Acquired - The Shopify IPO

Episode Date: August 6, 2019

Ben and David head north of the border to Ottawa, Canada to cover perhaps one of the greatest IPO success stories of the past 5 years, Shopify. From humble beginnings as a “lifestyle business” hawking hipster snowboard gear online to now routinely mentioned in the same breath as Amazon, the tale of Shopify and its incredible CEO Tobi Lütke’s ascent is not one to miss!Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Links:https://www.snowdevil.cahttps://www.jadedpixel.comCitron’s “research” report:  https://citronresearch.com/citron-exposes-the-dark-side-of-shopify/Carve Outs:Ben: Moment smartphone camera lenses: https://www.shopmoment.comDavid: Quoteapro engineering and head of product roles — DM @david in the Acquired Slack ; Bill Gurley on Invest like the Best: http://investorfieldguide.com/gurley/Editor's note: Shopify actually powered $41b of sales, not $14b, in 2018, as discussed toward the end of the episode. $14b was the fourth-quarter number. While this changes the analysis of value captured at the end of the episode (Shopify only captures 2.5% of merchant sales as their own revenue, not 7%, which is admittedly very different), it doesn’t change overall sentiment on the company discussed in the episode.

Dan, 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. 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. 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 am 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. The company IPO'd in May of 2015 with a market cap of $.3 billion dollars in the ensuing four years it has 27 x that and today has a market cap of 35 billion dollars not bad for a pivot no no no 218 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 I can't wait to dive in 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. Having read a lot of business books and played a lot of StarCraft in my day. I was going to say.

Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes. As you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know from listening to us all year, ServiceNow is pretty remarkable about

embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this. So what are AI agents? AI agents can think, learn, solve problems, and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control. Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service, software development, you name it.

These agents collaborate, they learn from each other, and they continuously improve, handling the busy work across your business so that your teams can actually focus on what truly matters. Ultimately, ServiceNow and Agentic AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. If you like the show, you should come join the 2,500 person and growing acquired fans that are hanging out in our Slack at acquired.fm.

And if you want more acquired than just this, you should consider becoming an acquired limited partner. David and I release about one LP 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 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 slash acquired. All right, David, I think we are ready to hit it. Are we ready to do this? Let's do it. All right, let's blast off. So Ben, as you alluded to, you cannot talk about Shopify without talking about its co-founder and CEO, not its CEO at founding, but co-founder and now CEO, Tobias Lutke. So who is Toby? Ottawa, Canada now with his wife and his children, because that is where Shopify is headquartered,

where their world headquarters are, and where he co-founded the company. However, he was not born there. I believe he's a naturalized Canadian now. I think he's a Canadian citizen, but he was born in Germany. He was born in Koblenz, Germany, which is a town about halfway between Cologne and Frankfurt. Toby, when he was growing up, he was quite the precocious young man. His parents gave him a Schneider CPC when he was six years old. And a Schneider CPC... Yeah, what is that? Was a computer. It was, to the best of my understanding, roughly like kind of the German equivalent

of the Commodore 64 that helps place things. So this would have been 1986, Toby received this, and he was enamored. And he was enamored with two things about it. One was that he could program it and hack it and build things for it, and he could 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 CPC and presumably future upgraded computers as well. So much so that by the time he was kind of 11 or 12, he was taking the games that he was playing on there and he was hacking into the code and he was rewriting the games. I don't know if he was writing to cheat or make it easier or build his own levels or just because he was like, it was like Minecraft before Minecraft. In another world, he could have been Notch. And he has a lot in common with Notch too. Totally, totally. Well, we're going to have to do a Minecraft episode at some point here. have been uh he could have been notch and he has a lot in common with notch too yeah totally

totally well we 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 loves computers and video games this is like a dilbert comic like 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. Yeah, making real-time decisions. Yeah, and you know, he has this great line in there. And one thing that becomes immediately evident about Toby when you start studying him is he's highly intelligent. He has this great line in, 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 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 interesting interesting i know maybe he's changed his team maybe his kids

were playing too many video games that could be um anyway we digress so what does toby do is he's growing up you know he's really into computers at 17 he does something very different from what a highly intelligent 17 year old would do in in the u.s or in canada or in many other countries germany at the time has this pretty cool program to, I think the goal of which is to increase the number of programmers in the country, computer programmers. 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 going to start as a trainee and then an apprentice and then you're going to become a journeyman and then you're going to become a, you know, programmer and then you can become a master programmer.

And so Toby drops out of high school, joins this this formal program through, I believe, through the German government and becomes a programmer trainee. And he apprentices with Siemens, the huge technology company, manufacturing and technology company programmer trainee. And he apprentices with Siemens, the huge technology company, manufacturing and technology company in Germany. He grows up, he becomes a great programmer, but he's programming in Java, which is, you know, for all of our engineer listeners,

we'll smile and laugh here. I learned to program in Java. You probably did. Did you? Dude, the AP computer science test was in Java. Totally, totally. And, you know, Toby's like, yeah, all right, Java. Also, no, I learned to program in java you probably did did you do the ap 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 oh that's awesome of course gotta make websites uh see i actually learned to program like in in college like in actual computer science courses and 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 didn't go to college to just making websites earlier. Anyway, so he felt like it was pretty restrictive, but he still loved programming. And as he gets a little older, he's making money. He didn't go to college. He's working. He develops another passion. He has some disposable income. He gets really into snowboarding. And this is, trust us, listeners,

all of this is going to become very relevant. Literally everything we're talking about here is going to become very relevant in just a minute he's in his early 20s at this point you know because 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 a place uh i've been too many times i'm sure you probably have uh too been i don't think we've been together which is whistler canada and brit Columbia. I did tear an ACL there. So I have mixed feelings as much as I love Whistler. Fun fact on tech nerd trivia, Whistler was the code name for Windows XP. Oh, no way. Yeah, that's pretty cool.

Yeah. So if you haven't been to Whistler and you are a skier or a snowboarder, you got to 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, kind of love at first sight, 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 moves over, lives with him in Germany for a year. Man, persuasive. It's like when we talk about on the LP show, founders have to learn to sell because your

job is always selling. And can you be compelling not only to pitch, but for hiring people? I can't imagine a more test of how compelling can you be than you should move to Germany with me. You should move to Germany for me. Well, it turns out that Toby's not quite ready to be CEO yet, though, because he might have won the short game but lost the long game here because she says, okay, I'm going to move over. She moves over for a year. And then she persuades him to move back to her hometown of Ottawa, Canada. Ottawa, of course, in the province of Ontario is the 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 does something really exciting. They make backend accounting software for companies, but Toby can, he's a great programmer. They let him work remotely. Shortly after he moves, though, in 2004, this company goes bankrupt. And so Toby has now moved across the world to be with his soon-to-be wife and finds himself out of a job in 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 Fiona make some money here. And, you know, maybe I can use programming, do it on the side, but like, really, I just want to kind of 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 and 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 at this point 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, yeah, this is great. We love snowboarding. We're going to keep going together. Let's throw a small business together that we can do to fund

our habit. Maybe what we should do, it's now 2004, Web 2.0 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, 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 get together, and Toby codes up a website. They call it snowdevil.ca.

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 Snowdevil is not your typical snowboard store. Instead, Snowdevil is a partnership among two riders who are only interested in selling boards and bindings that they love to ride on.

Nothing else. If you want big brands like Burton or K2, you should try Walmart. If you want high-end, top-quality brands like NeverSummer, Nidecker, Tech9, and others, you should try us. Yours truly, Scott and Toby. And then they list their personal gear setups for their snowboards. 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 today's standards.

It's like there's some mismatch there when you're looking at it. But, you know, 2004 is a very different time on the web. Yeah, totally. Well, and so why do we tell this whole story? You know, two reasons. 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 kind of amazing, this whole hipster ethos of we're going to curate the best artisanal brands and sell them. What is Shopify powering today? All of these D2C brands and Instagram commerce, it all comes back to this same kind of ethos. They were way ahead of the curve here. So in the process of setting this up, Toby, of course,

is CTO of the company. Scott is CEO of newly formed Snow Devil. Toby is in charge of putting the website up 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 actually get a shopping cart, checkout, and inventory, and manage everything. And he's using tools like OS Commerce, and Yahoo Stores, and Miva. And 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 an instant message one day. And real quick, before we dive into this chapter, do you know the history of Yahoo stores, David? No, I don't. So Yahoo made an acquisition of a company in 1998 for $49 million that became Yahoo stores. Do you know what that company was? Oh, was that PG's company was or was that pg's company

it was vo web vo web oh my god wow of course paul graham of uh who would go on to found y accommodator man i didn't realize vo web became yahoo stores yep like many acquired episodes the 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 an IM from a friend who's also a programmer right around this time in 2004 and 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. He works at this place called 37 Signals. They make this thing called Basecamp. It's like pretty cool software.

And they make it in this really obscure programming language called Ruby. But they've built this framework for using it for the web. It's called Ruby on Rails. You should check it out. These guys are like, what, too good for PHP. Yeah. Then if only you had started coding in Rails, then maybe there would be no Acquired. You too could be CEO of a $35 billion public company right now. So Toby says like, okay, cool. I'm going to check it out. So he starts a side project, just hacking on Rails. And he does

what many hackers were doing in these days. He decides he's going project, just hacking on Rails. And he does what many hackers were doing in these days. He decides he's going to build a blogging system. So he builds an open source blogging content management system for the web. He calls it Typo. And it kind of blows up. It gets over 10,000 installs of people running their blogs, hosting their blogs using Typo. And Toby becomes pretty well known. He gets in touch. He meets the 37signals guys. Yeah, he meets David, he meets Jason. And he ends up joining them, not joining 37signals, but he becomes a core contributor to the Rails open source framework. The funny thing is, if you go to Toby's LinkedIn, this is still

like in his about is like three three lines and one of the lines is about the the creator of the typo weblog engine it's just great that like you know this guy's running a 35 billion dollar company and that's still a big pride yep i mean that's uh that's toby 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 Snowdevil, the backend for Snowdevil. He says like, well, shoot, I'm just going to rewrite all of that from scratch and do it in Rails. And I bet I can get rebuild our store and not use this crappy software that Paul Graham wrote for and have it work pretty fast. So he

does. And within two months, he's completely written the backend for Snowdevil and they have their own custom commerce engine 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 this snowboard site. You just built this thing in Rails that you can easily plug in and do the back end like this was hard for us maybe maybe we could make an even better lifestyle business if instead of selling snowboards we sold software and 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. 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. It's one thing to build your own software for your own site. It's another thing to make it plug and play for commercial availability. And they have some money saved up from their sales at Snowdevil. Toby and Fiona move in with her parents. They raise about $200,000, mostly from Fiona's dad and from Toby's uncle, 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 Winand. And 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 design this product and make it really easy to use and install and has a huge, huge contribution to this first version of the product. And I believe still to this day, I believe in interviews, Tobias said he has veto power on any shipping, any feature of that is that is Shopify. That's power. By the way, 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 to sell their snowboards. They're doing all of this new software business still in the same Canadian entity as 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 in the same entity. So when they're finally ready to release the software in 2006, 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, plugs in, I need a name, and comes up with jadedpixel.com. Really, really rolls off the tongue. Really catchy. And if you go to jadedpixel.com today, we'll link to it in the show notes. It redirects to Toby's LinkedIn profile. Yes. So then in 2006, they would formally rename the company from its sort of nameless Canada LTD. It was Entity 4261607 to formally in 2006, call it Jaded Pixel Inc.

Yeah, Jaded Pixel Inc. Now, fortunately, Scott at this point makes a major contribution to this budding software company right before they launched. And he's like, yeah, I don't know about this Jaded Pixel thing as the product name. Maybe we should reconsider that. And mercifully, he comes up with Shopify. We're shopping 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 2000s 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. And amazingly, the domain was available. Toby talks about this. They just registered on GoDaddy. They didn't have to buy it from anybody. It was just there. Man, times have changed. So the initial feature set that they ship with is pretty basic. And they're inspired by kind of the whole Rails 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 you can get orders delivered to you as a merchant via an rss feed you have automated inventory organization and you also have the ability to plug in payment processing. So they're not doing payment processing natively at this point, but of course, taking payments is super important. And they make it really easy to just plug in PayPal or any other third party credit card processor that you'd like right there on your website. Pretty cool. Yeah, pretty cool. And a far, 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 Snowdevil. So they needed a business model

for this new software that they were going to sell or offer online. I think Chris Anderson from Wired hadn't yet written the book on freemium. I think that came out a couple years later. But, you know, percolating 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, you know, no barrier to entry, anybody can set up a store and just start selling. 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 realized 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 going to use. And of course, everybody's very optimistic. When I sell my million things. Well, yeah, when I have $100 million in sales, I'm not going to want to pay Shopify, you know, $10 million a year, whatever they were charging. And so the business model is really holding them back here. They figured that out. And they decide, okay, we got to switch things up. How are we going to do this

instead? What if we, you know, SaaS is like 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 charging on a usage basis, what if we just make it like really, really simple? You know, we'll charge 29 bucks a month and you get a full featured 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, you know, I don't know the biggest business on Shopify, but there's enormous businesses on Shopify. They're not just paying $29 a month. I mean, at this point, you don't leverage on Shopify. Uh, Google is on Shopify,

like, uh, enormous, enormous companies are on Shopify, but if Shopify were taking 10% of their revenue, of course that wouldn't be possible. Uh. So, and this is a fun aside too. It's also like, speaks to the, what the company was like in these early days and they're like, how Toby and Scott were thinking about things. They realized, they knew they needed to make this change. And so they were 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 they did it the day before Toby and Fiona got married. That was probably not a good idea. Toby talks about how he spent the whole night the night

before their wedding just 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 2007 when they made that switch in 2007. And that is a Toronto based angel investor named John Phillips discovers the company and he invests $250,000 at a $3 million post money valuation which was pretty rich for you know i have to imagine 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 based in toronto and he had worked with a ton of companies and he becomes a really important mentor to toby especially through what's about

to happen in the next year in 2008. Scott kind of gets the early stage startup bug again, and decides that, hey, you know, this company scaling, it's a SaaS company, I'm not sure this is really what I want to do. And he leaves, and Toby ends up having to take over the CEO role. So from, you know, a kid who is an apprentice programmer who loved playing video games, and his parents thought, 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. 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 listen to Toby in interviews, 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. He's an amazing, amazing engineering leader. And it really leads to them being able to attract incredible talent and 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 on Rail project, were, you know, dying to go and work with them. 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 that were in Ottawa. And Ottawa is not far from Toronto. And Toronto, of course, has great engineering universities and technology companies. Nortel was in Ottawa. There were a few chip companies in Ottawa.

But 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, at least in software, yes, 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 2.0 software company based in Ottawa, and they're able to recruit just incredible, incredible technical talent. He joked about Toby being like the engineer's engineer as a CEO. So all this is happening. And he was really wrestling with, what do we do about this? We're growing. Should I raise venture capital? I think the market opportunity for this is big and getting bigger. Should we tick into being a growth company and

put fuel on the fire? And he wasn't sure. And so he decided, you know what, I'm going to run a test. And the company had become cashflow positive in 2008 with about 10-ish employees. They made over a million dollars in revenue in 2008. 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, 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,

you know, images of the website in 2008. And they're listing Tesla Motors as one of their marquee merchants. It's pretty awesome. I've got some Wayback Machine things to bring up later from this site. Oh, man. So Toby's like, okay, I'm going to run this test. He saves up $50,000 in cash flow from the company. And he decides, I'm going to use this $50,000 and I'm going to 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's running? They're super cool. So the first one is, or one of them is they decide that, you know, there are all these like web design consulting firms out there 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, we'll give you 20% 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 you're giving me a tool that I can use for my clients to make my life easier and I'm going to make revenue from that? Great. 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 David Zager, who's our head of design at PSL, and he used to run a design and dev agency and did for years and was part of this program. And he sort of smiled when I was like, yeah, back in, you know, 06, 07, 08, 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, these people who are going to be building 30 to 100 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 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. Do you remember the partner that they run this competition with? I do not. None other than Tim Ferriss. No way. Yeah. Tim becomes an advisor to the company and Tim was like, hey, people love competitions. What if you gave away $100,000 to the team that builds

the biggest business within a X-month period on Shopify? And Toby's like, $100,000? I don't have $100,000. I can't give away. And Tim's like, trust me, you'll make it back. I hear Tim Ferriss is pretty good at growth marketing. Yeah. They launched this contest together and they get over a thousand new merchants signing up to the platform just through this contest. And it generated over 3 million in revenue across those new stores. It's a pretty good ROI for that $100,000 growth investment. I'd write those checks all day. Totally. And then what probably becomes the most important thing that they do during this time, in June

2009, they ship the Shopify platform. They build an API to allow third-party developers to plug in their existing tools or write tools right into Shopify merchant pages and accounts. And this really takes everything to the next level. Because again, if you think back to building in Rails, it's very minimalist, functional, design-oriented frameworks. And that's what Shopify had always been. 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 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 the third-party ecosystem builds those and plugs in this just massively increases the reach of types of merchants that could use shop Shopify for anything or add functionality or do subscription sales or do whatever without cluttering 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. It very much is like WordPress and blogging. It's really hard to shake that inertia because they have all the plugins. Shopify has exactly that in the e-commerce world. Totally. And in a minute, we're going to talk about Stripe in a sec. But things like that, something like Stripe can get built, which is incredible and game-changing for the ability for people to take payments online, and it just plugs right into Shopify. So in 2009, the first year they start really aiming for growth and running these tests, they pass a hundred million dollars of sales that merchant gross sales that merchants do on Shopify. Uh, remember this is like 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 Shopify has cumulatively, uh, in 2010, they pass $100 million of sales over the life of the company in the two and a half years that Shopify has cumulatively. In 2010, they do $124 million in merchant sales just that year. And at the end of 2010, Toby finally gives it, and I assume probably ran a, knowing him, an exhaustive process in meeting everybody and optimizing for his venture capitalists, he finally raises a Series A, a $7 million Series A led by Bessemer with Firstmark and Felicis participating. And it's kind of off to the races to the company and full-on growth mode after that. What episode did we just do where Firstmark was also,

it was like one of their first checks. That's right. Yeah, right around the same time. Firstmark had a couple of really, really great investments right at the beginning of their life as a firm. Really 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 want to be the best run, most successful 20 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 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, really, I just think makes him such an admirable leader and CEO of a company is now when he talks about it, he says, I was absolutely wrong. I hurt the business. I set the business back by years,

for those first couple of years. And then during the time when he was running those experiments, not raising venture capital earlier and not seizing the opportunity. And obviously, they've been lucky that they've still been know, still been able to kind of achieve dominance in the space and become a $35 billion public company. Yeah, there's some survivorship bias here. Yeah, totally. But, but yeah, like 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, which is very rare that you get that level of humility from a 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 riding it better than anyone else. How big can it be? So right after they raised that series A in December of 2010, they only had about 20 employees at the company at that point. By the end of the next year in 2011, they had over 100 employees. They had passed 10,000 merchants on the platform. That year, they did 275 million in merchant sales. The following year, they go from 10,000 merchants on the platform to 40,000 and three quarters of a billion dollars of GMV. They make 24 million in net revenue from that, which obviously is a lot less. This is the first year from their S1 that we have their net revenue. But that continues to just grow and grow. The next year, they have 80,000 stores, $1.6 billion in GMV, $50 million in net revenue.

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 Shopify? It was around this year in 2013, when I think Tob 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 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 2013,

they launched, maybe there's more we can do because if you become a big merchant, you don't just want to sell on a website online. You want to sell in a lot of places. And so in 2013, they launched Shopify point of sale for offline sales. They have devices that you can put in a physical storefront, use that to actually be your point of sale. But even more importantly, they're now syncing your online inventory with your offline inventory. And back in 2013, that was probably kind of gee whiz. You think today about all of these D2C brands out there that now have all of these, you can't even call them D2C brands anymore because they are internet brands because they have physical stores in major metro areas around the world. It's a critical enabler for this. And of course, all of those brands were built on

Shopify and starting to grow in these early days in 2013. The other thing that they do the next year in 2014 is they officially launch Shopify Plus. So what's Shopify 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 different business segment in a different office. It's based in Toronto, not in Ottawa. The concept behind this, I think all coming from Toby, is that the core ethos of Shopify 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 Anheuser-Busch, you know, I think all of which are big customers using the platform. They want something different. 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 going to 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 you're talking about engaging with these really big customers, it is expensive to go in and actually do the sales and marketing to get those accounts. So to give you a sense for today, where they're doing, they did about a billion dollars in revenue last year. They did spend 350 million on sales and marketing. So this business has never quite been, let's throw up a website and people will just come to it and will just sort of service themselves. It does actually require spending to go and get that business. So the net of all of these new initiatives is Shopify's growth just continues in the venture capital era. In 2014, they cross 100 million in net revenue. They do 105 million in net revenue. And then in April of 2015, the company files to go public on,

interestingly, on both the New York Stock Exchange and the Toronto Stock Exchange in Canada. They had two different tickers. So you can take your pick should you choose to invest in Shopify. On May 20th, 2015, they priced the IPO at $17 per share, which equated at pricing to a $1.3 billion market cap. Think about this as a $35 billion market cap company today, just about four years later, they start trading the next day at $28 a share, which is 60% higher. Actually, the stock stays relatively flat for the rest of the year. It would pick up later the next year. But 2015, for the whole year, they do an amazing $7.7 billion in GMV of merchandise that merchants are selling on Shopify.

What's that up from the previous year? I didn't find what GMV was in 2014. In 2013, it was $1.6 billion. So in two years, they 8x'd it. Yeah. Or 7x'd. Probably 5x, 1.6 to 7.7. But still, incredibly impressive.

Net revenue is $ 205 million for the year ended 2015. So we thought a fun coda, and 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 2017, so not quite two years ago, Shopify became the target of a activist hedge fund investor, a short seller named Andrew Left at Citron Capital. He released a report on Shopify decrying the company as a get-rich-quick scheme that was... The title of his report is the hottest... This is 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 nasdaq they're on the new york stock exchange is a completely illegal get rich quick scheme 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 was in 2017 the company said they had 500 000 merchants on the platform how could it even be possible that there are 500,000 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 scheme. How could it be possible if there's 2 billion media outlets on the internet? But it's because of the internet.

How could it be possible that there are now, I don't know how many homes are on Airbnb, something like two, 3 million, 4 million, maybe a lot of hotels possible, you know? So anyway, this is great. He releases this report says the, you know, the FTC is definitely gonna, gonna come after Shopify. He puts a $60 price target on the stock. The stock had been trading at around $115 a share at this point in time. Six months later, the stock is, so we're now in spring of 2018, the stock is trading in the mid $120 a share. So like, okay, he didn't do so hot on his shorts here. It was at 115 before, right? It was at 115. So it was roughly flat at this point.

So like, okay, it's not down. He's not doing good on his short position. Fast forward a little bit further to April of this year of 2019, just a few months ago. The stock is now trading at $205 a share. Remember back in October 2017, Citron had put a $60 price target on the stock.

What did they do? What does Andrew and Citron do? They come out again with another research report talking about how terrible Shopify is. And then he puts a price target of $100, up from 60 this time on the stock, says it will be down at $100 within 12 months. And if it is not,

he is going to donate $200,000 to charity. Well, we're not 12 months yet from there, but today... All he can come up with is a $200,000 bounty with that kind of a claim? This is so amazing. Today on July 31st, 2019, the stock closed at $317 a share for a $36 billion market cap. You just wait till it hits 60, David. I know, I know. Well, we're going to do our narratives

and bulls and bears here in a minute. And certainly, no doubt, it is an expensive stock right now, but an illegal get-rich-quick scheme that is probably not an accurate characterization of this company. Yeah, yeah, yeah. All right, listeners, Probably not an accurate characterization of this company. Yeah. Yeah, yeah.

All right, listeners. Our next sponsor is a new friend of the show, Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to midsize businesses and provides enterprise grade security with the technology, services, and expertise needed to protect you. They offer a revolutionary approach to managed cybersecurity that isn't only about tech, it's about real people providing real defense around the clock. So how does it work? Well, you probably already know this, but it has become pretty trivial for an entry-level hacker to buy access and data about compromised businesses.

This means cybercriminal activity towards small and medium businesses is at an all-time high. So Huntress created a full managed security platform for their customers to guard from these threats. This includes endpoint detection and response, identity threat detection and response, security awareness training, and a revolutionary security information and event management product that actually just got launched. Essentially, it is the full suite of great software that you need to secure your business, plus 24-7 monitoring by an elite team of human threat hunters in a security operations center to stop attacks that really software-only solutions could sometimes miss. Huntress is democratizing security, particularly cybersecurity, by taking security techniques that were historically only available to large enterprises and bringing them to

businesses with as few as 10, 100, or 1,000 employees at price points that make sense for them. In fact, it's pretty wild. There are over 125,000 businesses now using Huntress, and they rave about it from the hilltops. They were voted by customers in the G2 rankings as the industry leader in endpoint detection and response for the eighth consecutive season and the industry leader in managed detection and response again this summer. Yep.

So if you want cutting edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired, or click the link in the show notes. Our huge thanks to Huntress. Well, let's do it. Let's dive into narratives and let's do this a little bit differently than we normally do. 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. Shopify was less of an interesting media darling at that point, but now is really starting

to heat up and get a lot of coverage. And so 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 acquired history and facts of the company. And there was one other company that some listeners out there might be wondering, man, why didn't Ben and David talk about 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 2004 to today, the company would be Amazon that we were talking about.

Yeah. Well, let's start with the bear case here. It's relevant for both the bear and the bull. You know, all of this is like great. And certainly you can't take anything away from the incredible business that Toby and Shopify have built over the last 13 years. But isn't Amazon going to just take over all of e-commerce? Like why are people going to be selling on their own channels anymore when eventually everything's going to end up on Amazon and they're going to have the best fulfillment, the best delivery, and the best pricing and everything? What are these 800,000 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 saying about how dominant Amazon is. Yeah. And then you look at the price of Shopify. They did about a billion dollars in net revenue last year. Which puts it at 35x trailing 12 months revenue. Yeah. Which also, by the way, I mean, to take a step back and talk about, they ended 2015 with about 200 million in net revenue. Three years later, they end 2018 with a billion in net revenue. That's incredible growth. But yeah, that's a

very expensive stock. 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 valuation multiples based on any company metric. This is a good point, I think, for less finance-y folks to talk about why 35x trailing 12 months revenue is big. First thing to point out is it's not 35x trailing 12 months income. In fact, the company is still a loss-making company. So it's not a big loss-making company. In 2018, they lost $64 million. In 2017, they lost $40 million. But 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 high-growth company. But imagine for a moment that it was a 35x trailing 12 months income, the profit that they were making. Like you still would have to believe that. Which back in the day when I started in finance, 35x earnings per share multiple, like that was expensive. Now we're talking about 35 times revenue. Right.

Like you would still have to believe to believe that this valuation is correct that if you were to do a discounted cash flow, so all the future years left of income that that stock was going to generate discounted to today, that it would be worth 35 times as much as it's making now. And so that's still a big leap to make. 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 going to account for oh and it's not even actually the profits it's the revenues so like it starts to give you a sense of why like wow this is really being valued not only that it has a ton of growth in front of it but that you that they're really going to find a way to turn

this corner. And they're effectively breakeven right now. This net loss is so small relative to revenue, but they're going to find a way to flip that faucet and start becoming a very profitable company as well. If we were to... This is going to be very apt. We were to channel one of our recent CEOs of one of our recent subjects here at Acquired, Eric Yuan at Zoom, he would say the price is too damn high, 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 this Amazon question out there.

How could you justify paying such a high price for a company that is competing in the same category as Amazon and is more expensive than Amazon? So I think unless you have anything else on the bear side. No, please paint me the picture. Let's flip to the bullseye. And actually, I think for me, the topic here is still Amazon. So Toby has this really great quote in one of his interviews where he says, look, if you assume Amazon is going to eat retail of everything that has a barcode on it, and basically you kind of 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 going to sell on Amazon? Are upstart DTC brands going to sell on Amazon? Like, maybe they will. And actually, you can now on Shopify sell. They have a plug into Amazon. You can easily sell on Amazon from Shopify. But I think there's a lot of stuff out there that isn't going to sell on Amazon. Yeah. And I think the way that I think about

this is sort of timing that this company, the market for people selling things directly on the internet, 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 era where people want to 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 not good at. Not good at. And so it makes sense. 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 yeah no amazon.com subordinates the brands of the products exactly you don't when when you're buying 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 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 going to sell on Amazon? It's this. It's Instagram brands. It's, you know, quote unquote D2C internet brands. And you can think what you will. And, you know, personally, I feel like there's so many out there and it's probably overhyped and like, you know, quote-unquote D2C internet brands. You can think what you will. Personally, I feel like there's so many out there and it's probably overhyped and hashtag millennials everything.

That's a direct David Rosenthal quote, ladies and gentlemen. Hashtag millennials everything. There we go. There we go. But 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 and she has her audience. She sells to her audience. Her audience is primarily on Instagram, other social media properties as well. But most

of what she's doing is selling on Instagram. It's estimated that Kylie's cosmetics brand did over $300 million 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 going to be a lot of stupid millennial brand startups that raise a lot of money out there and go bankrupt. But there's also going to 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 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 their return on sales and marketing spend actually got better, even though the company's revenue was growing. So if you were 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 as of some data that I was looking at from 2016, still accelerating into an market fit, or at least as of some data that I was looking at from 2016, still accelerating into an expanding market. And the ACV continues to grow. So that's the average customer value, basically the amount that any given Shopify customer is spending or giving to the company is growing at about 14% a year. So it's not even like, you know, oh man, we onboard someone and then, or if you take the average across all of our merchants, any given merchant is increasing their business with us. Mm-hmm, mm-hmm.

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, the other part of Shopify's business that we haven't talked as much about, we alluded to Stripe earlier, is through both the platform 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 make as a merchant, but they're revenue sharing with Stripe, for instance, when Stripe is powering internet payments for their customers. Yeah, it is worth taking a quick aside here and saying, so Shopify did $14 billion 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 flown to Stripe from Shopify. And Shopify benefits from that in some way. So to kind of look at how does Shopify make money, well, we've talked a lot about this subscription solution so that that's the SaaS fee that you're paying per month to Shopify. They have 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 SaaS fee. So the part of the thesis that you could

form if you are really excited about the future of this company is there's going to be a lot more stuff that they could sell to them too. A lot more stuff. I think the bull case to sum it up is there's gonna be a lot more merchants 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. If you think about that 14 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 $14 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% 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 going to be able to continue to expand that over time. The question that you then have to ask yourself is, okay, cool. 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? more and more customers, 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 very interesting thing that was recently announced is the Shopify Fulfillment Network, which is 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 is powered by Shopify. It's a Shopify interface, much like you interface with anything else on their platform using sort of just the really nice Shopify tools or sort of the nice plugins in their ecosystem and 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 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 going to use FBA. Amazon controls the whole stack and they own the warehouses. So from a business model perspective, Shopify's way is great because it's asset light. 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, and they don't have ownership over that margin the way that Amazon does. They have to sort of share in the economics with those 3PL 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. Shopify must have thought through all this as they were launching and thinking about their strategy. They need to be the anti-Amazon here because, they need to let the brands and the merchants be the stars because the more you start controlling the experience and the customer, the more those brands are going to get pushed down below Spotify and then you're in an Amazon world. Shopify.

Shopify. No, no, no. You said Spotify. I have a feeling I've already done that on this episode. And I think... Listeners, we apologize. I was wondering how long it was going to take us to get into this. Oh, yeah. Oh, man. Spotify, also a great company.

But you raise that really great point. It's exactly the one that we absolutely owe mentioning it, that Ben Thompson has covered so well on Stratechery, and that is Amazon is much more like an aggregator where they're the brand, they control the whole experience, and they aggregate all of the customers and the customers shop 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 not going to control the whole experience. We're going to make picks and shovels. You're going to have the relationship

with that customer. And their bet is that they're able to make enough money off of, it's one out of every $14 that gets purchased. They're able to make enough money that that business model works too. And it supports 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 fangs are really Amazon and Facebook and Google. Apple's probably in a different category. This is the first chink in that armor, right? Like where the actual business model of a aggregator being Amazon could be maybe not the seeds of its own undoing, but like Shopify is able to successfully compete precisely because it has a different bit of product and business model.

Yeah, but I think where I would really go with this is the big opportunity is the aggregator one. Like Amazon is a billion dollar market cap company and Shopify is richly valued at a, you know, supposedly rich at a 30. So really what we're saying is 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. All right. So real quick, you know, on what would have happened otherwise before we moved to Playbook, I think the interesting thing here is like, we've seen this so often in the last, you know, well, always on Acquired, but especially in the last you know well always unacquired but

especially in the past year this company almost didn't happen you know they were like gonna sell snowboards on the internet was toby and 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 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 a merchant storefront um would square uh which square is is now starting to try to compete with shopify online uh would square have done that earlier and so then online and offline or would it have been a totally, you know, different startup called Shopify started by someone else entirely? Yeah, 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 kind of 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 and sold to Yahoo. There were Magento was around, but like there wasn't another 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 otherwise yeah it's interesting you know you mentioned Magento we haven't talked about them on this episode I had initially assumed Magento was an old school incumbent that Shopify was competing with. Are they not? No. Magento was started by the folks from OS Commerce in, I think, 2008, I want to say. But what they are, Magento, the strategy was not the right one. I can't believe they started four years after Shopify. I know. Well what they did i think i haven't fully researched this yet but it's an open source platform i think they basically took the os commerce tech open sourced it and it 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 sass like you don't have to deal with all that and so the people that were using magento were like they were trying to go sell to big existing retailers 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 not a low end disruption play in the way that sort of the classic Clayton Christensen idea of serving this new up and coming market as a crappier toy type thing. It wasn't that at all. Yeah, it wasn't that at all. I think it comes back to Toby saying like, we had this two year essentially delay where where I wasn't ready to take venture capital and needed to prove it to myself and the company that we were truly a growth company.

And yet still, no viable competitor popped up during that time. I really wonder why. Yeah. All right. Playbook? Playbook, yeah. Let's do it. I mentioned the Wayback Machine. So I went and looked at their website from 2008 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. It is amazing to me how value propositions change over time. If you were to start this company today, I surveyed some people who have started Shopify sites, and I said, why do you use Shopify? Why is it so great, they have inventory management. I heard they're coming out with fulfillment. And in 2008, the way that they

were billing it was security, hosting, and bandwidth. And I think it's just amazing that you serve the needs of your customer as they grow and as your market grows. Totally. Well, back to what we were just talking about with Magento, back in 2008, hosting was a... Man, if you and I wanted to start a store selling acquired t-shirts, and we had to spin up a server and install a Magento package, like, oh my, we wouldn't do that. I mean, we haven't even made it to install or set up a Shopify store. so yeah maybe this episode will inspire us okay so my playbook on this one it's struck uh going through this history here you know so many twists and turns as always but toby joining the core rails team and creating typo and then typo becoming a thing in the Rails community actually was a huge, huge 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 yeah Yeah. Yeah. That's a great point. Like distribution. We talked about, we talked 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 spinning versus, spinning your wheels. Yep. Yeah. If you build it, they will come is just so, so rare. All right. 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 just want to pause and we can think about that for a moment. The classic thing I'm always afraid of when we can think about that for a moment. 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 going to build their own thing and they're going to 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 for Shopify

actually goes up as their customers grow the business. And so it's amazing that they can keep pricing power and keep layering on through the platform that they've woven with the App Store and with the incredible ease that they provide in taking on a lot of things that these companies don't ever want to 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, going 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 that. And 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 think just as you said, it's adding and layering in all these products and services and the platform and the point of sale and payments and

all of that around the core offering where as you start growing, you need those. And then it's just, well, it's easy to plug in Shopify solutions. It's got to have a ceiling, right? Because I hadn't really thought about this till now, but there's not a network effect between customers, like between merchants. So 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 allowed them to generate so much revenue and sort of expand as their customers expand is that that is deceptively large and complex. The set of things that all these different plugins do, hosting and security and payments, all this stuff 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 ceiling for which 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 a lock-in network effect the way facebook has a lock-in network effect it's a platform network effect is actually, it's a little bit weaker, but it can support you up to a point. In my notes, I had a quote from Toby that I didn't talk about because it wasn't relevant as we were going through the story, but I think it's relevant here. 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 I think he thinks about it as a platform

company. And that's subtle but different. And so he talks about this. He says, I read a book about Bill Gates pretty early in life when I was like 16 or so. And one thing that Bill said is that everyone in the world wants to be a platform. These are back in the platform day, the Microsoft before network effects were popular. But Bill always, 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 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. 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 making the case for sort of the bundle economics of of shopify being the point of integration and the bundler of all these things exactly exactly that's a, that's a good way to slice it. All right. Should we do a quick value creation versus value capture here? 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 14th 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 with a lot of businesses, particularly recently sharing economy businesses, 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 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 become merchants and lower the barrier for entrepreneurship. I think it's undeniable that they have created net new value in the world. You'd really have to reach deep like Citron to argue that this is not net value creative to the world. Yep. Yeah, I'm 100% with you.

Okay, let's grade the IPO. For me, I mean, this is, if we think about 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 you could argue, I guess, 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 dilution had they IPO'd, 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, like your average person didn't know.

And then by doing it right at the cusp of the world going into this like DTC brand, Instagram commerce, influencer marketing, and Shopify being at the center of all of that by being a public company, 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 launching Shopify Plus. And that's now a quarter of the business. This is a no-brainer, at least a solid A in terms of what they were able to get out of going public when they did for me. Yep. That's a great, great point. Then the only question is, did they make good use of the capital that they raised in the IPO? And sort of what did that allow them to do? I don't think there's anything magical about it. I think they spent it on sales and marketing and accelerated the growth of the company and subsequently have done very, very, very well in the investor community, obviously, and then very well with customers too. So I don't disagree with anything you said. It's interesting. They've made some,

a few small acquisitions over the years. They haven't made any meaningful acquisitions. You would think they're going to make an all stock acquisition in a big way here soon. Like 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. Yeah. Well, maybe that could be a future Acquired episode. Yep. All right. Carve-outs?

Let's do it. So I have two carve-outs. The first, we've never done this on Acquire before, but our most recent investment here at Wave Quota Pro, I spoke about them on our latest LP show. They are hiring for a bunch of roles, both engineers and for a head of product. They are a tech-enabled brokerage for scrap metal recycling. So if you talk about value creation versus value capture in the world, they are literally keeping metals of all types out of landfills. The company is less than a year old, is already doing millions of dollars a month in GMV. They are hiring the technical team here in San Francisco to build up the backend. So the company is like, if you think about Flexport, if you think about Convoy or Uber Freight, like very similar type businesses, we're super excited to help them grow. So if you are either an engineer and want to work at a company like we were talking about,

Uber, Flexport, Convoy, Lyft. We would love to talk to you about Quota Pro. Who would ever want to be a product lead at a fast-growing company started by, or invested in by David Rosenthal? Well, there could certainly be worse things out there. And then my official carve-out this time is Bill Gurley on Invest Like the Best. No way.

It's literally mine. No. That's great. All right. Well, I'll let you take it then. No, no, no. Because I came up with the second one because I was thinking about it. And I've recommended so many episodes of Invest Like the Best that I was like,

so it's literally the one I have a strikethrough through that one. Then I have a second one. So take it away. But it's so the one, I have a strikethrough through that one than I have a second one. So take it away. But it's so damn good. It's so good. I mean, anytime Bill speaks, it's worth listening. But in this one, he talks about a whole bunch of things, a cross-venture, the way he thinks about companies.

He talks about a great kind of XY axis chart that he thinks about evaluating the scalability of companies and marketplaces. Very worth listening to. A masterclass as always. Yep. Absolutely. And actually, especially relevant to this episode. Indeed. My carve out is, David, last time we did carve outs, you talked about a recent trip that you went on. 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 four day bike route starting and ending in Telluride, Colorado. You're riding between eight and 11,000 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 big Sony NEX 6 around on my back and it's fun to bust that thing out. Oh man, while you're riding those miles? Dude, yeah. I mean, the telephoto you know you got to get the you got to 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 pack and busting out the big camera and doing the whole song and dance there. But also it enables me to do things like hyperlapse or all the different, like Spectre is an app that does these cool time lapses and Moment has 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. But they have a series of other lenses, too, that really turn your phone into a camera that you thought it could never be 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, yeah, 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, uh, Seattle company, right? It is,

it is led by a great CEO, Mark Burrows. Andos. And I know a super, super talented team over there. So can't recommend it enough. And that's been my toy of the month. I just can't believe that you lug your big DLSR around on your bike chest. So it's funny. It's a mirrorless, but it kind of doesn't matter that it's a mirrorless because I also have the telephoto lens on it. So it's big and heavy anyway. Oh, man. Love it. All right. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance

and monitoring. Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yep, Vanta is the perfect example of the quote that we talk about all the time here on Acquired, Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product.

Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools, no manual reviews to cobble together your security and compliance requirements. It is one single software pane of glass that connects to all of your services via APIs and eliminates countless hours of work for your organization. There are now AI capabilities to make this even more powerful, and they even integrate with over 300 external tools. Plus, they let customers build private integrations with their internal systems. And perhaps most importantly, your security reviews are now real-time instead of static, so you can monitor and share with your customers and partners to give them added confidence. So whether you're a startup or a large enterprise and your company is ready to

automate compliance and streamline security reviews like Vanta's 7,000 customers around the globe, and go back to making your beer taste better, head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. All right, well, listeners, thanks so much. We hope you enjoyed this episode. If you want to become a limited partner, subscribing gets you access to our bonus show where we dive deeper into the nitty gritty of building companies. To listen, you can click the link in the show notes or go to glow.fm slash acquired and all new listeners will get a seven day free trial and you can listen right here

in the podcast player of your choice. So with that, we'll see you next time. I'll see you next time i'll see you next time