Hedge fund Black-and-White Capital criticizes Etsy’s search functionality, spending and business model.

(Bloomberg)—Etsy Inc. is being targeted by hedge fund Black-and-White Capital LP, which is urging the online marketplace for handmade goods to explore strategic alternatives, including a possible sale, as it undertakes various operational and governance improvements.

Black-and-White, which says it owns about 2% of Etsy, is publicly releasing its proposals and criticisms after months of private talks, according to correspondence obtained by Bloomberg. The firm highlighted Etsy’s need to re-accelerate revenue growth and reduce bloated operating costs, the letter shows. Etsy is No. 22 in the Internet Retailer 2017 Top 1000.

Shares of Etsy rose as much as 6.2% Tuesday and traded up 3.1% to $11.40 at 9:35 a.m. in New York, giving the company a market value of about $1.4 billion. The stock has declined almost 30% since an initial public offering about two years ago. The company could fetch at least $15.50 in a sale, or be worth $30 after operational improvements, Black-and-White said.

“The company’s historical pattern of ill-advised spending has completely obfuscated the extremely attractive underlying marketplace business model,” Black-and-White wrote. “We are fully prepared to take any actions we believe are necessary to protect the best interests of all Etsy shareholders.”

The investor wants Etsy to better invest R&D to fix its “horrendous search functionality,” suggest similar available items and redirect marketing expenses to drive repeat customers, among other steps, Black-and-White said. The Brooklyn, N.Y.-based company should also shift most of its IT infrastructure to the public cloud and improve product categorization, the fund said.


Representatives for Etsy didn’t immediately respond to requests for comment.

Trading debut

Etsy, which raised $307 million in its IPO in April 2015, including an overallotment, surged 88% in its trading debut. It acquired Blackbird Technologies last year and has increased marketing spending to promote its brand and newer craft offerings, while facing competition from larger online rivals including Amazon.com Inc. (No. 1 in the Top 1000), which launched its own Handmade store in 2015, and eBay Inc.

The company, founded in 2005, is scheduled to report its first-quarter earnings after markets close Tuesday in New York.

Black-and-White also called for governance improvements, including separating the roles of chairman and chief executive officer, currently held by Chad Dickerson, declassifying the board and enabling shareholders to call special meetings.


Seth Wunder, who previously co-managed Contour Asset Management and was formerly an equity analyst at Morgan Stanley, started Black-and-White in 2016. Among its investors, the hedge fund attracted about $270 million from Brummer & Partners, the Swedish hedge-fund allocator said in October 2016.

B certification

Activist investors typically amass stakes in public companies and pressure executives and directors to make changes they argue will boost shareholder returns.

Some changes Black-and-White is urging could be at odds with a unique feature of the company: it’s a certified B Corporation. To gain and hold that certification, Etsy adheres to standards, including that it benefit the community, environment, employees, consumers, and suppliers.

For Etsy, that has meant paying workers more than 40% above the local living wage and covering most of employees’ health insurance premiums. It also means the company the company has a mission alongside profit-making. Etsy has said that it considers its B-corporation certification as central to its success.

“Our reputation could be harmed if we lose our status as a certified B Corporation, whether by our choice or by our failure to meet B Lab’s certification requirements, if that change in status were to create a perception that we are more focused on financial performance and are no longer as committed to the values shared by certified B Corporations,” the company said in its IPO filing.