How They Started Page 8

  Etsy closed out the year having handled $3.8 million in sales for its merchants. But the Brooklynites didn’t take to California, and returned home after just a month in the Noe Valley house. Soon Chris and Haim would be coding at Haim’s house, with Chris crashing on the uncomfortable couch they dubbed “the spine-crusher.”

  The team continued on in this way until Etsy got its first Brooklyn office in 2007. It was a heady time: the company had just seen its millionth sale, and two million items would be sold before the end of the year. With its first real office, Rob started Etsy Labs, installing silk-screening machines and other craft supplies and holding events where crafters would create goods on site.

  The company also added a new revenue stream to its business model, offering sellers the chance to pay a $7 fee to have their product featured prominently in Etsy’s “Showcase.”

  In Rob’s view, Etsy sellers were like the tiny fish that band together to repel scary big fish in the children’s story Swimmy, by Leo Lionni. Bringing crafters together on the site, he hoped, would enable them to better compete with big-box stores.

  Some crafters found a dark side to being an Etsy seller, though. Crafters reported toiling 14-hour days at what amounted to less than minimum wage to create their wares. On the flip side, success could get you banned from Etsy. The site’s rule was that all goods must be handmade. If sellers became popular and wanted to make more goods than they could personally handcraft, they had to leave the site.

  Doubting Thomas

  Sales volume skyrocketed in the next few years, hitting $26 million in 2007 and $87.5 million in 2008. With growth, though, came chaos. The company staff mushroomed to 60 without a planned structure for how they would interact. Silos developed. Teams lost focus. The site struggled to keep up with crafters’ demands for more features.

  At the same time, the site’s explosive growth drew more interest from funders. Etsy was able to raise a much larger funding round in 2007: $27 million from Accel Partners, Acton Capital Partners, Hubert Burda Media, and Union Square.

  With investors looking on and increasingly anxious for the site to turn a profit, Etsy needed someone more seasoned to create a stronger corporate structure. Former Amazon and NPR Digital Media manager Maria Thomas was hired as chief operating officer. Maria was quickly elevated to CEO, with Rob stepping away from day-to-day responsibilities to focus on creating a charity that would help empower crafters.

  The leadership change was a breaking point for Chris and Haim, who were burned out from the years of long hours. In particular, Haim had been working in the company’s rented New Jersey data center under hellish conditions, locked alone inside a security cage in a noisy, cold, poorly lit, windowless cavern he dubbed “a raver’s prison.” The two identified pressing problems and told Maria about their proposals to solve them, and were rebuffed. They asked to do research-and-development work for new Etsy projects. Again, the answer was no.

  “She said, ‘I have no interest in any of this—I’m bringing in all my own people,’” Haim recalls. “It was time for us to go, because this was never going to work. If you don’t have board seats, you don’t have power—that’s the most valuable lesson we learned.”

  The Etsy site today.

  In 2009, Etsy moved to larger, art-filled offices on the fifth floor of a former printing company in Brooklyn’s artsy DUMBO neighborhood (the acronym stands for “down under the Manhattan Bridge overpass”). The new space would allow Etsy to add employees and offered more room for Etsy Labs activities.

  The return of Rob

  Maria accomplished some critical milestones during her time at Etsy. Most importantly, the company turned profitable in 2009 and saw over $180 million in sales transacted by its merchants. Revenue increased sevenfold during her tenure. The company laid plans to open its first foreign office, in Berlin, and made its first acquisition, buying online-advertising startup Adtuitive for an undisclosed sum.

  But there was a feeling amongst both staff and crafters that the company had lost its way on the creative side. A community council was formed to try to involve crafters and respond to concerns, but the discontent persisted.

  Ultimately, Rob was drawn back to the helm. In December 2009, Rob returned as CEO of Etsy, and Maria left the company.

  Where are they now?

  In 2010, Etsy had seven million registered members and 400,000 sellers. Ten million items were listed for sale, and the site received 940 million page views. The company saw revenue of $40 million on over $300 million in merchandise transactions. By September 2011, Etsy had already exceeded the previous year’s sales, with nearly $358 million in revenue.

  In August 2010, Etsy raised an additional $20 million from Accel, Hubert Burda, Acton, and Index Ventures. In all, the company has raised more than $51 million. Etsy is the subject of regular rumors of a public offering, but as of fall 2011, no plans had been announced.

  Post-Etsy, Chris and Haim work together at the startup Postling, which makes social media management tools.

  In July 2011, just eight months after his return, Rob announced he would depart Etsy again. Chief Technology Officer Chad Dickerson, who had joined Etsy at the same time as Maria, assumed the CEO mantle. Union Square’s Fred Wilson said this second departure felt like goodbye.

  “Rob is so very much that founder who cares intensely,” Wilson wrote on his blog, A VC. “He has given so much to the company over the years, and he just completed a product road map that provides a guidepost for what Etsy will become in the coming years. Etsy is his creation and will always be.”

  Groupon

  Turning coupons into cash

  Founders: Eric Lefkofsky, Andrew Mason and Brad Keywell (shown, left to right)

  Age of founders: 42, 30 and 42

  Background: Serial entrepreneurs and law students (Brad and Eric) and entrepreneur and public policy student (Andrew)

  Founded in: 2008

  Headquarters: Chicago

  Business type: E-commerce

  Coupons have been around since the late 1800s, when Coca-Cola began mailing out free Coke offers. More than 100 years later, a new company would put an Internet spin on coupons—and create one of the fastest-growing companies ever seen. Sales exploded from $5,000 in 2008 to top $1 billion in 2011.

  Groupon offered a new marketing avenue for small merchants: the online daily deal. The wild popularity of Groupon’s deals attracted over $1 billion in venture capital, spawned legions of competitors, and led to an IPO that valued the startup at a staggering $12.7 billion. The most improbable thing about Groupon’s success, though, is that the shopping-deals site was launched as an afterthought, by founders whose initial goal was to make the world a better place.

  Start up early and often

  Eric Lefkofsky started his first business while studying law at the University of Michigan. Apex Industries sold carpets to incoming students and grew to $100,000 in annual sales. Next came a T-shirt company, Mascot Sportswear, which he built and sold off.

  Next, Eric teamed with law-school pal Brad Keywell to buy Wisconsin apparel firm Brandon Apparel Group. The two borrowed heavily to grow the company to $20 million in sales. But then fashion trends changed, sales crashed, and Brandon went out of business. In the aftermath, the pair faced multiple lawsuits.

  On his blog, Eric called Brandon “a huge failure. We over-leveraged the company and it eventually crumbled under the weight of that debt when the industry began to consolidate against us.”

  While the Brandon legal mess dragged on, Brad and Eric started their first e-commerce venture in 1999. Starbelly.com sold corporate promotional items. At the height of the dot-com boom, Starbelly raised $9.5 million in venture capital, and quickly sold to retail chain Ha-Lo Industries for $240 million. When Ha-Lo failed shortly afterwards, shareholders filed class-action and civil lawsuits against Eric and Brad. Discouraged, Brad took a job with famed business magnate Sam Zell.

  Eric pressed on, though. “I never thought of stopping,�
�� he wrote on his blog. “I just put my head down and kept moving forward, kept working toward success.”

  Eric’s next company, InnerWorkings, developed proprietary software to enable printing companies to bid for jobs online. A key funder for InnerWorkings was found when Eric went to a college reunion. There, a classmate introduced him to venture investor Peter Barris of New Enterprise Associates (NEA). Eric would later meet NEA investor Harry Weller as well, and NEA invested in the company. InnerWorkings went public in 2006 and today is a $400 million business.

  In 2005 Eric teamed with Brad again, spinning out the supply-chain and logistics division of InnerWorkings to found Echo Global Logistics. The following year, they co-founded MediaBank, a technology-enabled media-buying software company. In 2012 MediaBank announced a merger with competitor Donovan Data Systems to create a $1 billion company, MediaOcean.

  For its part, Echo grew rapidly, received over $17 million in funding from NEA, and went public in 2009. But perhaps Echo’s most notable achievement was hiring a certain idealistic young Web developer: Andrew Mason.

  Raised in Mount Lebanon, Pennsylvania, Andrew also had the entrepreneurial itch. At 15, he started a food delivery service, Bagel Express. After high school, he moved to Chicago to attend Northwestern, majoring in music. He played in punk bands and had a wacky side—for a long time, one of his social media profiles featured a shot of him in his underwear. But his true passion was social justice, and Andrew planned to get a master’s degree in public policy.

  Getting to The Point

  To earn extra money, the grad student placed a Craigslist ad for web-development work, and was hired on at Echo. He caught Eric’s eye by pulling a round-the-clock work stint.

  “He took it on himself to rewrite a program in six or eight weeks,” Eric remembers. “He was pretty young and he was sleeping at the office. I just thought he was super-talented.”

  Soon after, Andrew departed to return to school. Several months later, though, Andrew reconnected with Eric. Andrew had an idea for a website that would help citizens come together to work on social-action projects. He called it The Point.

  On the site, individuals could start campaigns—to raise money for a new park, for instance, or to pressure a corporation to recycle. People would pledge to help by taking action or donating. When a critical mass of people signed on, a “tipping point” was reached whereby the campaign moved forward.

  Intrigued, Eric offered Andrew a $1 million investment if he would quit school and begin work on The Point immediately. So in January 2007, Andrew left campus life behind and started building the site.

  In the original business plan, three potential revenue models were identified for The Point: advertising; taking a percentage of the money raised in fundraising campaigns; or charging a fee for helping groups of people buy items in bulk at a discount. But the initial goal was simply to build the site, draw big traffic, and focus on the social-change mission. Monetization would come later. In the meanwhile, Andrew kept his burn rate low by hiring just a few developers to work on The Point’s launch.

  “We had the ability to iterate and experiment without spending a lot of money,” Andrew says.

  He paid rent for a small suite in Echo’s vast offices inside a remodeled former Montgomery Ward warehouse in downtown Chicago. In November 2007, The Point went live, and over the next year drew only a small following. This made it unlikely that either advertising or fundraising commissions would generate substantial revenue.

  The initial goal was simply to build the site, draw big traffic, and focus on the social-change mission. Monetization would come later.

  To raise more money for The Point, Eric reconnected with his longtime funders at NEA, Harry Weller and Peter Barris, who invested $4.8 million in January 2008. Weller remembered Andrew from InnerWorkings and says he jumped at the chance, even though The Point’s business model was as yet unformed.

  “This was a bet on the team,” Weller says. “We knew the idea would transform over time. We really thought highly of Andrew—he was a sort of inspirational, visionary guy paired with two strong operator/entrepreneurs.”

  Under increasing pressure to generate revenue, Andrew began investigating the idea of group buying through the Internet. To start, Andrew studied companies that had tried group buying and failed.

  “The process of coming up with the idea,” Andrew says, “was a process of eliminating the reasons that the previous attempts at the concept failed.”

  One Seattle startup Andrew looked at, Mercata, had raised nearly $90 million before going bust in early 2001. Mercata let consumers band together to bid down prices on goods and services they wanted. Mercata’s “auctions” took too long, though, and customers lost interest. Merchants didn’t want to participate either, as they made less margin. Mercata also focused on selling items such as consumer electronics, for which bigger competitors such as Amazon could offer lower pricing.

  Get your Groupon

  One day during this time, Andrew was inspired after taking an architectural tour around Chicago. He realized local discount deals would work well for group buying. Theaters had empty seats, restaurants empty tables, museums could use more members. The merchants could make a discount offer to fill some of that unused capacity, and the extra revenue would be found money.

  Each deal would last only one day, so customers could buy quickly. He’d sell only one deal a day, which would allow for a focused marketing effort. There would be a tipping point for each deal that the merchant could set. If enough customers didn’t buy the deal, nobody got it.

  It wasn’t hard to come up with a name. The product was a “group coupon,” or Groupon for short. At first the name was “Get Your Groupon.”

  The local-deal idea offered a revolutionary new way small merchants could affordably advertise online. Groupon also used the Internet in a novel way that NEA’s Weller says grabbed his interest: instead of encouraging people to stay home and online, it encouraged them to go out and experience new things in their community. It wasn’t world peace, but it was a positive goal.

  “We could make life better for small-business owners and increase buying power significantly for consumers,” Andrew says. “Somebody who makes $30,000 a year can live like they make $60,000. That translates into freedom and experiencing more life—and that’s something we could all get very excited about.”

  To sign up his first merchant, Andrew simply went downstairs. The owners of Motel Bar, a restaurant and bar on the ground floor of Echo’s Montgomery Ward building, readily agreed to do a deal offer. In October 2008, Andrew put together the first Groupon, a two-for-one on Motel Bar pizzas. Customers would pay The Point and receive a voucher through the site, which they would redeem later at the restaurant. The Point would send Motel Bar its share of the proceeds.

  “We could make life better for small-business owners and increase buying power significantly for consumers. Somebody who makes $30,000 a year can live like they make $60,000.”

  “We went from idea to launched product in just over a month,” Andrew says. “And it was a success—25 people had to buy in, and it tipped.”

  Encouraged, Andrew tried more deals. But in 2008, Groupons were still a sideline to The Point. Revenue for the year was just $5,000.

  For Andrew, a couple of key deals that came shortly afterward demonstrated the potential of Groupons. One was for a stay in a sensory deprivation tank, an offbeat service Andrew was unsure would sell—but it did. Another notable offer was for a $180 tooth-whitening treatment, a much higher price than Andrew had yet tried. When hundreds of people signed up, the team knew Groupons could be a real revenue stream for The Point.

  “We realized we’d tapped into this insane demand,” says Eric. “People wanted to go skydiving, try that massage parlor, become a member of the Art Institute, or go on an adventure trip—but they needed something to push them. Groupon was that thing.”

  In January 2009, Chief Technology Officer Ken Pelletier threw a late holiday
party at his small apartment for the entire The Point staff, their spouses and friends. It would be the last time the company would fit in such a small space.

  “People wanted to go skydiving, try that massage parlor, become a member of the Art Institute, or go on an adventure trip—but they needed something to push them. Groupon was that thing.”

  It was clear Groupon wasn’t a revenue model for The Point—Groupon was the point. The company was reorganized and renamed that month, with Brad serving as a director. One year later, Groupon would have 300 employees. The year after that, Groupon would have a staff of 5,000.

  A bumpy ride on a hockey stick

  Chicago clearly loved Groupon, snapping up $100,000 worth of deals in the first quarter of 2009. It was time to test Groupon deals in another market to see if Groupon would work beyond the founders’ home turf. The second Groupon market, Boston, opened in March.

  Any doubts about the business model were quickly laid to rest. Boston took off just as Chicago had. Everyone realized Groupon wasn’t just a good local money-making idea—it was a huge, global idea.

  As it happened, Groupon’s timing was perfect—the economy had just gone into the tank, and bargains were hot. Bloggers raved, the mainstream media took note, and a media honeymoon began that would boost the company’s early expansion efforts.

  Corporate missives were often playful, as in a blog post noting that the black background of the Groupon logo “symbolizes the constant darkness that would plague a world bereft of daily deals.”

  After Boston’s success, board members urged Groupon to expand as fast as possible, fundraising aggressively to pay for staff and online advertising. Groupon needed to build brand recognition and acquire scale to operate efficiently. Also, the barrier to entry for daily deals was fairly low. Competitors would be coming soon, NEA’s Weller forecast—and in fact one of Groupon’s most successful competitors, Living Social, launched that year.