How Etsy Identified Its Purpose and Executed a Turnaround | Cold Call

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0:37What propels you? Propel with Gatorade Electrolytes. 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 % 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.

1:21They 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 CEO's 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 Ranjai Gulati. I'm your host, Brian Kenney, and you're listening to Cold Call on the HBR Presents Network. Ranjai 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.

2:01And I know the case we're going to talk about today relates directly to the ideas in your book. Ranjai, thanks for joining me. Brian, thank you for having me. I'm delighted to be here with you today. 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.

2:32Thank you. Why don't we just dive in? You ready? Yes, absolutely. Let's dig into the case, roll up our sleeves. 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. 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. Well, when I start the case discussion, I start by right away taking the students into the

2:58Josh Silverman: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 % or so take the job and about 40 % 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. I'm always interested in how and why faculty decide to write certain cases. Etsy is a pretty well-known organization.

3:35How did this idea come to you and how does it relate to your research and the ideas in your book? I did not know what Etsy was doing.

3:45Josh Silverman: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 to me, I thought this is going to be a great story on the dark side of capitalism. I was looking for negative stories, you know, and the more I dug into it, the more I found there was a story behind the story.

4:23Josh Silverman: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 it.

5:07propel fitness water with gatorade electrolytes zero sugar and vitamins propel hydrates better than water to help you get the most out of your workout and get back to your best self what propels you propel with gatorade electrolytes social performance as well but i was not looking

5:25Josh Silverman: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 older 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 kind of the pivot point to do so. I think people are skeptical about this notion of purpose when it comes to business.

6:07What do you think stakeholders, employees, customers, shareholders, what do you think they're looking for from business and business leaders today?

6:16Josh Silverman: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 gonna write a book on purpose, I would have told you you're crazy.

6:48Josh Silverman: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 title, self. 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.

7:25Josh Silverman: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 kind of think about how it benefited Etsy. It also allowed me to see how a company actually embeds purpose into the organization. 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? Like, is there an easy definition for that? You know, I think a deep purpose leader who is centered around a clear sense of why are we here?

8:07Josh Silverman:What is our objective? And they reference that on everything they do. They are 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, that you are chief purpose officer.

8:46the other part of it that I think is very very important to understand is that purpose involves making trade-offs and choices hard choices Josh had to lay off almost 200 people and he had to shut down the values team the day before he did that he went for a walk with his daughter he said I'm about to do some things that are gonna make me look really bad in the news and you may hear about it from your friends and you're gonna 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... This episode is brought to you by Google Chrome.

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9:59What propels you? Propel with Gatorade electrolytes. It's customers and for the community, but it's not going to come across that way. These are hard places to be. You asked earlier, why are business 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.

10:24Josh Silverman: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. And these are politically charged issues that are very divisive in our society today. Fortunately or unfortunately, society, customers and employees demand their leaders to take a stance on some of these issues. All right. Well, let's talk about Etsy because there was some rebellion that was happening there. 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? Like, what do they do?

11:01Josh Silverman: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 wares 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 a really 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.

11:51Josh Silverman: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. Yeah. 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? I think it's important to distinguish the word idea from ideal.

12:26Josh Silverman: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 craftspeople 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. In some ways, it was almost like a mission-driven organization.

13:07We always think that nonprofits are mission-driven and businesses is profit-driven. But this sounds like it was leaning more towards the mission-driven ideal as you're describing it.

13:18Josh Silverman:Absolutely. I think it was very much of a mission-driven. And by the way, making money was not part of that mission. 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. 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.

13:59But at some point, the business comes calling. And those are trends.

14:06You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. Propel Fitness Water. With Gatorade electrolytes, zero sugar, and vitamins, Propel hydrates better than water. To help you get the most out of your workout and get back to your best self.

14:41What propels you? Propel with Gatorade Electrolytes. Position there from Rob to Chad Dickerson. Tell us a little bit about Chad Dickerson and the situation that he stepped into. Chad had big shoes to fill. Anybody coming after a founder can tell you that, right?

14:57Josh Silverman:Especially a larger than life founder. And Chad had big shoes to fill and he did them very well. But, you know, 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 of 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.

15:35Josh Silverman: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. How does that go over with the investor world? It's interesting. They managed to go public, right? 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 if you look under the hood, all these troubles come back to bite them about nine months after IPO. I think what you have to realize, you're a privately held company. It's a different story.

16:10Josh Silverman:You can communicate to your limited investor pool and tell them what you're doing. And this is who I am, what I'm doing. You're not going to the public markets. You know, 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.

16:46But if you look at the pure numbers, what do you see?

16:50Josh Silverman:Their top line growth has stagnated. And what has also started to happen is they're ballooning their SG &A, their spending, 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 indisciplined spending, unfocused. As you start probing the organization, you discover that was what was happening. You can say I'm social, but it 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.

17:23Josh Silverman:And public markets don't accept that. Yeah. 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? I think he said that as even as a board member, you know, you look at the financials and you see that they are spending money in ways that are not delivering any kind of growth.

17:57Josh Silverman: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 know, 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 the also realization was that while the sellers are 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.

18:36And furthermore, even their IT spend that had ballooned, they were building infrastructure from scratch internally. So it was... This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required. Compatibility and availability varies 18+.

19:10Propel Fitness Water. With Gatorade electrolytes, zero sugar, and vitamins. Propel hydrates better than water. To help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade electrolytes. Back-end stuff rather than customer-facing stuff.

19:28Josh Silverman:But he gave it 10 % 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%. 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, the decisions and the trade offs that he had to make in the process. Can you describe that? 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.

20:08Josh Silverman: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. Chad is crying. People in the audience are crying. Boy. Along with Chad being let go, 80 people have been let go. This is the first time Etsy is having layoffs. The values group is going to be shut down. And you can see employees in the company, suddenly people start to quit. So there's an attrition going up. Everyone's talking to the media saying, killing the soul of Etsy.

20:45Something else that Josh said to me, he said, you know, 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. The first few months were really around fixing Etsy 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