (and tell the same story to your employees, business partners and investors). Staying vigilant to the long-term strategy in company communications is one signal that you live your vision. Southwest Airlines CEO, Gary Kelly, makes a habit of thanking the employees of Southwest at the start of his investor calls and reiterates the company's commitment to serving customers better than their competitors. Mark Zuckerberg states Facebook's purpose and big picture aspirations early in investor calls and frames his major points in long-term language. Mark Bertolini started Aetna's last investor call with "The Aetna Way" -- rather than just jumping into the financials.

  • Align the metrics with the strategy -- not the stock price. What are the best indicators of Etsy's success over the long haul? The stock market is affected by many things outside the control of management. And as we all learned in business school, short-term share prices are largely random. Financial targets like Return on Equity that put the stock price at the center of the bull's-eye lead to an excess of what we see in the market now -- using cash to buy back shares and bump the stock price rather than invest in the company's future -- the focus of Larry Fink of BlackRock's recent letter to Fortune 500 CEOs.
  • Pay your executives accordingly. "Pay for performance" is still the rage, but to align management with the values and vision requires a different approach. Delaying payouts under stock-centric pay schemes to emphasize long-term value creation seems like a good idea -- but it doesn't really work. Rather than correct for short-termism, to load up executives with stock assures that the market dominates the internal conversation -- and in ways that negatively affect culture and values. Jillian Popadak, researcher at Duke University, found that "results-orientation" leads to less customer-focus, integrity, and collaboration. We need fresh thinking to restore common sense to executive pay, and Etsy will need to innovate to align its management team with its core purpose and long-term strategy.
  • "...shareholders initially realize financial gains: increases in sales, profitability, and payout occur. However, over time, I find intangible assets associated with customer satisfaction and employee integrity deteriorate, which partly reverses the gains from greater results-orientation." - Popadak

    Think old line firms like 3M and P&G, as well as newer entrants like Tesla. These companies keep the focus on creating high-quality goods and services that deliver real value for customers while respecting mission-critical inputs and constituents -- employees, natural resources, host communities.

    For Etsy, listening to their customers cannot be just a slogan. The sellers who pay to use the Etsy platform have their own livelihoods at risk. Etsy members think this is THEIR company -- just ask them. Keeping the focus on their customer's welfare will be Etsy's North Star.