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Inside iCloud: Apple Inc has quietly doubled its Reno, Nevada data center site


Apple has greatly expanded its data center near Reno, Nev., about four hours east of Silicon Valley. However, it appears that the company’s aggressive growth in iCloud server capacity is only just getting started, with massive room for expansion surrounding the facilities.

The initial facilities at Apple’s data center within the new Reno Technology Park began operating in early 2013, following large scale construction preparations to build one of the world’s greenest data centers in operation.

By the end of 2013, Apple had erected the first of its large scale server buildings on the property, ringed the site with rainwater culverts and security fencing, and had installed sophisticated water cooling systems.

Just over a year later, the company now has two massive buildings on the site, providing twice the capacity of its initial large structure. However, with 345 acres of land reserved by Apple, there’s plenty more room to grow.

The site is situated across the highway from existing solar facilities operated by NV Energy, but a reported partnership between the utility, Apple and SunPower will greatly expand the area’s energy output.

In 2013, Apple announced that a new 137 acre solar array would eventually provide “43.5 million kilowatt hours of clean energy, equivalent to taking 6,400 passenger vehicles off the road per year.”

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Cook says discriminatory ‘religious freedom’ laws are dangerous, calls for action


In an editorial published by The Washington Post on Sunday, Apple CEO Tim Cook comes down hard on a spate of U.S. legislation he believes enables discrimination under the guise religious freedom.

After posting a series of tweets on Friday speaking out against controversial laws in Indiana and Arkansas protecting “religious freedom,” Cook went a step further and penned a scathing editorial condemning such legislation as “designed to enshrine discrimination in state law.”

“Something very dangerous happening in states across the country,” Cook writes, referring to a flood of new legislation some believe equates to government protection for discriminatory practices.

Specifically, Cook takes issue with recent bills that institutionalize the right to penalize homosexuals based on established “religious freedoms.” As applied to Arkansas, Indiana and multiple other states, these laws are openly biased.

Baptized in a Baptist church, Cook says faith played an important role in his development, adding that he continues to be a proponent of religious freedom. However, he was never taught that religion should be used as an excuse for discrimination. For Cook, issues of discrimination harken back to his early life in Alabama during the 1960s and 1970s, when America’s struggle with racial equality reached its boiling point.

“Discrimination isn’t something that’s easy to oppose,” Cook writes. “It doesn’t always stare you in the face. It moves in the shadows. And sometimes it shrouds itself within the very laws meant to protect us.”

Cook, who wields considerable clout as CEO of the world’s largest company, said he writes on behalf of Apple in condemning discriminatory legislation, adding America’s business community has long recognized that “discrimination, in all its forms, is bad for business.”

“Our message, to people around the country and around the world, is this: Apple is open. Open to everyone, regardless of where they come from, what they look like, how they worship or who they love,” Cook writes. “Regardless of what the law might allow in Indiana or Arkansas, we will never tolerate discrimination.”

In speaking out so publicly, Cook hopes others will stand up against similar legislation, arguing bills currently under consideration will eventually hurt job growth.

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Drowning In The Live Streams


Phones can make us jerks. They let us ignore friends, cancel plans last-minute, and annoy those around us in public. But this month, we got a whole new way to abuse our mobile devices. Unless we can manage how we interrupt each other, it could ruin one of the most promising modern communication mediums: live streaming.

“Josh Constine is live: I’m bored so watch me”

“LIVE – Josh Constine is desperate for attention”

“Josh Constine is live: Vague, click-bait description”

“Live – Josh Constine is actually doing something interesting”

“Josh Constine is live: nope, back to distracting you for no reason”

This is basically how notifications from live-streaming apps Periscope and Meerkat work. Occasionally urgent and compelling, frequently noisy. Suddenly, anyone can make all their friends’ pockets buzz whenever they feel like it.

That’s a huge a responsibility we’re not necessarily ready for.

Until now, push notifications weren’t usually a broadcast. You might alert someone by sending them a message, liking something they posted, tagging them, or giving them the nod on Tinder. With a few exceptions like Secret and Swipe that haven’t really caught on, you had to individually trigger each push notification sent to someone.

Yet because live streams only happen in real-time for a short time, Meerkat and Periscope have convinced us that we need to get an alert every time a friend opens a window to their world.

Sometimes these intrusions can lead us to serendipitous shared moments. An unoccupied few minutes sees you transported to the party, the front row, the intimate discussion, or the beautiful scene. But they can also work the other way around. Your celebration, concert, heart-to-heart, or blissful experience can be interrupted by an invite to commiserate with someone’s spare time.

Right now we’re still in our honeymoon period with mobile live streaming. But if we don’t learn how to use them responsibly, people will get so pushed off that they mute the notifications entirely.

The problem is the incentives are aligned all wrong. Live-streaming apps want content and engagement, so they’re built to make starting a stream as quick and frictionless as possible. Live-streaming apps are not designed to make you take a deep breath and consider whether anyone gives a shit about what you’re going to broadcast.

Humans want attention, and the immediacy of live streaming is both seductive and addictive. Knowing you can instantly assemble a doting audience can make some people drunk with power. Everyone wants to be a thinkfluencer, a commentator, an eyewitness. If only a few people tune in, so what? You were just trying to show them something. No harm done, right?


Each flippant, low-quality broadcast exhausts and detracts from the network and the platform. They make people less likely to open live streams and more likely to turn off notifications for everyone. That effectively severs the connection between the user and app — often a death sentence for engagement.

Apps need to teach us when to stream

Unfortunately, ignoring or muting alerts are both much easier than managing your live-stream social graph so you only follow Periscopers or Meerkatters with a high signal to noise ratio. As with any unfiltered feed or channel, it’s easy for loudmouths to drown out those you care about. Yet the platforms always offer better ways to discover new people to follow than to figure out who you should unfollow.

And since both Periscope and formerly Meerkat were built to piggyback off the interest graph of Twitter, where you don’t get push notifications whenever people post, you may be following the wrong people and way more people than you should.

Some users have already been pushed to the brink of insanity and silenced Periscope or Meerkat. And if these developers don’t act to educate people when to stream and offer more granular ways to get notifications, legions more will opt out.

At the very least, Periscope and Meerkat should offer a little guidance as to when people should stream. Encouraging people to wait until they have some special to show or important to say, rather than just whenever they have the free time, could go a long way to filtering out broadcast pollution.

We also need smarter ways to control what triggers a notification. Some especially curious viewers with smaller graphs might be okay with an alert every time a friend streams. Others might prefer only getting a push from a personal invitation to watch. Perhaps the apps could surface the best content from friends by only sending alerts when a stream hits some threshold ratio of viewers to hearts/favorites/re-shares. Or maybe I find my friends insufferably lame and only want a push when there’s a big, zeitgeisty trending stream.

Ultimately, it will fall to our own sense of courtesy. We have to learn that the “Broadcast” button carries much more weight than most on our phones. Wearables like the Apple Watch might make it faster to check and dismiss notifications, but the first step is not to send dumb ones in the first place.

Live streaming holds immense potential for knowledge exchange, shared experience, and empathy…as long as we know when to keep our spigots closed.

Featured Image: Ljupco Smokovski/Shutterstock

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Crossing the Cybersecurity Trust Chasm


Editor’s Note: Deepak Jeevankumar is an enterprise IT investor at General Catalyst Partners where he has a wide range of investments in cybersecurity, big data and storage startups. The opinions expressed here are Deepak’s personal opinions and do not reflect the views of General Catalyst or their portfolio companies. 

Kudos to the President for visiting Silicon Valley last month and drawing the attention of the nation to a new world of continuous cyber attacks.

The executive order signed by the President addresses the critical piece that is needed to help companies protect themselves in the future  – by sharing cyber threat information between different private sector companies, and between the government and the private sector.

But we need to cross the cybersecurity trust chasm to make sharing really work.

Today, this trust has been broken in the system due to incessant hacking of employee/customer confidential data stored in private sector enterprises. Multiple allegations of excessive snooping against the private sector and the government have only complicated matters.

We need to (re)build trust: between the government and the public; between a company and its employees; between a company and its customers; between different private sector companies; and finally between the government and the private sector.

The traditional cybersecurity debate has been portrayed as a security vs. privacy dialog. Trust has largely been ignored. But, trust and only trust can bring together the repelling poles of security privacy.

To build trust effectively, we need three ingredients: timing, talent and technology.

In the last couple of years we have seen increasing severity and public exposure to cyberattacks. Public awareness of the effects of cyber-terrorism has probably never been higher.

The Sony attack specifically has created a perfect storm of timing. Unlike most other cyber-theft activities where credit card, personal information or critical business information is stolen, the Sony attack was real cyber-terrorist activity.

It is a rare case, where the perpetrators of cyber-theft crossed the line in to threatening violence in real life. Cyber attacks are now a top national issue. People are outraged that cyber terrorism could lead to physical terrorism. They want to know how the government and private sector can safeguard them against such scenarios.

Everyone’s interests are seemingly aligned. Let us all seize the moment before it is lost and build trust.

A critical piece for rebuilding trust is having the right talent focused on it. Box recognized that trust is a competitive advantage and appointed a Chief Trust Officer few years ago to build trust with their customer base on their security practices.

We need Chief Trust Officers in every private company, in the NSA and in other branches of the government. It will be the responsibility of these executives to make sure that the trust concerns of the public/employees/customers are adequately addressed by using the right tech tools and instituting controlled security-monitoring processes.

Technology can also be used to build this trust by addressing transparency, data persistence and trusted sharing.

In the Silicon Valley code development world, we are familiar with the continuous integration model of code development. Similarly, we need to implement the concept of ‘continuous trust’. Just like consumers have financial tools like that monitor their different financial accounts and provide an easy conduit to understand their ‘financial health’, they need access to easy-to-use tools to check the status of their ‘security health’.

These tools can increase transparency in the system by showcasing how efforts taken by corporate and government security actors are protecting people’s assets in real-time. Frankly, there is a dearth of such tools in the market today.

Another major tech hurdle in the way of building trust is the question of data persistence. Once we upload a photo or a file, it can stay in cyberspace, unprotected unencrypted in many cases, ‘forever’. The owner of the data looses control.

Can we have expiring data based on time and need? Can an employee revoke access given to his company for his/her personal data once he leaves the company? Can the keys to the data be handed to the employee and not the employer? Again this is an area screaming for startup innovation.

Cyber-terrorists deploy guerilla warfare tactics. To fight a ‘distributed’ adversary, we need a ‘distributed’ army of the people / customers / employees. Technology innovations can also create secure sharing platforms to create this distributed army.

The private sector already has industry forums like FS-ISAC. We need to build automatic real-time sharing platforms with the help of such forums. Sharing should start selflessly from the government to the private sector.


Once trust is re-built with the private sector, sharing will start organically in the other direction (i.e. private sector to government). Tech product features in these sharing platforms can also ensure that such trust doesn’t get exploited.

The President’s executive order addresses this problem at its heart. In the recent past, we have seen a few innovative startups working on this hard problem like ThreatConnect, Vorstack, Soltra, and ThreatStream (a General Catalyst portfolio company).

While fear, vanity revenge hold cyber-terrorists together, only trust can hold us all together. Security entrepreneurs have been handed a golden opportunity by the President raising the cyber threat issue to national consciousness. There are many product gaps that need to be filled to increase transparency, promote continuous trust and to create new trustworthy threat sharing networks.

Let us turn trust into a competitive advantage. And let us not forget we are fighting the war on the same side. Few weeks ago, I woke up to the news of a potential $1B global cyber heist. Winter is coming!

Featured Image: Artem Popov/Flickr UNDER A CC BY 2.0 LICENSE

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Chairman Wheeler Predicts FCC Will Beat Legal Challenge To Net Neutrality


Now that the FCC is the subject of several lawsuits, and its leader, Chairman Tom Wheeler, was dragged in front of Congress repeatedly to answer the same battery of inanity, it’s worth checking in to see how the agency is feeling. Is it confident that its recent vote to reclassify broadband under Title II of the Telecommunications Act will hold?

Yes, unsurprisingly. Recently, Wheeler gave a speech at Ohio State University, laying out his larger philosophy regarding the open Internet. His second to last paragraph is worth reading:

One final prediction: the FCC’s new rules will be upheld by the courts. The DC Circuit sent the previous Open Internet Order back to us and basically said, “You’re trying to impose common carrier-like regulation without stepping up and saying, ‘these are common carriers.’” We have addressed that issue, which is the underlying issue in all of the debates we’ve had so far. That gives me great confidence going forward that we will prevail.

That confidence isn’t itself too newsworthy — why would the FCC pass something that it can’t defend? But at the same time, Wheeler echoes one of his top lawyers, Gigi Sohn, who first extolled the use of Title II in the agency’s plan, among other legal tools, in an interview with TechCrunch:

We like to say it’s the belt, the belt and the suspenders. The critical thing is we are reclassifying broadband Internet access as a Title II service. That is the biggest thing, and that allows us to move forward with the strongest possible authority. We also have authority through Section 706 and Title III for mobile. So basically we’re using all of our authority. We’re not letting any of it languish.

And here’s Sohn saying that the FCC is going to win:

It’s been over a ten-year slog to get these rules right. We really feel confident that we are on the strongest possible grounds. We will win the inevitable legal challenge.

If the FCC loses in court, and the issue heads to the Hill, who wants to wager a sizable sum of money that absolutely nothing would get done. Place dogecoin on your mark in the comments.

Featured Image: Pablo Martinez Monsivais/AP

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Unpacking Etsy’s S1


Editor’s note: Ezra Galston is a venture capitalist with Chicago Ventures and the former Director of Marketing for CardRunners Gaming. He writes the blog BreakingVC.

As an investor in many digital marketplaces (Kapow EventsSpotheroBloomnationShiftgig, among others, as well as an arts and crafts community, Blitsy) I have been eagerly awaiting Etsy’s S1 filing to get a deep look into the business.

The filing didn’t disappoint. Etsy is a powerful business with extraordinary network effects. Its customers are extremely loyal, and its committed sellers are earning significant income. But there are legitimate concerns: it is the quintessential case study on the challenge of low margin platforms. Additionally, it faces uphill challenges – a slowing growth curve and unclear product pipeline. Most importantly, the IPO comes at an inflection point as Etsy looks to expand from its niche, artisanal focus to serving a much wider market.

Let’s dive in.

Sizing up the space

To truly understand Etsy, I felt it important to size it up against a few other marketplace businesses: Homeaway, Shutterstock and GrubHub.¹ Although they’re different, they’re all participants in some aspect of the freelancer/sharing/independent economy. They all aggregate wildly fragmented markets. They also all make a similar claim: that their platforms ultimately expand the total addressable market and earnings for their merchants, despite acting as a fee taking middleman.

To start, here are some high level stats to see how they stack up against Etsy. Note, Homeaway does not report the Gross Values transacted across its platform as much of its revenue comes from subscriptions. I have attempted to back out those numbers based on several assumptions ².

Here are my takeaways from this breakdown:

Growth is slowing. This isn’t a huge surprise. It of course becomes incrementally harder to grow at the same Y/Y percentage as scale increases. But it’s especially concerning that their growth slowed in the face of a marketing spend that more than doubled in 2014 from $18 million to $40 million (or, more accurately, increased by 40 percent on a percentage of revenue basis).

Seller services are paramount. Etsy’s gross margin has been increasing by a compounded 10 percent year/year for the past three years. Given that it has a consistent 3.5 percent commission and $0.20/listing fee, the obvious question is how that’s possible? Answer: Ancillary services, add-ons, and products all targeted at its power sellers. Etsy breaks out its revenue into two categories: Marketplace Revenue (3.5% + $0.20/listing) and Seller Services (everything else). At the end of the day, to buy into Etsy, you need to believe that this product-focused revenue will grow significantly and drive its valuation.

Extraordinary network effects. One of my favorite metrics to analyze is marketing spend as a percentage of revenue. In this regard, Etsy is outright compelling. Historically it has spent 40-70 percent less on a percentage basis than their competitors, while realizing similar, if not greater, growth rates than other marketplaces. “Network effects” may be a buzz term, but Etsy is the paradigm. Eighty-seven percent of traffic is direct/organic while 78 percent of purchases are from repeat buyers. There’s a reason they can spend a whole lot less on marketing than the competition: Their powers sellers drive acquisition on their behalf.

Was 2014 an experiment? Etsy will need to credibly communicate to the market that its 2014 marketing efforts were experimental – being the first time its ever ramped marketing efforts so quickly and with a focus on building self-sustaining international markets. Its S1 suggests the increase was mostly buyer-side SEM acquisition in these foreign markets (and research suggests minimal traditional TV or radio advertising). But the results were disconcerting with CAC nearly doubling in 2014.

The strength of the network

When investing in marketplaces, one of the defining factors I look for is evidence that the platform is generating sustainable and beneficial economics on both sides. For example, at Zipments, many couriers are earning nearly double as independent workers on the platform than at their prior messenger agencies.

Another example: Bloomnation received the following e-mail from one of its florists:

I wanted to take a moment out of my day to thank you for allowing me to be part of Bloomnation. I spoke to you months ago. I was really hit hard and struggling in Jan-Feb. I was worried being a single mom and this was my 15th year in business. I work alone in order to take care of my son. I had no clue how internet sales worked. Your company has helped me get out of the red zone I was in and revitalize the energy of my shop, flow[ing] with orders. I really really appreciate your orders coming into my shop. In June I was able to put my son into school so I could focus on more business. You helped me fall back in love with my life and love of flowers. I feel so happy its like the feeling of how I first started back in 1999 when I was 19 in my garage on the beach.

The reason this supply-side effect matters so much is because of power law distribution: namely, power sellers will be the primary drivers of scale on your platform. While the long-tail of one-off sellers does provide product breadth and liquidity, power sellers will drive both volume and organic referrals to their own native product stores.

Consider how this has played out in the case of Etsy (note that Etsy defines a 2011 Active Seller/Customer to include all 2011 actives, including those acquired between 2005-2010, which self-selects for a large number of existing power users):

In its S1, Etsy offered a glimpse into its 2011 cohorts of both buyers and sellers. In this breakdown, we see that although only 32.3 percent of sellers who had sold an item in 2011 were still actively selling in 2014, those who remained on the platform had developed into serious power sellers – on average $13K per active seller from that cohort. And as power sellers become smarter and empowered by better tools, I expect their average earnings to continue increasing. This is one of the most fundamental signs of Etsy’s strength – the ability for its sellers to earn a living.

On the buyer side, we see an identical pattern of highly valuable repeat purchasing emerge:

Based on what I’ve seen among marketplaces, my best guess is that a typical cohort (2012-2014), will see year/year attrition of 80-85 percent or so, but the business isn’t built on one-time buyers. The power buyers are coming back and purchasing 110 percent year over year. One of the fundamental questions the public markets need to ask is how many of these customers exist in the market and can Etsy find a way to reach them?

But overall, on a high level, Etsy has done an impressive job maximizing value for its sellers, especially as compared to its competitors.

​The statistic to look at here is that in spite of active sellers increasing by 63 percent over the past two years, GMS per seller correspondingly increased by 32 percent in the same period. This is in contradistinction to a normal supply/demand curve – and is additional proof that Etsy’s buyers and sellers are among the most loyal and committed.

By comparison, Shutterstock’s active contributors, which also grew by 63 percent in the same period, only saw its earnings per seller increase by 19 percent. Impressive to be sure – but only half of Etsy’s growth.

As an aside, Homeaway would appear to have decelerating value to its property owners. But their business is heavily subscription based and free-to-post listings (implying lower quality properties) are what’s dragging down the averages.

Nevertheless, Etsy and Shutterstock are also effectively free to create profiles and sell goods – whether high quality or not. It’s something I’d consider if I were an investor in Homeaway.

Marketing – CAC and payback 

From a pure customer acquisition standpoint, none of these businesses break out CAC or LTV the way traditional e-commerce businesses do. That said, I’ve made some assumptions to get a rough model:

Above, I’ve broken down CAC for buyers OR sellers, assuming the entire marketing spend be allocated to either side. The biggest assumption I’m making in this exercise is simply that I’m defining “new customers” simply by taking the current period’s cumulative buyers (or sellers) and subtracting the prior period’s. That’s obviously a poor assumption because there was (a) attrition among actives and (b) reactivation of dormant accounts. But in assuming that (a) and (b) roughly cancel each other out, we can get a sense of Etsy’s marketing engine.

That said, in reality, Etsy has two customers – buyers and sellers. Its S1 notes “Marketing expenses increased $21.8 million, or 122.2 percent, to $39.7 million in 2014 compared to 2013, primarily as a result of an increase in search engine marketing from Google product listing ads” (implying mostly buyer focused acquisition). So here’s what it looks like if we assume 80 percent of expense on demand-side (buyers) and 20 percent supply-side (sellers).

Overall, CAC increased Q/Q across the board, both for buyers and sellers alike. While worrisome, it’s also expected at Etsy’s scale as there’s a general law of diminishing incremental returns. But here’s why that matters, and how Etsy stacks up versus GrubHub and Shutterstock:

  • The glaring metric is how small Etsy’s average spend per buyer and its corresponding Gross Margin per buyer. Etsy is truly only a business that works at scale – which they have – but it’s a clear red flag to other businesses attacking spaces with small order sizes, tiny margins and only medium frequency of purchase. Very few businesses like that will ultimately make it – Etsy did – but it’s the exception: it should be a warning to entrepreneurs.
  • The reason GM per customer matters is because customer acquisition is darn hard (and getting incrementally harder) and large order sizes, large margins, or high frequency provide a vital margin of error. Etsy stacks up better than its competitors on Payback period, but its expensive 2014 eroded its Payback advantage.
  • Most marketers will tell you that, at Etsy’s scale, targeting a Payback of anything under 12 months is good. And even with its small revenue/buyer, it’s still well below 12 months. But the gap is closing fast. Even with its strong network effects, I fundamentally do not believe its CAC can be reduced significantly, if at all. That leaves two options: 1) Improve gross margin to enhance revenue/buyer or 2) Stop investing as heavily in growth to realize the benefits of its highly profitable, power users.

It’s not all about that base 

The common thread across all these marketplaces is the continual move away from a dependency on pure transactional revenue. Here’s how all four consider their revenue breakdown:

Etsy has six main revenue sources: 3.5 percent transaction commissions; $0.20 listing fees and seller services; promoted listings; direct checkout; shipping labels; and point of sale payments (like Square Reader).

Homeaway has three main revenue sources: subscription revenue from property owners for bundles of listings which comprises 77 percent of all revenues; 10 percent transaction commissions from pay-per-booking listings; and a variety of ancillary revenue sources such as national and local advertising, property management software solutions, insurance products, and tax preparation services.

GrubHub has two main revenue sources. It’s notoriously tight-lipped regarding its exact commission structure, but most estimates put its base commission to be relevant on listings about 10 percent and variable commission for preferred placement.

Shutterstock has four main revenue sources: subscription purchase packages; on-demand pricing where sellers receive 20-30 percent of the purchase price; license revenue from its video and music assets; and ancillary revenue from its online learning platform SkillFeed or cloud asset management software, WebDAM.

For each of these marketplaces (with the curious exception of Homeaway ³) base transactional fees are of diminishing incremental importance – with ancillary products and services driving much of the platform margin growth. This likely explains why, for example, Grubhub has been so focused on entering the delivery game: a significant gross margin boost.

In Etsy’s case, the growth of non-transactional revenue is their strongest growth driver. So much so that they explicitly highlight the growth in their S1:

Etsy’s Seller Services revenue has nearly doubled from 25 percent to 45 percent of total revenues in the last two years and now includes a full 450bps of Etsy’s gross sales volume. Vitally, the hyper growth in these new categories is offsetting a tangible decrease in Etsy’s core marketplace gross margin – down 8 percent over the past two years – most likely from discounting to new customers which has a contra-revenue (and thereby margin-contracting) effect.

These Seller Services are doubly important because Etsy also covers credit card processing fees on marketplace transactions, cutting its marketplace GM from 5.65 percent to an effective 3.5-4 percent. With that in mind, the question investors should be asking is how expensive are these supplementary services to build and operate and can they continue to grow nearly 100 percent year over year?

Although 2014 revenue grew by 57 percent, overall expenses grew by 68 percent. The silver lining is that if you remove marketing expense from the calculation, annual expenses grew only 51 percent.

Investors should be pushing Etsy to break out these expenses more clearly. Last year was one of learning on the marketing side for Etsy, and I would expect performance and spend to stabilize in 2015. If that assumption is correct and if the expenses requisite to support seller services continue to mature, Etsy will have a healthy balance sheet – although, at the expense of hyper growth.

Isn’t crafting trendy?

Both GrubHub and Shutterstock go to great lengths to define the breadth of their space – $70 billion and $16 billion, respectively – with Shutterstock even commissioning a research report on the study. The home vacation rental market is massive, easily bursting into the hundred-plus-billion mark. But Etsy makes no mention of its market size – no comparison to arts and crafts supplies (a $30 billion annual segment). It’s a curiosity that reflects Etsy’s possible Achilles heel – that the market simply isn’t that big. It really feels intentionally omitted:

Etsy sellers offer goods in dozens of online retail categories, including jewelry, stationery, clothing, home goods, craft supplies and vintage items. Euromonitor, a consumer market research company, estimated that the global online retail market was $695 billion in 2013, up from $280 billion in 2008, representing a compound annual growth rate, or CAGR, of 19.9%. This growth is expected to continue, with the global online retail market becoming a significantly larger portion of the total retail market, reaching $1.5 trillion by 2018, implying a 16.6% CAGR from 2013.

With GrubHub at 2 percent market penetration and Shutterstock at (estimated) 2.5 percent if Etsy is nearing 10 percent of its addressable market, for example, that would certainly explain why its growth is slowing while GrubHub is accelerating in spite of identical gross sales.

While, in principle, the market for jewelry, home goods and craft goods is outright massive, Etsy’s strict guidelines around hand-crafted, artisanal products is certainly limiting. This concern that led to its major revision of seller guidelines 16 months ago as well as its launch of Etsy Wholesale just 9 months ago. Even so, the success of outsourced vendors has yet to be validated – and casts real concern around their total addressable market.

Running through this market size exercise would make me extremely wary as an early-stage investor of the myriad niche or vertical specific marketplaces targeting smaller markets. I’d go so far as to say that any space without a minimum of $5 billion in annual transaction volume is a non-starter.

The bet

If Etsy were to hit the public markets today at a $2 billion valuation (WSJ says $1.7 billion) here’s how it would compare to its peers:

On both a revenue and EBITDA basis, Etsy believes it deserves a premium to more mature, slower growing marketplaces, which is fair. But unlike GrubHub, its growth is decelerating – quickly – even in spite of its focused efforts to leverage high-volume whole sellers and point-of-sale.

The bet on Etsy is:

  1. The market is ultimately larger than we currently estimate, especially internationally. Because GMS growth is decelerating by 15-30 percent annually, you need to either believe that macro trends cause consumers to increasingly favor hand-made artisanal goods, or that they’re able to appeal to the non-handmade, non-artisanal yet “still boutique” buyer and seller.
  2. Etsy can continue to acquire and cultivate power users via low-cost marketing through the power of its community and network effects.
  3. They can continue to build and launch high quality ancillary products that an overwhelming percentage of their active sellers are willing to pay for (between 18-36 percent of all active Etsy sellers currently subscribe to each of their Seller Services) – thereby enhancing their overall Gross Margin.
  4. It’s able to build product and sustain community quality while simultaneously stabilizing (or contracting) overhead expenses.
  5. Their community and brand values render them not susceptible to even more niche/verticalized platforms such as Minted or Dawanda stealing ever precious market share.

Some parting notes

As Bill Gurley wisely communicated to Uber, one of the best ways for a company to avoid disruption is via cutting prices to the point where its effectively impossible to be undercut on price. This is Etsy. As compared to its peers, Etsy is the cheapest of transactional marketplaces for both buyers and sellers. But that comes at a cost: Etsy only works at scale – and its profitability is thereby dependent on non-transactional revenue.

Investors should be confident that Etsy’s loyal community will continue driving sales into the foreseeable future. The converse is that GrubHub or Shutterstock’s merchants are far more likely to abandon the platform for a lower-cost provider. Taking into account the size of the space and GrubHub’s growing margins, it’s no wonder investors are so bullish on the next generation of food-delivery apps – Postmates, Doordash and Sprig – with both a huge whitespace and opportunity to steal market share on price.

The majority of marketplace startups today are geo-focused, on-demand platforms (Uber is the paradigm). Though not a single one of these is yet to hit the public markets (or disclose detailed info), there are a couple of clear best-in-class benchmarks already emerging:

  • 10x Growers: This has most frequently been going from $10 million in revenue to $100 million in revenue in a single 12-month period (Instacart, Postmates, BlueApron TheRealReal… Uber is of course in a separate orbit altogether) and
  • $100k in 30 Days: When platforms are able to launch new cities and see a minimum of $100K in localized GMV in its first month. This new class of marketplaces needs to be highly attuned to unit economics as logistics/delivery charges can handicap otherwise healthy margins.

Maybe it’s the Chicago bias in me, but wow does GrubHub seem like a beast of a business. Yes, in my opinion, it’s more susceptible to pricing disruption, but its accelerating growth, strong marketplace margins, mere 2 percent market penetration and heavy consumption frequency are really impressive. It’s deserving of its premium multiples, and I’ll be watching closely over the next 12 months.



¹ I’ve seen some other articles try to compare Etsy to eBay, Alibaba, Wayfair and Zulily. I think all these comparisons are really flawed. Ebay is far too mature, founded nearly a decade before Etsy, not to mention that PayPal, not its marketplace, is its strongest product. Alibaba is far too horizontal to be an accurate comparison; and although Wayfair and Zulily connect buyers to sellers, they’re both predominantly flash sales e-commerce businesses. I concede that the actual Wayfair platform is functionally a marketplace, but its growth driver, Joss Main, does not conform to the same dynamics.

² Homeaway’s pay-for-performance listings generate a 10 percent transaction fee. They have a variety of subscription bundles for power sellers, but we can assume that power sellers are savvy enough to generate noticeable discounts to that 10 percent fee on a subscription basis. I used a sliding scale, based on their subscription versus pay-for-performance listing to estimate their Gross Margin. Their Gross Margin was also positively affected by ancillary services (which they do self report). Shutterstock does not formally note their GMV or Gross Margin but it can be backed out by assuming that their revenue represents gross transactional revenue, and subtracting the payouts to contributors noted in their cost of revenue description. Although that take is approximately 70 percent, their gross margins are ultimately slightly higher due to revenue from the SkillFeed platform and WebDAMs software.

³ I can only assume in order to mitigate questions of relevance versus Airbnb’s low friction signup/transactions. As well as to increase Gross Margins – I estimate from ~5% effective on a subscription basis closer to 10%. That said, their subscriber services are one of their strongest differentiators relative to Airbnb and it will be interesting to watch that battle play out.

Author note: I am not a registered investment advisor not am I a public market expert. This post should not be the basis of your investment decisions.

Featured Image: Anna Rassadnikova/Shutterstock

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