Invest Like the Best with Patrick O'Shaughnessy - Tobi Lütke - Embrace the Unexpected - [Invest Like the Best, EP. 278]

Episode Date: May 24, 2022

My guest today is Tobi Lütke, co-founder and CEO of Shopify. Having first spoken to Tobi at the beginning of the pandemic, just two months into it, this felt an opportune moment to revisit Shopify and the world through Tobi’s eyes. Among many things, we discuss Shopify’s evolution into the world of atoms-based building through Shopify’s fulfillment network, the value of infrastructure writ large, and the impact of market volatility on day-to-day business building. Please enjoy my conversation with Tobi Lütke.   For the full show notes, transcript, and links to mentioned content, check out the episode page here.   -----   This episode is brought to you by Canalyst. Canalyst is the leading destination for public company data and analysis. If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com/Patrick.    -----   This episode is brought to you by Brex. Brex is the integrated financial platform trusted by the world's most innovative entrepreneurs and fastest-growing companies. With Brex, you can move money fast for instant impact with high-limit corporate cards, payments, venture debt, and spend management software all in one place. Ready to accelerate your business? Learn more at brex.com/best.   -----   Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.    Past guests include Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more.   Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here.   Follow us on Twitter: @patrick_oshag | @JoinColossus   Show Notes [00:02:44] - [First question] - His interest in infrastructure as a whole and why it’s underrated [00:07:18] - Whether or not we’re currently building enough digital infrastructure  [00:09:45] - Base level principles for decision making around building infrastructure  [00:13:17] - How much room is left for innovation and whether or not we’ll just reinvent basic human instincts [00:15:22] - Ways new ideas are fed into a product funnel at Shopify and greenlit [00:19:34] - Solving eCommerce infrastructure and what he attributes to Shopify’s success [00:24:23] - Overview of the Shopify Network and how it’s evolved over time  [00:31:04] - Lessons learned in an atom-driven world in regards to fulfillment and logistics [00:34:37] - Common ways bits thinkers are often wrong when solving atom problems [00:35:50] - Spreadsheets tend to win meetings and how the ROI on a fulfillment network impacts its ecosystem [00:40:26] - Navigating becoming an aggregator that sits on top of their merchants and whether or not there are plans to participate as a distributor [00:45:45] - Fair market value, what it’s been like managing through such a volatile market, and important takeaways [00:50:54] - Thoughts on capital allocation decisions as Shopify continues to grow [00:53:25] - Advice for company leaders effectively communicating with their teams about stock-based compensation  [00:59:04] - How much COVID altered their trajectory and what he’s most interested in as he looks out to the future [01:03:45] - What he’s learned about blockchains and the crypto space given recent events [01:08:45] - A new idea he’s encountered recently that he’s fallen in love with 

This episode of Invest Like the Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis. Founded by a former byside analyst who encountered friction sourcing, building, and updating models, Canalyst is now used by over 400 institutions, including the largest money managers globally, and by a number of guests on the show. With detailed company-specific models and data on virtually every public company, panelists clients are able to ramp up faster, update models instantly, and incorporate the highest quality fundamental data into any workflow.

If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com slash Patrick. That's C-A-N-A-L-Y-S-T dot com slash Patrick. Stay tuned after the episode for my conversation with Canales customer, Giuseppe Coco, of L-K advisors. We talk about how Giuseppe has built Canales into his process as an international investor and much more.

Today's episode is sponsored by Brex, the integrated financial platform trusted by the world's most innovative entrepreneurs and fastest growing companies. With Brex, you can move money fast for instant impact with high limit corporate cards, payments, venture debt, and spend management software all in one place. Ready to accelerate your business, learn more at brex.com slash best. That's BREX.com slash best. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest like the best is part of the Colossus family of podcasts,

and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy asset management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Oshonosi Asset Management may maintain positions and the securities discussed in this podcast. My guest today is Toby Lutki, co-founder and CEO of Shopify.

Having first spoken to Toby at the beginning of the pandemic, just two months into it, this felt like an opportune moment to revisit Shopify and the world through Toby's eyes. Among many things, we discuss Shopify's evolution into the world of atomist-based building, through Shopify's fulfillment network, the value of infrastructure writ large, and the impact of market volatility on day-to-day business building. Please enjoy my conversation with Toby Lukie. So Toby, it is almost exactly two years to the day since we last did this. It was early May in 2020. There was still a ton of uncertainty related to COVID. I guess there still is some extent today. And the world in Shopify and lots of things have changed a tremendous amount. I know

certain things haven't changed too. So I've been really excited to do. an updated version of our conversation, it will bounce all over the place. But before we hit go here, we're having this fascinating conversation around the concept of infrastructure, generally speaking. I think it started with this idea that we might be about to come on stream to a lot of good, useful new history books written by people who are really there to see this stuff get built in the digital world. I'd love me to sum up that idea of what your interest is in infrastructure and the way that history is written, even things like payback on infrastructure. in the ways in which we might underestimate it.

I think this is a great tone setter for what we're going to be talking about today. I'm thrilled to be back. Thanks for having me, and most of quite some two years. A lot has happened. I think people are just underestimating the value to society of infrastructure

by some incredible factor. Because you see these kind of things like the interstate system. How do you imagine this thing would have worked if these things wouldn't have been built? I'm not an Adams person. I'm more like a bytes person. I find that infrastructure, especially with software, has this incredibly unreasonable leverage and unreasonable payback period.

And often we have these conversations about what's the state of planet Earth? What are things truly like? Are things getting better? Things getting worse? There's a lot of people sharing excellent opinions on these things. As a website, I hope I say this right. I think what happened in 1971 might be a different year, but something around that time. collection of charts where once the right year comes around or a lot of numbers sort of disconnect

from their previous correlations. I have no idea what happened in the year. But as a student of history and especially of digital history, increasingly I'm thinking about a very very tangent of the thing that happened is that just simply most of the value creation in the world has slipped out of the things that is represented in GDPs, where a whole bunch of people build the upper net around this time, when we got modern operating systems. We've built a lot of second-based computers in the 90s, but none of this was reflected anywhere. Dotcom happened and everyone tried on the idea

like that this tech thing could be very big and then found some of the ground truth to be wanting. But really sort of early mid-2000s, Web 2O, I think we call it, or at least coinciding with that emergence of that term, I think it was the moment where the world of technology said, hey, we actually know exactly how to provide value for everyone. We know exactly how to deliver services and goods and things over the internet. And by way, there's a lot of tweaks on the intuitions that people develop in the physical world. Physical world is very rivalrous.

If you build a bridge in one place, you probably don't build a bridge somewhere else. At some point, in the world of atoms, things become zero-sum, limited amount of attention, the very least, and then resources as well. The digital world is different. Basically, you have to machines, you load something on a silicon chip into memory, and then you apply electricity, and you get this thing. Infrastructure and internet, I mean, I like to believe Shopify is infrastructure, but there's public domain libraries. Just pick one, you know, SQLite.

It's like a library, probably none of your listeners have heard about, but you have probably like something to the tomb of a hundred SQLite database on your phone right now. It's just file format of the world, basically, and increasingly runs more and more and more and more parts on servers. It's just this brilliant open public domain piece. that was written by a team and under great leadership, incredible conviction. But it's not soft-based infrastructure.

It's now people are using it every day for different things. And no one has to decide if we use SQLite, that means someone else can also have SQLite because all of us just add electricity. What that stores then is like an unbelievable compounding value. Again, in a lot of the ways we look at the world through GDP and other things, it's impossible to capture the value that's created here. every time someone updates something on GitHub,

theoretically, it can be copied infinite amounts of times. These are not new ideas I'm sharing here, obviously. In a way, we've talked about this zero marginal cost of software, and of course its powers a lot of value in a lot of software companies. I'm starting to believe that we haven't fully set this idea to its logical conclusion, how much of a change will cause over the next while. If you think about its compounding effects and the return or payoff pattern to infrastructure in general.

Do you think that's the reason why, certainly in the world of Adams, it seems like we're unwilling to re-up the same way we didn't sit under Eisenhower in the 1950s or something? It doesn't seem to be that will because it's very expensive. It takes a long time to build. And then it's a very long-lived asset. And maybe digital, those things are all exacerbated. Do you think that in general, we're also not building enough digital infrastructure,

given this idea? It certainly seems like Shopify and others are building. tons of tooling, APIs are everywhere. This is a big trend, but is one of the conclusions from this, it's not nearly big enough because of its potential payoff? There wasn't a lot until recently. I think there's been a counterswing. I think we will only feel the effects of this.

Even blockchain's infrastructure, they are common. You put a smart contract on a blockchain, they will also run forever. In fact, the smart contracts that people put on blockchains are potentially the pieces of software that will live the longest. They might be still executable and callable in millions of years in some cases. Now I'm making a very big assumption of the future viability of blockchains. But assuming blockchains are going to be part of what we'll do, they'll be around, which is exciting. That's the equivalent of a park.

Your city builds a park. That's a piece of infrastructure. That park can be used for events. All sorts of new things can be done with that. We could make open source code, which was the blueprints, which went could be loaded into touring machines. But we didn't have persistent touring machines that forever execute, which we do now have, although very inefficiently right now. So I think a lot of pieces are being put in place for kind of a new deal on the internet. Posting is becoming much simpler again. What GitHub has done over the last 15 years is they underappreciated in the way it created a community around people just sort of helping each other. You see increasingly really great companies that are just really either all in on infrastructure

like Twilio or Stripe or Adian or like take a lot of this infrastructure, like add a little bit of It's on infrastructure, but really customize it in such a way that it's super available to non-technical people like that's what Shopify is doing. Obviously, I think this is insanely valuable. It's been on my day working on these kind of things. And I like to invoke all this because I think maybe sort of I'm feeling the times, but there isn't a lot of optimism around and I feel there's so much to be optimistic about. So I under and I fly a little bit of counterforce to that particular pendulum. Yeah, it's amazing how much prevailing market conditions and prices can impact people's mood. We'll talk about that a little bit later. Sticking with infrastructure, though,

I wonder if you've developed any principles or principle thinking around what makes for better infrastructure or valuable infrastructure to build. And I asked this question from a place of Shopify's own history. When we last talked, a lot of the things that if you go to Shopify's website and see what you can do as a merchant didn't even exist two years ago. So you've obviously had to make choices, we're going to build this, we're going to not build this. What do you think about in terms of just base level principles that help you with decision making for what kind of infrastructure to build that will have the most leverage in the world? There are some guiding principles in Shopify product that really help us make these decisions.

For instance, there's a very basic sentence which actually does a lot of work within the company. Shopify wants to make the important easy and everything else possible. Probably everyone who listens to this has bought from Shopify stores. You might have not known that it was a Shopify store because they look very, very different. This is powered by a template language I wrote forever ago called Liquid. it. Basically, the merchants can open a text editor and just make their website look whatever I want, or buy a theme from someone. That's infrastructure in a way, because here's something I learned about infrastructure, which might sound very abstract, but maybe it's useful. If you imagine an hourglass,

an hourglass has sort of a narrow waist at some point. Maybe a comic book version of an hour glasses like two triangles inverted pointing at each other. Great infrastructure can be done, then you can define what this sort of narrow waste is between the triangles. For instance, let's go of stride because it makes this point, I think, quite well. There's one triangle on top, which is the internet and all the engineers and all the developers. They have a set of desires. They want to accomplish tasks which involve movement of money. And then there's a bottom triangle, which is like a word of cobalch court in banks.

There's a lot going on and a lot of things you need to know. But if you manage to create a thin race, in this case, in a form of an API, now you have an agreement in the middle. this is almost as a protocol. Here's a fantastic thing. Once this protocol exists, it actually allows the two triangles to be replaced over time. In the case of something like Shopify,

Liquid is again, these templating language, people can write it. If you wrote some in 2005, the first time the Shopify vended in the beta, it will still work. Shopify is the ship of Theseus. Nothing about Shopify's to say.

The Liquid Paras has been rewritten many, many times. Everything changed about the triangle below, everything changeable to triangle above. Most people don't actually even write liquid. They actually just use drag and drop editor, which we build on top, which then writes the liquid for you. The amazing thing is, again, once the protocol has been defined,

once the demarcation line has been created, once the narrow list is defined, then really incredible things can happen because as long as the thing keeps working that's in the middle, you can evolve all the pieces. And I think that's a really, really, really powerful idea for product creation. People encounter this. If you've ever queried a database, again,

use SQL, and that's just a thin-waist system. It's an agreed upon which that gets you the data, and as long as you keep it simple, if you send something to Microsoft SQL server or SQL Lite, you'll get the answer, assuming they have the data. So that idea unlocks, I think, the right approach to Internet infrastructure creation, because once these protocols have been defined, teams can go and saying, okay, they sort of made this work with duct tape and regular expressions in terms of liquid, but let's build this properly, scale it out, make it so that people can use this from now and forever.

So someone once explained it to me as the equivalent of an outlet in your wall that's become standard than anything you plug into it, like electricity flows through it very reliably. And in a way, that's a standard or a protocol or something that is sitting right next to us all day every day, that without it, who knows what would have been invented. I'm also struck by the examples being the choke points, if you will, the most basic natural things that humans have been doing forever, like Stripe, people been paying stuff, Twilio, communicating, Shopify, selling, buying. How much do you think just that is the guide for good infrastructure, just looking for the longest lasting perennial human use cases? And then starting from

there, maybe they've all been mine. I'm curious how much room you think there is left to go, talking, paying. Some of these things I've listed are like the major human motions. But I think my sense from you is that we're still pretty early in digital infrastructure building. So how do you think about that. Some parts are tooled up and some aren't. It's sometimes very, very surprising which ones aren't. Other things that are very, very long-lasting is ownership. People like owning things. We like to acquire assets. We like to have title to them. This is not just the utilitarian value. This is also for starters and for all sorts of reasons that are uniquely human. And we didn't have good infrastructure for this. We probably still have not great infrastructure with this. It's just

barely becoming possible to own things on the internet. I think there's lots of white space. I do fully agree, well, that one of the best things you can spend some time thinking about is what are the things that people have been doing for a very long time. If they've been doing something for a very long time, like making something on the internet that taps into this emotion or into this sensible community or whatever that is you identified, I think you can analyze almost every major success story in the digital space right now, and you really see a digital version of something that people have already been doing, which tells you how early it is.

we are pre the emergence of new things. Maybe even video game world is sort of there, but I think we are spending our time on computers and on the internet very, very different right now than people will end 20 years from now. So there's plenty of materials to be part of being pioneers. So when you think about this applied specifically to Shopify, and there's, let's just call it like a funnel of ideas for marginal infrastructure that could get built, or I guess improvements to existing pieces of infrastructure, How does that funnel work?

How are ideas fed into the top of it? What are the layers of decision making that ultimately lead to something getting greenlit? What is the way that that product funnel works, given the amount of white space that might exist? We were talking about last time the difference of the last two years. I think that we've gotten a lot better at this and spend a lot of time thinking about this, because frankly, here's an experience I've had when the COVID pandemic and the shelter at home orders happened. And we all did that two years ago. It was very clear that this is going to be a very, very,

way, way, white knuckle affair for everyone. There's untold stories there still. Like, I mean, the world almost ran out of service in a very significant way, but probably most people don't quite understand how close of a call that was. If COVID would have happened, like two years before, I'm not sure we could have pulled off,

not we as in Shopify, but the internet. The cloud hosting providers were like very close to food rationing. A lot happened during this time. I pulled the entire list of things that everyone was working on and basically redeirived everything from like, does this help right now? I'm a very vocal proponent of long-term thinking. People should make decisions based on the decision they assume the company 10 years from now

wishes they would have done. But sometimes you've got to just look at what's there and be really, very practical. So I went through. In the end, I think I stopped about 60% of what we were working on. None of the things we were working on was because people made incorrect choices, sometimes just maybe not quite applying the larger sort of frame of reference. For instance, there's a lot of projects to customize Shopify to be better for brochures and so on. I'm like, I understand the pitch of like, that's so-and-so big market.

And if you just get 1%, it's not my favorite form of communication, but I recognize that it happens. So a lot of the projects that are going on, we're trying to drag Shopify into adjacencies. I'm a very firm believer that you have to pick your place and then try to be ideal for that. And actually, maybe to a certain point, actually discourage people to pull your product. into areas it's not meant for. Because Shopify should be the best piece of software everyone uses who is in our space. Because it's like cheap and fast and delightful

and is an integration point and simplifies the business and magically anticipates the next step and has something, a product, good service for you that can just help you do your thing. Shopify wants to be the mushroom to Mario or the fireflower to Mario.

Just give you powers that are awesome. Moving in all these adjacencies increases the TAM, but it stratifies it into concentric circles. For some people, it's going to be ideal in this way, but for many people it will be just never quite there. And I think that can actually have some really negative effects through the feedback and all these kind of things on companies. Anyway, from where we learn,

need to have a really good mechanism by which we get the best of what we have. Sharpath's very bottoms up. People can write proposals for every opportunity they see. That goes into a system which is called GSD, which stands for Get Shit Done. then there's these phases, there's a proposal phase, a prototyping phase,

a build phase, and the releasing phase, and this system allows everyone in a company to see everything that's going on. It's the entire plan, once a year, write product themes for a company,

things that we cause to make true over the year, and then they decompose into different projects. Then as these proposal is submitted for transition to the build phase or to prototyping phase, and then we can have great conversations about, is this not yet? is this a hell yes, where does this go in a priority stack? And I think building this out has been incredibly clarifying and very, very good for the

company. So a lot of the work, I think, of the last two years has been to get companies just really, really, really align on their missions. Companies can get very, very distracted in a lot of ways. And they allow themselves to do things that aren't the mission. This is especially true in a world of product. Again, if you follow away, moving into their adjacencies, I don't think you will have a work class product in your adjacency.

you're not out-competing someone's main mission with your side quest. If we go back in time and think about the number of potential ways or companies trying to solve this kind of problem, e-commerce infrastructure, there were a lot of them through history. Shopify has emerged as the clear winner, I would say, or the default as if you're going to build an online presence, you do with Shopify, and there's other options, but it's sort of the default mode. Is there anything that you most attribute that success to?

in 2005 through, let's say, through 2020, then we'll talk about this kind of modern era as a separate segment. And popping to mind is we're talking about finite infinite games, the great James Kars book and this great talk that I love called Inventing on Principle. You started this to sell snowboards. I don't know how much of this was a grand ambition of yours versus the unfolding of following a certain set of principles. So I would love just like level set on that early period and why you think you won relative to a lot of people trying to solve a similar problem.

It's really hard to attribute it to one thing. I can guess at things that contributed. I mean, luck and timing. People luck, timing luck. All these things are really, really big factors in here. And I think Shopify succeeded. If you press me on one thing, it's people luck. We've had an incredibly hardworking, aligned team

of people who worked together for a very long time and all fall in love with a problem. And I have a choreography. wanting to understand every atom of a space we are trying to solve problems in, and through the group and through the chats, like, managed to see what ought to exist rather than but doors, and that is a vision, and that is a thing that you can then execute against.

Jim Carst's book is really meaningful to me, partly because I love the way he describes what infinite journeys are. He talks about it, like you start with some kind of a vision set out towards some horizon that you find interesting, starting out on curiosity. The goal is not trying to reach Verizon because that would make it a finite game. The goal is actually just make it towards Verizon so that you gain more vision. I find that cycle to be intoxicating. I love thinking about Shopify as a journey because, again, I sold snowboards.

And I built software in an obscure Japanese programming language, which then captured everyone's imagination and pushed attention to my snowboard store, which felt very unearned, but sort of happened. The other thing that James Carrs talks about in his book is that the biggest functional difference between people engaged and playing finite games, something like tennis where you're trying to win based on score or infinite games is a relationship to change. If you are playing a finite game, the rules need to be defined ahead of time because there's a winning condition and the game's over, then all participants agree it's over because some condition has been met. The infinite game has no such facility. In fact, all change is interesting. change actually causes the journey to go differently. Go more precisely.

You welcome it. Frankly, that's also useful psychology right now. And for all of the last two years, this decade seems to be really prioritizing you're rewarding by adaptable. If your reaction to change is fight it and try to revert to what has been before, I think you're in for a really bad time.

This is meaningful to me, and it's the way I've been thinking about a company. I think this attitude partly itself has caused some of the success, frankly, because I'm surprised all the things that fell into scope for us. Because, again, when I started, Shepfer is by no means of first e-commerce software.

There was a lot of other things there, and there was an entire industry. So this was reasonably established, but I never felt I joined that industry, but I solved problems that took me through this terrain. I think that's helpful because there was also a point-of-sale industry, which I don't think that's a separate thing.

You're solving a similar problem, in another form factor, usually it should be connected to the same infrastructure in the end. So that was obvious to us. And then all the book we've done through multi-channel, shopper is playing a very different role. It's your data warehouse. Sometimes it's your business coach.

It's your bank, your financier. It plays a role that is hugely utilitarian to a kind of people who are engaged with an entrepreneurial journey. That has never been defined by someone saying, this is the confines of an industry, but it's actually been set by us just keeping on this journey and figuring out where to go next, always talking a lot with our customers and having a really good understanding for the challenges they face.

And I think this takes us into all these places that we could never have anticipated. Like now we are building warehouses and robots and all these kind of things. I didn't think that would be part of a journey, but it clearly is. And I think it's good to be humble and not have too many assumptions about the future,

but rather develop a very, very strong sense of figure out what. that's right. What is there overwhelming evidence for and then react to that? People are probably less familiar with that. Example you ended on Shopify fulfillment network. I would love just to take that as a microcosm of these ideas and maybe explain literally what it is to people, but I'm especially interested in its evolution. Why, obviously you were incredibly good at purely digital infrastructure. And one of the things that's interesting that's happened in COVID is forced the digital and the

physical to smash together out of necessity, as you pointed out, thank God for the internet during COVID, and sort of pushed everyone into this intersection and less often Adams or bits only. So maybe start by saying, what is Shopify network today? And then really, I'd love to hear on how it evolved and how it began, because I think it would be a great way to get into your company in your head about this kind of decision making and where to go next. I'm on WhatsApp, France, for probably 100 merchants. And from all backgrounds, I just talk to people

and then I sort of upgrade us into a chat and then we talk about what works and what doesn't. And very quickly this usually becomes talk about the business rather than the software because software hopefully works really well. But that's actually even more helpful because it just gives you a sense for like where do things get really complicated.

Our observation with Shopify has always been that the journey is uphill. It's not easy. Shepra never claims it is. Entrepreneurship is fundamentally a little bit reasonable. There's wonderful quotes not by me. People point out that you end up spending a hundred hours a week working for yourself so you don't have to work 40 hours for someone else. Often this doesn't make sense. But again, for some people, it's super important. And frankly,

for our economies, it's really important that people do this because most people in the world are employed by small and medium businesses. There's about five and a half million people employed by the millions of merchants on Shopify and that's very very meaningful. So we talk with them, what we found is it's an uphill journey, which is okay. Everyone's willing to do this because it's very gritty people who embark. But if it becomes a technical climb, it filters out a lot of people. A lot of people just opt out of the journey, basically just forego future growth at a point where things become very obscure.

This actually started really early once upon a time. For instance, actually, one of those brick walls was just getting a payment gateway. I know it sounds crazy that the internet was ever like this, but when Shopify started and seen a lot of parts of the internet, it was very hard to get a payment gateway. So that's trivial now, because it's built in. You just get one. So we build up the infrastructure, us and our partners, to just underwrite people. And then this particular technical climb disappears.

It becomes just a slope, which, again, everyone will continue on. So you actually have more entrepreneurship because some obstacle like this was overcome. Think about the importance of tooling infrastructure and also EACS here. There is significantly more people employed today because of good U-X and not getting people to be stuck and integrating more. I think this is really overlooked part of the effects of this type of friction. This is really how Shopify thinks about what I'll do next. People have lots of problems accessing capital from banks. Banks have in their charter that the point of why they get these privileges, especially retail banks, which they have, is so that they lend money to small businesses because that's, again,

huge return on investment for society if that happens. However, banks do not want to do this anymore. We had to give up at some point. Realistically, that's how it should work. But in reality, they want to lend money to companies that have huge revenue. It's lower risk. It sort of makes sense, but that means they disappeared from playing an important infrastructure role in society. So then we have shop with a capital because people are worthy to be underwritten and for advances. And again, their business can grow significantly only when there's capital available to grow business. We're going through all the obstacles. The one that just is a slam dunk thing is,

it depends on your product somewhat, but at some point you really have to have a plan for how to get to at least two-day, ideally overnight delivery for products you have. In the past, it was an experience, unlike anything else entrepreneurs have done to this point. Then they decided to go into a new channel, like the sale on Facebook, on Twitter, on Instagram.

There was a click of an app which they added, and then they did that. That's how people are used to growing their business. getting logistics set up is to work with whatever factory and contact manufacturer you have, figure out freight across the Atlantic and Pacific, you then have to

find warehouses. It is a completely different world, which involves a lot of different people to talk to and complexities. So it just felt they obviously in scope for a long time that at some point we have to solve this. In fact, I started talking with the board of directors

and they wisely told me that this was too early over 10 years ago, wanting to go into this direction. I think this is important to say. We're doing this not because you want to be in the logistics space. We rather actually don't want to be going into the logistics space, although it is wonderful and fascinating. And there's lots we can actually bring, given our unique experience about processes and visualization technology and digital infrastructure and whatnot. But integrating an end-to-end is one of the goals we have. We would like to get to the point they're running a sizable retail business, could if you choose, be treated as passive income.

We want to automate as many parts of it as possible so that you and your team can focus on product creation, which is the most valuable thing you can be doing. Doing undifferentiated work, figuring out there's some packages. To me, that is like the digital system just should really know where packages are. Like, otherwise what the hell is going on? That's not differentiated work. Now, we found that the more entrepreneurs end up spending time on their product, better the products get. And this is one of the wonderful things about the direct-to-consumer world that emerged in the last few years that there's much more alignment between the people making the products and the people getting them and they're happy to send feedback. And there's no reductionist channel and merchandising

team in the middle that optimizes your products for being easy to stack or just a higher profit margin so you can compete against fiber products around it in the I-hide chef space in the supermarkets. Those are all influences on products that don't lead to better products. And I think this is actually at the root of a lot of a criticism about disposable consumerism that I think is being leveled. It's not because people love stuff. It's because people hate the stuff I get.

We're starting some of the processes and helping getting people to be at this direct relationship, which just leads to actual all birds, like wonderful products like this, which are clearly just built the feedback from the people who wear them and want to recommend them. I think that works better for everyone, and it's what we want to see more of. But something like this in particular,

thinking back to your point about, you got to be careful about which adjacencies you get dragged into. Obviously, logistics is firmly in the vertical of core muscle movements or something, whatever you want to call it, for a merchant that's selling online, they have to get their stuff to places.

What lessons have you learned entering into a much more atoms-driven world in terms of what good product means? What is a good fulfillment network? I wouldn't know how to answer that question. Obviously, there's the 800-pound gorilla in Amazon that proves that you can build incredible logistics networks over time. I mean, it's just a very different kind of calculus than a great new piece of software, which I don't think anyone would say Amazon builds great software. They seem to build great infrastructure. So what have you learned about that? Is it radically different? than what makes you good at software.

There's a different set of skills required than what makes you good at software to be excellent at fulfillment and logistics. Yeah, I think so. We tend to talk a lot about intuition because intuition is also one of us underestimated things. Intuition is actually all of your life's sort of knowledge channeled quickly. I always recommend people to actually actively build their intuition

for the kinds of problems they want to solve in their career. There's this uncanny thing, like people were just like incredible, effective and so on. they can look at an architectural drawing and instantly tell you if it's good or not. And then they need to think maybe 10 minutes to figure out what the problem is, but something pink their brain about, maybe call it weak signal detection. Like, there's something wrong here.

And I think this is the way intuition can be really helpful, but you have to understand that it's task-based. So intuition built in a world of bytes is not good intuition in a world of atoms. Actually, you almost want to get away from having the people who have that kind of intuition make choices and the other thing. Sometimes the rights people end up being the most useful people in the meetings because, of course, everyone with industry experience will understand how things are. And a lot of engineers have a really good ability to think from first principles and just

figure out that's what it is, but what ought it to be? How could this all work together? And then you don't just pivot to that. You figure out from now on every step we do, everything we implement, how can we make it so that we can get closer to the ideal eventually. That's the humility that is really, really important. What does good look like? I mean, good looks like if you can put on a website

that this thing will be with you tomorrow and then it's good. At some point, this crunches together to SLAs, so it becomes quantifiable in this way. And you're right, another thing you can do is also look at what Amazon built, and that's also very, very good. Shopify's relationship with Amazon, the media is trying to make this very zero sum.

We treat them as a very worthy rival. Sometimes ask us what you can learn from them and sometimes you ask what you can do better from them and I hope they treat us the same as well but again and in those circumstances I'll be thinking about how to capture pieces of pies from a competitor's actually ever. Positive sum thinking is so valuable

because it's amazing how often people are trying to compete for pieces of pies rather than just grow markets. Everything about the Shopify journey has convinced me it really doesn't pay to really have market analysis this well-known venture capitalists passed on Shopify in 2008, partly because there was only 40,000 online stores, and that was not a big enough market for their investment.

And I'm still sort of disappointed with that, because I realized especially venture capitalists should not make this particular category mistake. If it's common there, it's clearly common everywhere. I love this idea that if you bring the Bits person into the Adams' conversation, their intuition may just be wrong. In what ways is it most commonly wrong? I mean, change management for software is deploy.

Change management with people is a project that's going to take you a while. The cost to switch is significantly higher. There really is a long itinerary of things that are wrong. It's useful, but it's useful as an input, not useful as a, let's do that thing. This goes beyond the engineers, of course. Even U.X has been really interesting because, for instance, you're designing U.X for robotics. You scan an item, goes onto a chalk is what the robots are called, and the chucks does the heavy lifting of moving it around.

So just let the associates do the things that they uniquely can do well and let the robots do the stuff that they don't actually like doing. So that's the way we build our robotics. But this requires a very interesting human interaction design that's like ought to not wind up annoying after a while. And I think it's really important. And designing interfaces that people are using like every minute is different from stuff that people sign up once

and then process some orders in every day. People that just have to recalibrate. I think that also makes me work really fun. You mentioned earlier this notion that maybe the factor is 100x that we're underestimating the potential impact of, especially close to zero marginal cost, digital infrastructure. When you've approached the Shopify network, how has it felt to be much more tied to like real napkin math,

return on investment math, higher CAPX? To use a crazy example, no one buys an apartment, expecting it to 100x. It's not going to happen. There's limiters that don't exist in the digital world and the physical, and therefore the math behind it all, the return on investment and the ways it impacts the ecosystem maybe are more measurable. Do you think that's true? And how much does that figure into your decisions on how to, when to, where to build the fulfillment network? You can attack the fulfillment network with Excel spreadsheets. And ideally, you encode confidence factors into a lot of your numbers.

I always chafe a little bit about spreadsheets lead to fake certainty. and very often the spreadsheet ends up winning the meeting and I find that there's a lot of ways how that can go very wrong. So I'm encouraging people to like next ideally to every column that has an assumption in, like put your confidence in. And then instead of having a final number about what's best,

I want to see the error margins. Anyway, I think partly about it like this because it needs to make sense on this level as well, but I see the real benefit of a film and network actually totally differently. I want Shopify to be a magic product that can accept money in whatever way the planet Earth conspires to move money around. It can do your brand justice in making you look fantastic in whatever channel you choose to be represented in.

And then it will get your customers to be incredibly delighted with the experience of buying from you by making the things show up the next day. And magic internet side that solves all those kind of problems so that you can just really make the product. It's very hard to capture this in spreadsheets on SFN alone. I think it's actually important for the story of what Shopify is becoming. And it's exactly this infinite game thing that's being really honed in here.

Because I want people to say that Shopify is ideal when you're starting a new retail business. It's simply the ideal software. My work is to make it so that people who, for whatever reason, choose not to use Shopify, make a huge strategic mistake. I don't control people's choices. I control only our choices. So we need to show up with the best thing that this particular assemblage of people can create.

In the end, it's very hard to quantify the effects of something like the fulfillment network. Again, I'm comfortable with unquantifiable. We really should double-click on this a bit because it is a very reoccurring topic. I do think that somewhere around the time VisiCalc got invented or when we first started bringing in spreadsheets, Think about that piece of infrastructure and how much value that's created in the world.

I think it's a little bit of a victim of its own success because it's been so useful, especially to the world that existed when it first came around. You know, all models are wrong, but some models are useful. So that's true with spreadsheets too. I would say that there is an unbelievable competition for everything in the world that's quantifiable, partly because people are guided into this space by spreadsheets. there's a primacy to make decisions this way. The Venn diagram of value you can create

and value you can directly quantify is like a very small overlap. I would say it's probably 80% of a value that's there can't really be quantified because it hits you in second order effects. Even when you value companies, how do you value a company like Shopify? Obviously, people are, but the best thing we have ever figured out to do it

is create a market and observe the buying and selling patterns. Although, as we all know, there's a huge multiplier on confidence in the future encoded in this. So this can swing significantly, while the company actually, its fair market value is clearly only increasing because it's launching awesome stuff. So it's like a zigzag somewhere that has the actual real market value, presumably somewhere in the space traversed. But it doesn't spend a whole lot of time in it, I think, or close to it. So I think that we just have to be comfortable with things like taste, things like intuition, with things like, that's awesome. you do something and say, that's awesome, I don't know how to put that into the spreadsheet, but I can tell you it's going to be reflected in the numbers if a lot of people agree with it.

I don't think shopper can succeed in the long term. If you're not comfortable with building things purely for the unquantifiable, with some semblance of faith in the second and third order effects being good for the spreadsheets. One of the most interesting parts of our discussion last time was this obvious tension that I think you've lived with and held, and obviously we talked a lot this time and last time about wonderful product. And then obviously, the other side of every business is distribution. And really, I think the Shopify merchant's responsibility, as you described it last time,

was create a great product and sell it, get people that it would be appropriate for to know it exists and to want to be interested in and buy it. And then everything else will do for you. I've really enjoyed that discussion about as Shopify becomes more ubiquitous and used by more and more merchants, how do you make sure you're not the aggregator that sits on top and you're the brand sort of in the background. And then I'll go back to the Infinite Games Horizon. One of the things that popped on the horizon was the IDFA change, which materially impacts the way that Shopify merchants are trying to reach and sell their product to their customers.

Has your view evolved or changed on this at all? Shoplify's role in the potential for distribution for each merchant partners and even a centralized role that it could play, you know, the shop app came out after our first conversation. How has your view changed at all through COVID on this idea of distribution and whether or not you should play a role. My view has been, if you do it, we have to be very careful about it. And I think that has not changed. It's a complex topic. The ATT changes are interesting.

And what they really highlight is just things on the internet are fleeting. And I advertised my snowboards in 2004. I was the only person bidding on the keywords for all the ski resorts. That's also a very different internet. Things change, opportunities arise and some opportunities are closed. The ATT changes specifically, I mean, they captured everyone's imagination. I don't actually think they are even amongst the largest changes that have happened. They are unfortunate changes, partly because I think small businesses ended up in a crosshair

and potentially in a friendly fire of something unrelated. They're not a huge change. It's something 5 to 10% maybe. The one thing about them, and this is why I really particularly dislike them, is because it's not an even distribution across everyone. If you have a paying mass market product, you're probably not affected at all. It's very regressive. The people were most affected, other people making the products at the intersection of three different things,

electric skateboards for the people who like technology and skateboarding. Some of the products that are doing really well in Shopify are intersections three ways across, finding the set of the 1,000 through fans that really need something like that. That specifically thing has gotten harder, which unfortunately also is, usually the smallest of the merchants or the ones which are starting because a lot of the white space is in finding your unique niche. So in a way, I think the ADD changes cause some very regrettable situation where it's fine for people who are already big, but devastating, or at least 30% impacting, which

sometimes is the entire margin for the people who ought to build businesses and we would like to see succeed. To a certain degree, product discovery is being dragged out of us in shop. It's something that clearly the users of shop really want. from us. I think doing a really good job, coming up with new ideas, new shopping surfaces, which are non-rivalrous between all the merchants to a degree that's possible. But that's really early. We announced the shop for our audiences product, which can help a little bit with finding these more niche audiences. Now, that's a very early product, which is currently aimed at plus

merchants. There's an ambition to bring this further because we really care about getting people through the starting period. But there's also some opportunities for helping people for their first sales. My ideal situation here would be help as much as we can get past the Cold Start problem and then potentially as they get larger,

help them figure out their broader marketing approaches through data analysis, potentially models, potentially audience creation based on your own data. But this is all the early variant flux. I would say, though, that new opportunities, for advertising keep coming around.

Like connected TV is becoming more of a thing and radio ads actually turn out to be underutilized now because a lot of money has shifted into other channels. And then new attention platforms are coming along all the time. I think the important thing for us is we want to help people be able to take advantage of what other people build. And as much as we can do something ourselves, that's also good.

But I don't think it's utterly necessary for the success. I have a friend that jokes on a long enough timeline, any big enough business sells ads. And it's a funny conception, but it's just funny how many times it serves to be true. It sounds like in this case, what you're saying is there's going to be a lot of places where you can get the attention of the customer and you have to be creative and you have to adapt and the keywords start getting higher, et cetera, but that this is maybe a good example of Shopify not getting dragged into an adjacency, do what you can to support it.

But ultimately, it is the responsibility of the merchant to know how this works and evolve than adapt. Finding product market fit is square in the center of a particular vertical slice that we want to help people. I really like Kevin Kelly's 100 True Fans essay. And finding the first 1002 fans is just objective in the beginning. And I think the internet should conspire to make that possible for people. And we will work hard on trying to make it easier as well, especially because lately, as you see, it's becoming harder. You said something earlier about the fair market value of the company probably being maybe there's some jagginess to it, but it's a fairly steady line And then I was thinking about this analogy of a guy walking through Central Park from like corner to corner at a 45 degree angle.

And that fair market value is sort of the guy walking and he's talking his dog on a long leash and the dog is running on either side of the fair market value. And sometimes that's what the stock market looks like or the price for a given stock. What has it been like managing through a very at first upside volatile and then downside volatile stock price, knowing from our first conversations and other times we've talked that this is obviously not something that you or you want the employee. to be focused on, but nonetheless, is an input into the business if you need capital or want to sell shares or buy shares or whatever. What lessons have you learned managing this where I think you're maybe the best performing stock added the most market cap like any company? And then there's been growth, multiple contraction on the other side in 2022. Tell me everything you can about what you've learned managing through this and what you've found to be important.

I think a really important thing is what's the relationship between a company and the stock. And we talk about this internally well. I think that's serving us really well. This is not our stock. Our stock is a marker. People forget this, but the stock price is set by someone making a stealth decision and someone making a buy decision. People coming to an agreement at this particular number and that goes into the tickers. You're not in offices anymore, but all our offices are connected to electricity grid.

I don't think you can really predict how well the company is doing based on how much energy is consuming. It's related to what's being done, but it doesn't represent some kind of incredible wisdom of a company. Shopify has huge potential. I think that's quite clear to the people who observe a company. It plays a super important role to its customers, and it's just a good deal. I think it's a very focused company that's building great product in a space that's

for valuable, all these kind of things. So you see this, and what you do, I think, is you do a sort of internal check about, like, hey, how optimistic am I about the future? Then you take whatever you see with the company and you multiply it with that thing. And then the end result is going to be something that you're willing to engage in a trade with. Now, if the world changes a lot and everyone's optimisticness is cancelled for the time being, then suddenly you're multiplying a very, very, very low number, and then you just traded that. Sherpherre has the pleasure and displeasure of being large modifier, they

affected by people's read about future and markets and economies. So I think that's been interesting. Friends have encouraged me to sometimes share some of these things that we discussed internally on Twitter and then now plenty of IR people are encouraged me to stop doing that as well. So it's certainly on both sides of this. I think things get really bad than people making decisions based on the stock. Outside of for a personal portfolio, do I'm buying or selling, that's your decision that you can make with a stock because that's the one thing. It's authoritative over.

I want Shopify to be like a really, really high quality winning sports team. Some people describe their companies as families. I just don't find that to be a really good. analogy. I like professional sports team better. Does anyone believe that the team members in a sports team check the betting markets before the game? Maybe they do, but then you're in front of a goal as a striker, you should think about can you score, not what's the betting market say and then change your decision based on this. This is the tweet I made. And then people said, well, what about stock-based compensation and these kind of things? I was talking about decision-making.

I also get that part. That causes some conversations inside of companies for sure. I think all of these acute microchanges like this can be handled during a downturn. Again, back to iteration. I think in good times, everyone's iteration is largely proxies to what companies ought to be doing. Probably 80% of the random unsolicited feedback you get is actually something you should take very seriously. I think doing downturns. But the reason why I think a lot of companies end up washing out during downturns is because doing the good times, especially 13 years of good times, you end up in a pattern that you just end up

caring or even prioritizing what other people think, and you're running a company on sort of a say-so of some kind of group consensus. I think in downturns, you really have to have a vision that you're following. Frankly, your moves are not going to be intuitively the right moves. You really need those asbestos pants in those times to deal with this. I think a lot of companies end up willing to do this. So tying this all back to the stock, I spent super little time think about this. I don't even think I manage on the stock. Again, I work all day on fair market value of business. Other people buy and sell. That's eventually convergent again on whatever the fair market value might be. And that's how I think about it. That's how I teach it to people inside of a company. And that's

the entire thing. Now, sure, you have some moves you can do, especially if you want to use stock for M&A during good times. But frankly, if you raised cash during previous times and now you can deploy it, then you're in very good shape. But prudent money management, I think, involved raising money for rainy days, which I think most companies have executed really well this cycle, which is also different from times past, I think. It's fascinating to think about, it seems to be in the crosshairs again for people, the relationship between capital markets and companies, where for a long period of time, especially in technology, capital was sort of like a faucet that you turned on and off,

and maybe we're going through a protracted downturn here, and that will be different again. How much do you think about the capital allocation piece of Shopify as it grows, things like share issuance, share buybacks maybe would be the question today. As the multiples come way down, you already addressed M&A and the sort of potential for arbitrage there. This is a very different thing than focusing on product-driven fair market value. But how much do you think about some of those bigger capital allocation decisions and the ways that it might impact everything that matters to you at Shopify? Capital allocation is the name of entire game. Funding a team that's looking at something is a huge expense. At some point, show me a roadmap. And I just

show you your actual strategy. Obviously, the deep financial ones, share buybacks and capital raises are the top of the iceberg of capital allocation work, which are observable by everyone from great distance. I think the people who have built good companies with good unit economics are good capital allocators at the end of the day. Different tools come out during different times and we will use every tool that's available. Sharpufer is not immune to the sunk cost fallacy, but I think it's better than most companies. We don't really have sacred cows in these ways. If something makes sense, it makes sense. I personally bought some Shopify shares.

I couldn't think about a share by back for Shopify, but there's a lot of things going on that make that hard. So it's probably not the best use of Shopify's capital, but as an outsider doing an open trading window, that seems like a really good investment. Shopify is profitable as a private company. Then it was profitable again as a venture back company. It has been profitable for times as a public company.

I'm a card-carrying member of a club of people who says that companies ought to make money at some point. I do find it's important that people look at the union economics independently because if they are really good and company invests, of course, a lot, then that's a very different thing. I'm not saying anything crazy because there's been lots of fantastic companies that can be observed with this lens. I think everyone's fine with this. The way you do anything is how you do everything. If you're on a journey, you have to be good at being on this journey and being good on the segment of a journey is different from good times compared to tough times. I would like my work to be judged based on, did I do the right thing from a long-term perspective,

given the macro situation, the water shop before I was swimming in at the time. That's the way I think about it. Do you have any advice for company leaders that are trying to communicate with their teams, especially around something like stock-based compensation where people are people. They see their shares. They look at the price. They do the math. And stock-based compensation can be a very big part of compensation for the technology sector.

is there anything you've done for your team or with your team that you've found to be extra effective at just level setting around this topic that you think other leaders could productively adopt? Presumably the leaders are going to be on the same side of the table as the rest of the team. So I think actually just saying that it's really, really good. Like it's like, hey, this sucks for everyone. There's free things that make us all use this tax based compensation in terms long-term alignment and so on. It's very hard to improve on as a facility, but it has this massive downside of everyone freezing the current level of ambient market optimism into a number that's really relevant for everyone after with point. We would never,

ever design a system on scratch like this. It's a fairly dumb system. The upsides are, of course, spectacular because it really can swing both ways, but the downside is also obvious. We are thinking about how would you actually do compensation from scratch if you would design it today and see if you can get in that direction, just because if it weren't for the stock-based compensation, strike price setting, then there would not be a real relation between the stock price outside of when people sell shares and buy shares when it matters or when a company wants to sell shares than it matters. But I think there's a benefit of reducing the day-to-day impact of the stock price onto a company as much as possible. And I think we'll see more new and clever compensation systems again

that are going to try to just go for different sets of tradeoffs, try to reproduce some of the things that we got through stock-based compensation in other means. I think that's worthwhile thinking about. We'll not solve the immediate issue. Outside of that, I don't have good advice. The best time to talk about these things was half a year ago. We were lucky to just tell everyone,

when the stock was up 20%, we did not get 20% smarter. So it goes down 30% tomorrow, we also didn't get 30% dumber. This is all philosophically points at a very particular spot. that's very right. I think we might have even talked about this last time. It's like Alfred Adler's idea of separation of tasks.

I find that's incredibly applicable concept or basically in a nutshell is what do you control? And then he talks you into actually you don't control anything other than the content of your brain really, which is a very stoic idea, but also clearly right.

He talks a lot about interpersonal conflicts. Someone says, this person doesn't like me and I feel bad about myself because of that. He's a retort that your job is to be a likable person and if that person doesn't like you,

then they control that and that's nothing to you. It's hard to live this. It's clearly correct. And frankly, it might just simply be the best idea in the world, at least a candidate for that. I really find that broadly applicable. What's my job?

My job is fundamentally to fill my brain with a set of intuitions that are going to be really, really good in the moment in Shopify, being able to make flexible decision, being able to know enough and have enough depth about all the things that Shopify works on, that I can at least countercheck people's assumptions based on first principle thinking.

That's important to me. The goal of the company is just be the best company you can. Work on the fair market value. You're not a stock. The stock is a voting mechanism on how much we succeed over time with all sorts of other confounding variables in it. To me, it's extraordinarily liberating to think about the world in this way. It guides me in all sorts of places.

I want to be the best dad I can. The relationship with my children is an emergent fact based on that. How is this working? One of my sons is going to be one of those which really has to retrain dependence and everything dad is doing is uncool, which, you know, like I'm sure I'm going to get into this phase soon. That is regrettable, but not something I'm going to try to micromanage away because that things go really bad. I find that really useful when thinking about stock. I think that really useful than talking about compensation. I think, again, compensation specifically is the base salary, sure, it's a stock-based compensation, which of course is a bummer to

everyone there right now. But also your lifetime earnings is the thing that you should optimize for. Forget your stock-based compensation. Forget your salary. It's about the skills you acquire. Most people will listen to are part of industries that are very meritocratic, or at least have good performance management, tech and finance and so on. And the world will conspire to get you to the place where you have most marginal value. Otherwise, you should find another place to work for. the trick, if you want, make money is learn the most, become better at your skills. It's hard to imagine something better to pick up and learn about than the behavior of companies in times of the purse strings are a bit tighter and ambient optimism is a bit lower.

I think people can rise to vocation and I think companies will wind up being a lot more focus, more and more of their adjacencies are going to fall to a wayside because at the end of the day, we make goods and services that are hugely delightful to our customers, and that's kind of the entire thing we're doing as companies. Figuring out how to be of as much value for that and be the person who has conviction or knows what to do next, then other people are looking around to figure out who is emergent as a leader, those are the things that will have much bigger impact than these underwater grants that you might be fretting about.

at least try to balance the attention units that you have in your brain between both of those parts of your compensation and optimize when you're part of a company, always for working at a place where you can grow the most and where you can learn the most. That's honestly the true key to lifetime earnings. That's interesting how that fair market value concept can be zoomed down to the individual and it boils down to learning fueled by curiosity is a really cool concept. I would also sum up what you said about all of this is capital markets at their best form for a company represent opportunity. They should not be fully relied upon. If you're in that game of full reliance on capital markets, you're subject to the whims of things you don't control. And unit profitability

and being profitable through the journey and controlling that destiny is really critical and a really cool takeaway. If you think about now where this all goes from here, I love the Buffett quote. I almost never quote Buffett, but this is a particularly good one. Every storm runs out of rain. I just think that's so true. This storm will run out of rain too. And the other side of this is going to be, we know the trend lines. We've seen the e-commerce penetration trend line. We've seen the digital penetration trend lines, which are inexorable. Where does that take us? How much do you think COVID altered that trajectory? Obviously, for a period of time, it drastically inflected the adoption curves. And it seems like we're leveling off or even returning to the prior curves. How do you think

about all of that and where we're going. This is kind of harkening back to where we started, which is digital infrastructure as a concept. What's exciting to you to close on an optimistic and forward-looking note? What has your deepest interest or curiosity right now as you navigate towards that horizon? We've been trying to solve very complex technical problems for a long time, and just the quality of solutions coming right now is just better than, I think, a lot of the thought of the past. And there's this other effect that we alluded to, earlier, which is that enough people are the end of their careers now and actually take the time to write books about what they learned. And I think there's such a young industry that we just didn't have that good source material,

or at least things that we can immerse ourselves in the thoughts and lessons learned of some other individual, and then pick and choose the ones which we think will be relevant for the long term. You can do this in every space. In tech, you couldn't. This is not that much important things written yet. And that's really changing. There's lots of lessons learned now. and that's really good.

And so COVID leaped forward. In terms of GDP numbers, in terms of usage, these are these sort of vectors that we use to figure out which direction things are going. Things have jumped forward, like upwards and then meanded back to basically the trend line. Every chart I've ever seen, I see some of them have a trend line and it's like not the trend line.

People engage in a little bit of motivated reasoning with graphs at times and things are tracking ahead. And that makes sense because we now are living on a planet where I think everyone has a functioning understanding about how to communicate remotely, utilize the internet, involve it in their lives with their families, with their companies, with their churches or whatever, that is going to lead to a different outcome. Innovation is very path-dependent, and it will be a very different world because of this. Maybe not in exactly ways we fought.

For some time, we thought maybe this is just a 10-year leap ahead, and there would be no convergence, there would just be a step function and then like a dent in the chart. maybe this is true in some places it's not true universally. Again, that's fine because people consume whatever they want to consume and the wonderful thing is now it's like no one's forced to be inside anymore under a shelter in place,

no matter what you think about, these kind of policies. So people have personal agency again and we'll see what they do. But one thing we will not have to deal with anymore is ignorance about the digital realm. So that's massive opportunity space again. And I'm super encouraged

about cultural trends within engineering because everything is getting a lot more pragmatic again. Things have gotten very theoretical and people fell in love a little bit with the tools rather than the output of the tools that can happen doing good times. There's always a bit of a back-to-basics

that happens when times get a little bit tougher. You will end up doing nothing after a while if you don't get these times every once in a while. So that's encouraging. It was already going on before it happened, but it'll accelerate it, which is especially important because the plan of it's going to be limited by the lack of engineers.

We don't have enough for all the digital problems we have to solve. So engineering efficiency is going to be the second best thing there. Lots of advance in UAX. I think the product discipline is sort of coming in its own and has stronger self-confidence. No one's surprised by the unreasonable power of data either. So I think these four disciplines sort of make the R&D realm, and R&D realm is going to be the one which dictates innovation. I would say it's as healthy as I've ever seen it,

as disciplines, and that's, I think, really, really exciting because it will lead to fantastic products that people will be extremely excited about inside of companies like Shopify and now there's involved with SOS RAM as well. I realize that I have an opportunity to ask you about your interaction with this notion of blockchains and ownership in the digital sense. At a time when it's a bit out of favor, we're talking on the 17th of May in 2022. And we've just been through some very prolific blowups with something like Luna, there's definitely a flush out, I'll call it, that's happening, a forest fire of sorts that's happening in that world. But you said earlier something really

interesting, which is like people like to own stuff. And we don't have that hourglass choke point for pure ownership in the digital sense. What have you learned about this area that's interesting to you, especially as it seems like it's being tested right now? What intrigues you? What might this unlock? How should other people think about it? Because I know you've spent time on it. I'm very excited about this. I'm not a fan of a lot of things that are going on on it. I think you're right. Like the lunar thing is just nuts. You invoke the concept of a forest fire. Good forestry management involves actually letting fires go through so that the fuel on the ground doesn't build up and make something that ends up being fully out of control. I was hoping something

more measured would go through, but like it was quite clear that something I had to go through. My excitement about crypto is really from an enablement perspective. Again, the zero marginal cost copying of everything is the world we all live in. It's a totally intuitive, obvious concept to me that everything can be infinitely copied. In fact, even using a website is actually copying images from a server into your main memory. Again, I think about things very much from enablement and infrastructure perspective and the blockchain and specifically smart contracts, which I think are even more meaningful than a blockchain, just really creating things that we couldn't do. We were limited to building basically the things that could be built with abundance. So that was

a really, really good first step, but you want the internet to be able to implement complex systems that involve ownership and trust is a very human concept, and figuring out how to port trust is very, very tricky. And in fact, if you ever see the charts of trust and institutions, it's trending very much a wrong way. We may actually lose certain institutions over this decade from the ability to engage with citizens in a way where everyone's really fully trusting each other. So I think we need, like math is very good as a way to model trust. think the internet has gotten some new skills, new commons, new infrastructure. We will be able to build very, very cool things with that.

We see this in the arts right now, like NFTs. It's easy to level criticism there. But I've also had dinner with people who have very memorably dedicated entire lives to a particular very nichey subpart of art, wrote essays about it and so on. And it just ended up being one of those types of arts that just was really compatible with the ideas of NFTs and blog. Chains. The work went up and ended up capturing everyone's imagination and has one of those every time it's traded 5% split amongst the artist and initial publisher. But if the only thing

we end up here is an actual business model for the arts, there's a lot of people who think that humanity being human is actually defined by arts. I'm not sure I would take that position, but I think the fact that it's in running means we actually should take it seriously. And this is the first time the arts have gotten a new business model since patronage. That's pretty notable. Usually, then something is. is unlock something new that's possible. It's not going to be used for only just one single use case. Now, that all being said, I've got to figure out how to get some of the frothiness out of this.

More and more people are learning that some institutions are very good institutions and really ought to exist and ought to have some leverage. And how it all can be reconciled? I don't know. There's a small part that shopfire can play around because we love the idea of communities. A lot of goods on Shopify stores end up resembling our communities. NFTs are very good club membership, attestation. So products that are available to people or potentially infinitely reordable to people after their title is managed by something you have in a wallet is just a very cool way to think about bootstrapping new communities.

So there's lots of things we can support there and support merchants with. I have a lot of friends who made a good deal of money. Not everyone stayed in the arena, me and some of my colleagues did. A lot of people made a good deal of money and followed the sirens call of zipping moaters in a beach. and I always thought this was really regrettable. I love when people build. Again, I love entrepreneurship. I think that comes through in these conversations.

I see a lot of them come back. Just because something that actually is probably not much right now, but it will unlock completely new potential in somewhat in similar way how the 90s Internet did. I think this is what a lot of us are reminded of because the 90s Internet, you went to a university to get your first terminal Netscape, web browser experience. There wasn't a useful website to go to.

Remember, like with default at my local university was basically Yahoo. There's one website that's called the big red button that does nothing, which you could push. So unfortunately, I think a lot of crypto is like big red button that doesn't do a lot. That is not a statement about the future potential of the entire space far from it.

So this is what I personally like about it. Well, since I've already had you on and asked my normal closing question, I thought I'd come up with a new one for this time. Is there an idea, that you've encountered recently that you've fallen in love with, that's relatively new to you. It could be from a book, could be from any source. You strike me as someone that collects interesting and useful ideas, tries them on for size,

keep some, jettison's other. What have you encountered that is something that you're playing with right now is potentially interesting or useful? That's a new idea. I do love digging into ideas and handling them. obviously spend a good deal of time trying to figure out my thought on infrastructure.

We did talk at length about it, so I don't want to go more into it, but a return investment of a polar program is probably in the like $5 trillion. It's just nuts how much. I'm so sad that you're not doing these things anymore. I understand why, but I understand how to fix it.

But again, if we can at least keep doing it in the digital realm, then things are good. I mean, the thing I just find is like culture. It's like we had a really cool thing going, which I'm missing now.

where everyone works digitally, we really succeeded with company internal multiculturalism where our Shopify Plus team was in a different office and had a cohesive culture which was fantastic for this kind of thing. Even the engineers that were part of PLAS

ended up staying late at the end of the quarters and they had a gong there and they shipped at the end of the quarter. No one Shopify has ever considered doing this. We ship once something is done. I guess what multiculturalism to me means is like tolerance and appreciation of other cultures but ability to maintain difference as well.

Because I think if you end up meeting exactly in the middle, you have a very undifferentiated culture. Sometimes the spectrum of things that people are allowed to talk about gets very limited even in these environments. So we're trying to figure out how to do this in digital. That's something I'm thinking around. They analyze really good companies. I think they have succeeded being able to have different parts of a company,

work on different pace, different North Stars, different pursuits, different culture, different norms, instead of driving towards a global cohesion level. And I think to me that's loadable. It's a wonderful thing. I mean, it feels like the whole world's trying to figure this out. Like, what is the right mix of separation, decentralization, in person, digital? It's like there's no good answer to it.

But everyone's yearning for something different than generic, all digital, Zoom-filled days. And it's important to solve. Well, Toby, this is, as always, just incredibly fun, so many interesting topics to cover. I think for me, the takeaway is this notion of working on something, well-defined, taking it very seriously, and understanding this principle of the horizon, that you should love the unexpected changes that come at you, because all that's doing is giving you more opportunity to learn versus live in a rigid rule system that becomes very difficult when there's chaos, like what we've seen in the last couple of years.

So I really appreciate your time. I always learned so much from you. Thank you so much. Yeah, thanks for having me. This was great fun. Next, you'll hear my conversation with Canalist customer Giuseppe Coco of LK Advice. We talk about the good, the bad, and the ugly around proprietary models and how Giuseppe has made Canalist a key component of his investment process.

So, Giuseppe, I think the place to start is with the concept of a deep economic model on a business. You've got a unique background in banking where I think you spent, God knows how many hours building complex models. And I'd love to just begin there. Just talk us through your early experience, building models, sort of the good, the bad, and the ugly. Yeah, so, you know, we started out of investment banking, which is very much a very much of just, banking, which is very much on the private side. And there, obviously, you have a lot more information. And so you can go in a lot more detail. So you would look at the models that we were building for deals were frequently 20, 30, 40, 50 tabs, thousands of lines long, only like to get

to a very simple output. And you know, you would spend hours just changing this, changing this, updating this. It would literally take forever. And it was very difficult, almost like to audit. You would find something, okay, you know, this number should be this, this number should be that, right? And you would literally go back and spend hours and hours and nights just trying to reconcile that just because most of the times people are just adding more and more complexity to those models and always ask for incremental complexity. What do you think is the most useful and the least useful part of how those complex models are built on the banking side? Obviously, precision is good if you can get to it, but false precision is bad. What do you think the good and the bad is of? that style of model building that's so complicated. I think to a lot of people that provides Paul's comfort because it's more like the more the merrier, but it's actually not the case. It's more sort of, you know, what are the relevant things?

What are the key things that actually make a difference? And frequently, that unfortunately just gets lost in the detail. On the good side, to be frank, I don't think there is actually much because think of a solution like Canalist, which the first time I opened the Cannibalist model, I was amazed by the level of detail and precision that they could get basically into their one-tap models. I was totally amazed by that, that it was even possible. Until that point, I mean, that hasn't even crossed my mind that it was really possible to build such a detailed and sophisticated yet simple model in a manner that they do.

If you think about those early days and what Canalist does or when you first encountered it, what did you like about the service when you first encountered it? What did it replace for you? and because you didn't no longer have to do those things, what did it open up or unlock for you with your time? When I first started on the by side, you started out by the sort of models manually. My former boss asked me,

you know, to build out like models manually into this and to that. I mean, obviously like your work basically piles up. And I mean, it just takes hours. It can easily take a few hours until, you know, if we don't want to potentially even like three weeks, depending on the degree of complexity, to build a proper and running a fully integrated model for any of the companies. What Canada does is basically condense.

all of that process. So it's as simple as downloading any PDF file just from the internet. And you have the whole model there with all the relevant KPIs, with all the relevant drivers, so you can overlay basically your inputs. I think from all the tools I have been using on the vice site and I'm using today, it is the one that reduces friction the most. Giuseppe, I'm curious, where did you first hear of Canales? Funny enough, I actually heard about Canales on your podcast in an ad. And, you know, It was one of those evenings. I was at home listening to a podcast and like, you know, I heard automated models, auto-opdating.

I was like, oh, my God, this is exactly what I need. And I'm curious if you've interacted with others in the investing industry, too, that are using it more and more, like, are you seeing more colleagues or even competitors or friends using it, too? Is that part of the growing network of it? Here in the UK, my previous firm, I started using it and our team started using it. And then, you know, a team that was sitting like next to it was like, okay, hey, what are you guys doing?

You know, how are you doing this so fast? And then they started using it as well. So it became sort of viral. And then when I joined here, so RSIO, funnily enough, you know, when we first met, we talked about it. It's like, you know, hey, there's this amazing solution, which I'm using as part of my process. He was like, oh, yeah, he's ex-fidelity. One of the Canadaist founders is also ex-fidelity.

So he had it very much on the radar. And, you know, it wasn't even a discussion to get up and running when coming here. Maybe just talk about your day-to-day life at LK advisors. What exactly is it that you are doing? What is the daily workflow? so that we understand how it slots in. Depends on the time of the year. Currently, you know, we're going into earnings season.

So what we're doing right now is lining up our numbers across the models for the companies that we're holding, seeing where our estimates are. And then obviously, there's just like preparation work at the moment. The rest of the time is screening for real ideas, speaking to management teams, attending conferences, setting up calls. And for all of this, Canada, it's extremely helpful because, you know, you always have a single source of truth, which we can. refer to look at the numbers and to get a better sense for where that is and how, you know,

something that a management team may say, something that we like learn may impact our estimates and where and how they could potentially translate into value. That single source of truth thing is interesting. How historically in firms like yours or in your experience, knowing other analysts and PMs, how is ownership of the model typically handled? Because it seems like one nice thing like you said about panelists is it's a single source of truth. Like it's almost its own ownership.

You don't have to worry about it as much. but how in the absence of something like Canales are models typically shared and responsibility for them shared between teammates? Maybe like even going back to the previous experience, I think generally in finance and I think most people will agree that models are sort of pure. The model on a company, the idea or whatever it may be, is sort of viewed as the holy gray, the numbers that people use based the estimates on of value. And it's sort of like the most things, sort of, you know, what is the impact of fill in the blank get X, Y, Zad? So people hold it a very, very high regard, and people are very, I want to say, almost jealous of their model. And everybody thinks that if you own the model, you own the process and you ultimately, like,

have to do. But the model also is, it's usually in pre-canalist type of times, it is extremely time-consuming and inefficient to maintain. The way it's normally like shared among sort of like teammates is usually it's quite easy for mistakes to sort of sneak in. And Canalist is great because there are no mistakes in their models. If you want to have something added, right, you can just read out to the support team and product analysts and they will mend it to your satisfaction.

So thereby using Canalist, you don't need to worry about maintaining your single source of true. How would you compare how you use Canalyst from your sort of hedge fund days to what you're doing at LK advisors? Is it different? Is it similar? Is it highlighted anything for you about the product or products? It's a bit different.

I think in my previous role, the coverage universe was a bit more fixed, a bit more Europe-focused. So it was more about updating, maintaining, forming a rolling view. I think in today's role, it's very different because our coverage and our universe is basically global. So when I came in, I had to think of, okay, so how can we actually like leverage this? And one of the thinking was, for instance, I was very keen to build a what I would call a quality scorecard, which would allow me basically to, when you have to think about across developed markets, what is what most of what we do, potentially even like some emerging markets, how do you compare, cross-compare companies on a qualitative basis?

So we started building out this process, which looks at more than 250 KPIs, to help us build sort of a scorecard, which has to score any company along those KPIs from one to 10. And this is a process that we found very well working for us. And that without Canalyst, I mean, it would have been virtually impossible. Taking years or something. Yeah, it would have taken multiple years, multiple years. What do you think is interesting about where you sit? You know, you're in London.

Obviously, a global coverage in universe is probably a little bit more important to you sitting there than if you sat in New York or something. How does that transfer into the use of Canales and the global nature of what you do? Canada, over time, since I started first using the product, they have expanded massively, you know, and wider into, especially like European companies, as well as EM and developed Asia companies. So the universe has expanded tremendously. The other great thing is, you know, we work closely with their product team to make suggestions on sort of, you know, companies that we care about and companies that we know, sort of, you know, people here in Europe care about. And they are extremely reactive to initiating and launching on new models when we ask them to. That gets put on sort of like a wait list. So, yeah, we continue doing that as we, you know, take an interest in different companies here in Europe. And I think the roadmap is sort of, you know, to get to like sort of 10,000 companies slash models,

which is a pretty wide scope. What do you still do that's, I'll call it very manual that you don't think is too high value and you wish could be automated? Another way of asking is like, what do you hope is on candleless products? roadmap. I think it would be nice to have something what I would call a by-site consensus. If you ask many people in the industry today, by-side consensus is this very elusive concept of whisper, what some people may even call, right, it's like an sort of unformed expectation and it may vary. What would be amazing would be to have some sort of panelist user-weighted, anonymized average of what actually the users on the other side thinking and then you know sort of

providing an opt-in or an opt-out whether you kind of think you want to participate in that i think that would be amazing the other thing is they're currently working on this canis platform and we have like an internal developer who's working with their team to scale this scoring mechanism that i have just mentioned to you through a python-enabled web platform to basically like run that even at larger scale through the entirety of their platform. And as that becomes basically more life and more consumer-friendly as their website, I think it could open up very exciting opportunities and use cases down the line. I'm curious, Giuseppe, if there's anything that you think is lost in the process of outsourcing some of this model updating, another way of asking it would be,

you know, if you're updating these things manually, does that give you some sort of felt sense for the business that you can't get just by looking at the numbers? And do you think that's worth that at all. I mean, obviously, you're a big catalyst user, so I can guess your answer. But I'm just curious whether there is a downside to, I'll call it, outsourcing some of this manual work around updating the models. I think the first part is that once, you know, when I, remember when I open my first tenant model, you see all these things and it's more like, okay, how does this work? Right, you look like an introduction. It's like, hmm, you know, I like it, do I trust it? And I think it's more when you have your sort of, you know, the companies that you know and you follow them and

you have a sense for the history, obviously, you know, you need to look at the numbers and you just anecdotally get a feel for what it is. But I think the beauty of Canales is again I mention, right? So you open a Candlest model, there are five tabs, and they have these, like, beautiful summary sheets. And I almost find it a lot easier to just look at those trends and get a sense for how something has performed, what is driving X, what is driving Y. They actually enhance, in my view, that process of understanding what is going on. I had this debate with multiple friends, And my view is that it's totally overrated to say, sort of, you know, you need to build the model to entirely understand the business. I think you just need to like look at the numbers, understand and how they flow, which is, you know, what Canada helps you with and do.

I think the other thing that I found super helpful that initially wasn't as intuitive is their custom templates. So Canada says like standard templates or an LBO, ADCF, comms, all these usual things. we have our sort of proprietary process of how we look at things, how we value things, the score cut that I've mentioned to you. So we spent, we invested a decent amount of time into building our own templates that correspond to our process that work exclusively on the kind of platform. Once we scale, we put in that, you know, it incrementally helps us understand and make sense of a business and whilst we can, you know, continue to comply with how we do things and how

we think about things. Awesome. Joseppe, thanks so much for taking the time to do this today. Really interesting career arc that you've obviously done a lot of modeling. So a great set of experience to understand why this is valuable. Thanks so much for your time. Thank you. If you enjoy this episode, check out join colossus.com.

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