Beachmint Etsy

August 19, 2013

Michael Pachter (213) 688-4474 [email protected]

PRISM … Progress Report for Internet and Social Media

In This Issue: BeachMint, Etsy

BeachMint

 Subscription-based women’s apparel retailer featuring six private label product lines  Co-founded by former managers of incubator Slingshot Labs; now has $73.5 million in funding

 Over-scaling resulted in minor layoffs; still growing about 50% YOY

Etsy

 Online market for homemade and vintage goods; valued at $688 million in May 2012

 We estimate net revenue of $120 million for 2013 on $1.44 billion in gross merchandise sold

 Some signs indicate waning buyer interest; possible slowing growth

THE INFORMATION HEREIN IS ONLY FOR ACCREDITED INVESTORS AS DEFINED IN RULE 501 OF REGULATION D UNDER THE SECURITIES ACT OF 1933 OR INSTITUTIONAL INVESTORS.

WEDBUSHPRIVATE COMPANY STRATEGIES GROUP Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see page 12 of this report for analyst certification and important disclosure information.

BeachMint

BeachMint is a network of six online retailers, each specializing in a specific type of women’s apparel or accessories. The sites market private label merchandise and recommend to customers based on style-preference and purchase history. BeachMint retailers operate on a subscription basis – customers make a monthly payment for each service and accumulate “credits” that can be applied toward the purchase of any item they choose. If the user chooses to skip a month, he or she is not charged. The company integrates social elements to deepen customer engagement and encourage feedback for more accurate curation. Users can comment on product pages and earn style points from one another. BeachMint enhances product exclusivity by incorporating celebrities and professional designers in developing and curating products.

The company was founded by Diego Berdakin and Josh Berman, a co-founder of MySpace. The pair had operated Slingshot Labs, an incubator launched by News Corp. to develop web ventures for the media conglomerate. Slingshot was shut down in May 2010 and Berdakin and Berman transitioned quickly to BeachMint, which launched in October of that year. Berman is the CEO and Berdakin is President.

The company grew quickly, receiving several investments from venture capital firms and reaching 150 employees in early 2012. However, since then the performance of the firm appears uneven. BeachMint’s Chief Marketing Officer left the company in June 2012 and subsequent layoffs brought employee headcount down to 125 by October 2012. Greg Steiner – hired as the COO in July 2012 – believed that the company had scaled its offerings and headcount too quickly. In July 2013, PandoDaily ran a story asserting that BeachMint was on the verge of closing its doors. Citing inside sources, the article stated that the company’s board BeachMint’s social elements had fired the founders and were planning to return the remaining equity to investors. The board and the founders firmly denied the claims, demanding that PandoDaily retract the story and apologize. The publication refused to do so, and issued a follow-up article defending its report.

Business Model

BeachMint sites charge users a monthly fee for access to the respective brand’s merchandise; the fee is credited toward any subsequent purchase. While users can subscribe to each site separately, the “credit” received from the subscription fee can be applied to most other BeachMint lines. Customers can skip a monthly purchase free of charge if they notify the company through the website by the fifth day of the month. The monthly fee effectively acts as a pre-payment, encouraging the customer to buy an item from Brand Product Type Celebrity/Designer Monthly Fee Subscription Competitors BeachMint because she feels she JewelMint Jewelry and Accessories Cher Coulter $29.99 Lucid Box has already paid for it. Furthermore, StyleMint Clothing Mary-Kate and Ashley Olson $29.99 Stitch Fix BeautyMint Skincare Products Jessica Simpson / Nerida Joy $39.99/$49.99 Birchbox customers that do not intend to ShoeMint Shoes Rachel Bilson / Nicole Chavez $79.95 JustFab, ShoeDazzle make a purchase may fail to opt out HomeMint Home Goods Justin Timberlake / Estee Stanley $9.99 and feel obligated to buy an item so IntiMint Sleepwear and Loungewear Brooke Burke-Charvet $19.99 Secret Envelope the money is not wasted.

Financial

BeachMint has seen rapid top-line growth since its launch. By June 2011 the firm generated $500,000 in monthly sales (via Annualized Run-Rate (Million) FashInventI) at an annual run-rate of $6 million. The founders claim that revenue tripled between June 2011 and January 2012, 80 imputing a run-rate of $18 million (via VatorNews). PandoDaily 60 estimated that annualized sales reached about $40 million by 40 October 2012, and in July 2013 Berdakin claimed the company 20 grew 50% YOY (via TechCrunch), implying annualized revenue 0 of approximately $60 million. COO Steiner disclosed in October

2012 that BeachMint was operating at a loss, but margins were

Jun-11 Jun-12 Jun-13

Oct-11 Oct-12

Apr-12 Apr-13

Feb-12 Feb-13

Dec-11 Dec-12 Aug-12 improving (via PandoDaily). President Berdakin told TechCrunch Aug-11 Source: Company Data, Wedbush 2

in July of this year that the “quality of BeachMint’s revenues continue to increase,” and that the company was continuing on a path to profitability. These statements suggest that BeachMint remains unprofitable, but continues to improve margins.

Funding

The company has accepted four rounds of venture funding totaling $73.5 million. New Date Amount Valuation Enterprise Associates (NEA) – BeachMint’s biggest shareholder – has participated in every round. Other repeat investors include Trinity Ventures and Anthem Venture Jun 2010 $5 million Partners. The most recent round of $35 million came in January 2012 with participation Dec 2010 $10 million from Accel Partners, Goldman Sachs and several other new and existing investors. Jun 2011 $23.5 million $150 million Management has confirmed that it is actively seeking new investors, possibly in Asia. A Jan 2012 $35 million strategic investment from an Asian partner could enable BeachMint to expand internationally and boost growth.

Market

BeachMint was an early entrant in the growing industry of subscription e-commerce. The business model was popularized by ShoeDazzle in 2009 (but was since abandoned) and has been adopted by many online retail startups such as JustFab, Birchbox and Dollar Shave Club. Although the model has enabled many companies to experience early growth by securing return customers, companies have had difficulty translating the growth to profit (via LA Business Journal). In our opinion, many consumers resent being required to pay a monthly charge or to opt out affirmatively, limiting the growth potential for companies using the subscription model.

The market for online retail is large and rapidly expanding. comScore estimates that e-commerce accounted for 9.6% of U.S. discretionary spend in Q2 2013; purchases from desktop computers totaled $49.8 billion with 16% YOY growth from Q2 2012. Apparel and accessories – BeachMint’s main revenue source – is one of the fastest growing categories at over 19% YOY. Although these figures represent large market opportunity, a competitive environment coupled with high startup costs pose significant barriers to entry. Established companies such as Amazon and eBay benefit from scale and logistical efficiencies that required several years to develop; advantages that young companies struggle to compete with as they face burdensome inventory and shipping costs.

Competition

Although Amazon and eBay are the dominant players in online commerce, BeachMint competes more directly with companies that market their own apparel brands to BeachMint’s Style Profiler consumers. This space includes large public companies such as Guess, Abercrombie & Fitch, The Gap and American Eagle; however, these companies sell merchandise in brick-and-mortar stores as well as online. The Gap generated $1.9 billion in global online sales for 2012 (Internet Retailer).

JustFab is BeachMint’s largest subscription competitor, while ShoeDazzle switched from an exclusive subscription model of $39.99 per month at its inception to pay-as-you-go with an option to join VIP membership at a reduced commitment of $9.95 per month earlier this year. JustFab reached approximately $100 million in sales in 2012, and expects to reach $250 million in 2013 and turn its first profit (VatorNews). ShoeDazzle has been less fortunate, experiencing internal challenges and struggling to attenuate its business model throughout its growth. CEO Bill Strauss overhauled the subscription-only model and left the company after serving for only three months; the company’s founder, Brian Lee, replaced Strauss, reintroduced subscriptions in opt-in, hybrid form with pay-as-you-go, and laid off about 10% of the firm’s 240 employees. ShoeDazzle reached $100 million in revenue for 2012 and expects to be cash flow positive by the end of 2013. JustFab and ShoeDazzle specialize in shoe sales, just one of BeachMint’s verticals. Other subscription- based competitors include StitchFix (clothes and accessories), Birchbox (beauty products) and Ellie (workout clothes). Bombfell is a subscription clothing line for men, and Whittlebee sells children’s clothes with a similar model.

We believe that BeachMint has significant headwinds to overcome to reach profit stability. Online apparel retail is a fragmented market with established competitors that have considerable advantage from economies of scale. Although the subscription model increases customer stickiness, it has yet to be proven as a profitable, scalable pricing strategy. Although BeachMint’s strategy to carry multiple lines has complicated its growth, it may prove advantageous over time by introducing its subscription model into new spaces (e.g. home goods) and increasing brand recognition.

Etsy

Etsy is an e-commerce company that operates a marketplace for handmade and vintage goods as well as commercial supplies. The company acts as an intermediary to the end customer, similarly to eBay, by facilitating transactions. Headquartered in New York with offices in San Francisco and Germany Etsy transacts business in over 150 countries, has over 22 million members and 60 million monthly unique visitors, and generates over 1.3 billion page views per month. In 2012, the company facilitated over $895 million in merchandise sales, up 66% from the year before. 17 million products are listed on Etsy offered by over 800,000 active sellers.

Etsy maintains a policy that prevents commercial entities from utilizing its marketplace as a distribution vertical. With the exception of groups of individuals that have collaborated to create a product, items that are not “handmade” cannot be listed on Etsy. Additional exceptions include commercially created supplies that intended for D.I.Y. projects and over-20-year-old vintage goods. Given the practical challenges around verifying the volume of products sold on a daily basis for authenticity, resellers and other commercial entities have become more visible on the platform.

Initially, merchants had to pay $0.20 per item listed on Etsy upfront. This policy led merchants to engage in the practice of listing sets of items (e.g. 30 chairs) individually and renewing the same listing upon sale to minimize transaction costs. Since this practice deterred users interested in purchasing sets from sellers, in May 2012 Etsy began charging only $0.20 per listing regardless of item quantity. Products are listed either for four months or until the item sells out; renewing a listing for an additional four months costs the same amount as posting a new listing. Etsy charges merchants a 3.5% fee on the transaction price of goods sold, collected monthly. Merchants are also charged monthly to advertise on the website. Etsy provides a direct checkout option for qualified merchants and charges a 3% processing fee in addition to a $0.25 per order charge which, unlike Etsy’s 3.5% transaction fee applies to tax and shipping payments as well. Etsy’s fee structure compares favorably to eBay’s, which charges 7% to 11% of final sales costs (including shipping) for items sold for less than $2,800.

Etsy’s founders spent three months designing the site, and the company launched in June 2005. CEO Chad Dickerson was formerly CTO of Etsy before being promoted in July to lead the company. Etsy maintains a culture where employees are encouraged to take risks and a policy of “blamelessness” where employees are not penalized for mistakes. The company has over 300 employees and Etsy’s browsing page expects to add about 20 to 30 in the near term.

Financials

Etsy reached profitability four years after launch in 2009, according to a Wall Street Journal report that cited sources that claiming had Etsy generated about $50 million in net revenue in 2011. comScore estimates U.S. e-commerce transaction volume reached $198.7 billion in over the previous four quarters.

Based on past financial performance results, Etsy generates on average $0.083 of net revenue for every dollar of merchandise sold on its websites. Applying this ratio forward while accounting for seasonal effects, we estimate that Etsy will generate approximately $120 million in revenue in 2013 from $1.44 billion in gross merchandise volume. These figures imply 61% growth over 2012 totals, assuming consistent growth rates in users and posted items with past years. However, certain metrics indicate that this may not be the case. From January 2012 through June 2012, new members and items sold were flat to slightly up. These metrics were slightly down in the same period for 2013; this decline correlates with a decrease in online interests as measured by Google searches (pictured in the chart below). Taken together, these measurements may signal an overall slow-down in buyer interest in Etsy as a platform. In order to achieve our estimates, Etsy will have to restore its former growth pattern in the second half of the year.

Etsy Estimated Net Revenue $140 8000 140.0 $120 7000 120.0 $100 6000 5000 100.0 $80 4000 $60 80.0 3000 $40 2000 60.0 $20 1000 40.0 $- 0

20.0

Jul. '11 Jul. Jul. '12 Jul.

Jan. '12 Jan. '13 Jan.

Jun. '11 Jun. '12 Jun. '13 Jun.

Oct. '11 Oct. '12 Oct.

Apr. '12 Apr. '13 Apr.

Feb. '12 Feb. '12 Sep. '13 Feb.

Sep. '11 Sep. 0.0

Dec. '11 Dec. '12 Dec.

Aug. '11 Aug. '12 Aug.

Nov. '11 Nov. '12 Nov.

Mar. '12 Mar. '13 Mar.

May. '12 May. '13 May.

GMV (Millions) Items Sold (Thousands) New Members (Thousands)

Source: Company Data, Wedbush Source: Company Data, Wedbush

Source: Google Funding Date Amount Valuation

Etsy is backed by $92 million in venture funding. Union Square Ventures has 6/05 $400,000 participated in several rounds as has Accel Partners. Acton Capital Partners has 11/06 $1 million also invested multiple times. In January 2013 Etsy hired a new CFO, Fidelity 7/07 $3.25 million portfolio manager Kristina Salen. Some news outlets took the hiring as a sign that the company was preparing to go public, but CEO Chad Dickerson suggested that 1/08 $27 million $90 million the firm was exploring other options, such as secondary market transactions. He 8/10 $20 million $300 million also indicated that he hoped to engage sellers and buyers as investors in a liquidity 5/12 $40 million $688 million event.

Market

According to comScore, Apparel & Accessories and Home & Garden are two of the fastest growing segments in e-commerce, with YOY growth over 19% in Q2; Etsy’s merchandise pivots on these verticals. The company will continue to benefit from increased adoption of online and mobile retail. Because Etsy focuses on vintage and homemade goods, its main e-commerce competitor is eBay. Though eBay is far larger than Etsy at $14 billion in revenue, Etsy benefits from a communal culture among its users and a narrow focus on quality goods within its three product verticals. Within the company’s three most popular categories – Jewelry, Vintage and Supplies – Etsy outsells eBay significantly. Smaller competitors include private companies ArtFire, Bonanza, and European firms DaWanda and ezebee.com.

While Etsy has handily dominated its core segments, we believe growth will slow as the company approaches market saturation within its small addressable niche. The company has already established itself in many international markets, and further geographic 5

expansion will likely yield only marginal growth. Etsy can broaden its reach by integrating commercial verticals; however, this may alienate its existing user base, which takes Etsy’s emphasis on authenticity very seriously. Some industry analysts have suggested Etsy’s size may justify establishing its own payments system, akin to eBay’s PayPal. Such an undertaking would be costly but could make existing operation more profitable.

Last Week’s News

Fab.com raises additional $5 million, will create joint venture in Japan Less than two weeks after Fab.com let go nearly one-fifth of its employees, the company today received $5 million from Itochu Corporation as part of its Series D funding round. Fab CEO Jason Goldberg stated the two companies will create a joint venture to make Fab available in Japan. The Series D round has now reached $165 million. (AllThingsD) PRISM: 5/6/13

Firefox OS coming to U.S. in ZTE Open, available through eBay The ZTE Open will be available in the U.S. starting August 16th for $79.99. The unlocked smartphone is the first in the U.S. to use Mozilla’s Firefox OS mobile operating system and will be released in the U.K. as well. The Open is available in Spain, Colombia and Venezuela currently. (The Next Web) PRISM: 7/8/13

Fitbit receives $43 million in fourth funding round Fitness band developer Fitbit got $43 million in venture capital from the Qualcomm Ventures, SAP Ventures, Foundry Group, True Ventures and Softbank Capital. CEO James Park said the cash will be used to further develop products. The company’s Flex band competes with Jawbone’s UP and Nike’s Fuelband. Fitbit has now raised a total of $66 million. (TechCrunch)

New Relic to reach $100 million run-rate by April 2014 New Relic, an application analysis firm, disclosed that it expects revenue to reach an annual run-rate of $100 million by March 31st 2014. Chief marketing officer Patrick Moran said the previous quarter’s revenue grew 130% YOY. New Relic’s software analyzes data regarding an applications interaction with platforms and other apps, so that companies can monitor the performance of their software products. (VentureBeat)

Twitter considering “Trending TV” feature for timelines Twitter is expanding its relationship with television by a testing a card-style box holding links to trending TV shows. The cards appear at the top of users’ timelines. The limited release applies only to iOS apps currently. Clicking links leads to a page about the TV show with relevant Twitter accounts and recent tweets. (TechCrunch) Twitter Report: 4/22/13

Braintree introduces Marketplace API for easy payment dispersion E-payment processor Braintree is offering a Marketplace service to merchants that make regular payments to outsourced suppliers. The service automatically sends payments to suppliers, eliminating the need for vendors to hold funds and payout. For example, when a customer makes a payment to Uber, it can be immediately split between Uber and the driver. The new service competes with similar features from PayPal (eBay) and Stripe. (TechCrunch) PRISM: 7/22/13

Chegg files for IPO, seeks $150 million Santa Clara, California-based Chegg filed publicly for an initial public offering. The company generated $213.3 million in 2012, up from $172 million in 2011, though it operated at a loss of $49 million for 2012. The eight-year-old firm was previously valued at $800 million based on its most recent funding round in March 2012. The cash from the IPO will be used to expand its offerings, which focus on educational tools for college students. (AllThingsD)

About The Wedbush Private Company Strategies Group

The Private Company Strategies Group of Wedbush Securities is a leader in providing research and trading to the rapidly growing industry of privately traded securities, with an emphasis on companies in the social media space. We assist companies in raising growth capital through traditional private placements and provide liquidity options for existing and former employees through tailored selling programs. We also work with venture capital, private equity and hedge fund investors to help them adjust their holdings in some of the most dynamic companies. We endeavor to understand the underlying industries of the private companies we trade, in order to help our clients make informed decisions about their investments. We provide discreet customized solutions for our institutional and accredited private clients through a team of professionals located in New York, Los Angeles and San Francisco.

Contact Wedbush Securities Private Company Strategies Group:

Michael Pachter Kevin Cohen Managing Director, Equity Research Director of Trading, Private Company Strategies Group Head of Research, Private Company Strategies Group (213) 688-8089 | [email protected] (213) 688-4474 | [email protected] Twitter: @michaelpachter

Sheri Kaiserman Mark Benson Head of Equities Director of Research (213) 688-4483 | [email protected] (213) 688-4435 | [email protected]

@WedbushPCoS Wedbush PSG

http://linkd.in/RxlmjN https://twitter.com/WedbushPCoS

About Wedbush Securities Founded in 1955, Wedbush Securities is a leading investment firm that provides brokerage, clearing, investment banking, equity research, public finance, fixed income sales and trading, and asset management to individual, institutional and issuing clients. Wedbush currently ranks as a top liquidity provider for the NASDAQ, and was ranked as the #1 stock picker for 2010, 2011, and again for the 1st half of 2012 by Barron’s. Headquartered in Los Angeles, with over 100 offices nationwide, Wedbush focuses on relentless service, client financial safety, continuity, and advanced technology. (www.wedbush.com)

Covered Companies Mentioned in this Report (priced intra-day August 19, 2013)

COMPANY TICKER RATING PRICE PRICE TARGET eBay EBAY Outperform $53.04 $64.00 Guess GES Neutral $30.55 $32.00 Abercrombie & Fitch ANF Outperform $48.38 $60.00 The Gap GPS Neutral $43.17 $43.00 American Eagle AEO Outperform $16.21 $20.00 Nike NKE Neutral $64.31 $58.00

Important Disclosures

The information contained herein is intended for accredited investors as defined in Rule 501 of Regulation D under the Securities Act of 1933 or institutional investors.

Wedbush Securities Wedbush does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The analysts receive compensation that is based upon various factors including WS’ total revenues, a portion of which are generated by WS’ investment banking activities.

Analyst Certification I, Michael Pachter, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report.

Disclosure information regarding historical ratings and price targets is available at http://www.wedbush.com/ResearchDisclosure/DisclosureQ213.pdf

Investment Rating System: Outperform: Expect the total return of the stock to outperform relative to the median total return of the analyst’s (or the analyst’s team) coverage universe over the next 6-12 months. Neutral: Expect the total return of the stock to perform in-line with the median total return of the analyst’s (or the analyst’s team) coverage universe over the next 6-12 months. Underperform: Expect the total return of the stock to underperform relative to the median total return of the analyst’s (or the analyst’s team) coverage universe over the next 6-12 months.

The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to the other stocks in the analyst’s coverage universe (or the analyst’s team coverage).*

Rating Distribution Investment Banking Relationships (as of June 30, 2013) (as of June 30, 2013) Outperform:54% Outperform:15% Neutral: 41% Neutral: 1% Underperform: 5% Underperform: 0%

The Distribution of Ratings is required by FINRA rules; however, WS’ stock ratings of Outperform, Neutral, and Underperform most closely conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS’ stock ratings are on a relative basis.

Wedbush Equity Research Disclosures as of August 19, 2013

Company Disclosure News Corp. 1 eBay 1 Guess 1 Abercrombie & Fitch 1 The Gap 1 American Eagle Outfitters 1 Nike 1

Research Disclosure Legend 1. WS makes a market in the securities of the subject company. 2. WS managed a public offering of securities within the last 12 months. 3. WS co-managed a public offering of securities within the last 12 months. 4. WS has received compensation for investment banking services within the last 12 months. 5. WS provided investment banking services within the last 12 months. 6. WS is acting as financial advisor. 7. WS expects to receive compensation for investment banking services within the next 3 months. 8. WS provided non-investment banking securities-related services within the past 12 months. 9. WS has received compensation for products and services other than investment banking services within the past 12 months. 10. The research analyst, a member of the research analyst’s household, any associate of the research analyst, or any individual directly involved in the preparation of this report has a long position in the common stocks. 11. WS or one of its affiliates beneficially own 1% or more of the common equity securities. 12. The analyst maintains Contingent Value Rights that enables him/her to receive payments of cash upon the company’s meeting certain clinical and regulatory milestones.

Private securities may involve a high degree of risk and are intended for sophisticated investors who are capable of understanding and assuming the risks involved.

Private securities may have a high level of volatility. High volatility investments may experience sudden and large drop in their value causing losses that may equal your original investment.

Private securities are illiquid and may not be readily realizable and it may be difficult to sell or realize those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed.

Investors should obtain advice from their own financial advisor and only make investment decisions on the basis of the investor’s own objectives, experience, risk tolerance, and resources.

The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a representation by this corporation, nor is any recommendation made herein based on any privileged information.

This information is not intended to be or should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned herein.

This firm, Wedbush Securities, its affiliates, officers, employees, members of their families, or any one or more of them, and its discretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to time, purchases or sales thereof in the open market or otherwise.

The information and expressions of opinion contained herein are subject to change without further notice.

The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm.

Any reference to past performance is not a guarantee of future results.

Supporting documentation will be furnished upon request for any claims, comparisons, recommendation, statistics or other technical data. Additional information with respect to the information contained herein may be obtained upon request.

Applicable disclosure information is also available upon request by contacting the Business Conduct Department at (213) 688-8090. You may also submit a written request to the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017.

RESEARCH DEPT. • (213) 688-4505 • www.wedbush.com EQUITY TRADING Los Angeles (213) 688-4470 / (800) 421-0178 * EQUITY SALES Los Angeles (800) 444-8076 CORPORATE HEADQUARTERS (213) 688-8000