Amid growing pains, Etsy raises $40 million

The day before thousands of Etsy members plan to protest the online marketplace over what can be considered handmade, the NY-based startup announced that it had raised an additional $40 million in funding, bringing its total funding to about $91 million.

The new round of capital was led by Index Ventures, but also included Accel Partners, Union Square Ventures, Hubert Burda Media and Glynn Partners. The company also announced that Danny Rimer from Index Ventures would be joining the board.

In addition to the funding, the startup said it had secured certification as a B Corporation, a corporate status that allows companies to pursue solutions to social and environmental problems. New York-based Warby Parker is also a Certified B Corporation, along with about 500 other companies, including Patagonia and Seventh Generation.

In a phone call, Chad Dickerson, Etsy’s  CEO, told me that part of what drew him to Etsy was its set of values and “sense of changing the world by changing the way the economy works.” The company decided to begin the Certified B Corporation process five months ago to ensure that it’s commitment would be to shareholders as well as other stakeholders.

“This is a real way to hold our feet to the fire and continue to be a great company, not just from a business perspective, but from a community perspective,” he said.

Even though the new corporate distinction signals to investors that the company is thinking about outcomes beyond the bottom line, he said, Etsy’s investors understand that securing Etsy’s values is critical to its success.

“They’re really great business people, but they understand the values of Etsy,” he said. “They’re focused on encouraging me to do the right thing for the community … that will help the company grow.”

In a blog post to the Etsy community, Dickerson said becoming a Certified B Corporation was “one of the most important things Etsy has ever done.”

The new round of funding – and the decision to define itself as a socially responsible company – comes at a pivotal time for the company. In the seven years since its launch, Etsy has attracted about 875,000 active sellers and 15 million members. In 2011, the company said sellers grossed more than $525MM in sales. But the company’s rise has not been without a few growing pains.

As evidenced by the protest of more than 4,000 community members, the company is balancing the need to expand without alienating the loyal communities who have helped Etsy grow and give it so much of its value. Last July, the company announced that former CEO Robert Kalin would be stepping down to make way for Dickerson, who was previously CTO. The move signaled the company’s decision to make the technological investments needed to support the growing company.  Since becoming CEO, Dickerson has made two acquisitions (previously, the company had only made one), launched a new internal advertising product, and released a new way for buyers and sellers to handle transactions.

With the funding, the company said it will continue international expansion, which it recently started with German and French launches. It will also offer sellers more products and services, citing its recent acquisition of wholesale site Trunkt as an example of the kinds of additions it has in mind.

In his post, Dickerson also said the funding ensures that the company has the necessary operating funds to last for several years and be in a position to make decisions that serve the community if not always the bottom line.

“We also want to be able to make decisions like the [fee policy change] you saw last week…where frankly, Etsy loses money but it’s the right thing to do for sellers,” he said.. “As we stated in our values, we plan and build for the long term.”

Prior to its most recent round of funding, Etsy was valued at around $300 million. But citing sources familiar with the deal, the Wall Street Journal reports that this round more that doubles that.

Fred Wilson, managing partner of Union Square Ventures, said that Etsy is ten times as big as it was when Dickerson joined four years ago and has the potential to be ten times its current size over the next five to ten years.

In a sense, he said, it’s more like a social network than a traditional online commerce site because of the more intimate real-world environment that it creates.

“It could be a global marketplace where people can conduct person-to-person commerce,” he said. “And, in my opinion, it could be an enormous opportunity.”

Updated Tuesday afternoon with comments from Fred Wilson, managing partner of Union Square Ventures.