When it comes to online commerce, we are big fans of community and marketplaces. In the age of “search for the lowest price” retailing, there are few differentiating features that can deliver a sustainable advantage in online commerce.

We have not found anything in the online commerce area that has interested us until earlier this year when we met Rob Kalin and his co-founders. Last July they launched Etsy to serve the needs of artists who wanted a place to sell their handmade goods.

In the past 10 months, Etsy has grown by word of mouth to over 10,000 artists selling their handmade goods to over 40,000 buyers. Today, there are over 100,000 listings on Etsy, every single one of them handmade and available for sale. And over 70,000 items have been sold on Etsy at a sell-through rate that beats eBay.

In nine months, with no marketing, a few press mentions, just one mention on Techcrunch (in November of 2005), and plenty of word of mouth, Etsy has grown to be one of the top 4,000 domains on the web according to Alexa.

What we like about Etsy is its marketplace model, the vibrant community, and a truly unique shopping experience that is ideally suited to artistic goods. Etsy feels so right for the market it is serving.

We also like Etsy’s global reach. Click on the geolocator and go shopping for handmade goods in Korea or New Zealand. Buy directly from the artist with no middleman.

The business model is straight out of eBay – listing fees and a small piece of the . But Etsy charges significantly less and has a simpler fee structure than eBay. If you are an artist and want to start selling on Etsy, it is quite simple. Go to the List An Item page, sign up, and post your works for sale.

This is a low friction marketplace where buyers and sellers can transact without overhead. But it’s also a fanatic community where users flag goods that aren’t handmade and get them taken down quickly. It’s the kind of place where one artist seller will build a logo for another’s store just because they want to help buid the marketplace.

If you go to Etsy and I suggest you do, you’ll see some of the most advanced flash work we have ever seen, done by Etsy team member Jared Tarbell. It is certainly the most advanced flash we’ve seen for a commerce oriented application. It is that use of flash and the use of the picture as the defining object of the service (flickr for commerce?), that creates the unique shopping experience.

We are looking forward to the launch of the new version of the service which is coming shortly. We’ve seen it and it will take the shopping model much further with scalability to address the growing number of participants in the Etsy marketplace.

Last week Union Square Ventures participated in a small “friends of Etsy” round of financing that will allow Etsy to launch the redesigned service, hire a few people, and keep growing.

This round was put together by Caterina Fake and Stewart Butterfield, founders of Flickr, and includes Joshua Schachter, the founder of Delicious, and Albert Wenger, the former President of Delicious. These four people have been advising Rob and his colleagues for the past year and we feel very fortunate to be part of this excellent group of advisors and investors.

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