A lot of people scratched their heads when Etsy raised $27 million. What on earth? Handmade goods, that’s about as low tech as you can get!
Then Umair Haque, a well respected blogger and strategist – albeit one who is known for being a bit “out there” – asked Is Etsy the next Google? Maybe Umair was just saying that this is big. One of his commenters pointed out: “not Google, but maybe the next eBay”.
That makes sense. When eBay came out, the first reaction was “huh, Pez Dispensers and junk from garage/attic?”. eBay was an online garage sale and Etsy is an online street fair.
The bloom has gone off the eBay rose recently, so it is interesting to think about what went wrong at what was almost the perfect start-up success. Many people critiqued eBay for buying Skype at too high a valuation, but that seems like a tactical error only. The big issue is that they lost sight of what made eBay special when they started selling mass-produced stuff. There is something about being a public company, with investor pressure for endless hyper growth well beyond the natural growth constraints of the market, that seems to drive this kind of brand-destroying diversification.
Selling off inventory from big companies (eBay’s diversification) may be a great business, but it was not what made eBay magical. Garage sales, antique shops, auctions….these all have a bit of magic and romance. It is about finding something unique and special.
Handmade goods have the same appeal.
The reason it is so hard for most technologists to see the power of services such as eBay and Etsy when they first come out is that we tend to look at the world through the prism of big companies and consumers. What is so powerful about eBay is that around 750,000 people see eBay as their primary source of income and double that 1.5 million see it as a significant contribution. Etsy can have the same income-generation impact for lots of people globally. Where do all these millions of people fit in the big company/consumer model?
According to a 2005 survey, close to sixty percent of Americans reported that they dreamed of starting their own business.
Etsy is part of a much broader economic shift. So is the Blog Networks challenge to MSM and the smaller rounds of financing for start-ups in the programmable web.
We may be witnessing the historical high water mark of giant companies in developed economies. In 1955, Fortune 500 companies generated 1/3 of GDP in America. In 2000 that had risen to 2/3. If you prefer %, from 33% to 66%. Hidden in those numbers are the countless family farms that could not withstand the onslaught of Agribusiness and the Mom & Pop shops that closed when Wall Mart came to town.
Imagine a world where the Fortune 500 share of GDP went back to 1/3 and small businesses got back the 1/3 they lost in the last 50 years.
This may be about to happen for 3 big reasons:
- The Internet reduces transaction friction, making it easier for small businesses to do business with each other, with consumers and with big companies.
- Big companies are no longer seen as a reliable source of employment; decades of outsourcing and layoffs at the first whiff of a problem, all cloaked in inhuman corporate speak, have had their effect. This changes the risk/reward decision for talent. The best and brightest will more likely go the self-employed route, start a business or work for a small business where at least you have coffee with the owner and he or she looks you in the eye when (s)he has to fire you. Fortune follows talent.
- Consumers are looking for that extra special something, the customized motorbike and the grass fed local beef and the hand-made jewelry. We want what your average person does not have, the opposite of mass produced products. This growing consumer demand arise from decades of mass affluence and the fact that the Internet makes these types of products visible.
The Rise of Mass Customization
Maybe we are finally going to see the long-anticipated wave of mass customization.
The trouble is, customization costs a lot of money. Ask a Savile Row tailor. Consumers want that special something at a price that is a bit closer to the mass produced stuff.
Who is going to meet that demand for mass customization? The mega farming corp in Iowa that is used to distributing huge volumes via Cargil, onto to General Mills and finally to Wall Mart? Or thousands of artisanal specialty food producers? The supplier who contracts with factories in China to produce huge quantities of toys based on what consumers bought last year and who will lose his price break if he changes the volume? Or the thousands of small producers locally who will custom-produce on demand, meeting the actual demand today?
I would always bet on the latter. This is a distributed version of the Dell model applied to lots of industries. This is distributed mass customization.
The reason that mass customization has taken longer than predicted is that we have been looking in the wrong place. Re-tooling large companies to do mass customization is too hard, the micro-niches are too small and there is just too much fear of cannibalization and resistance to change.
This is the coming wave of small business that can easily trade globally – with each other to offer new products and with consumers to meet specialized demand.
What has been missing is order aggregation. There are plenty of long-tail customers who reject the mass-produced plastic toy made in China but who want the pink version of the Rambo soldier made out of recyclable wood (OK, I made that one up!). But you won’t find enough of these customers by setting up shop on your average high street.
Aggregating the long tail is clearly something that the Internet does well.
Etsy is a good example of an emergent business network that creates trust within a specific market. That trust enlarges the market by enabling transactions to happen. Then more suppliers come into the network to meet growing demand and the range and quality of products improve; and so the consumer demand improves and so on….
Just don’t try shoving mass-produced junk through these networks. It won’t work. These networks have a very good junk filter!