The cautionary tale of Etsy reveals an existential question looming over StartupLand
When you decide to take your company public, you buy into a system that is far, far bigger than you. And as much as you may want to change the system, as a public company, you have to focus on your business and your shareholders first. That’s the law, enshrined in all corporate governance documents.
Now, governance can be rewritten, and Etsy, subject of a major Times profile this past weekend, had done just that. Before it went public, Etsy was a B Corporation, but as it prepared for the public markets, it decided to forgo the most stringent part of B Corp. certification — enshrining itself as a “PBC” — a public benefit corporation. Publicly traded PBCs are rarer than unicorns — there’s only one, Laureate Education, and, well, its stock isn’t exactly encouraging others to join the fray.
Because it plans on letting its PBC certification lapse, Etsy will no longer be a B Corp, and the piece argues that much of what made it unique is also either gone or in significant transition. Here’s a money quote: “Once a beacon of socially responsible business practices with a starry-eyed work force that believed it could fundamentally reimagine commerce, Etsy has over the past year become a case study in how the short-term pressures of the stock market can transform even the most idealistic of companies.”
Like most companies that take large portions of venture capital, Etsy was always on the path to either the public markets, getting acquired, or bankruptcy. That’s the base reality for any VC-backed company, as Luke Kanies argues in his compelling “Understanding Venture Capital” series now running over in Medium’s member area. To me this bears a deeper think about whether our investment model is broken, or at the very least, in need of a major rethink. Consider these facts:
- We have a tech platform oligarchy that is quite adept at identifying billion-dollar-plus opportunities (or threats), and they’re not afraid to purchase their way into those emerging markets (or obliterate a threat) via acquisition.
- The central thesis in most venture funds is to spread bets across dozens, if not hundreds, of different companies, with one or two of those bets “returning the fund,” a few others delivering modest returns, and the rest essentially failing.
- The kinds of companies that “return the fund” are “unicorns,” the multi-billion dollar wins like Uber, Airbnb, Mulesoft, Roku, or Snap.
- A big IPO is the most certain way for a unicorn to “return the fund.” It’s rare to get a huge win from M&A prior to a big IPO. It happens (Instagram, WhatsApp), but such an outcome is increasingly rare because….
- Tech oligarchs are very good at seeing the potential for a big winner, then buying them out well before they scale to massive exits. Far more typical are smaller deals that may provide some returns, but hardly “return the fund.”
It takes a certain kind of insanity, if you’re a founding team, to say no to platforms like Facebook, Google, Amazon, or Apple when they come knocking. Typically, they’ll do so early in a company’s life, well before founders have ceded financial control to investors. Sure, some folks manage to demure (Snap comes to mind), but it’s increasingly rare. This means the classic venture model which drives tech startups towards an IPO is imperiled. And that’s not good news for innovation overall. As the Atlantic put it today: “So much capital is now required to acquire customers for a successful start-up, the very idea of a bootstrapped one might romanticize an ecosystem long gone…All those hypothetical “next Netflixes” only hope to be acquired by Netflix, or Google, or Facebook anyway.”
We’ve grown accustomed to a definition of success in tech startups that is increasingly hard to justify, and much of it is being driven by an outdated venture model based on one or two companies “returning the fund.” A far more robust model would be to manage investments across a healthy middle group of companies that each provide modest returns to the fund. But that would require a lot more work, and a lot more skill. In my experience, however, investors with this philosophy are the best ones working today. By extension, such a model would rely on “smaller” IPOs, rather than monster multi-billion dollar debuts like Snap, Twitter, Facebook, or Alibaba.
As Fred Wilson put it in the kicker to this weekend’s Etsy piece: “Going public was the best thing that ever happened to this company.” Etsy may not have set the world on fire, but it’s a real business charting its own course in the public markets. It’s not a memory buried inside Amazon, it didn’t perish in the flames of an oligarchic embrace. Bring on the smaller, nimbler, faster public companies: I for one hope hundreds more will make it there.