Etsy, the popular marketplace for all things handmade, just announced that it will not just be hosting the 2012 session of Hacker School at its headquarters in New York, but that it will also offer ten $5,000 grants to women who would like to attend this year’s session but don’t have the financial means to do so. As Etsy’s VP of engineering Marc Hedlund notes, the idea here is to ensure that about 50% of the next Hacker School class of about 40 participants will be female.

Hacker School is one of the many recently launched programs that aim to teach budding programmers to become better hackers. It’s a three-month, full-time program based in New York. The application deadline for this year’s summer session is May 7 and the program will run from June 4 to August 25. Hacker School itself is a free program and those who get the Etsy grants “can spend the money on whatever expenses necessary to free you up for Hacker School, no questions asked.”

Hacker School co-founder Nick Bergson-Shilcock also notes that the female applicants will be judged on the same scale as men. “It frustrates us a little that we feel the need to say that,” writes Bergson-Shilcock, “and we think it underlines the sexism (intentional and not) that so pervades the programming world.”

Etsy’s Marc Hedlund acknowledges that “20 is a small number,” but that he himself has only hired about 20 female engineers in the past 17 years. He also notes that he would be more than happy to hire any of the female engineers from this next batch of participants, “but more importantly, we just want to see these women go on to get fun, creative, lucrative jobs in technology — and hopefully tell other women about the great experiences they’ve had.” At Etsy, a site that has given many female entrepreneurs a chance to start their own businesses, eleven women currently work in Engineering and Operations. That’s up from just three last September. Etsy has about 100 employees in Engineering and Operations.

Etsy, online seller of various hand-made hipster goodness, has reached a major milestone today. After less than four months on the App Store, the Etsy for iPhone app has surpassed 1 million downloads. The app launched in mid-November 2011.

But that’s not all Etsy has to celebrate. Since the release of the app, it’s seen 25-60 percent growth in visits month-over-month, and is seeing an average of 30 pageviews per visit.

Recently Etsy decided to get in on the Pinterest fun. It’s been clear from the start that Pinterest would appeal to marketers, brands, and retailers alike. They just needed to find a way to leverage it. But it would seem that Etsy already has that covered.

The site recently added a “Pin It” button to its listings, right next to the Tweet and Like buttons, making it easier for users to post things they like on to our hot new social network.

Currently the app is only available to iPhone and iPod touch owners, but Etsy did mention that they’re looking for an Android developer. Any takers?

Remember Jonathan Bouman, the young, Netherlands-based developer who brought us the awesome creation that is Scrolldit, a scrollable version of Reddit? Well, he’s back. And this time, he’s made a scrollable version of Etsy. It’s called Scrollsy, and, if you’re an Etsy lover, I guarantee that you’re about to waste a whole bunch of time on this site.

Like Scrolldit before it (and Bouman’s under-the radar creation, the Facebook scroller ScrollFriends), the new site offers a simple and visually attractive way to browse though the content from a more traditionally laid-out website. It’s how Etsy would look if Etsy was Pinterest. And it works great on the iPad.

On Scrollsy, you can browse by category, search by keyword and there are even filters for colors and price range. Zoom in/out buttons let you make the photos smaller and more condensed, or larger. And you can just keeping scrolling down, scrolling down and scrolling down for more stuff.

Bouman says that his earlier efforts at Scrolldit were a “huge success,” which he likes to measure by time wasted. 377,913 unique visits at an average of 1.20 minutes per visit equates to 453,496.6 minutes wasted. “An impact of 314.93 wasted days on our world economy,” Bouman happily proclaims.

“However, with all those minutes wasted, I felt the need to do something productive,” he says, “Scrollsy is a good try – supporting all those small shopkeepers, trying to give them more exposure.”

So there you have it. Scrollsy. Enjoy your weekend.

Online pinboard Pinterest is all the rage these days, and as Etsy is showing today with its latest product announcement, e-commerce sites are starting to realize the power of pinning. The e-commerce marketplace is making it easier for Pinterest users to pin and organize Etsy items, via a new Pin It button on Etsy listing pages, alongside the Tweet and Like buttons.

Etsy says that its members are big fans of Pinterest (and so is Etsy), so the integration makes sense. Etsy is also using Pinterest’s price display feature. So when you pin listings with the Pin It button, the required pin description field is prefilled with the item title and price. Users can also add a note about why they like the item, which will be added to their Pinterest posting.

As we’ve reported in the past, Pinterest encourages members to collect photos and links to products. Via these Pinboards, users are creating socially curated shopping catalogs, the social element comes in because everyone follows their friends’ pinboards.

Also, since Pinterest is still invite-only, Etsy users who don’t use the pinboard can sign up for the site here.

So why are e-commerce sites starting to catch on? Pinterest is collecting a ton of commercial intent and data (especially from women) and is in a position to know what types of products to recommend users or what types of content to show them in the future. And the platform has become a real destination to discover new products.

As e-commerce sites allow users to automatically pin items, this serves as another form of advertising and discovery for retailers on Pinterest. Considering the viral nature of Pinterest, it’s safe to assume more e-commerce sites are going to catch on and add Pin It buttons to their product pages.

But in contrast to other “clones” in Europe, DaWanda does not deserve such a comparison, since they’ve managed to build a unique and individual style and community. Neither from a design perspective nor from a strategic one. With 120,000 designers on the site the company just announced that they’ve raised € 4 million in their latest round of financing. They are using the financial boost to develop and strengthen their international presence, with a focus on France. Those providing the capital are newly won investor Vorwerk Ventures, and existing shareholder Piton Capital. It’s an early birthday present for the designer marketplace, which was founded in 2006 and will be five years old in December.

Until now, DaWanda has been based in Berlin and plans to open up offices in Paris and other European countries in order to shape their local communities and drive sales through local events. No word on whether the startup plans to expand to the US, but at this point is highly unlikely since DaWanda is already market leader in Europe where lots of countries are still lacking such a service and thus the startup is facing little competition.

The startup hit profitability in 2010 and since then managed to increase its turnover every year. Existing investors Holtzbrinck Ventures, Team Europe Ventures, The European Founders Fund and Point Nine Capital remain shareholders. Interestingly, when Etsy raised $20million in its series E round, the investors included Hubert Burda Media and Acton Capital Partners – both german investors.

We’re back for a new episode of TC Cribs, and this one is chock-full of unique, incredible creations that you’ll never see in another office: yep, we made it to Etsy.

The Brooklyn-based company gives artists, designers, sculptors, and all sorts of other creative people a place to sell their wares online — and the startup is eating its own dogfood by decorating its office with items purchase from the site. And boy, does it work. You can’t walk three feet without stumbling across a man-made out of metal wire or freakishly massive owl.

Bonus: if you watch til the end, you’ll see a sleep-deprived version of me make a painful attempt at playing Heart and Soul. Yeah, we had to cut out some profanity.

Thanks, as always, to Ashley Pagán and John Murillo for the camera work, and to Mr. Murillo for the editing and fantastic music selection.

Also make sure to check out our previous episodes of TC Cribs:

• Inside The Psychobox: A Tour Of Dropbox’s Bumping Office
• Take A Doc On The Wild Side At Scribd (With Bonus Go Karts!)
• Dogs, Unicorns, And Mysterious Gongs: Inside Yelp’s 5-Star Pad
• TC Cribs: IGN HQ Gets Its Game On With Lawn Gnomes, Plumbers, And Creepy Dinosaurs
• TC Cribs: From Frenchmen To Randy Raccoons, An Inside Look At Seesmic
• TC Cribs: Inside The Snuggified Home Of Posterous
• TC Cribs: Meebo’s Headbanging, Rocket-Flinging Office (With Magical Passageways)
• TC Cribs: Unlock The Secrets Of GroupMe HQ (Beware The Time-Out Chair)
• TC Cribs: Inside The Escheresque Home Of Justin.tv and Socialcam
• TC Cribs: Inside Tumblr’s Reblog-Worthy Digs

Today marked a bit of leadership shuffling at Etsy, the online marketplace to buy your local hipster a handmade good, as CTO Chad Dickerson takes over the reins as CEO from Rob Kalin. Etsy is Kalin’s brainchild, and the founder has been acting as CEO since 2009.

Dickerson explained the change today on Etsy’s blog, saying that his focus as the new CEO will be to impel Etsy to move faster “and more purposefully”, and re-prioritize risk-taking and “learning by doing” and “iterating”.

Etsy has been growing fairly steadily over the last few years, and a report by GreenCrest Capital, a private equity firm, estimated that the startup’s revenue will grow from $72 million to $201 million by 2016.

However, while growth potential is high, the firm said that “storefront concerns were reaching a crescendo”, with customers expressing concern over the amount of effort it takes to maintain an active Etsy storefront.

In Green Capital’s survey of “over two dozen prolific Etsy sellers”, more than 80 percent of sellers “had concerns about their Etsy experience”. These concerns also included financial considerations, competition, privacy concerns, and “Etsy’s lack of technological capabilities”. Well, maybe the CTO being made the new top dog will help to allay some of the latter concern.

Another obstacle for Etsy, according to the report, is that the handicraft market “represents less than 1 percent” of retail sales in the U.S. and is “highly fragmented, comprised primarily of thousands of small, independent retailers”.

That being said, the firm predicts that the online craft sales will grow at 9.5 percent per year over the next five years, which would mean that there is market growth potential ahead. However, that number is “well ahead of offline sales”, but short of their expectations of “aggregate U.S. ecommerce market growth at 12 percent”.

comScore also had Etsy hovering at around 7.4 million monthly unique visitors worldwide in May, a number that has remained largely flat going back to December 2010.

Based on Green Capital’s report and comScore’s statistics, it would seem that Etsy’s leadership shakeup comes at just the right time.

Union Square Ventures Partner Fred Wilson weighed in on the leadership change on his blog, saying:

Transitions are never easy on the people involved and the company that goes through them. But they are inevitable in any company’s evolution. Some of them work out well and others not as much. But the role of the management and Board is to constantly try to have the right people in the right roles at the right time. And I think we’ve got that at Etsy now and I’m excited to see Chad step up to the top job and lead the company forward.

For more of Dickerson’s post addressed to the Etsy community, check it out here.

Editor’s note: Guest contributor Jon Bischke is a founder of RG Labs and an advisor to Altius Education, Fatminds and Udemy. You can follow him @jonbischke.

It was the best of times. It was the worst of times. 

-Charles Dickens from A Tale of Two Cities

For people who spend most of their days within a few blocks of tech start-up epicenters such as South Park in San Francisco, University Avenue in Palo Alto or the Flatiron district in New York, last week’s jobs report must have created some cognitive dissonance. After all, we’re in a boom/bubble right? It’s really hard to hire good people isn’t it? But take a moment to step outside the world of high technology and a dramatically different picture emerges of what’s going on in America.

The number of unemployed now eclipses 14 million nationwide. Underemployment is scary too with U-6, the government’s official measure of under-utilization,rising to 16.2% in June from 15.8% in May. But the worst number of them all might be mean duration of employment (the length of time that the average unemployed person has been out of work) which has spiked to 40 weeks. As a Wall Street Journal article this week pointed out, if you factored in those who’ve dropped out of the labor market (and therefore aren’t counted in unemployment numbers), the situation would appear even worse.

Which bring us to an important question: Should Silicon Valley (and other tech clusters throughout the country) care? After all, as long as people in Nebraska or the Central Valley of California have enough money to buy virtual tractors to tend their crops in Farmville, should the tech community be worried about whether those same people are getting paid to do work in the real world? Is what’s best for Silicon Valley also good for America?

On one hand, a thriving tech sector is a beacon of hope for America and perhaps one of a shrinking number of things keeping the country from slipping from its perch as the world’s foremost economic superpower. Fast-growth companies like Facebook, Groupon and Twitter create jobs, attract foreign investment (see Sarah Lacy’s article “How We All Missed Web 2.0′s “Netscape Moment”) and generate tremendous amounts of wealth for employees and shareholders which circulates throughout the economy.

In addition, a host of technology companies enable people around the country to make money. Etsy empowers people anywhere to make money selling handmade goods. AirBnB allows anyone with a house or apartment to make money renting it out. And whether you’re talking about design communities like 99designs, crowdsourcing platforms like CrowdFlower, outsourcing sites like oDesk or an artisan food marketplace like Foodzie, tech-enabled marketplaces allow millions of dollars to flow from consumers to producers every year. (Check out Semil Shah’s article “The P2P Evolution” for more great examples of this in action.)

Furthermore, tech companies are helping to reshape how people train for and ultimately find employment. It’s easier than ever to pick up new skills online with the explosion in blogs, tutorials, screencasts and online video. For a self-motivated individual of at least average intelligence there is a shrinking number of excuses for not possessing in-demand skills. And jobs and recruiting platforms like Branchout, Jobvite, LinkedIn and Monster.com certainly help job seekers to smooth the path to employment.

But there’s a flip side to the argument that this technological innovation is good for the country. Books like A Whole New Mind,  The Great Stagnation and The Lights in the Tunnel make arguments that automation and outsourcing are increasingly pushing jobs outside the country and in many cases, doing away with them altogether (you did see that crazy video of the Diapers.com warehouses didn’t you?). The rate of increasing technological innovation certainly produces new jobs but does it produce jobs at a rate great enough to replace those it might be eliminating?

In a similar vein, many of the companies in Silicon Valley are succeeding precisely because they’re disrupting existing players in their industries. Amazon is doing really well right now (almost $10 billion in revenue in the last quarter alone). Borders…not so much. Go iTunes and Spotify. RIP Tower Records. Creative destruction is alive and well but how many people in Silicon Valley are thinking about what happens to that displaced worker at the record store or bookstore?

Maybe something is missing in the Valley and surrounding tech communities and that’s a stronger sense of responsibility to make sure that the vast majority of the country isn’t left behind by all this cool technology that we’re building. In Paul Graham’s essay Great Hackers he points out that the more sophisticated tools become, the greater variation there is in productivity. He writes:

In a low-tech society you don’t see much variation in productivity. If you have a tribe of nomads collecting sticks for a fire, how much more productive is the best stick gatherer going to be than the worst? A factor of two? Whereas when you hand people a complex tool like a computer, the variation in what they can do with it is enormous.

If accumulation of wealth correlates with productivity then, in Graham’s view, increasing variation of wealth might actually be a sign of good things. But could this increase in variation lead to the creation of two almost completely distinct countries in America, one which continues to boom and create enormous wealth for those who reside in it and another for which long-term unemployment and underemployment and the corresponding frustration that accompanies those states becomes the norm?

Megan McArdle wrote a poignant article entitled “Why Unemployment Matters” in last week’s Atlantic where she detailed some of the crushing residual effects of being out of work. It’s worth reading and asking the questions: Can we be doing more about this? Should we even be doing anything about it? The answers to these questions matter a lot.  Please share your thoughts in comments.

Image via Getty

It’ll run you $25 Canadian — at this point normally I’d make a joke about Canadian dollars, but our uppance has come on that account, so I won’t — plus $8 for shipping. I could really use this thing, actually.

[via Design Sponge and Swiss Miss]

From the why-didn’t-anyone-think-of-this-before department: meet Heartsy, which is basically a Groupon for Etsy, i.e. a daily deals site for handmade items sold on Etsy stores.

The concept should be overly familiar to you: registered users get sent exclusive deals on handmade items sold on Etsy by email. Acquired coupons, or vouchers as Heartsy refers to them, can be redeemed at the Etsy store that sponsored the deal (example).

If you’re an Etsy seller, no need to do the math on it to see if it’s worth you while or not – someone already did that for you. (Spoiler alert: it depends).

Like many other daily deal sites, you get cash every time you refer a new user. Heartsy also cleverly lets you vote on what type of deals you think they should be running in the future.

Currently, Heartsy’s services are free, but don’t expect that to last long: a transaction fee will be added to the program in the near future.

Let’s say you want to find that perfect quirky little black dress for New Year’s Eve? Like a mashup of Etsy, Flickr color search and Google Instant, Glancely lets you search Etsy visually, sorting instant results by color and by price so you can scan through multiple green knit caps or purple socks or whatever handmade items your heart desires. Hold your mouse over an item to get a closer look and click on an item to go straight to its Etsy profile.

The most interesting thing about Glancely is that creator Davin Bentti plans to expand beyond Etsy, his ultimate goal being thousands of retailers and millions of products and searching. He is currently adding more upscale retailers like MacMall, Kidorable, GelaSkins, Scarpasa and Diamond.com and has BestBuy, FinishLine, Linea Pelle and PrincetonWatches in the queue, considering “pretty much anyone who has images big enough to use.”

While TheFind and Milo also offer visual shopping search, the results are sometimes underwhelming from a visual standpoint. Says Bentti, “The concept of visual search results isn’t really being exploited the way I think it potentially could be and the technology is either there now, or will be soon.”

Glancely is currently looking for seed funding. Aside from further expansion and product scaling, Bentti plans on eventually having a Glancely mobile app, visual input for search and potentially localized results.

Gift giving can be so hard, especially if you have a bunch of hipster friends who turn their noses at anything even slightly pedestrian. (“A box of See’s Candy that you bought at the airport? Are you kidding me?”). Well, fear not. All you need to do is make them take this little Etsy Taste Test on the commerce site for hand-crafted goods. After selecting a series of product photos that match their taste, they wil be presented with a grid of recommended products, along with other people on Etsy who have similar tastes.

Or you can take the test yourself and pass around the link to people who might want to buy you a present but have no idea what to get (because your taste is so discerning). If you want to get me a present, here is my page. The results are sort of hit or miss. I like that modern table, but it’s going a little crazy with the wallet suggestions (6 of the first 12 items—I only picked one wallet!), and I really don’t need a pair of Candy red high heels. But at least the suggestions are all original.

This is just an experiment for Etsy, but it’s a fun way to find new products. And if you can’t find anything there, try the Hunch Gift-O-Matic.

Editor’s note: This post is the second part of an analysis of different consumer Internet business models by guest author Steven Carpenter. It is suggested that you first read Part I.

Most consumer Internet startups fall into a baker’s dozen of possible business models. In the first part of this post, I tried to lay out the three main buckets those business models fall into (media, paid service, and physical commerce) and then began to sketch out the first four business models (search, gaming, social networks, and new media). In my analysis, I include a rough financial model showing the key drivers necessary for each different type of business model to generate $10 million in annual revenues.

In this post, I continue with the final nine business models (marketplace, video, commerce, retail, subscription, music, lead generation, hardware and payments). As I mentioned last time, this list is not meant to be exhaustive but it should cover most consumer Internet startups today. Please feel free to comment or email me at tcteardown at gmail to let me know what I may have overlooked or help me flesh out my analysis. You can also view, download, and use each of the below financial models here.

Type 5: Marketplace

As I wrote in detail in the Teardown on hand-made goods marketplace Etsy, online marketplace companies create efficiencies between buyers and sellers that are difficult to achieve in the real world. The leading online marketplace is eBay, which happens to run the default sale process as an auction, but fixed price sales have emerged as competitive due to their simplicity and ease of use. Marketplace companies make money by getting as many people as possible to put their goods up for sale and charging a nominal fee for those listings. The more products available for sale the more buyers are attracted to the platform, and the higher the likelihood that a sale will be consummated, generating a commission for the company. Due to the network effects of marketplaces and small fees, these businesses are notoriously difficult to achieve critical mass and take a long time to build. But once they do, these companies tend to have a long, profitable existence. Newer listing companies, like AirBnB, which focus on higher price points ($100+), may achieve scalability faster than traditional product marketplaces.  In my financial analysis below, I estimate that a typical marketplace would require 2 million listings a month generating gross sales of $12.5 million a month in order to achieve $10 million worth of annual fee and commission revenues for the marketplace itself.

Key Drivers:

• Listings
• Listing Fee
• Sales
• Commission

Type 6: Video

While the cost of video production has come way down, creating high-quality video content still requires a moderate investment and high level of skill. Innovation in the video space has seen the use of freelance video producers who charge $200-$300 to produce and edit a 5-minute, professional-looking video on a variety of subjects. Once you have a handle on production, video companies need exposure to as broad an audience as possible, so distribution is key. Video ad rates are typically amongst the highest in online media ($15-$20 CPM) but a viewer will only see one ad per viewing. Therefore, the number of ad impressions is critical because the broader your audience, the higher you will rise in importance with the online media buyers. Most media buyers will not even consider your videos as a buy until you can guarantee their clients exposure to tens of millions of viewers.  An Internet video company would need 120 million video views per month at an $8 CPM in order to reach $10 million in annual revenues.

Key Drivers:

• Unique Viewers
• Ad Impressions
• Sellthrough Rate
• CPM

Type 7: Commerce

Selling physical goods online is one of the more proven consumer business models. With Google’s ascension over the past decade, e-tailers are getting smarter and smarter about driving cost-effective traffic to their offerings via free search engine optimized pages as well as paid keywords. Social media via Facebook and Twitter has become another main activity to aggregate purchasing intent; Groupon, for example, drives more than 50% of its traffic from Facebook and Twitter. Creating unique community experiences, like Threadless and ModCloth, is another innovative way to increase customer loyalty and repeat purchases, while keeping the marketing spend low.

Once you drive potential consumers to your offering, you need to convert those people into paying customers. Because of these free and low-cost direct marketing channels, it has never been easier and more cost-effective to launch an ecommerce business. That said, fulfillment, customer service, and managing a warehouse is incredibly complicated, so attaining profitability for these companies can take years.

Key Drivers:

• Uniques
• Conversion Rate
• Average Spend
• Gross Margin
• Acquisition Cost

Type 8: Rental

Similar to commerce companies, rental startups like Chegg, Zipcar, and RentTheRunway, sell access to a digital or physical good. The biggest difference with these companies is that they are selling short-term access rather than ownership, so how frequently they turn over their inventory along with the average rental rate and frequency of rental are the main drivers of the business. Cost effective access to inventory and how many times an asset needs to be turned over to breakeven are keys here.

Key Drivers:

• Uniques
• Conversion Rate
• Average Rental Rate
• Repeat Purchases
• Customer Acquisition Cost

Type 9: Subscription

Subscription companies sell access to a premium service recurring on a monthly, quarterly, or annual basis. Subscription businesses are typically either content (music, video), information-based (financial, news), access-based (LinkedIn), or data services (Box.net). Regardless of what kind of premium service you are providing, the single most important metric is customer lifetime value (LTV). LTV incorporates your churn rate (what percentage of your customer base stops paying you each month) and dictates how much you can spend on customer acquisition. Once subscription-based businesses mature, they are incredibly predictable and profitable—see Netflix—because the company knows how to aggressively and cost-effectively acquire a customer based on expected margin. These kinds of businesses should never spend more than 40% of expected LTV on marketing to ensure profitability. Like marketplaces, subscription businesses often take several years to get to scale but if they hit 50,000 subscribers, they are typically around for the long haul.

• Uniques
• Conversion Rate
• Customer Acquisition
• Churn Rate
• Life Time Value

Type 10: Music

As I wrote in the Teardown on Pandora, consumer audio/radio startups are difficult to monetize because they are typically amongst the lowest-valued forms of advertising. It makes sense because audio ads are not actionable, and display ads often get ignored (music apps tend to stay open in a browser tab in the background). The other challenge to audio companies is access to cost-effective content—music rights are difficult to secure and typically cost-prohibitive. Pandora has shown that a sustainable business can be created, but it also takes huge scale (10 million+ users) to reach that critical point.  If you can attract 10 million unique listeners a month and show them 40 ads each at a $2 CPM, plus you can convert 1 percent of those into paying users of some kind and squeeze out an extra $2.50 from each of those, then you can get to $10 million in annual revenues.

Key Drivers:

• Uniques
• Ad Impressions
• CPM
• Conversion Rate
• Upsell Value

Type 11: Lead Generation

I have found that lead generation businesses are amongst the most widely followed, least understood of the 13 consumer models. The reason I say that is not that entrepreneurs don’t know what the model is, they do, but that the scale required to generate a sustainable lead gen business is not appreciated. Lead gen businesses need to do four very difficult things well:  1) drive a ton of traffic; 2) get people to click on offers; 3) convert a significant portion of those clicks to complete the offer; and 4) have enough high-value offers that the company generates enough revenue. Successful companies here either focus on a vertical, like financial services, that pays high bounties ($50+) or they have figured out how to encourage significant volumes of repeat purchases. The challenge with financial services lead gen companies is that customers don’t tend to turn over their credit card company or open a new brokerage account several times a year. A startup like Hunch, if it chooses to monetize via leads, has a shot at increasing repeat purchase volume due to its personalization engine and forecasting demand.

Key Drivers:

• Unique Visitors
• Offers Viewed
• Conversion Rate
• Affiliate Cost Per Action

Type 12: Hardware

Perhaps the most traditional business model of the group, hardware companies manufacture a physical good and then distribute the product through online and offline channels. Hardware companies make money based on retail price less cost of goods sold, minus marketing costs. Hardware startups, such as Kno, and Tivo and mobile phones before that, are bundling hardware with ongoing services. There are three factors that lead me to believe that we will see an explosion of innovative hardware companies over the next few years: 1) manufacturing costs in China continue to come way down as is their ability to cater to customized, small runs; 2) software is becoming easier to update remotely; and 3) the ability to bundle unique services on the devices. This is a space to watch.

Key Drivers:

• Units Sold
• Gross Margin
• Marketing

Type 13: Payments

Payments are a volume-based business. These companies are charging pennies for each transaction that flows through their systems, so the biggest drivers of these kinds of businesses are the number of customers that have access to your payment method and the size of the average transaction. The characteristics that make up a good payments or financial services company are the number of high-quality distribution deals you can enter with a customer base that has demonstrated it will pay for goods and services.  You need one million customers a month making payments of at least $25 to get to $10 million in annual fee revenue, assuming a 3.5 percent fee.

Key Drivers:

• Unique Users
• Average Payment
• Transaction Fee

Editor’s note: Engineers love to take things apart to learn how they work. They call this a teardown. In his ongoing series of TC Teardowns guest author Steven Carpenter takes apart popular business models to see how they work. He’s done this with Groupon, Chegg, and Zynga. This time, he looks at handmade goods marketplace Etsy.

A few weeks ago, Etsy, the New York-based marketplace for handmade goods around the world, raised $20 million in new capital at a $300 million valuation—3 times the valuation of its last round in January, 2008. In contrast to the meteor-like rise of Groupon and Zynga, Etsy’s revenues have grown consistently since its launch in 2005, while establishing a trusted brand and international platform for makers of all kinds of wares to sell their products. Based on my analysis, Etsy will do $380 million in gross merchandise volume (GMV) and generate $30 million in revenues this year, up from $180 million in GMV and $15 million in revenue in 2009. This implies a 10X revenue multiple in the company’s latest valuation, compared to EBay’s 3.6 multiple.

The two key questions for Etsy are: How big is the market for handmade products? And can it continue to take share from eBay’s marketplace business?

Let’s take a look at how Etsy makes money and how it can reach $100 million in revenues.

What is Etsy?

Etsy provides an online marketplace where artisans can sell their wares to people looking for one-of-a-kind, handmade goods. Unlike sites such as eBay, Etsy does not run any auctions. All goods are for sale at a fixed-price.

Based on data from Compete, 5.6 million people visit the site each month, up from 4.4 million a year ago, and that is after rebounding from a rapid fall-off in traffic following the holiday shopping season. (Click on charts to enlarge). The good news appears to be that Etsy is able to retain new buyers and sellers who try it out, presumably due to a great shopping experience.

Etsy has over 6.7 million products listed for sale, half of which fall into just three categories: jewelry, art supplies, and vintage. Jewelry alone, with 1.5 million listings, accounts for nearly 25% of all of Etsy’s products.

While this is trivial compared to eBay’s 117 million listings, Etsy’s 6.7 million products are more than double eBay’s 3.2 million listings for similar handmade goods. Ebay’s largest crafts categories appear to center more on hobbies such as sewing and scrapbooking, suggesting Etsy is attracting new sellers into the market.

In a little over four years, Etsy has firmly established itself as the place to buy and sell items such as art, glass, jewelry and art supplies, among others. This suggests further that eBay continues to be vulnerable across other categories where 1) community is a core part of the selling-buying experience, and 2) the company has been unable to attract higher-end sellers.

For a company of its age, Etsy has gone international exceptionally fast. It has sellers in over 150 countries and supports 23 currencies. It is rare for a startup to have garnered international demand so quickly and it is operationally very difficult to support. This is a huge competitive advantage.

How is Etsy Doing?

Etsy makes money in two ways: it charges sellers $0.20 to list a product for 4 months, regardless of the price of the item, and then it receives a flat 3.5% commission for each completed transaction. This contrasts starkly with eBay’s complex listing and commission structure.

I compiled and analyzed the data Etsy releases in its monthly “Weather Report” since 2008. Based upon my projections for the upcoming quarter, Etsy will do close to $30 million in revenues this year, up 80% year-over-year. (This is on the low end of the $30 million to $50 million range CEO Rob Kalin himself projects)

When you look at my estimates of where Etsy derives its revenue from on a monthly basis, two interesting things emerge. One, similar to other retailers, Etsy generates a disproportionate percentage of its revenues during the fourth quarter, suggesting the company is largely seen as a site for gifts. And two, while the business is driven by commissions, Etsy is seeing incremental revenue by keeping listing fees low so that sellers keep products on the system longer (ie, “Legacy Listing Revenue”).

Let’s look a little deeper at each of Etsy’s revenue components. Gross merchandise value (GMV) is the total value of goods sold. Looking at this metric each month since January, 2008, this has been steadily growing, with December witnessing the largest sales volume. Last December, Etsy achieved its highest total of $25.6 million. After reaching a new plateau, the company sold $25.6 million worth of good. This holiday season should see 2X-2.5X last year’s sales.

Etsy is achieving these gains by increasing both the volume of transactions as well as seeing a higher average price point. The number of items sold each month has risen steadily from under 400,000 in January, 2008 to 1.4 million in August, 2010. Meanwhile, Etsy’s average sale price has increased from $12.25 to $18.16 in that same time period

Etsy is also seeing steady growth in attracting new listings. As evidenced in the data, new listings are growing at a much faster rate than new members joining the site. This suggests that legacy sellers are continuing to value Etsy as a sales platform, but that it has to do more to attract both newbie sellers and buyers. Once consumers interact with the site and find something to either buy or sell, they seem to become loyal customers.

In terms of the team and profitability, Etsy has not had to spend resources on advertising and marketing. Etsy is an engineering and support-driven company, 90% of the people are either building the platform or supporting buyers and sellers. To put a fine point on this, Etsy has more people dedicated to its community (12) than it does to marketing (8). This suggests the company should be able to scale the business profitably without an outsized investment in customer acquisition.

If you look at Etsy’s online marketing efforts, it spends next to nothing on customer acquisition.

Etsy’s Growth Opportunities

While eBay saw its marketplace growth stagnate at just over $1 billion a quarter, I see several areas Etsy must optimize to pass $100 million a quarter in business:

1. Expand Internationally with localized platforms. Etsy experienced unusual organic international demand from the outset. While the majority of usage still occurs in the US, Etsy needs to take a page from Groupon and get into the local markets and establish a strong local presence quickly. Scaling and supporting an international platform is difficult so if it can figure it out over the next 12 months, it will provide a strong competitive advantage
2. Attract More Sellers and Listings. As I discussed above, new users are not keeping pace with new listings. The company is already running local meetups, which is a smart strategy to take from eBay’s playbook. I am not sure if Etsy yet has an annual awards ceremony or eBay Live equivalent but there are many incentives the company could employ to encourage current power sellers to bring in new sellers and perhaps get a cut of their sales.
3. Increase Merchandise Value. Etsy has done a good job of providing a trusted platform for sellers, which will naturally lead to higher-priced goods. It needs to continue in this direction and explore additional categories than are consistent with its brand position.
4. Better matching of local supply-demand to avoid shipping charges. One of the biggest challenges to additional sales is expensive shipping rates. Etsy has to match local supply and demand and act as a matchmaker for similar or related products by geographic area.
5. Improve Discovery On Site and Personalization. Etsy has a common problem for marketplaces in that it is very difficult to find certain products. I anticipate that the company will continue to improve in this area as well as in personalizing product and artisan recommendations. Last December, the company acquired a company called Adtuitive to presumably spearhead these efforts.
6. Leverage Community Self-Selling and Sellers Groups. Etsy’s competitive advantage is that it has now reached the inflection point of a community of artisans. The company needs to allow those artisans to form collective seller’s groups and merchandise and advertise their wares together. The more Etsy can distribute its marketing efforts to the sellers themselves, the more it reinforces the community ethos and its economics.
7. Address Seasonal Nature. With nearly 50% of gross sales come during Q4, Etsy needs to merchandise products around other gift-giving occasions, such as birthdays and holidays, and have its sellers market them.
8. Create Additional Value and Revenue Streams. In May, 2008, Etsy launched a compelling service called Alchemy, that allows customers to put out a bid for custom-made goods. I looked at two random days over the past 2 weeks and counted 193 and 192 respective bids for goods. Right now Etsy allows this to be done for free, but this is an area where I can see a lot of promise. Furthermore, at some point in the near future it might make sense, given its international footprint, to create its own payment method.

Bugatti teardown photo credit: Flickr/David Villarreal Fernández

Crafty commerce site Etsy just raised another $20 million in its fifth venture round (that would be the Series E). Index Ventures is the new investor leading the round, with partner Danny Rimer getting an observer’s seat on the board. (The board is made up of founder Rob Kalin, Caterina Fake, Accel partner Jim Breyer and Union Square Ventures partner Fred Wilson). Previous investors Accel and Hubert Burda Media put in some money as well in this round.

The round gives Etsy a pre-money valuation of just under $300 million, about triple the valuation it got during its last, $27 million round in January, 2008. Most of the shares sold—nearly $14 million of the $20 million—were secondary shares held by some of the early investors. But unlike other rounds we’ve seen lately, this wasn’t a liquidity event for founders. Kalin says he did not sell any shares, nor did any employees.

Etsy started turning a profit at the end of last year, just when Kalin took over as CEO again. Kalin projects revenues this year to be between $30 million and $50 million and expects the company to continue to be profitable. The company has 125 employees. He expects the total gross value of goods traded on the site to double this year to $400 million, and hopes to hit $1 billion next year.

After a brief hiatus, the founder of Etsy Rob Kalin reclaimed the CEO title in January of this year. During a brief interview at Etsy’s Brooklyn headquarters, I asked Kalin, “Why do you think you deserve to be back as CEO?…Is  there anything really unique about your vision that will take Etsy to the next stage?”

Kalin responded:

“Sure, so why do I deserve to be CEO is something that you gotta earn every day, so I definitely don’t take that title for granted. As far as where we want to go, to me the most important part of commerce is the social aspect of it. Social aspect drives the marketplace.”

The five-year old marketplace for handmade goods is growing quickly each year, last year it pulled in nearly $200 million in gross merchandise sales. This year, Kalin says they’re on track to reach approximately $400 million in gross merchandise sales. That doesn’t translate into significant profits for Etsy— which only takes about 3.5% of each transaction— but Kalin says profits are secondary to the more important goal of increasing traffic and dialogue on the site.

In the next few years, he expects gross merchandise sales to be in the multi-billion-dollar range, but in order to get there, he says they will need to succeed in their social ambitions.

In the next 12-18 months, Kalin plans to roll out a social strategy that will go beyond the site’s current offerings, which include forums and chat rooms for members. He didn’t want to give away all the details, but he did say:

“Markets are conversations. For us at Etsy we want to figure out how buying an item from someone is a conversation. So Facebook’s message is to connect and share, and so Etsy is taking that one further, where it’s connect, share and exchange things. We’re playing with ways to create more, more social layers inside that experience so one would be being able to have a conversation with people who you’re buying from inside of your shopping cart another one would be using search queries not just to connect people to items but to connect people to other people.

To me this is the power of the web, so you know that quote from Aristotle, ‘Man is a political animal?’ is actually mistranslated. It’s ‘Man is a polis making animal,’ and not man, humans. Humans are village making species and we want to connect with other people.”

In episode two of our company profiles series, Kalin gives us a tour of Etsy, discusses profits, his social vision and why he stepped down in the first place.

The site features one creative invention or product per day, with an in-depth video review. Daily Grommet will also sell the product on its site and take a small cut from sales. Think Etsy meets social product development platform Quirky.

Daily Grommet features products of utility, style or invention that haven’t hit the big-time yet. For example, today’s product is a gardening wheelbarrow and cart. Other products include organic cotton socks, and collapsible flower vases. The company receives submissions from consumers and spotlights products with a video review explaining what’s compelling about each day’s product and the story behind its creation. Founded in 2008, DailyGrommet.com has nearly 400 products and video reviews in its online catalog.

Daily Grommet founder Jules Pieri says that the site incorporates Citizen Commerce, which allows consumers to connect with the investors and manufacturers of products in order to encourage innovation. Pieri declined to tell us how much of a cut Daily Grommet takes from sales, but says that its “healthy.”