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How Etsy Became Profitable — Without Sacrificing Its Purpose


HANNAH BATES: Welcome to HBR On Leadership, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock the best in those around you. Etsy, the online seller of handmade and vintage goods , was founded in 2005 as an alternative to mass-manufactured products. The company grew substantially in the coming decade, but remained stubbornly unprofitable. Then Etsy went public, and stakeholders demanded a new level of financial returns and accountability. But the company continued to struggle to contain costs until a new CEO arrived with a plan for a “purpose-driven turnaround.” In this episode, Harvard Business School professor Ranjay Gulati explains how CEO Josh Silverman made Etsy profitable and rediscovered the company’s soul by focusing on its social and environmental impact  You’ll learn why Silverman focused on improving the user experience for buyers on Etsy’s website. You’ll also learn how he made difficult choices in the early days of his tenure – like laying off employees for the first time ever at Etsy and   with his employees afterward. This episode originally aired on Cold Call in March 2022. Here it is.

BRIAN KENNY: The results are in, and they are worrisome. The 2022 Edelman Trust Barometer, which rates societal trust in business, government, the media, and NGOs, finds that distrust is now society’s default emotion. 49% of the 36,000 respondents around the world believe that government and media fuel a cycle of distrust. Business, by comparison, fares well with 61 percent saying it is the most trusted institution, but with that trust come expectations. Respondents believe that business is not doing enough to address societal issues like climate change and economic inequality. They think that societal leadership should be a core business function of any CEO and they want business leaders to be visible on those issues. It seems like the CEOs’ job description just got a little bit more complicated. Are they up for the challenge? Today on Cold Call, we’ll discuss the case entitled, “Etsy: crafting a turnaround to save the business and its soul,” with Professor Ranjay Gulati. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents Network. Ranjay Gulati is an expert on leadership, strategy, and organizational issues in firms. His new book is called Deep Purpose: The Heart and Soul of High- Performance Companies, and I know the case we’re going to talk about today relates directly to the ideas in your book. Ranjay, thanks for joining me.

RANJAY GULATI: Brian, thank you for having me. I’m delighted to be here with you today.

BRIAN KENNY: Listen, I love Etsy. I use them frequently. I won’t let that, in any way, make me lean in one direction or the other, but I really enjoyed reading the case. I’m sure a lot of our listeners have used Etsy as well and there’s some insights that come across here that I think will be really interesting for them. And of course, we want to talk about how this relates to the ideas in your new book. Congratulations, by the way, on the recent launch of that. So why don’t we just dive in? You ready?

RANJAY GULATI: Yes, absolutely. Let’s dig into the case, roll up our sleeves, and I’m ready to be cold called myself and be on the other end of this. Normally I’m the one cold calling my students.

BRIAN KENNY: I love it, great. Well, I want to start right there. Tell me what the central theme of the case is and what your cold call would be to start the discussion when you step into the classroom.

RANJAY GULATI: Well, when I start the case discussion, I start by right away taking the students into the shoes of the protagonist. And I say, “If you were Silverman, Josh Silverman, who has been a Board member, has been offered the job to be CEO of this company. And they’re going to fire Chad Dickerson, the CEO.” And the question I ask is, “Would you take this job?” And of course, the class gets split. I’d say 60 percent or so take the job. And about 40 percent say, “No, I won’t take the job.” And of course, for me, that’s great fodder because now I go to the ones who say, “No, I will not take this job.”

BRIAN KENNY: I’m always interested in how and why faculty decide to write certain cases. Etsy’s a pretty well-known organization. How did this idea come to you and how does it relate to your research and the ideas in your book?

RANJAY GULATI: I did not know what Etsy was doing. Actually, I thought of Etsy as a negative story because the media reporting of it was, here’s a company that lost its soul. It had this socially minded ideal, they were going to do all these great things, and then the dark side of capitalism took over. Destroyed all their mission and social orientation, fired all these people, and these people were vocal in the media. The media went after them. And so, to me, I thought this was going to be me a great story on the dark side of capitalism. I was looking for negative stories, and the more I dug into it, the more I found there was a story behind the story. The subtitle of my book is The Heart and Soul of High Performance Organizations. That’s what I wanted to know was, what do companies that do really well today do? And performance is defined both financial performance, I’m not taking that away at all, but are also able to … Let’s put it this way, accomplish what you might loosely call social performance as well. But I was not looking for trading off one for the other. And here was a company that had done financially very well under Josh, and as I found out, they had also sharply focused their social impact and done extremely well with that as well. If anything, the old Etsy, as I discovered, had a lot of challenges on both dimensions with it. And to me, that was the interesting insight, to see how did this company walk what I call the razor’s edge and make trade offs? They transformed themselves and they used having a purpose as the pivot point to do so.

BRIAN KENNY: I think people are skeptical about this notion of purpose when it comes to business. What do you think stakeholders, employees, customers, shareholders, what do you think they’re looking for from business and business leaders today?

RANJAY GULATI: Everyone expects more from business leaders today. More in terms of not just economic return, but also, as you said, other impact. What is your positive impact on the community and the environment and on society at large? Now, in that context, I want to clarify to you, purpose is not a purpose statement. I think that’s what plays into the cynics, where companies start to parade some kind of noble minded purpose statement. They’ve hired some communication consulting firm to craft it for them and they put it out there. If you told me five years ago I was going to write a book on purpose I would’ve told you you’re crazy, because to me, that’s how I thought of purpose. And as I was writing this book, I wanted a one word title. I said, “Oh, one word, titles sell.” So I wanted to call it Purpose. And then, as I wrote the book, I realized I had to call it Deep Purpose because so many companies practice what I call a shallow purpose. Now, if purpose is not a statement, what is it? Purpose is an intention. It’s an orienting frame of reference for who I am and why am I here? I had to first understand, what is purpose? On which there’s a lot of confusion, purpose has been hijacked by a lot of people. Why is it important financially, even? For companies. So let me make the economic argument for purpose. And then the third one, which is the hardest element, was the, how do you do it? And Etsy gave me all three. Etsy allowed me to clarify that purpose involves navigating economic and social benefit. It allowed me to think about how it benefitted Etsy. And also allowed me to see how a company actually embeds purpose into the organization.

BRIAN KENNY: Do you have a, before we dive into Etsy and the specifics of what they did, just so our listeners are thinking about it in context, how do you define a deep purpose leader? Is there an easy definition for that?

RANJAY GULATI: I think a deep purpose leader who is centered around a clear … anchored, centered around a clear sense of, why are we here? What is our objective? And they reference that on everything they do. They’re centered around that. That’s the first piece of it. The second piece of it I talk about is these are leaders who are not only bought into it themselves, but they recognize that they have to communicate this ideal in a compelling way. In what we call a big story way. They have to personify it themselves and embody and live it. They have to look for ways to then make sure it is resonant in the organization. So they are the carriers of this purpose. They need to understand that. That’s one big chunk of it. You are chief purpose officer. The other part of it, that I think is very, very important to understand, is that purpose involves making trade-offs and choices. Hard choices. So Josh had to lay off almost 200 people. And he had to shut down the values and purpose … the values team. And the day before he did that, he went for a walk with his daughter, he said. And he told her, he said, “Listen, I’m about to do some things that are going to make me look really bad in the news and you may hear about it from your friends and you’re going to hear all kinds of things about me. I just want you to know that what I’m doing is all on the right path. I’m doing it for the benefit of this enterprise and for its customers and for the community, but it’s not going to come across that way.” And so these are hard places to be. You asked earlier, why are businesses not stepping up and saying more? Business leaders today need to understand that sitting on the sidelines on any charged issue and saying, “I’m neutral,” is not an option. You can’t say, “That’s not me. I can’t take a stand on Black Lives Matter. I can’t take a stand on voting rights. I can’t even take a stand on gun rights. I can’t take a stand …” and these are politically charged issues that are very divisive in our society today. And fortunately, or unfortunately, society, customers, and employees demand their leaders to take a stance on some of these issues.

BRIAN KENNY: All right, well, let’s talk about Etsy because there was some rebellion that was happening there. And I think, for the few listeners out there who haven’t used Etsy and are unfamiliar with it, can you just describe what business they’re in? What do they do?

RANJAY GULATI: So Etsy’s origins were really to be a marketplace for crafts. And Bob Kalin, the founder, was himself a craftsman and he had this ideal of handmade, craft made things. As opposed to machine made, industrial production. So he had this ideal that, I want to have craft people sell their wears in a very economical way and not have to pay large margins to some middle person. So he was going to make a low margin, but easy for sellers. A beautiful idea. And the thing took off. It was really a remarkable story, based on an ideal. But that ideal later came back to be a challenge for them because, in any marketplace, there are sellers who this company deeply cared about. But there are buyers too. So they had a blind spot. They never thought much about the buyer experience. Of course you have to think that, for sellers to sell, you need buyers. So how are you going to make search easy for them? The transaction easy for them? The way Amazon has done for everybody else. But in the beginning there was no competition and so this thing just took off.

BRIAN KENNY: Yeah and to talk a little bit about Rob Kalin’s background, he wasn’t a business person, but he was a person with a good idea. But how did the culture sort of evolve under his leadership?

RANJAY GULATI: So I think it’s important to distinguish the word idea from ideal. He had both. There was an idea, that there is a marketplace for crafts, that’s the idea. But the ideal was, how can I help crafts people bring their wares to market and make a livelihood out of pursuing a craft? And the culture of the place, if you can imagine, was an extension of the founder. A lot of founder-led enterprises are basically, the founder is larger than life. Their persona permeates the whole organization, the culture, the beliefs. I can imagine it being a very idealistic place, focused on these sellers and supporting them in any way they could.

BRIAN KENNY: So in some ways, it was almost like a mission driven organization. We always think that nonprofits are mission driven and business is profit driven. But this sounds like it was leaning more towards the mission driven ideal, as you’re describing it.

RANJAY GULATI: Absolutely. I think it was very much of a mission driven, and by the way, making money was not part of that mission. And so, you think about it, that you’re running this business, you want to make it sustaining, you want to scale it, you want to grow it. So they wanted to do that. They were really on the frontier of this idea that business can have a social mission. What that also meant was, business doesn’t have to have an economic mission.

BRIAN KENNY: We know that’s not sustainable. And I think of this case as the tale of three CEOs as I read it. Rob presides over the founding of the company and the creation of this focus on purpose and attracts people to the firm that really buy into that passionately. But at some point, the business comes calling and there’s a transition there from Rob to Chad Dickerson. Tell us a little bit about Chad Dickerson and the situation that he stepped into.

RANJAY GULATI: Chad had big shoes to fill. Anybody coming after a founder can tell you that, especially a larger than life founder, and Chad had big shoes to fill and he did them very well. He understood technology, because at this point now you’re a technology company. You’re building your technology infrastructure and platform and you’re scaling the venture. He’s the one who’s going to take it public. He was very clear that he was not trying to change the culture or what made Etsy special. He puts in place a values and impact team, he puts in place generous employee benefits that employees can have access to all kinds of recreational opportunities and other things. He is very employee centric, he’s very focused on the sellers still, and he communicates clearly to the investor world that we may not make money for a while.

BRIAN KENNY: How does that go over with the investor world?

RANJAY GULATI: It’s interesting. They manage to go public so they are able to go public with this idea that we’ll make money in the long term. Because they’ve grown fast. The idea is a powerful one and they’ve really got traction. So the top line has grown, but brewing under the hood, if you look under the hood, all these troubles come back to bite them about nine months after IPO. So I think what you have to realize, you’re a privately held company, it’s a different story. You can communicate to your limited investor pool and tell them what you’re doing and this is why I am what I’m doing. You’re now going to the public markets. The expectation set changes and I think they underestimated the complexity of their notion of social impact in a public entity. Now, at one level, again, you might say, “Okay, this was about social impact. They were having a lot of social impact.” If you look under the hood, it’s not even entirely clear how much social impact they were having because they were not really measuring themselves on social impact. They were saying they’re doing social stuff, but if you look at the pure numbers, what do you see? Their top line growth has stagnated and what has also started to happen is they’re ballooning their SG&A, their marketing spend has doubled but revenues are not growing. I teach a course on turnaround, so when we look at that, what do you say? You say, undisciplined spending. Unfocused. And so, as you start probing the organization, you discover that was what was happening. You can say I’m social, but doesn’t mean you can’t be disciplined. And this gives social a bad name also because, oh, look, all these social companies, they use it to hide behind poor performance. It’s a cloak, a virtue cloak, and public markets don’t accept that.

BRIAN KENNY: And here comes the drama, because now you’ve got a board member in Josh Silverman, who is watching this and recognizing some of the things that you just described. I mean, they’re not succeeding on the business side, they may not be having the impact that they think they’re having on the social side, so he steps in. Just talk a little bit about that dynamic of the pressure that he was putting on Chad and the team there.

RANJAY GULATI: Well, I think he said that, even as a board member, you look at the financials and you see that they are spending money in ways that are not delivering any kind of growth. The classic thing, you have resources, now you start to pursue adjacencies as we call them. Yesterday I taught the “Lego” case, about how Lego almost went bankrupt chasing adjacencies. You build a theme park, you build video games, so similarly, what’s happening here is they’ve stopped investing in the core business. They’re growing headcount, spending money, and they also … the realization was that while the sellers were really happy with Etsy, the buyers were not. They were not happy because they were not getting what they needed: an easy interface and frictionless commerce. They were not. But Etsy wasn’t focused on them. And furthermore, even the IT spend that had ballooned, and Josh being a technology guy realized, that they were building infrastructure from scratch internally. So it was backend stuff rather than customer facing stuff. But he gave it 10 percent chance of success. When I asked him in class, I said, “So when you walked into this job, what were the odds you were giving yourself of success?” And he said 10 percent.

BRIAN KENNY: Wow. That’s a very stark reality that he’s stepping into. So let’s talk a little bit about how he took on this challenge and the decisions and the tradeoffs that he had to make in the process. Can you describe that?

RANJAY GULATI:So as his CTO explained to me, and he said for the first 90 days, we were in ambulance mode. There was a reason private equity was trying to buy and take it private. There were people hovering around to essentially replace everything out. And so they were in ambulance mode. And I think one of the first things that happened … Actually, it was a very emotional moment, actually. The case talks about, on the day Josh takes over and Chad gives his farewell speech. So Chad is crying, people in the audience are crying. Along with Chad being let go, 80 people have been let go. This is the first time Etsy’s having layoffs, the values group is going to be shut down, and the employees in the company, suddenly people start to quit. So there’s attrition going up and everyone’s talking to the media saying destruction of a beautiful … It’s killing the soul of Etsy. And something else that Josh said to me, he said, “One reason I wanted to really turn around Etsy was, Etsy had always talked about being a socially minded business. I wanted to show the world that you can be socially minded and be profitable. If Etsy fails, the presumption of everybody is going to be that, see, socially minded businesses can’t be profitable.” And he said, “Here was a unique opportunity to show the world that you can be profitable and living a purpose.” So the first few months were really around fixing Etsy’s strategy. They shut down a whole bunch of technology projects that had nothing to do with the core business, that were chasing ideas here and there. They said, “We got to focus on the buyers and not just the sellers.” You would understand this better than anybody, they had to change their marketing spend saying, “Let’s really be disciplined about our marketing spend.” In this process they had to right size the organization, as they like to … Euphemism for layoffs, I’m sorry. That was painful. So imagine being Josh at this moment. You’re getting a lot of heat at this time.

BRIAN KENNY: And he’s losing the hearts and minds of the employees, which, he’s going to have to contend with at some point.

RANJAY GULATI: Exactly. And this is where you have to understand the razor’s edge about making … People like to paint this idyllic world of social impact as win-win. No tradeoffs. You can do good and make money at the same time. And he was very quick in pointing out to me that that’s an ideal. Most of life is tradeoffs. Hard choices. And so he’s got to get the operations done, he’s got to get the financials stabilized, he’s got to get the right size in the organization, spending. Those are the immediate fixes. Once gets those in place, he is now trying to map out what his plan for the future is. Now, you shut down the values and impact team, you laid off people for the first time, you are allowing our B Corp certification to lapse. You really don’t care about the company.

BRIAN KENNY: So he’s playing right into that stereotype of the uncaring CEO who comes in and is just trying to strip everything down to make money.

RANJAY GULATI: Exactly. And that’s why I wanted to study them. I was like, great, I found the dark side of capitalism. I needed to find one and here we are. Josh, you are sacrificing, as one of them said, you’re sacrificing Etsy’s soul at the altar of profit.

BRIAN KENNY: Wow. That’s heavy. All right, well, fast forward. Tell us what happens here.

RANJAY GULATI: You know, it’s interesting. Once they stabilized the company and the financials, what next comes on is that he has to now say, “I want to not lose sight of our soul.” So he says, “We’re going to do social impact, but we’re going to do measurable social impact. And what are the three things we’re going to do?” So he maps out three things. Diversity, and he said, we’re going to measure ourselves. We’re going to have 50 percent minorities in key positions by 2023. Commitment. Environmental impact, we’re going to work on that. And we’re going to work on seller economic impact. And he says, “We’re going to publish audited reports of our progress on these three.” So he wanted to convince the employees in the company that he wasn’t forgetting the soul of the company. He said, we were not. And the point he tries to convince them of, which he does successfully is, we were not delivering even on social impact, folks. We were saying we’re doing social, but we had no measurable way to do that. And we’re going to combine that with the economic impact. Now, in this process of transforming the business and trying to connect the two, he says, “Our mission, a company that is trying to deliver on economic and social, needs to be able to connect the dots through a powerful purpose statement.” And they had a complicated, long mission statement. So he rewrites the mission statement. He doesn’t do it, he puts a team in place that goes and interviews people in the company saying, “What is the mission of Etsy?” Old timers who are still there. So he’s trying to crystallize everyone’s collective aspirations into a few words. And so that becomes his next piece of the puzzle and he is going to use that statement and the process of creating it to then say, “Now let’s connect the dots with our culture. Let’s connect it with our metrics. Let’s connect it with our organization. Let’s connect it with our goals. What are we going to get done?” And it’s that transformation of a revived Etsy that understands its place in the world, “making commerce human”. Is using that to prioritize, in a very disciplined way, its resource allocation so they can grow the business profitably. At the same time, delivering measurable social impact.

BRIAN KENNY: I love that mission, by the way, “making commerce human.” What I love about it is that it has immediate meaning, but it’s also something everybody in the organization can remember and recite and connect to. And that is very rare because a lot of firms create mission statements that are almost untranslatable to most people. Ranjay, this has been a great conversation. I’ve got time just for a couple more questions before I let you go. The first would be, if you pull the lens back away from Etsy and you look across the broader landscape, and thinking about deep purpose, do you feel like we are at a moment of inflection where business leaders broadly are starting to understand that this is an important part of their role? That they have to develop this sense of purpose if they really want to satisfy all the stakeholders that they need to think about?

RANJAY GULATI: So I think the problem that has happened is, business leaders understand everybody knows that they have to serve multiple stakeholders. And purpose has become this proxy for social stuff. In fact, some people even define purpose as anything but profit. So purpose becomes a hijacked word, is it shareholder value or is it stakeholder value? And who do I have to give how much to? And I think that’s confusing because purpose, actually, I want to remind everybody, is a generative force. It’s how to make the business more productive. What is lost sometimes in this discussion of Etsy is that the purpose allows Etsy employees to behave and operate differently when they come to work. Pride elicits a greater engagement than anything can get you. Purpose has allowed Etsy to have a greater strategy, what I call directional. So the first one is motivational. A directional benefit. Clarity of strategy. Being able to make informed tradeoffs. Purpose has actually had reputational benefits, your customers trust you more, purpose-oriented branding. And the last one is, purpose is a relational construct. It allows you to connect to your ecosystem of suppliers, partners, and others, because they also feel you must be a good person. Virtuous. Purpose has economic benefits, it’s not CSR, it’s not on the periphery, and that’s why my book, again, is called, Deep Purpose. Because I saw many people getting confused and practicing what I call shallow purpose. And I think, to me, that’s the real story. That leaders need to understand, yes, you need to operate in a multi-stakeholder world. What is an easy way into this world? And purpose gives you a vehicle, a platform, a tool that you can use to energize your organization while making a very deliberate way of tackling these very complicated issues.

BRIAN KENNY: Yeah. So my final question, you may have just answered it because that was a really … That was a great, insightful statement. But as our listeners are getting ready to log off here, what’s one thing you want them to remember about the Etsy case?

RANJAY GULATI: I think the one thing I want to remember is that I was really impressed with how people at Etsy talked about their work. I think all of us should expect more from work. The Great Resignation reshuffle are showing us that, after COVID, most of us have confronted tragedy, sickness, death. And we all expect more from work. And for the longest time we have allowed work to be a compartmentalized part of our existence. My job, that’s what I do for a living. I think we all are looking for more coherence in our lives. Not just millennials. People say, “Oh, the millennials are looking for it.” I think everybody’s looking for more coherence in their life. That my work allows me to also express my own creativity, the impact I want to have in the world, what is my legacy going to be? When we allow people to do that, they show up differently. At Microsoft, the CHR, or Kathleen Hogan says, “I tell my employees, you don’t really work for Microsoft until Microsoft works for you.”

BRIAN KENNY: Ranjay Gulati, thank you so much for joining me.

RANJAY GULATI: Thank you so much, Brian, for having me here.

HANNAH BATES: That was Harvard Business School professor Ranjay Gulati in conversation with Brian Kenny on Cold Call. Gulati is the author of the book Deep Purpose: The Heart and Soul of High- Performance Companies and he hosts a podcast of the same name. We’ll be back next Wednesday with another hand-picked conversation about leadership from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review. If you want more podcasts, articles, case studies, books, and videos like this, find it all at HBR.org. This episode was produced by Anne Saini and me, Hannah Bates. Ian Fox is our editor. Music by Coma Media. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.



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