Artsy's Moment of Decision

Sebastian Cwilich has announced his departure; Who can the board attract to take over?

Sebastian Cwilich Steps Down

In a surprise announcement from Artsy yesterday, the company’s Chief Operating Officer is stepping down:

  • “Artsy announced that co-founder Sebastian Cwilich will transition from his full-time position as Artsy’s President and COO into an advisory role, with the support of Artsy’s leadership and board. Sebastian will stay at Artsy until July in his current role, working closely with co-founder and CEO Carter Cleveland, the company’s leadership team, and the board to help recruit and onboard a new COO. Carter, who founded Artsy in 2009 and partnered with Sebastian in 2010 to launch the business in 2012, will continue as CEO. After July, Sebastian will remain actively involved with Artsy as a senior advisor and as the company’s second-largest individual shareholder.”

Positioning Cwilich

The announcement of Cwilich’s departure has been carefully crafted to re-affirm Cwilich’s centrality to the business. The Art Newspaper begins its second paragraph in the story on Cwilich’s departure with “Over the past nine years, Cwilich has made many of the key decisions for Artsy…”

That makes the board’s decision to release this news all the more noteworthy. They are signaling the departure of the company’s acknowledged strategic and operating head without having secured a replacement.

There could be two very different reasons for this: 1) Cwilich’s departure came from a sudden decision and the company hopes to attract talent by making the search as public as possible; or 2) the board is sending signals that it would be open to an acquisition offer.

In The Art Newspaper, the COO projected financial confidence for the service:

  • “We are in a very strong position financially and we are not raising money any time soon,” Cwilich says.

  • Citing a surge in users (1.3m, up 40% from 2017), an expanded partner base (3,000 galleries, up 35%) and a 58% spike in sales volume, Cwilich says he is “leaving on a high”.

The Search for a Business Model

Cwilich’s announcement, which is the beginning of a process rather than the end, raises a host of new questions about Artsy and its business. The 10-year-old service was initially launched on a wave of enthusiasm for digital services that exploited collaborative filtering. A decade after Amazon began to use customers’ buying habits to recommend new or additional products to them, Artsy emerged alongside Spotify hoping to be a centripetal force in art buying and discovery.

In plain English, that means Artsy hoped to divert the attention that a few artists receive in the winner-take-all market for art dollars and divert that attention toward lesser-known but equally appealing artists and their works. The company was built around the so-called Art Genome Project, an attempt to codify art in a way that would provide pathways for new art buyers to navigate art history and the market.

Although Artsy continues to make the Art Genome Project central to its corporate identity, the service was unable to make a sales commission a viable business model early on. Nor has the Art Genome Project remained instrumental in attracting traffic. Artsy replaced the expensive Art Genome Project with an equally or more expensive editorial operation to attract traffic. Now Artsy structures itself around providing a platform for galleries to market their artists and inventory for a fee. Art fairs became central events driving the firm’s traction.

Eventually, Artsy also developed a business in channelling buyers to auctions where it could command a commission fee and it has also experimented with offering advisory services to buyers and sellers. The auction initiative required a great deal of financial investment.

How Much Money Does Artsy Have Left?

Over its lifespan, Artsy has raised slightly more than $100m in capital. The funds came from prominent names in art, tech and the social world which helped give the company a distinctive aura. Though the firm holds tight to its self-conception as a tech company, it has gravitated over the last nine years toward the business model of a marketing firm.

The core of Artsy’s business, the subscription model where art galleries can display their inventory is a variation upon—and undoubtedly a vast improvement of—Artnet’s gallery network. Both services offer galleries greater leverage than posting works on their own websites. Think of them as the Facebook for art galleries.

The emergence recently of online viewing rooms at the biggest global galleries should actually bolster the need for smaller galleries to gain the marketing leverage of a service like Artsy. Unfortunately, on the other end of the spectrum, Instagram has proved a powerful tool to achieve similar ends without any expense.

Smaller galleries cannot command the traffic of Gagosian’s or Zwirner’s online viewing room using their own website. But they can replicate or exceed the scale of Artsy for free on Instagram if they have a talented social media manager.

As a point of reference, it is worth noting that in Artnet’s last annual report for the financial year 2017, the gallery network generated a little more than $5m in revenue. Not a terrible business but hardly one that can justify Artsy having raised $100m in capital.

Artsy does have more revenue opportunities than the gallery listings. But it also has the added cost of a news operation that does not run ads against the editorial to at least cover the costs let alone contribute to revenue. So Artsy’s editorial effort isn’t a profit center as Artnet’s has become it’s a traffic-building cost that eats into $100m war chest.

The last $50m the business raised was meant to build out the auction platform. That software was meant to act as a dashboard for collectors so they can manage their bidding across numerous auction houses. Anecdotal reports from within the auction houses, especially on works valued below $100,000 like prints, suggests Artsy was able to generate meaningful traffic for these auctions. Meaningful traffic should generate meaningful revenue.

How much money Artsy spent on that initiative is impossible to know from the outside. But whatever Artsy has not spent there or to cover operating expenses in excess of current revenues is what constitutes the “strong financial position” Cwilich says Artsy currently enjoys.

Who Is In Charge at Artsy Now?

The news of Cwilich’s departure was a surprise to many familiar with the company. Coming at the beginning of the year, it suggests the kind of management change driven by a board of directors who have lost patience.

The current board of Artsy, and the group who decided sometime late last year to accept Cwilich’s resignation, consists of

  • Wendi Deng

  • Joshua Kushner

  • Carter Cleveland

  • Michael J Farello

  • Sky Dayton

  • Andrew Sugrue

  • Rich Barton

  • Bob Pittman

Deng, Kushner and Cleveland represent some of the company’s earliest investors and founders. Farello keeps an eye LVMH’s L Catterton investment which was originally made by Andrew Sugrue who now has a seat from his investment at Avenir Capital. Two years ago, Artsy made a lot of noise about Robert Pittman and Rich Barton joining the board. Six months later, the company announced the original investors in the firm would double-down and contribute another $50m in capital to the company, as much as had been initially invested.

The presence of Pittman and Barton on the board with their long consumer facing experience at companies like Zillow, Expedia and Netflix was taken as a sign the company had a path toward growth and profitability. Pittman has since quietly left the board. (Correction: Pittman remains on the board.)

What Cwilich’s Departure Means?

The simplest reading of Cwilich’s departure is that company must make some new choices. After all, Cwilich claims authorship of the company’s strategy and execution. Stepping aside acknowledges one or both of those things have to change.

It is possible that revenue is growing at Artsy and the company needs a new operating executive who can rein in expenses. The firm has long since stopped spending profligately on parties at Art Basel Miami Beach but there is still a very large staff and recent ads for new senior editorial positions.

The other possibility is that Artsy’s revenue initiatives have not grown fast enough. The board has looked at the company’s burn rate of cash and wants to try to attract a new strategic and operating leader before it’s too late.

So Who Will Take the Job?

The biggest problem that Artsy faces is the lack of candidates with relevant experience. Moving the art world toward sustained low-touch digital sales has been a long and bumpy road. There’s a reason that, as Cwilich said to The Art Newspaper, “the art industry is one of the last to go online in a major way.” The two have little overlap which is why both Amazon and eBay were not successful in developing their online art sales businesses.

But to say that art didn’t go “online” requires ignoring the many ways that digital communication has changed the selling of art over the last 15 years. Rather than being a late adopter, the art industry gravitated toward email and digital images to its great advantage from the very beginning. Most art buyers are sophisticated users of digital technology in their professional and personal lives.

What Artsy has lacked is a digital business model. That’s one reason it gravitated toward Artnet’s business replicating the mix of news, gallery listings and auction information. But Artnet hasn’t proved any more of a breakout business success than Artsy has. There doesn’t seem to be anyone at Artnet to hire and lead Artsy forward.

It does not seem to be an option to hire someone with experience at a gallery or auction house because none of those enterprises have created an obvious digital success (which isn’t the same as saying these companies have not made significant strides in selling online.) Nor would someone with a successful digital background be able to easily decode the opaque and perplexing patterns of the art world with enough confidence to be able to lead a new business strategy at Artsy.

After raising $100 million and expending nearly 10 years of hard effort, Artsy raises the most troubling question for the art world as it continues to eye the online marketplace: what if there isn't a sustainable business model?

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