How They Started Read online

  Survival of the f ittest

  While some analysts questioned the logic behind the eBay-Skype deal, and others said eBay paid too much, one thing was clear: by the time it celebrated its 10th anniversary in 2005, eBay had proved itself many times over as an Internet business that was here to stay. It had peaked during the dot-com boom and survived while other high-profile, venture capital-backed brands such as Boo.com, eToys and Webvan had disappeared altogether.

  Today, more than seven million new items are listed on eBay each day and more than 112 million items are available at any given time.

  Although eBay’s foray into online auctions in China ultimately proved unsuccessful (it closed the website at the end of 2006 and instead entered into a joint venture with a Chinese company), eBay had more success with Skype. In 2007 Meg Whitman said that Skype had more customers in China than in the United States, and the growth rate in China was higher than anywhere else.

  Fittingly for an Internet business, eBay has not been slow to capitalize on other technology opportunities, as it now offers a site enabled for mobile devices, text-message alerts and blogs. It has also further diversified its services to offer “Best of eBay,” a site dedicated to finding the most unusual items advertised, and “eBay Pulse,” which provides information on popular search terms and most-watched items.

  More recently the company has branched out into other international markets and expanded its auctions business into event ticketing and comparison shopping, while navigating its fair share of challenges. The company has seen the overall growth of its core auction business slow down, and it has had to deal with numerous incidents of fraud carried out on the site. What’s more, eBay has faced intense competition from search engine giant Google, which in 2006 launched Checkout, its own online payment system. Amazon, too, has begun to attract independent sellers, the core of eBay’s business.

  The company’s success has been credited in part to its ability to innovate as well as to adapt.

  The inside of eBay’s headquarters.

  Where are they now?

  As of 2011, eBay had around 100 million active users globally. Its three biggest markets are the US, the UK and Germany. In Forbes’s 2010 list of the world’s billionaires, Pierre Omidyar was listed at number 148 with personal wealth of around $5.2 billion. He remains chairman of eBay but has kept himself busy with other ventures, such as Omidyar Network, a philanthropic investment firm.

  In April 2008, Meg Whitman stepped down as CEO (and in 2010 ran unsuccessfully for governor of California). She was succeeded by John Donahoe, president of eBay’s Marketplaces division, who remains CEO today.

  In 2009, eBay sold 70 percent of its share of Skype for $2 billion (having paid $2.6 billion for the online communications company in 2006). But in 2011 Microsoft acquired Skype for a massive $8.5 billion, valuing eBay’s 30 percent share at $2.8 billion.

  The full-year 2011 revenues showed an increase of 27 percent on 2010 levels to $11.7 billion. The company generated net income of $3.2 billion. PayPal also saw significant rise in revenue, with a 28 percent year-on-year revenue increase to $4.4 billion, with the payments provider adding a million new accounts every month in 2011.

  The company’s success has been credited in part to its ability to innovate as well as to adapt, a vision that has been with the company since the very beginning, and that continues to hold true today. The site introduced new measures to make its auctions and fixed-price listings easier to use, revamped its feedback mechanisms and strengthened its anti-fraud provisions in a bid to make eBay a safer place in which to trade. As Pierre explained in an interview in 2000:

  “What eBay did was create a new market, one that wasn’t really there before. We’ve had to evolve our strategies and policies from what I built in the beginning, which was a self-policing community of people, to one where we take a more active role in trying to help identify the bad actors”, he said.

  Etsy

  A handcrafted success

  Founders: Rob Kalin (shown), Chris Maguire, Haim Schoppik and Jared Tarbell

  Age of founders: All early to mid 20s

  Background: New York University (Rob, Chris and Haim), New Mexico State University (Jared)

  Founded in: 2005

  Headquarters: Brooklyn, New York

  Business type: Online marketplace for independent creative businesses

  In 2005, Rob Kalin was a 25-year-old college student, carpenter, photographer and painter looking for a good way to sell his wares. He would join with two other friends at New York University to create exactly that: an online marketplace for handcrafted goods. He gave it a short, nonsensical name: Etsy.

  From a website cobbled together in just a few months in Rob’s Brooklyn apartment, Etsy would grow in five years to move more than $300 million in merchandise, be valued at more than $300 million by investors, and employ more than 250 people.

  The ironic secret of Etsy’s success? Rob put more energy into helping the crafter community and promoting the lifestyle of buying handmade goods than he did into making Etsy a viable business. That philosophy would cause much conflict and turmoil at the company, but would also draw an enthusiastic user base and enable Etsy to succeed.

  “Profit isn’t a focus,” he said flatly in a 2010 video interview with the influential technology blog TechCrunch. “To me, the most important part of commerce is the social aspect. This is a huge opportunity to reinvent what e-commerce means. That’s our goal.”

  A little client project leads to a big idea

  In 2005, Rob and his friend Chris Maguire were hungry New York University students doing freelance Web-development work to try to cover their tuition. Chris was just 21. The pair formed a design company, iospace, but quickly tired of client work and wanted to create their own online business. The question was what it would do.

  Rob’s time at NYU overlapped only briefly with Haim Schoppik’s, but the two had something in common besides NYU: both were high school dropouts. Boyish, redheaded Rob had basically flunked out of high school—he had a 1.7 grade point average—and then bounced through six different colleges before landing at NYU. He only made it into the school through subterfuge, faking a student ID at MIT and then using a recommendation letter from an MIT professor he’d met to gain admission.

  For his part, Haim dropped out of high school at 16 to pursue his first love, computer programming. After a couple of years in the workforce, including stints as a site administrator for Goldman Sachs and Reuters, Haim went back to school. All three were students at NYU’s Gallatin School of Individualized Study, where students create their own majors.

  Entrepreneurial ideas seemed to grow in Rob’s head like weeds, Haim recalls, though many were of dubious value, such as opening a photo-scanning store. One early idea of Rob’s was to create an online community productivity software application. He even wangled $10,000 in financing to develop the idea, from a local realtor for whom Rob had built a home bar, Spencer Ain.

  “Rob’s hidden ability is talking rich people out of their money,” Chris says. “That’s what he’s best at.”

  Unfortunately, the concept floundered shortly after Rob got the money. The pair needed another website idea that could justify the investment money they were quickly spending.

  “To me, the most important part of commerce is the social aspect. This is a huge opportunity to reinvent what e-commerce means.”

  The turning point proved to be the duo’s pro bono revamp of a crafters’ chat-forum site, GetCrafty.com, which was owned by an NYU professor’s wife, Jean Railla. The project gave Chris and Rob the chance to work on community forum software. More importantly, they had a chance to chat with many of the site’s members online.

  “People kept saying they wished they had a better place online to sell their stuff,” Chris says. “eBay was too big, too expensive, and too ugly for what they wanted. And we were like, ‘There’s an idea. We could build that.’”

  Three months with three men an
d three cats

  The idea of a crafters’ e-commerce website caught Haim’s interest. At 25, Haim was the most seasoned worker of the group, bringing needed site administration and design experience to the project. The trio soon converged on Rob’s Brooklyn apartment, which became the designated launchpad for the site.

  “eBay was too big, too expensive, and too ugly for what they wanted. And we were like, ‘There’s an idea. We could build that.’”

  The apartment had several bedrooms, but Rob’s roommates had departed, leaving just Rob and his three pet cats. Chris and Haim would rarely make it back to their own homes over the next few months as they worked frantically to build the as-yet-unnamed website.

  “We literally lived there,” recalls Haim. “There are unflattering pictures of me asleep with my mouth open, drooling. We’d wake up and go to work and work until we crashed.”

  As the team built frantically and ran through its capital, the question quickly became how much site to build before launch. Rob was taking counsel from his grandfather, who had worked at both IBM and GE. He advised the trio to wait until they had a full-featured website and a solid business plan.

  Haim working away in their first “office,” Rob’s apartment.

  But Rob was also talking to a friend from his Brooklyn neighborhood, restaurateur Sean Meenan, who had created several successful eateries including popular Café Habana. The two had cemented their relationship when Rob built Sean a cool computer made of orange plexiglass for an Internet café. He liked Rob’s hustle: before the site’s launch, he noticed Rob out distributing flyers about the site at a Brooklyn craft fair.

  Sean had the opposite opinion from Rob’s grandpa: launch as soon as you possibly can, and add more features later. This latter theory won out, and a fairly bare-bones version of the site would launch after nearly three months of work, in June 2005.

  During this frenetic period, Rob was also out raising more money. He returned to realtor Ain for more funding, who also brought in his brother, Judson Ain. Sean was the third investor in the startup’s $315,000 seed-funding round.

  Why would Sean write a 25-year-old, first-time entrepreneur a six-figure check for an as-yet-unlaunched e-commerce website?

  “I was a big believer in Rob,” he says. “He has a unique perspective and he’s really smart. And there was something really sincere, innocent and hopeful about this project.”

  Origin of a made-up name

  As the site neared launch, Rob hunted for a name for the new business. He knew he wanted it to be something short—short website addresses are easier to remember—and he wanted a made-up word around which he could build a brand.

  Watching the Italian director Federico Fellini’s classic film 8½, Rob kept hearing the actors say “etsi,” Italian for “oh yes.” He also noted that in Latin it meant “and if.” Americanized with a “y” ending, the company was christened Etsy.

  The free launch

  In June 2005, Etsy launched as a free e-commerce site for crafters. Why? The billing system wasn’t built yet. Etsy had no way to assess, track or collect payments.

  Sean had the opposite opinion from Rob’s grandpa: launch as soon as you possibly can, and add more features later.

  It would be several more months before Etsy would be able to institute its initial fees: 10 cents per listing and a 3.5 percent fee on items sold. For now, crafters could get onto the site, put up listings and pictures of their wares, and sell them. Search tools for customers were rudimentary. Still, Etsy was up and going, and crafters took notice immediately.

  “The biggest landmark is after we launched, we actually saw someone list something,” Haim recalls. “Holy shit, somebody actually used us! And later on, somebody actually bought something. That was a real moment for me. From there, it just grew and grew.”

  As crafters signed on and began to use the site, the team continued to work madly on fixing problems and adding features. For instance, sellers of vintage items wanted more categories for their wares.

  The breakthrough addition was chat forums. The team had seen the power of forums on the GetCrafty site, but never imagined how crafters longed to share their problems and ideas. By the year’s end the team would be moderating 100 forum posts a day. (By 2008, it would be 15,000 posts.) Of course, managing all this took work, work, and more work for the small team.

  “Our work arguably never stopped,” says Haim. “There were always improvements to make and bugs to fix. We were literally always building it.”

  Quickly, it became clear that more robust search tools would be needed to sift through the growing piles of merchandise—jewelry and sock puppets, paintings and hand-sewn pillows. Rob knew a visual artist in New Mexico, Jared Tarbell, who was adept at working in the graphics program Adobe Flash. Jared had been hesitant to join before the launch, but once the site was up, he began working remotely from New Mexico on new search features.

  His first search tool allowed users to search for items by color, a useful feature for decorators. Etsy ended up patenting the technology, which is used by many retailers today. Other features added later were more whimsical, such as one that would select Etsy sellers who were celebrating their birthday. A geolocator was also added so shoppers could view goods from a particular country or city.

  Rob, Chris, Haim and Jared in California, circa 2006.

  “Our work arguably never stopped,” says Haim. “There were always improvements to make and bugs to fix. We were literally always building it.”

  While the tech team had their heads down, Rob had his eye on the big picture. He considered Etsy’s marketplace nothing short of revolutionary. He wanted it to be a tool to enable consumers to abandon mass-produced, cheap goods in favor of getting to know small merchants and purchasing their wares. On the seller side, more people would be empowered to make an independent living.

  “Etsy is about offering viable alternatives to mass-produced objects in the world marketplace,” he told the Financial Times.

  While it wasn’t done intentionally, launching as a free site had its advantages in attracting crafters. Once the pay model was introduced several months later, many users would accept the fees and continue to be Etsy sellers.

  By the end of 2005, several thousand crafters had sold $170,000 of goods on Etsy. Of course, there was little profit in it for the team, since the site was free for about half of its six months of operation.

  It wasn’t clear in these early days if Etsy would grow large enough to become profitable. Most of the products were low-priced, so Etsy’s commissions were small. But crafters loved the site, and shoppers were buying.

  Rob, Chris and Haim’s California adventure

  Now that the site was up and enjoying modest success, the budding company grappled with growing pains. As more users came on, the site developed problems and sometimes crashed. When it was down or a feature didn’t work, users would see a cartoon of a flaming Haim known as “Haim on Fire” with the caption, “Don’t worry—Haim’s working on it!” After one major 2007 outage, Etsy crafters expressed gratitude for Haim’s round-the-clock efforts to restore the site by making crafts incorporating the Haim on Fire image.

  The cartoon Etsy put up when their website crashed.

  Etsy needed more powerful computer servers, more staff—and more money. Fortunately, word had spread rapidly about the little startup. The tech press loved Jared’s innovative Flash features, while crafting magazines printed glowing tales of crafters who’d seen success on Etsy and been able to turn crafting into a full-time business.

  To connect with Silicon Valley venture capitalists, Rob laid plans to visit California. Rob’s Brooklyn pal and investor Sean Meenan came along as Rob’s wingman.

  Rob had contacted Flickr co-founder Stewart Butterfield via email, expressing his admiration for Flickr and asking him to take a look at Etsy. He did, and liked what he saw. Flickr had recently sold to Yahoo! for a reported $30 million, putting Stewart and his co-founder/spouse Caterina Fake in the inv
esting business. Both were enthusiastic about Etsy and would take the lead in helping secure Etsy’s first round of venture funding.

  Through Fake and Delicious founder Joshua Schachter, whom Rob had met at a New York party, Rob met a couple of heavy-hitting venture capitalists at Union Square Ventures: Fred Wilson and Albert Wenger (who had briefly been president of Delicious).

  Together, these investors committed $1 million in November 2006 to Etsy in its “Series A” venture funding round. Union Square would invest over $3 million more the following year. The negotiation was a triumph for Rob, who was nervous pitching Union Square as he’d heard the firm wanted at least a 20 percent stake to invest in a startup. Rob didn’t want to give up that much ownership.

  He boldly offered Union just 1 percent of the company, take it or leave it. Wilson immediately agreed, and Union Square was in. Albert says investing in Etsy was a no-brainer.

  “They didn’t have to pitch,” he says. “I could go on the site and see people were genuinely excited to have a marketplace just for them. The existing venues—craft fairs and consignment shops—were incredibly inefficient. I thought, ‘This is what the Internet is for—connecting people and enabling this kind of commerce that has a personal component to it.’ Plus, they had youthful enthusiasm aplenty.”

  The money was raised to fund “Etsy 2.0,” a major upgrade of the site. To stay close to their new funders, the Etsy trio rented a house in San Francisco’s Noe Valley area and set to work coding the new version.

  One bright spot in the frantic money-raising and site-rebuilding of 2006 was that Etsy doubled its listing rate to 20 cents. Haim says there was some griping from sellers, but as the fees on Etsy were still substantially lower than eBay’s—and far simpler to understand—most accepted it.

  During this time, Etsy picked up a marketing manager, former rock-band member Matt Stinchcomb. To this point, Etsy had put almost no money into marketing. Matt created “street teams,” bringing together Etsy sellers by market area or interest group. The groups offered support for crafters and put on local craft fairs and how-to events. This promotional method got the word out about Etsy and built crafters’ loyalty to the brand.