The Shopify IPO

0:00 You ready? She's always ready. Always ready. She's got her own chair here now. She hopped out of my lap, she's just sitting in the chair.

0:09 Mm. Uh all right, let's get started. Welcome. To season five, episode two of Acquired. the podcast about great technology companies and the stories behind them.

0:30 I'm Ben Gilbert, and I am the co-founder of Pioneer Square Labs, a startup studio and early stage venture fund in Seattle. And I'm David Rosenthal and I'm a general partner at Wave Capital, an early stage venture capital firm that focuses on marketplaces based in San Francisco. And we are your hosts. Today we are doing an episode that we have gotten a ton of requests for the Shopify IPO. Now here's a few fun things to know about Shopify before we dive in today.

0:59 The company IPO'd in May of 2015 with a market cap of 1.3 billion dollars. In the ensuing four years, it has twenty seven X to that. And today has a market cap of thirty five billion dollars. Not bad for a pivot. No.

1:15 No no. two hundred and eighteen million people have bought from a store powered by Shopify, the vast, vast majority of which do not have any awareness that they did that. And that is equivalent to almost all adults in the United States. Also not bad. The founder and CEO, Toby Lutke, is an absolutely fascinating character that uh I can't wait to dive in on the uh on the history and facts here. To give you a quick sense before we dive in, he tweeted last year, I firmly believe that I learned more about building businesses from playing StarCraft than I've learned from business books. He might be right. He might be right.

1:58 All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chat bot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do.

2:31 operate with obsessive customer focus. They embedded inside a massive law firm. For months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review where you

2:47 Drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's bet here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Ligora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Ligora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Lagora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries.

3:48 And crazily, they went from one million In about Eighteen months. Yeah.

3:56 truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired. And just tell'em that Ben and David sent you. If you like the show, you should come join the twenty five hundred person and growing acquired fans that are hanging out in our Slack at acquire.fm. And if you want more acquire than just this, you should consider becoming an acquired limited partner.

4:35 Dave and I release about one L P show for every main show in addition. And we use those episodes to go deeper on company building topics. Now I was really excited about how our last episode turned out, where we dove into series A and how it is a way different thing than it used to be, how valuations are are are very different today than what they were, sort of what's market, what's not market, what determines market. How did we end up here and all of this sort of tying into what we think the next major technology wave will be and when it will get here. So if you're a founder of a startup or a startup employee, this is one definitely not to miss. You can get started with a seven day free trial and listen right here in the podcast player of your choice by clicking the link in the show notes or going to glow.fm

5:21 Slash acquired. All right, David. I think we are ready to hit it. Are we ready to do this? Let's do it.

5:28 All right. Let's blast off. So, Ben, as you alluded to You cannot talk about Shopify. Without

5:35 Talking about its co founder. And CEO. Not it's CEO at Founding. But co founder and now CEO.

5:43 Tobias Lutke. So Who is Toby? Toby.

5:49 lives in Ottawa, Canada now with his wife and his children because that is where Shopify is Headquartered, where the world headquarters are. and where he founded co founded the company. However, he was not born there. He uh uh I believe he's a naturalized Canadian now. I think he's a Canadian citizen. But he was born, right? In Germany. He was born in Koblenz, Germany. Which is a town uh about halfway between Cologne and Frankfurt. Toby, uh when he was growing up, he was quite the precocious

6:20 Young man. He his parents gave him a Schneider CPC. Uh when he was six years old. And uh a Schneider CPC. Yeah, what is that? Was a computer. Uh it was uh to the best of my understanding, roughly like kind of the German equivalent of the Commodore sixty four that uh helps place things. So this would have been nineteen eighty six. Toby received this and he was

6:46 Enamored. Two things about it. One was that He could program it. And hack it and build things for it and he could

6:55 take it apart and put it back together and add hardware to it. But the other thing he was really enamored by you already foreshadowed Ben was he could play video games on it. And so he started playing a lot of video games on his Schneider C P C and presumably future upgraded computers as well. So much so that by the time he was kind of eleven or twelve, he was taking the games that he was playing on there and he was hacking into the code and he was rewriting The games.

7:24 To cheat or make it easier or build his own levels or just because like he was like it was like Minecraft before Minecraft. In another world. He could have been uh he could have been not. And uh he has a lot in common with Notch too. Uh totally. Totally. Well we we're we're gonna have to do a Minecraft episode at some point here. He was so into it that his parents, uh, you know, who were not techies, uh they were they were like Uh, this is weird. They actually took him to a psychologist to like have his behavior analyzed. Like, is this normal? And it turns out no, he just like he's totally normal. He just really

7:53 Loves computers and video games. This is like a Dilbert comic. Like uh he's exhibiting signs of engineer, should we be concerned. Exactly. And nobody is more engineer than Toby, as we shall see. Or at least at this stage of his life. And Ben, as you alluded to, he still talks today about how, you know, gaming is great training for entrepreneurship. You have to do resource management. You know, you're playing against opponents, you're in this dynamic world that's evolving, especially multiplayer online games. Making real-time decisions. Yeah, and you know, he has this great line in there. And it one thing that becomes immediately evident about Toby when you start studying him is he's highly intelligent. He has this great line in uh I think it's on the Knowledge Project podcast where he says, you know, people get upset. They got upset about that tweet about StarCraft. People get upset, parents get upset if their kids are playing too many video games. Think about it this way. Would you be upset if your kid were playing chess all the time? Like would you be if I had tweeted about that, would you be like vilifying me? And really, what's the difference here? It should be known the uh the tweet I I went to look it up in prep for this episode has been deleted. Oh.

8:52 Interesting. Interesting. Maybe he's changed his team. Or maybe his kids were playing too many video games. That could be um Anyway, we digress. So What does Toby do as he gr he's growing up? You know, he's really into computers. At seventeen He does something very different from what a highly intelligent seventeen year old would do in in the US or in Canada or in many other countries. Germany at the time has this pretty cool program to

9:18 I think the goal of which is to increase the number of programmers in the country, computer programmers. Uh, they allow kids to drop out of high school, not go to college, and become apprentices to become programmers. And the idea is it's like just like literally back to the Middle Ages. Like you're gonna start as a trainee and then an apprentice, and then you're gonna become a journeyman, and then you're gonna become a, you know, programmer, and then you can become a a master programmer. And so Toby drops out of high school, joins this uh this formal program uh through uh I believe through the through the German government, and becomes a programmer trainee and he apprentices with Siemens, the huge um technology company, uh manufacturing and technology company in Germany. he grows up he he, you know, becomes a a great programmer, but he's programming in Java, uh, which is, you know, for all of our engineer listeners will will smile and laugh here. I learned to program in Java. You probably did, did you? Dude, the A P computer science test was in Java. Totally, totally. And you know, Toby's like All right. Also, no, I learned to program in PHP. Like let's really? Of course. Gotta make websites. Uh see, I actually learned to program like in uh in college, like in actual computer science courses. And uh

10:29 I should have started just making websites earlier. Anyway, so he felt like it was pretty restrictive, but he still like loved programming. And as he gets a little older, you know, he's making money. He he didn't go to college, he's he's working. He develops another passion, he has some disposable income. He gets really into Snowboarding. And Uh this is uh trust us, listeners, all of this is gonna be very relevant. Literally everything we're talking about here is gonna become very relevant in just a minute. He's in his early twenties at this point.

10:58 'Cause he's working as a programmer at Siemens and other companies, like making good income. Uh, he loves snowboarding. He goes to the best place in the world to go snowboarding, and that's Place uh uh I've been to many times. I'm sure you probably have uh Tubin. I don't think we've been together, which is Whistler, Canada and British Columbia. I did tear an A C L there, so I have I have mixed feelings as much as I love love Whistler. Fun fact on uh Technered trivia, Whistler was the code name for Windows X P Oh no way. Yeah. That's pretty cool.

11:29 Um, that's yeah, so if you haven't been to Whistler and you are a skier or a snowboarder, you gotta go. It's like the best place in the world. So Toby's there on a snowboarding trip in his early twenties, and he meets a girl there, a woman named Fiona McKean. It's you know kinda love at first sight, a budding romance. And uh unclear if this happens on the trip or or later, he persuades her to move to Germany and come live with him. She's Canadian. And she uh she moves over, lives with him in Germany for a year. Man. And um persuasive. It's like when we talk about on the LP show, like, you know, founders have to learn to sell'cause your job is always selling and can you be compelling not only to pitch, but for for hiring people I can't imagine a more test of how compelling can you be than you should move to Germany with you. You should move to Germany for me.

12:17 Well, it turns out that Toby's not quite ready to be CEO yet, though, because um He he might have won the short game, but lost the long game here because she says, uh Okay, I'm gonna move over. She moves over for a year. And then she persuades him to move back to her hometown of Ottawa. Canada.

12:33 Ottawa, of course, in uh the province of Ontario is the uh capital of Canada, beautiful capital of Canada. So Toby moves with Fiona to Ottawa and he's still working for a smaller German company at this point, which uh does something really exciting. Uh they make backhand accounting software for uh companies. But Toby can he's a great programmer, they let him work remotely. Shortly after he moved though, uh in two thousand four, this company goes bankrupt. And so Toby is now moved across the world to be with his soon to be wife and finds himself out of a job in

13:08 Ottawa, Canada. So what does he do? He says, Well, you know That's all right. I didn't really like programming financial accounting software in Java. Maybe I can like find some other way to support myself and uh and Fiona and make uh make some money uh here. And you know, maybe I can use programming to it on the side, but like really I just want to kinda like make enough money that I can go snowboarding a lot. So he's kicking around ideas. And he teams up with he meets through Fiona a family friend of theirs named Scott Lake. Now Scott is very different from Toby. He is not a programmer. He was a jock in high school. He's super outgoing. Unclear if he played StarCraft or not. Didn't find that in the research. But he also loves snowboarding.

13:52 And uh he had worked on a few quote unquote startups in town in Ottawa, not like tech startups, but more lifestyle businesses. And he also kind of had the itch to do this on his own. You know what Toby's sort of doing in his free time uh uh at this point in in sort of the programming world not yet. Did you catch that not yet. Okay. This is about to come up. So they decide like okay, yeah, this is great. We love snowboarding. We're gonna keep going together. Like let's let's throw a small, you know business together that we can do to fund our habit. Maybe what we should do It's now two thousand four. Web two dot oh is starting to become a thing. People are becoming more comfortable buying things online. Amazon's been a public company for a while now. What if we just started a website to sell snowboarding gear? Of course, you know, because we're really like elitist about this, like we would never

14:40 We would never ride on like mass market, you know, stuff that you could go buy at sports authority or something. Let's use the power of the internet. Let's find like really boutique like artisanal gear and only sell that online. Like Perfect. Let's do it. They they get together and Toby codes up a website. They call it snowdevil dot CA.

15:00 You can go there. We'll link to it in the show notes. It is still up. And if you read the About Us section, it says Snow Devil is not your typical snowboard store. Instead, Snow Devil is a partnership among two writers who are only interested in selling boards and findings that they love to write on. Nothing else. If you want big brands like Burton or K two, you should try Walmart. If you want high end top quality brands like Never Summer, Nid Ecker, Tech Nine, and others, you should try us. Yours truly Scott and Toby. And then they list their

15:29 personal gear setups for their snipboards. Now the funny thing if you go to this website is they talk a big talk about how refined their taste is, but the website looks like absolute crap by total standards. It's like the there's some there's some mismatch there when you're you're looking at it. But you know, two thousand four is a very different time on the web. Yeah, totally. Well and we're So why do we tell this whole story? You know two reasons. Um one, because it's Super fun and just part of the lore of what becomes Shopify here in a sec. But also it's just like kind of amazing. This whole like eth this hipster ethos of like we're gonna curate like the best artisanal, like, you know, brands and sell the like What is Shopify powering today, you know? All of these D to C brands and Instagram commerce and like it it all comes back to this same kinda ethos. They were Way ahead of the curve here. So

16:18 In the process of setting this up, Toby, of course, uh is CTO of the company, Scott is CEO of newly uh formed Snow Devil. Toby is in charge of putting the website up and and he gets it up. Like he's a great programmer. But it's like it's super hard. He has to go find all of these various tools to like actually get like a shopping cart, check out and inventory and manage everything. And he's using tools like OS Commerce and Yahoo Stores and like Miva and they're like this just Not he says, All those systems made my skin crawl. This is a quote from him because of how bad they were. And just at that very moment as he's putting this site up, he gets

16:56 An instant message one day. And real quick, before we we dive into this chapter, do you know the uh history of Yahoo's stores, David? No, I don't. So Yahoo made an acquisition of a company in nineteen ninety eight for forty nine million dollars that became Yahoo Storage. Do you know what that company was or who the owner of the year. Was that PG's company? It was Via Web. Via Web. Oh my God. Wow. Of course Paul Graham of uh We would go on to found by Commodore. Man, I didn't realize VAWeb became Yahoo's stores.

17:28 Yep. Like many acquired episodes, the uh the internet was a very small place when all this was getting going. Oh my goodness. It's just crazy. It's just crazy. Well, so get this. Toby gets a gets an IM from uh a friend who's also a programmer. right around this time in two thousand four, and uh says like, Hey man, I found out about this new web development framework. You should really check it out. It's called Ruby on Rails. Like it's just getting started. There's this guy David Heinemeier Hansen. Uh he works at this place called Thirty Seven Signals. They make this thing called Basecamp. Uh it's like pretty cool software. And um they they make it in this this Really obscure

18:04 programmage called Ruby that um but they've built this framework for using it for the web. It's called Ruby on Reals you check check it out. These guys are like uh what too good for PHP. Yeah. Then if only you had started coding in Rails, then you know Maybe there would be no acquired. Uh, you too could be CEO of a thirty five billion dollar uh public company right now. So Toby says, like, Okay, cool, like I'm I'm gonna check it out. So he starts a side project, just hacking on Rails and he does what Many, you know. hackers were doing in these days, he decides he's gonna build a blogging system. Uh so he builds An open source.

18:43 blogging content management system uh for the web, he calls it typo. And it it like Kinda blows up. It gets over ten thousand installs of people running their blogs, hosting their blogs using typo. And Toby becomes pretty well known. He gets in touch, he meets the thirty seven signals guys. Yeah, he meets David, he meets Jason, and um he ends up uh joining them, uh not joining thirty seven signals, but he becomes a core contributor to the Rails open source framework. The funny thing is if you go to uh Toby's LinkedIn, this is still like in his his about is like three lines, and one of the lines is about the the creator of the typo web log engine. It's just great that like, you know, this guy's running a thirty five billion dollar company and that's still a big pride for him. Yep, but I mean that's uh that's Toby.

19:26 So of course what does he do next? As you can imagine, he's fully enamored of the Rails framework and he's just been through this terrible experience setting up Snow Devil, the the back end for Snow Devil. He says, Well, shoot, I'm just gonna rewrite all of that from scratch and do it in Rails and I bet I can get Rebuild our store and not use

19:46 this crappy software that Paul Graham wrote for uh and have it work pretty fast. So he does, and within two months, he's completely written the back end for Snow Devil, and they have their own custom commerce engine uh that he's built in Rails that is powering the store. And it's like way better than what he had before. Somehow he and Scott start talking about this and they're like, Wait a minute. We've got the snowboard site. You just built this thing in Rails that you can easily plug in. And do the backhand, like this was hard for us. Maybe

20:16 Maybe we can make an even better lifestyle business if instead of selling snowboards we sold. Software and um better margins. Yeah, you know we don't have to deal with shipping. Well, different kind of shipping. So yeah, they do that. And uh they're like, Okay, let's shelve the the snowboarding uh project. We can use it as a demo site, which it still is today for Shopify, and start working on this software. Uh so they spend A year and a half working on the software. Toby is a perfectionist, wants to make sure it's right. And of course, a big part of that is actually commercializing this. You know, it's one thing to build your own software for your own site. It's another thing to make it plug and play for uh commercial availability. And they have some money up from their sales at Snow Devil. Toby and Fiona move in with her parents. They raise about two hundred thousand dollars mostly from from Fiona's dad and from Toby's uncle, uh, who himself was an entrepreneur who had immigrated to Canada. They use that money and they bring on a programmer that Toby knew named Daniel Wynand. And uh he joins the team. And he's considered a third co founder of the company now. And he ends up taking over design. He's a programmer, but he's really interested in design and he helps

21:27 design this product and make it like really easy to use and install and has a huge um huge contribution to this first version of the product. And and I believe still to this day I believe in interviews Tobias said he has veto power on any shipping any feature. Of uh uh that is that is bad to Shopify. That's power.

21:47 By the way, they're they're doing all of this. So in 2004 they had created a Canadian entity to sell their snowboards. They're doing all of this new software business still in the same Canadian entity as the uh the the snowboard business. So talk about a wild like actual pivot, not like shut that down, do this other thing, like it's in the same entity. Yeah, it's the same entity. So when they're finally ready to release the the the software in two thousand six, they need a name for it. So they do the natural thing at the time. Toby heads on over to GoDaddy's domain name generator, uh plugs in I need a name and comes up with Jaded Pixel dot com. Really rolls off the tongue. Really catchy.

22:28 And if you go to jadedpixel.com today, uh we'll link to it in the show notes, it redirects to Toby's LinkedIn profile. Yes. So then in in two thousand six they would formally rename the company from its sort of nameless Canada LTD. It was entity four two six one six oh seven, uh, to formally in two thousand six call it Jaded Pixel Inc. Yeah, data pixelink. Yeah, fortunately. Scott at this point makes a major contribution to this budding software company, uh, right before they launch and um

22:59 And he's like. Yeah, I don't know about this jaded pixel thing as the product name. Maybe maybe maybe we should reconsider that. And uh Mercifully He comes up with Shopify. We're shopping.

23:12 And we're simplified. So simplify shopping. Shopify. I'm so jealous when you could just like do that and that domain is available. I know. Man, the mid two thousands were really, really a good time to build web companies. It's amazing this didn't become shopper or like something with no vowel somewhere. Yeah. Amazingly the domain was available. Uh Toby talks about this. They just they just registered on GoDaddy. They didn't have to buy it from anybody. They didn't have to do it. It was just

23:41 There. Uh man. Times have changed. So the initial feature set that they ship with is pretty basic and they're inspired by, you know, kind of the the whole Braille's kind of design philosophy of like minimalist Functional. uh but have everything happen on the web in the browser. And so with the first version of Shopify, you can have a fully customizable store template. You have a shopping cart, you can track orders, uh, you can get orders delivered to you as a merchant via an RSS feed. You have automated inventory organization, and you also have uh the ability to plug in payment processing. So they're not doing payment processing

24:19 Natively at this point, but of course taking payments is super important. And uh they make it really easy to just plug in PayPal or any other third party credit card processor that you'd like, uh right there on your website. Pretty cool. Yeah, pretty cool. And a a Far.

24:34 Far cry in terms of ease of use and ability to install and get set up than working with all of the Huge big. software packages that Toby had to do when he was first setting up uh Snow Devil. So They needed a business model.

24:50 Uh for this new software that they were gonna sell or offer online. I think Chris Anderson from Wired hadn't yet written The book on the Freemium. Uh I think that came out a couple years later. But Yeah, perkling around in these Rails kind of internet communities is this idea of like free software and freemium and building business models around that. And they think like Okay, yeah, like great, let's make this freemium and we should have a you know, no barrier to entry. Anybody can set up a store and just start selling.

25:20 And then we'll monetize with we'll just take a cut of the merchants' transactions as they sell. And it'll be really cool. Incentives will be aligned. It'll be great. Well, It turns out incentives weren't. quite so aligned with that. And fortunately they figured this out pretty quickly. People started trying it and thinking like, oh this is super cool. I can get set up. But then pretty quickly they realize either they start selling a lot and then they're like, wait a minute, I'm paying a lot of money to Shopify here because their fees are just scaling linearly with my sales. Or probably what's even more likely is people are making a decision about what platform they're gonna use. And of course everybody's very optimistic. When I sell my million things. Well yeah, when I have a hundred million dollars in sales, I'm not gonna want to pay Shopify, you know, ten million dollars a year or whatever they were charging. And so

26:07 Uh the business model is really holding them back here. I figured that out. And they decide, Okay, we gotta we gotta switch things up. how are we gonna do this instead? What if we, you know SaaS is like s sort of barely becoming a thing at this point. Salesforce, of course, exists. What if we look at this kind of SaaS idea and instead of instead of charging on a usage basis, what if we just make it like really, really simple? You know, we'll charge twenty nine bucks a month. And you get a full featured

26:37 Commerce package in a box from us. It turns out. That was pretty magical. you know, obviously the reason that this worked well is because there are things that you can charge more for as people develop bigger and bigger businesses. It's not like every single

26:53 You know, I I don't know the biggest business on Shopify, but there's enormous businesses on Shopify. They're not just paying twenty nine dollars a month. I mean At this point, Unilever's on Shopify, uh Google is on Shopify. Like uh enormous, enormous companies are on Shopify. But if Shopify were taking ten percent of their revenue, of course, that wouldn't be possible. Uh so and this is a fun aside too. It's it's it's also like

27:17 Speaks to the What the company was like in these early days and their like how Toby and Scott were thinking about things, they realized they knew they needed to make this change. And so they're just like, Okay, yeah, like let's change it. Let's like ship it and flip the switch. They did that. They didn't really talk to any of their customers before they did that. And um they did it the day before Toby and Fiona got married. Uh that was probably not a good idea. Toby talks about how he spent uh like the whole night the night before their wedding just like

27:47 Taking calls from super angry customers who did not understand what was happening to their business. Talk about never deployed a production on Fridays. Yeah, seriously. So another really fortuitous thing happens in this was in two thousand seven when they made that switch in two thousand seven. And that is a Toronto based angel investor named John Phillips discovers the company And he invests two hundred and fifty thousand dollars at a three million dollar post money valuation, which was Pretty rich for, you know, uh I have to imagine a a small company based in Ottawa, Canada back in those days. I would imagine everybody's pretty happy with that these days, given the the current market cap. But John was a lawyer, uh, based in Toronto and he had worked with a ton of companies. And he becomes a really important mentor to Toby, uh, especially through what's about to happen in the next year in two thousand eight, Scott kinda gets the early stage startup bug again.

28:43 And decides that, hey, you know This company's scaling, it's a SaaS company. I'm not sure this is really what I want to do. Uh, and he leaves and Toby ends up having to take over the CEO role. So from, you know, a a a kid who is an apprentice programmer who loved playing video games and his parents thought, you know, is there something wrong with him? He doesn't talk to people or other kids. He just sits on his computer all day. All of a sudden now he's shoved into the role of being CEO of this company that is Growing pretty incredibly quickly with all these customers.

29:14 as he becomes CEO of this company he doesn't just do the job the same way that any other CEO would do it. He applies his engineering mindset to this. And so you know when you when you listen to to Toby in interviews y you can tell that he thinks about things in this extremely logical, extremely structured way. He's so low ego. He's all about measuring results and going back and revising past decisions, changing his mind when they're in the face of new data, being wildly structured about decision making. So he basically becomes like The engineer's engineer. You know, he's an amazing, amazing engineering leader. And it really leads to them being able to attract incredible talent in in that first set of employees because the set of really talented technical people, many of them who had been open source contributors to the Ruby Ed Rail project, were, you know, dying to go and and work with him.

30:07 Yeah, totally. And you know, people are Moving from Germany from other places around the world to Ottawa to come and work at this company. But the other interesting thing is like, okay, so we take a step back and we now have like a fairly young CEO who was an engineer, has no management experience in charge of a high tech software company in Ottawa, Canada. Like this doesn't seem like a recipe for success. But Ottawa actually has some interesting features. So there were plenty of old school technology companies uh that were in Ottawa, and Ottawa's not far from Toronto. And Toronto, of course, has great engineering universities and and technology companies. Uh Nortel was in Ottawa. Uh there were a few chip companies in in Ottawa, but there was there was Nothing interesting happening on the technology front there until Shopify came along. And so all of a sudden now here's this like tech in in in software. Yes, and the tech on the software technology front. And I think Nortel had fallen on hard times by this point. And so now all of a sudden here's this super interesting hot web two dot oh software company based in Ottawa. And they're able to

31:10 to recruit just incredible, incredible technical talent. So all this is happening and you know he was really wrestling with like what do we do about this? We're we're growing Should I raise venture capital? I think the market opportunity for this is big and getting bigger. Should we tick into you know being a kind of a growth company and put fuel on the fire. And he wasn't sure. And so he decided, you know what, I'm gonna run a test. And the company had become cash flow positive in two thousand eight with about ten ish employees. They made over a million dollars in revenue in two thousand eight. Uh they also part of that was driven by they landed their first major customer that year. Which was Tesla Motors, which started selling the Roadster on Shopify. And to this day.

32:01 All of Tesla's online sales still run on Shopify. That is incredible. That's a great find, David. Yeah. That's really cool. I didn't go in the Wayback Machine, but I found in some articles about Shopify uh you know images of the website in two thousand eight, and they're listing Tesla Motors motors as one of their marquee merchants. It's pretty awesome. I've got some way back machine things to bring up later from uh from the site. Oh man. So Toby's like, Okay, I'm gonna run this test. He saves up fifty thousand dollars in cash flow from

32:30 the company and he decides I'm gonna use this fifty thousand dollars and I'm gonna run five growth tests. And if maybe like Two or more work, then like that's my answer that I should go raise venture capital and pour more fuel on the fire. And of course All five out of five work. And what are these tests that he that he that he's running? They're super cool. So the first one is uh one of them is uh they decide that, you know, there are all these like web design uh consulting firms out there.

33:00 And they're making you know, websites and commerce sites for a lot of their clients. What if we started Marketing not just to people who want to build businesses and merchant accounts, but to actually to them. And we take these designers, and if we can get some of them and we offer them, we say, hey, if you bring on a customer, onto Shopify will give you twenty percent of the lifetime revenue of that account. And that becomes a very compelling deal, as you would imagine, to these web developers of like, oh, you mean

33:30 You're giving me a tool that I can use for my clients to make my life easier and I'm gonna make revenue from that. Great. That uh that brings in a ton of customers. If you think about the way that this is sort of born of the developer community, it makes so much sense. I asked uh David Zager, who's our our head of design uh at PSL, and he used to run a uh a design and and dev agency and and did for years and was part of this program and he sort of smiled when I was like, Yeah, back in, you know 060708, they were doing really well. They were getting distributed through a lot of these web development agencies. And he just smiled and he was like, Yeah, they had this sweet referral program. And it's so funny because like today we would describe that in sort of the like enterprise SaaS world as like channel sales. Like, of course, you know, the these people who are going to be building thirty to a hundred websites a year for people who want to sell on the internet, you want to be their vendor of choice and you want to figure out some relationship with them. But it was so pioneering at the time. Yeah. So the next test

34:28 Is even more fun. They launch what Goes on becomes like kind of a sort of internet sensation. They launched the Build a Business competition on Shopify. Do you remember this, Ben? No. partner that they uh run this uh run this competition with?

34:45 I do not. None other. Than Tim Ferris. No way. Yeah. Tim becomes an advisor to the company and Tim is like Hey.

34:53 People love competitions. What if you gave away a hundred thousand dollars to The team that builds the biggest business within a like, you know, X month period on Shopify. And Toby's like a hundred thousand. Like, I don't have a hundred thousand dollars. I can't give away an Tim's like, trust me. Go make it back. And I hear I hear Tim Ferris is pretty good at growth marketing. Yeah. They launch this contest uh together and they get over a thousand new merchants signing up to the platform just through this contest. And it generated over three million in revenue across those new stores. Which pretty pretty good ROI for that hundred thousand dollar growth investment. I'd write those checks all day. Totally. And then you know what probably becomes

35:35 the most important thing. that they do during this time. In June two thousand nine They ship the Shopify platform. Uh they build an API to allow third party developers to plug in Their existing tools are right tools.

35:50 right into Shopify merchant pages and accounts. And this really takes everything to the next level. Because again if you think back to like building in Rails It's very like minimalist, functional, design oriented.

36:04 frameworks and that's what Shopify had always been. You know, they Toby talks about how the ethos at the company is think about features that most of our customers use most of the time and build those. And features that some of our customers use some of the time, or most of our customers use some of the time, we don't build those. But now Yeah. builds those and plugs in. This just massively increases the reach of types of merchants that could use Shopify for

36:33 anything or add functionality or do subscription sales or do w whatever, uh without cluttering and and and muddying the messaging of the core product. I guess the referrals were really the first piece of this, but this is really the second thing they do that starts to make this a really great scale business, because while the intention of doing this launching this platform is really around great, this is a way that we don't have to write code, but people can extend the functionality to attract more customers. What it really starts to do is build the moat where Shopify becomes the absolutely dominant platform because They've got all the apps. Like it's it very much is like WordPress and blogging. Like it's really hard to shake that inertia because they have all the plugins. Yeah, Shopify has exactly that in the e commerce world. Totally. And uh we're uh in a minute we're gonna talk about Stripe uh in a sec. But you know, things like that. Something like Stripe can get built, which is

37:25 Incredible and game changing for the ability for people to take payments online and it just plugs right into Shopify. So In two thousand nine, the first year they start really aiming for growth and running these tests. They pass a hundred million dollars of sales that merch gross sales that merchants do on Shopify. Uh remember this is like

37:45 Two and a half years into Shopify as a product in market. Uh sorry, in 2009 they pass a hundred million dollars of sales over the life of the company in the two and a half years that shop before. Yeah, has cumulatively. Uh in twenty ten, they do a hundred and twenty four million dollars in merchant sales just that year. And at the end of twenty ten Toby

38:05 finally gives it in, I assume probably uh ran a uh knowing him an exhaustive process in meeting everybody and optimizing for his venture capitalists. He finally raises a series A, a seven million dollar series A led by Bessemer, with firstmark and Felisis uh participating. And it's kinda off to the races to the company and full on. Growth mode after that. What episode did we just do where First Mark was also it was like one of their first checks. That's right. That's right. Right around the same time. Yeah, Pricemark had a couple of really, really great investments right at the beginning of their life as a firm, really.

38:39 Super impressive. You know, when you listen to Toby in interviews and he talks about the decision to take capital, you know, he had sort of long maintained this mindset that that's not the type of business this is. I think I don't have the exact quote, but he said something like, I wanna be the best run, most successful twenty person lifestyle business that there ever was. after these experiments, he sort of realizes, oh my God, we have enormous growth potential. And we may actually be one of those rare types of businesses that are indeed a good fit to go and and raise venture capital and try and grow like that. It's very telling about him as a person how long he resisted that and the discipline that he had around trying to build the business the way that he wanted before realizing sort of what a massive opportunity it was in front of him and sort of then let the opportunity guide the decision making. And I think what's even more telling about him, um

39:29 Really just think makes him such a admirable leader and CEO uh of a company. is now when he talks about he says I I was absolutely wrong. Like I hurt the business. I set the business back by years by not by for those first, you know, couple of years and then during the time when I was running when he was running those experiments, not raising venture capital earlier and not seizing the opportunity. And and obviously, you know, they've been lucky that they've um Yeah, still been able to kind of achieve dominance in the space and become a thirty five billion dollar public. Yeah, there's some survivorship bias here. Yeah. Totally. But uh but yeah, like they they could be two years further ahead of where they are now if he hadn't done that and he'll he freely admits that.

40:10 Which is uh very rare that you get that level of humility from a uh public tech company CEO these days. So the question at this point becomes like, okay, clearly This is A market and a wave that is Huge and growing. And Shopify is

40:27 Yeah. How big can it be? So right after they raised that series A in December of twenty ten, they only had about twenty employees at the company at that point. By the end of the next year in 2011, they had over a hundred employees. They had passed ten thousand merchants on the platform. Uh that year they did two hundred and seventy five million in merchant sales. The following year they go from ten thousand Merchants on the platform to forty thousand.

40:55 And three quarters of a billion of GMV. They make twenty four million in net revenue from that, uh, which obviously is a lot less. This is the first year from their uh from their S one that we have their net revenue. But that continues to just grow and grow. The next year they have eighty thousand stores one point six billion dollars in GMV. Fifty million in net revenue.

41:17 David, do you have a sense of what was powering growth for them at this point? Like is it still this sort of referral engine through dev shops or you know, is it word of mouth, like what is leading to just the flocks and flocks of merchants running to to Shopify? It was Around this year in twenty thirteen when I think Toby and Shopify really kind of take the ambitions up to the next level. And that's like, okay, we've been this Easy way for

41:45 Small mostly small merchants to set up and run commerce businesses online. And we have some small merchants that have grown into large merchants, like Tesla. We have some large merchants that have switched over from Magento or, you know, Big Commerce or whatever and like come to use us or Commerce OS. But maybe there's more we can do. So in twenty thirteen They launched maybe there's more we can do because if you become a big merch, you don't just want to sell on a website online. You want to sell in a lot of places. And so in twenty thirteen, they launch Shopify Point of Sale. for offline sales. They have devices that you can put in a physical storefront, use that to uh actually be your point of sale. But even more importantly, they're now syncing your online inventory with your offline inventory. And you know, back in 2013, that was like probably kind of Gee Wiz. You think today about all of these D to C brands out there that now all of have all of these uh you can't even call them D to C brands anywhere because they uh are internet brands because they have physical stores in major metro areas around the world. It's a like critical enabler for this. And of course all of those brand were built on Shopify and growing starting to grow in these early

42:56 Days in twenty thirteen. The other thing that they do the next year in twenty fourteen is they officially launch Shopify Plus. So what shop of uh Plus. It's basically the enterprise version of the core Shopify product. And I think it was really interesting that they segmented this out as a completely it's a completely different business segment in a different office. It's based in Toronto, not in Ottawa. The concept behind this, uh kind of I think all coming from Toby, is that the core ethos of Shopify

43:25 is these small merchants, these entrepreneurs, these startups selling on the platform. But when they try and go out and they sell to Unilever, they sell to Google, they sell to Anne Eiser Bush, you know, I think all of which are big customers using the platform, they want something different. They want They want account managers, they want handholding, they want, you know, SLAs, they want uptime, all of these things. They start this whole other division that's gonna go out and purely attack those. And so now Shopify plus and these big customers is over a quarter of the total revenue of the company. When I was asking that question about growth and and you know, you're talking about engaging with these really big customers, it is expensive to go and and actually do the sales and marketing to get those accounts. So to give you a sense for today, you know, where they're doing, they did about a billion dollars in in revenue last year. They did spend three hundred and fifty million on sales and marketing. So you know, this business has never quite been let's throw up a website and people will just come to it and will just s sort of service themselves. It does actually require spending to go and and get that business.

44:24 So the net of all of these is new initiatives is Uh Shop of Fay. It's growth just continues in the venture capital era. In twenty fourteen

44:37 They cross million in net revenue. They do a hundred and five million in net revenue. And then in April of twenty fifteen The company files to go public on Interestingly, on both the New York Stock Exchange and the Toronto Stock Exchange in Canada. They're two different tickers. So um you can take your pick uh should you choose to invest in Shopify. On May twentieth, twenty fifteen, they priced the IPO at seventeen dollars per share. Which equates to a equated uh at pricing to a one point three

45:08 billion dollar market cap. Think about this as a thirty five billion dollar market cap company. Today, just about four years later. They start trading the next day at twenty eight dollars a share, which is sixty percent higher. Actually the stock stays relatively flat for the rest of the year. It would it would pick up later the next year, but twenty fifteen for the whole year, they do Amazing. Seven point seven

45:32 in GMV of merchandise that merchants are selling on Shopify. W what's that up from the previous year? I didn't find what GM V was in twenty fourteen. In twenty thirteen it was one point six billion. So in in two years they eight X'd it. Yeah. Yeah. Or uh seven X. Seven probably five X, one point six to seven point seven. Uh but still.

45:54 Incredibly impressive. Net revenue is two hundred and five million for the year ended twenty fifteen. So we thought a Fun coda and you know the the topic of this show is the Shopify IPO, which we will grade in a minute, but a fun coda to sort of catch us up Today, we thought would be in October of twenty seventeen. So not quite two years ago. Shopify.

46:16 became the target of a activist Hedge fund investor. A short seller. Named Andrew left at Citron uh Citron Capital. He released a report

46:32 On Shopify. De crying. The company. as a get rich quick scheme. That was

46:39 Uh the title of his report is the hottest this is all in in all caps. The hottest stock. On He eventually has now changed it to the New York Stock Exchange. Originally it said the hottest stock on the Nasdaq. They're not on the Nasdaq, they're on the New York Stock Exchange. Is a completely illegal get rich quick scheme.

46:58 in parentheses with a good software platform. And he basically is accusing the company. What's illegal about it? So he accused the company, uh Shopify. He just didn't believe it. Like that at this point This is in twenty seventeen, the company said they had five hundred thousand merchants on the platform. How could it even be possible that there are five hundred thousand merchants? Different merchants in the world that would be selling online. That's ludicrous. Who are these people? It must be a multi level marketing Ponzi. How could it be possible? I don't know how many homes are on Airbnb, something like two, three million, four million, maybe. A lot of hotels be possible, you know? So anyway, this is great. He releases this report says the you know the uh FTC is definitely gonna gonna come after Shopify. He puts a sixty dollar price target on the stock. The stock had been trading at around a hundred and fifteen dollars a share at this point in time. Six months later

48:01 The stock is so we're now in spring of twenty eighteen. The stock is trading in the mid hundred and twenty dollars a share. So like, okay, he didn't do so. So hot on his on his short here. It was at one fifteen before. Roughly flat at this point. So like okay, it's not down. He's he's not he's not doing not doing good on his on his short position. Fast forward a little bit further to April of this year of twenty nineteen, just a few months ago, the stock is now trading at two hundred and five dollars a share. Remember back uh in October twenty seventeen So trying to put a sixty dollar price target on the stock.

48:36 What did they do? What does Angie and Sitron do? They come out again with another research report talking about how terrible Shopify is. And then he puts a price target of a hundred dollars. Up from sixty this time on the stock. Says it will be down at a hundred dollars within twelve months. And then if it is not, he is gonna donate two hundred thousand dollars to charity. Well, We're not twelve months yet from there. But today All he can come up with is a two hundred thousand dollar bounty with that kind of a claim. And Michael. This is so amusing. Uh Today on July thirty first, twenty nineteen, the stock closed at three hundred and seventeen dollars a share for a thirty six

49:15 Billion dollar. We just wait till it hits sixty, David. I know, I know. Well, we're gonna do our uh narratives and bulls and bears here in a minute and and certainly No doubt it is an expensive stock right now, but uh an illegal get rich click scheme, uh That is uh probably a a m not an accurate characterization of This company.

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51:23 That Ben and David sent you. Well let's do it. Let's dive into narratives and and let's do this um a little bit differently than we normally do, uh listeners. David and I were talking before the show. For companies like Facebook, we felt that it made a lot of sense to do the bulls and bears sort of in the press leading up to the IPO. I think Uber was really exciting to do this. Uh Shopify was less of an interesting media darling at that point, but now is really starting to heat up and and and get a lot of coverage. And so I th I think the interesting thing is, you know, what are the bull and bear cases to make about the stock now? So it's interesting. We just went through, you know, this whole

52:00 uh acquired history and facts of the company. And there was uh One. Other company that Some listeners out there might be wondering. Man, why why didn't Ben and David talk about

52:11 a company that I usually think of when I think of Shopify and I hear people talking about it. And that is Amazon. One would think if we had just spent an hour talking about the rise of e commerce from two thousand four to today, like the company would be Amazon that we were talking about. Yeah. Well it's start with the bear case here. It's relevant for both the bear and the bull. All of this is like Great and certainly um you can't take anything away from the incredible business that Toby and Shopify have built over the last 13 years.

52:41 But Isn't Amazon gonna just take over all of e commerce? Like why why are people gonna be selling on their own channels anymore when like eventually everything's gonna end up on Amazon? And they're gonna have the best fulfillment and the best delivery and the best pricing and everything. What do these eight hundred thousand merchants do not selling on Amazon third party sellers and doing selling over on their own dot coms powered by Shopify? It makes no sense to me based on what everybody is is saying about how dominant Amazon is. Yeah. And then you look at The price of

53:12 Uh Shopify. They did about a billion dollars in net revenue last year. Which puts it at thirty five X trailing twelve months revenue. Yeah. Which also, by the way, I mean to take a step back and and talk about they ended 2015 with about two hundred million in net revenue. Three years later they end twenty eighteen with a billion in net revenue. That's incredible growth. But yeah, like that's a very expensive stock. Um You know, Amazon is cheaper than that. Why shouldn't I buy Amazon instead of Shopify? And rarely do you hear Amazon is cheaper than that when people are talking about uh valuation multiples based on any company metric. This is a good point, I think, for m less financy folks to talk about why thirty five X trailing twelve months revenue is is big. First thing to point out is It's not thirty five X.

54:00 Trailing twelve months. Income. In fact, the company is still a loss making company. So it's not a big loss making company. The tw in twenty eighteen they lost sixty four million dollars. In twenty seventeen, they lost forty million dollars. But you know, this company is not at the end of the day. Turning a profit. on all this billion dollars of revenue that it's getting. Now, of course, there's lots of great reasons for that. The company's a a high growth company, but imagine for a moment that it was a 35x trailing twelve months

54:29 Income. the profit that they were making. Like you still would have to make it. Back in the day when I started in finance, thirty five X earnings per share multiple, like that was that's a That was expensive. Now we're talking about thirty five times revenue. Right. Like you would still have to believe to believe that this valuation is correct that, you know, if you were to do a discounted for cash flow, so all the future years left of income that that stock was gonna generate discounted to today.

54:55 That it would be worth thirty five times as much as it's making now. And so, you know, that's still a big leap to make. Think who knows what the world's going to be, let's assume, which is a stupid thing to assume, but just for a moment that they're not going to grow anymore, which is what the entire thing's predicated on. There's 35 years worth of cash flows that we're gonna account for. Oh, and it's not even actually the the profits, it's the revenues. So like it it starts to give you a sense of why, like, wow, this this is really being valued not only that it has a ton of growth in front of it, but that you know, they're really gonna find a way to to turn this corner and they're effectively breakeven right now. This net loss is so small relative to to revenue, but that they're they're gonna find a way to flip that faucet and start becoming a very profitable company as well. If we were to uh

55:41 This is gonna be very apt. If we were to channel our um one of our recent uh CEOs of one of our recent uh subjects here had acquired Eric Juan at Zoom, he would say the price is too damn high. Uh which is ironic because of course Zoom itself is also trading at an extremely high revenue multiple right now. So It's extremely expensive the stock. But then there's also like there's this Amazon question out there, like how could you justify paying such a high price for a company That is You know, competing in the same category as Amazon and is more expensive than Amazon. So

56:17 I think unless you have anything else on the bear side. Let's flip to the bull side. And actually I think for me The topic here is still Amazon. So Toby has this Really great quote. Where he says, you know, look if you assume

56:35 Amazon is going to eat retail of everything that has a barcode on it. And basically you kinda like need to have a barcode to sell on Amazon. The question then is what happens to everything that doesn't? have a barcode on it. Like is Tesla gonna sell on Amazon? Or Upstart DDC brand's gonna sell on Amazon? Like maybe they will. And actually you can now on Shopify sell uh they have a plug-in to Amazon. You can easily sell on Amazon from Shopify.

57:02 But I think there's a lot of stuff out there that Isn't gonna sell on Amazon. Yeah. And I think the way that I think about this is sort of timing that this company the the market for people selling things directly on the internet.

57:19 or let's expand and say selling things directly both on and off the internet actually expanded dramatically in the years after their IPO. Like we're in this this era where you know People wanna sell things in a bunch of different ways in subscription methods, using a strong storytelling component, using a strong brand component, all these things that Amazon is is not good at. Not good at It makes sense. And and not and I don't mean not good at in a tactical way. It's not like oh darn, they just couldn't hire the people to figure the dang thing out. It's a structural problem. Like Amazon.com subordinates the brands Of the products. Exactly. You don't when and when when you're buying up from a third party seller, like David, can you name one third party seller that you've bought from on Amazon in the last year?

58:06 They come in an Amazon. I think they all have a lot of LLCs in them. But yeah, okay, so right. This is like so we're saying like okay, what doesn't have a barcode, what's not gonna sell on Amazon. It's this. It's It's Instagram brands. It's it's you know, quote unquote D to C internet brands. And you can think what you will and you know, m personally I feel like there's so many out there and it's probably overhyped and like you know, just like hashtag millennials everything. But Um I said direct David Rosenthal quotes, ladies and gentlemen. Hashtag millennials everything. There we go. There we go. But you know, Toby also talks about this in the same talk. He's like, Look, Kylie Jenner launched a cosmetics line a couple of years ago and she launched it on Shopify.

58:52 And she has her audience. She sells to her audience. Her audience is primarily on Instagram. Other you know, social media properties as well. Um, but most of what she's doing is selling on Instagram. It's estimated that Kylie's cosmetics brand did over three hundred million dollars in revenue last year. They have seven employees at the company. They don't sell on Amazon. At least as far as I know, I didn't check, but I'm pretty sure they don't sell on Amazon. So the question is like, okay, yeah, there's gonna be a lot of Stupid, you know, millennial brand startups that raise a lot of money out there and go bankrupt. But

59:24 There's also gonna be some companies that become really big, huge companies that are just fundamentally architected in a different way and have direct relationships with customers. And Shopify is the platform that they use to to manage all that. Yep. And if you look at the way this ends up manifesting from a metrics perspective, there's two things that increased after their IPO. Their sales efficiency increased as revenue continued to increase, which is kind of crazy. Like they their return on sales and marketing spend actually got better. even though the company's revenue was growing. So if you were f sort of saturating your market, that would go down because you're reaching worse and worse customers. They're still accelerating into product market fit, or at least uh as of as of some data that I was looking at from 2016, still accelerating into a an expanding market. And the A C V continues to grow. So that's the the average customer value, basically the amount that any given Shopify customer is spending uh uh or giving to uh to the company is growing at about fourteen percent a year. So it's not even like

1:00:28 you know, the uh oh man, we we onboard someone and then uh or if if you take the average across all of our merchants, any given merchant is increasing their business with us. Mm. Mm. And that's things like going from regular Shopify up to Shopify Plus, which I think goes up to $2,000 a month. Probably even more than that for the big accounts that they're directly managing. And then that's also, you know, uh the other part of Shopify's business that we haven't talked as much about. We alluded to Stripe earlier. Is through the But the platform.

1:01:03 And third party services available on Stripe, as well as things like Shopify Point of Sale and other products that they offer, they do make money per transaction. It's not like the original business model where they're just taking a flat percentage of every transaction that you that you make as a merchant, but uh they're revenue sharing with Stripe, for instance, when Stripe is powering internet payments. Uh for their customers. Yeah, it is worth taking a quick aside here and saying, uh so Shopify did fourteen billion dollars last year in GMV, so the amount of goods sold on Shopify is 14 billion. Stripe processed almost all of those payments. So a lot of money flow into Stripe from from Shopify. And Shopify benefits from from that in some way. So to to kinda look at how does Shopify make money.

1:01:48 We've talked a lot about this subscription solution, so that that's the you know, SaaS fee that you're paying per month to Shopify. They have uh uh what used to be equal, or actually what used to be smaller and is now a little bit larger is their merchant solutions revenue. So that's payment processing fees, transaction fees, referral fees, sales at the point of sale hardware. David, exactly what you're talking about. So half the business is actually other things that they can make money on from their merchants in addition to, of course, the the the SaaS fee. So the part of the thesis that you could form if if you are really excited about the future of this company is there's gonna be a lot more stuff that they could sell to them too. Mm-hmm. A lot more stuff. I think the the bullcase to sum it up is there's gonna be a lot more merchants.

1:02:32 That'll use Shopify. In the future. That are gonna sell a lot more stuff to their own customers and Shopify is gonna be able to sell a lot more stuff to those merchants. Yep. And I'm pulling forward from tech themes here for a minute, but I think it's totally totally valid.

1:02:46 If you think about that fourteen billion in GMV. the goods that were purchased powered by Shopify and the billion dollars in revenue. That starts to paint this picture that for every fourteen dollars spent Shopify is able to capture a dollar of it, which is pretty interesting, because then you can start to really think about, well, what if that were a take rate? That's what? About 7% uh of they basically have a 7% take rate on the marketplace model. And the thing that you would kind of have to believe is they're gonna be able to continue to expand that over time. The question that you then have to ask yourself is, okay, cool.

1:03:20 Let's assume that it keeps growing and they keep getting more and more and more customers, you know, more merchants onboarded this thing and that TAM is indeed expanding. Well, what else could they do to make it easier to be a merchant in the world? And by providing more value there, can they then claim more value of those transactions that are sold. And that's exactly what they're doing right now. And so the the the very interesting thing that was recently announced is the Shopify fulfillment network, which is uh partnerships with third party logistics providers, so people that have, you know, warehouses and manage shipping stuff to people. with a common interface for merchants that that is powered by Shopify. It's a Shopify interface, much like you interface with anything else on their their platform using just sort of just the really nice Shopify tools or sort of the nice uh uh plugins in their ecosystem in their app store. So what that actually allows these merchants to do is be competitive with Amazon and do things like two day shipping. But

1:04:20 importantly, and this is where this sort of sits on the fence between bear and bull. This is very different than Amazon's approach. So with fulfillment by Amazon, Amazon actually owns the warehouses. So if you're a third party merchant you're saying, cool, I'm gonna use FBA, you know, Amazon controls the whole stack and they they own the warehouses. So from a business model perspective, Shopify's way is great because it's asset light. You know, it's it's it's software margins, baby. I love it. It's More like a software business, but they don't have control over that whole experience. They're outsourcing it to a bunch of other third party logistics providers.

1:04:53 And they don't have ownership over that margin the way that Amazon does. They they have to sort of share in the economics with those those three PL providers. So the question that I think you have to ask yourself is can Shopify really make it as seamless for merchants to use their Shopify fulfillment network And those merchants' customers as sort of Amazon has made FBA. Yeah, it's interesting though. Sothaf I must have thought through all this as they were launching and thinking about their their strategy They need to be the anti Amazon here,'cause like they need to let the brands and the merchants be the stars.

1:05:30 Because the more you start controlling the experience of the customer, the more those brands are gonna get pushed down below Spotify and then you're in an Amazon sort of world. Sho Shopify. No no no I i you said Spotify. I have a feeling I've already done that on this episode, and I think uh listeners I was wondering how long it was gonna take us to get into this. Oh yeah. Oh man Spotify also a great company. But but you raise you raise that really great point. It's exactly the one that you know we we absolutely owe mentioning it to uh that Ben Thomson has covered so well um on Strat Techri, and that is Amazon is much more like an aggregator where they're the brand, they control the whole experience and and they aggregate all of the customers and the customers shot through them independent of who the merchant is. Whereas Exactly as you said, Shopify is the anti Amazon. They're a platform and the bet there is, look, we're we're not gonna control the whole experience. We're gonna make picks and shovels. You're gonna have the relationship with that customer.

1:06:34 And their bet is that they're able to to make enough money off of it's one out of every fourteen dollars that that gets purchased, they're able to make uh enough money. that that business model works too and it supports a a a different customer segment. This is the first kind of example I think we've seen. Of a If you believe Ben's aggregation theory and that that has led to the

1:07:02 Thangs are really Amazon and Facebook and Google. This is the first Tink in that armor, right? Like where the actual business model of a Aggregator.

1:07:15 being Amazon. Could B maybe not the seeds of its own undoing, but like Shopify is able to successfully compete precisely because it has a different You know, product and business model.

1:07:29 Yeah, but I think where I would really go with this is the big opportunity is the the aggregator one. Like Amazon is a a billion dollar market cap company and Shopify is richly valued at a you know I supposedly rich at at a thirty So r really what we're saying is they're there is an unaddressable opportunity by the aggregator in this market that also happens to be very, very large. Well it depends I think how large Brand first. Merchants continue to become.

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1:09:46 All right, so Real quick, you know, on what would have happened otherwise before we move to Playbook I think the interesting thing here is like we've seen this so often in the last, you know well always unacquire, but especially in the past year. This company almost didn't happen. You know, they were like gonna sell Snowboards on the internet was Tobian Scott's, you know, initial ambition. And so I think the interesting question is like, okay, if this company hadn't happened, like what would have I I think it's there's people selling on the internet and picks and shovels to do that. That certainly would have happened. Would Stripe be more than a payment processor? Would it also be

1:10:21 Storefront. Yeah. Storefront. Um would Square, uh which Square is is now s starting to try to compete with Shopify online, uh would Square have done that earlier and so did online and offline. Or would it have been a a totally, you know, different startup? called Shopify started by someone else uh uh entirely. Um I think that's interesting. It was a strangely empty space. I mean Toby talks about one of the hard things was that they didn't have a big competitor. Their competitors were these incumbents and really crappy experiences, so Yahoo stores and everyone else that he's ripped to pieces and and you know, he he kinda says like we had to have a higher bar because we didn't have real competition. And so it is interesting. There was this strange lull in the market where like Via Web was started, sold to Yahoo, there were uh Magento was around, but like there wasn't another

1:11:12 sort of like low end disruption e commerce provider. For like the better part of a decade. And now you have people trying to compete with Shopify because it looks like a very real market, but Yeah, there there wasn't really anyone who would have come in and done exactly what they did when they did it.

1:11:29 Uh otherwise. Yeah. It's interesting, you know, you mentioned Magento, um, we have talked about them on this episode. I had initially assumed Matento was an old school. incumbent that Shopify was competing with today. Are they not? No, I did started by um the folks from OS Commerce. in I think two thousand eight, I wanna say. But what they are, Magenta, the the strategy is was not the right one. I can't believe they started four years after Shopify. I know, I know. Well what they did, I think, haven't fulfilled this yet, but it's an open source platform. I think they basically took the OS Commerce tech

1:12:07 open sourced it and then started an open source company around that. But the problem with open source Software like that with how they were doing it was people had to take the software and host it and like install it like and like either on prem or like or whatever. But like where Shopify was just like, yeah, we're we we host, like we're the we're SAS, and like you don't have to deal with that. And so the people that were using Magento were like, they were trying to go sell to big existing enterprise online. And say like oh use open source instead of closed source. Uh but they missed this whole other bottoms up market that was getting started. It's it's not a low end disruption play in the way that sort of the classic Clayton Christensen I idea of serving this new up and coming market as a, you know, crappier toy type thing. It wasn't that at all.

1:12:51 Yeah, it wasn't that at all. I think it comes back to Toby saying like we we had this two year essentially delay where like I wasn't ready to take venture capital and needed to prove it uh to myself and the company that we were truly a growth company. And yet still nobody No we know, viable competitor popped up uh during that time. Um I I really wonder why.

1:13:13 Yeah. Uh playbook. Playbook. Yeah. Let's do it. I mentioned the the way back machine. So I went and looked at their website from two thousand eight and I just had to share this quote. Selling online with Shopify is easy. We take care of hosting, bandwidth, and security. So you can focus on your business.

1:13:32 It is amazing to me how value propositions change over time. Like if you were to start this company today, Like w I I surveyed some people who have started Shopify sites and I said, Why do you use Shopify? Like why is it why is it so great? Why aren't you figuring out a different way to sell your stuff online? And people said, Oh my gosh, the templates, the really clean UI, the modern plugin ecosystem. the fact that payment processing is a total breeze. They have inventory management. I I heard they're coming out with fulfillment. And like in two thousand eight, the way that they were billing it was security hosting and bandwidth. And I think it's just amazing that that uh

1:14:08 You serve the needs of your customer as they grow, you know, and as your market grows. Totally. Well well back to I mean, what we were just talking about with Magento. Back in two thousand eight, like hosting was a Man, if you if you and I wanted to start a store selling acquired T shirts, you know And we had to spin up a server and install a Magento package like Oh my

1:14:26 Oof, we wouldn't do that. I mean, we haven't even made it to install uh or s or set up a Shopify store, so Yeah, right. Maybe this episode will inspire us. Okay, so my playbook on this one it's Uh uh going through this history here, you know, so many But Toby Joining the core rails.

1:14:49 Team. And Creating typo. And then typo becoming a thing in the Rails community. Actually was a huge, huge

1:15:00 competitive advantage that they had because when they then launched Shopify. all of these people who had blogs that were on typo that like You know, maybe they might want to sell stuff on their blog or create a business around it. And all of these other developers that developers might want to start businesses and sell things online. They all knew of Toby and they all knew what he was working on. And then all of a sudden it was like, Oh, cool, like Toby's like just shipped this new thing that like lets us sell online. Like maybe we should use that. Um such a huge competitive advantage.

1:15:35 Yeah. Yeah, that's a great point. Like distribution, um we talked about we talk about this a lot on the show and we think about it a lot as you know, as venture capitalists. Like distribution and distribution advantages are not often talked about or thought through in the early stages of a startup, but they make the difference between becoming A big successful company that starts to get traction and a flywheel's bidding versus You know, just spinning your wheels.

1:15:59 Yeah. Yeah, if you build it they will come as just so, so rare. All right, I had I had one more, and that's looking at the financials of this company. As customers sell more, Shopify makes more per dollar sold. And I I just wanna pause And we can think about that for a moment.

1:16:17 the classic thing I'm always afraid of when we're starting a new company at PSL is Oh man, are we building something that will be really great for someone to get started? And then when they have sufficient resources, they're gonna build their own thing and they're gonna move off of us. And like it's a great business to get other people started, but then you don't get to keep their business over time. Well As these businesses grow, Shopify actually makes more money off of them. Like this is amazing. Merchants pay for advanced services as they become larger and more sophisticated. So the effective take rate

1:16:48 for Shopify actually goes up as their customers grow the business. And so it's it's amazing that they can keep pricing power and keep layering on through the the platform that they've woven with the app store and with the incredible ease that they provide uh uh in taking on a lot of things that these companies don't ever wanna do themselves. It's incredible that they can grow that take rate. As those businesses scale. Yeah. Well and it's so funny, I mean go back to the you know, the original marketplace take rate business model didn't work for exactly the reason, Ben, that you know early stage startups who do that, you know, run a risk of of that. And you're you're always afraid of that of like, oh man, will our best customers be incentivized to leave us as we grow? They've figured out a way to and I th I think you just as you said, it's

1:17:37 adding and layering in all these products and services and the platform and the point of sale and payments and all of that around around the core offering where As you start going, you need those and then it's just well, it's easy to easy to plug in Shopify solutions. It's gotta have a ceiling, right? Because uh I I hadn't really thought about this till now, but there's not a network effect between customers. Like between merchants. So

1:18:06 The lock in and the advantage all comes from customers, you know, merchants saying we don't want to do this in house. I think the thing that's that's allowed them to generate so much revenue and and sort of expand as their customers expand is That

1:18:21 that is deceptively large and complex, the set of things that all these different plugins do, you know, hosting and security and uh payments, like all this stuff is is stuff people don't want to do, but like Apple would never host store.apple.com on Shopify. Like they actually there is some Uh above that, you actually do have the resources to do a hundred percent of it yourself, even including fulfillment. So it's it's interesting thinking about like it's it's not

1:18:52 a lock in network effect the way Facebook has a lock in network effect. It's a platform network effect is actually a It's a little bit weaker. But It can support you up to a point. In my notes, I had a a quote from from Toby that I I didn't talk about it because it it wasn't relevant as we were going through the story, but uh I think it's it's relevant here.

1:19:11 I don't think Toby actually thinks about Shopify as a network effect company. I think he thinks about it as a platform company. And that's subtle but different. And so he he he talks about this. He's yeah, he says, I read a book about Bill Gates pretty early in life when I was like sixteen or so. And one thing that Bill said is that everyone in the world wants to be a platform. Back in the platform day by Microsoft before network effects were popular. But Bill obviously, and I've heard Bill say this too, you're only really a platform if the value of the ecosystem on top of the platform is larger than the company that owns the platform. And I think that's what's going on here with the Shopify quote unquote platform, with payments powered by Stripe, with now logistics that they're adding on. They're adding all of this value. So why do Shopify's merchant customers allow Shopify to take more percentage of incremental dollars over time. It's because the value that those merchants are getting from those services is greater than the margin they are giving to Shopify.

1:20:11 Like if they would have to go do that. stitch all that together in themselves, the amount of margin they would have to give up is significantly higher than the margin that they give to Shopify by doing it all as an integrated platform. I think that's how it happens. So it ends up actually the making the case for sort of the bundle economics of of Shopify being the the point of integration and the bundler of all these things. Exactly. Exactly. That's a good way to slice it. All right. Should we do a quick uh value creation versus value capture here?

1:20:40 Yeah. And this is a section that has one name and means two things. The first of which is are they able to capture a good amount of the value they create, certainly. I mean we keep talking about this one one fourteenth number. The second thing that I think is interesting is value creation in the world on an absolute basis. So a value creation versus value destruction. And the reason we added this section was because uh with a lot of businesses, particularly recently sharing economy businesses, uh a lot of our listeners had argued, hey, like you keep talking about how these companies have created all this market cap for themselves, but like There's a chance it's value destructive in the world and like the thing that they're destroying is is actually greater than what they've created for themselves. This is not at all the case in this company. Shopify has enabled so much innovation and so many creative entrepreneurs to to, you know, become merchants and lower the barrier for entrepreneurship. I I think it's it's undeniable that they have created net new value in the world.

1:21:38 You'd really have to uh Reach deep like um Like Citron to uh to argue that this is uh yeah, not net uh value cre uh creative to the world. Yep. Yeah, I'm a hundred percent with you. Okay, let's grade the IPO.

1:21:56 For me. I mean this is Uh if we think about the w the value of doing the IPO and doing it when they did. To me is just like immense. This is An A bordering on A plus because

1:22:11 You could argue, I guess, I against it that they IPO'd too early before this massive expansion and perceived expansion in the market, and thus they could have taken less solution had they IPO had they gone public later. However, I think by going public when they did and kind of getting on the map, most people didn't really know about Shopify out there. You know, certainly in the investor community, in the finance community, but I think also just Broadly your average person didn't know. And then by doing it right at the cusp of the world going into this like D to C brand

1:22:44 Instagram commerce, influencer marketing, and Shopify being at the center of all of that, but being a public company, uh that helped. Also then on the other side of that, by Shopify going up into the Unilevers and the Googles and the big companies out there, being a public company certainly helped them on that and and launching Shopify Plus, and that's now a quarter of the business. This is a no brainer, at least a solid A. Uh, in terms of what they were able to get out of going public when they did for me. Yep. That's it.

1:23:14 Great. Great point. Uh then the only question is Did they make good use of the capital that they raised in the IPO? Um and and sort of what did that allow them to do?

1:23:25 I I don't think there's anything magical about it. I think it they spent it on sales and marketing and accelerated the growth of the company and subsequently I've done very, very, very well in the investor community, obviously, and then very well with with customers too. So I don't disagree with anything you said. It's interesting. They've made some uh a few small acquisitions over the years. They haven't made any uh meaningful acquisitions. Um You would think they're gonna make an all stock acquisition a big way here soon. Like if if you were if you were a capital allocator who was running this business right now and it was valued where it was, I think you'd want to spend your stock on buying some interesting stuff.

1:24:02 Yeah. Well, maybe that could be a uh future acquired episode. Yep. Right. Carvalhouts?

1:24:09 Let's do it. So I have two carve outs. Uh the first, um we've never done this on the choir before, but our Most recent investment here at uh at Wave Quota Pro. I spoke about them on our latest L P show. They are hiring for A bunch of roles, uh both engineers and for a head of product. They are a tech enabled brokerage for scrap metal recycling. Uh if you talk about value creation versus value capture in the world, like they are literally keeping, you know, metals uh of all types out of landfills.

1:24:43 The company is less than a year old, is already doing uh millions of dollars a month in GMV. They are hiring the technical team here in San Francisco to build up the backend. Um so the company is like uh if you think about Flexport, if you think about Convoy or Uber Freight, like very similar type businesses, we're uh super excited to help them grow. So if you are either an engineer and want to work on a really early stage company in a exciting market that's growing quickly, hit me up in Slack and uh I'll send you on to the company. Or if you're an experienced product lead, uh ideally at a company uh like we were talking about, you know, Uber, Flexport, Convoy, Lyft. Uh we would love to uh love to talk to you about Quadapro. Who would ever want to be a product lead at a fast growing company started by or f you know invested in by David Rosenthal? Well, there uh there could certainly be worse things out there. And then my uh my official carve out uh this time is Bill Gurley on Invest Like the Best. No way, this is literally mine. No. That's great. All right, well I'll let you take it then. No, I because I came up with the second one because I I was like uh I was thinking about it and I've I've recommended so many episodes of Invest Like the Best that I was like, uh so it's literally the one I have a strike through through that one that I'm

1:25:55 I have a second one, so take take it away. But it's so damn good. It's so good. I mean anytime uh Bill speaks, it's worth listening. But um in in this one he's he talks about You know, a whole bunch of things, you know, across bencher, uh the way he thinks about companies. He talks about a great um kind of XY access chart that he thinks about uh evaluating the scalability uh of companies and marketplaces. Very worth listening to the A master class as always.

1:26:24 Yep. Absolutely. And actually especially relevant to to this episode. Indeed. My carve out is uh David, the last time uh we did carve outs you talked about a recent trip that you went on. Um mine is a product that I use on a recent trip that I went on. I really like to ride my bike and I went on a trip to the San Juan Skyway. So it's a a four day bike route starting and ending in Telly Ride, Colorado. You're riding between eight and eleven thousand feet and you're riding through the amazing southwestern Colorado mountains and Durango and Silverton and all these really incredible places. Of course I had a lot of fun, but one of the things that I really like to do when doing these bike trips is take pictures. Of course I lug my

1:27:05 Big Sony. um NEX six around on my back and uh it's fun to bust that thing out. I know those miles. Dude, yeah, I mean the the that the telephoto, you know, you gotta get the You gotta get that shot. But Another thing that I brought this time for the first time was moment lenses to uh to put on my my phone and take advantage of all the cool sort of phone apps that there are that number one you can do the maybe dangerous thing of taking out your phone and taking some pictures while you're riding, instead of me taking off my, you know, pack and busting out the big camera and doing, you know, the the the whole

1:27:39 the whole song and dance there. But also it enables me to uh do things like hyperlapse or uh you know all the different like Specter is a uh an app that does these cool time lapses and Moment has a a time lapse feature in their app, but to give folks an idea Moment makes these really, really beautiful and really high quality glass lenses that do telephoto, that do wide angle. That's the two that I brought. Um but they have a series of other lenses too that really turn your phone into uh a camera that you thought it could never be and and and do some really cool I would say effects, but it's actually It Uses. physics and optics to change the light that's hitting the sensor on your phone. And um super cool.

1:28:20 Yeah, I I they're super small. You can I keep them in my backpack and I just use them in daily life and um I can't recommend getting some moment lenses enough. I think they're they're super fun. So um that was my also a uh Seattle company, right? It is. It is. Led by uh great CEO Mark Burros. And uh I know a super, super talented team over there. So Can't recommend it enough and that's been my my toy of the month. I just can't believe that you lug your big DLSR around on your page. So it's funny, it's a mirrorless But it kinda doesn't matter that it's a mirrorless'cause I also have the telephoto lens on it, so it's big and heavy anyway. Oh man.

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1:30:16 free trial and you can listen right here in the podcast player of your choice. So with that. We'll see you next time. We'll see you next time.

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