The Shopify IPO

Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal discuss the remarkable journey of e-commerce platform Shopify, from its pivot from a snowboard shop to a technology powerhouse with a $35 billion market cap. Shopify's IPO in May 2015 marked a significant milestone, with the company's market cap surging from $1.3 billion to $35 billion in just four years. The founders, including CEO Tobias Lütke, attribute much of their business acumen to unconventional sources like playing StarCraft. Shopify's success is partly due to its focus on enabling merchants to sell both online and offline, while continually expanding its services, including payment processing and logistics. Despite skepticism from critics like Citron's Andrew Left, Shopify has proven to be a value-creating platform, empowering over 800,000 merchants and fostering entrepreneurship. The episode also touches on Shopify's environmental efforts and its recent initiatives like the Shopify Fulfillment Network.

Summary Notes

Introduction to Acquired Podcast Season 5, Episode 2

  • The episode is about Shopify's IPO and its backstory.
  • Ben Gilbert, co-founder of Pioneer Square Labs, and David Rosenthal, general partner at Wave Capital, are the hosts.
  • Shopify IPOed in May 2015 with a market cap of $1.3 billion, which grew to $35 billion in four years.
  • 218 million people have purchased from a Shopify-powered store, mostly without knowing it.

"Today, the company ipoed in May of 2015 with a market cap of $1.3 billion. In the ensuing four years, it has 27 x that and today has a market cap of $35 billion."

The quote indicates Shopify's significant growth in market capitalization from its IPO to the present, highlighting the company's success.

Shopify's Founding and CEO Toby Lütke

  • Toby Lütke is a key figure in Shopify's history, described as a fascinating character.
  • Lütke learned about business from playing StarCraft, as mentioned in a tweet.
  • He is a naturalized Canadian, born in Germany, and currently lives in Ottawa.
  • Lütke's early exposure to computers and video games shaped his interest in programming and entrepreneurship.

"The founder and CEO, Toby Lutka, is an absolutely fascinating character that I can't wait to dive in on the history and facts here."

The quote emphasizes the significance of Shopify's CEO, Toby Lütke, as an interesting and influential person in the company's story.

Pilot as a Partner for Startups

  • Pilot is a company offering accounting, tax, and bookkeeping services for startups and growth companies.
  • It is now the largest startup-focused accounting firm in the U.S.
  • The company is backed by Sequoia, Index, Stripe, and Jeff Bezos.
  • Pilot aligns with Jeff Bezos's axiom about startups focusing on what makes their "beer taste better" and outsourcing the rest.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

The quote highlights Pilot's role and scale as a provider of financial services for startups, emphasizing its growth and importance in the startup ecosystem.

The Story of Shopify's Co-founder and CEO Tobias Lütke

  • Tobias Lütke's background includes hacking video games and becoming a programmer apprentice at Siemens.
  • He moved to Ottawa, Canada, after meeting his wife Fiona, and started Snowdevil, a snowboard gear website.
  • Lütke was introduced to Ruby on Rails and became a core contributor after creating an open-source blogging system called Typo.
  • Snowdevil's backend was rebuilt using Ruby on Rails, which led to the pivot from selling snowboards to developing and selling the e-commerce platform, later named Shopify.

"Toby received this, and he was enamored. And he was enamored with two things about it. One was that he could program it and hack it and build things for it, and he could take it apart and put it back together and add hardware to it."

The quote describes Toby Lütke's early passion for computers and programming, which played a significant role in his future endeavors and the creation of Shopify.

Shopify's Pivot from Snowdevil to E-commerce Platform

  • Toby Lütke and Scott Lake initially started Snowdevil to sell snowboarding gear online, focusing on high-quality, less known brands.
  • Frustrated with the available e-commerce tools, Lütke built a custom solution using Ruby on Rails.
  • The new platform was more efficient and led to the decision to pivot from retail to software, selling the e-commerce system to other businesses.
  • Shopify was officially launched after a year and a half of development, with funding from family and contributions from co-founder Daniel Weinand.

"So, yeah, they do that, and they're like, okay, let's shelve the snowboarding project. We can use it as a demo site, which it still is today, for Shopify, and start working on this software."

The quote explains the strategic decision to transition from an online snowboarding gear retailer to a software company, using the original retail site as a demonstration for the newly developed e-commerce platform.

Company Naming and Initial Branding

  • Toby initially named the software company Jaded Pixel, Inc. after using GoDaddy's domain name generator in 2006.
  • Scott, a key contributor, suggested the name change to Shopify, which signifies simplified shopping.
  • The domain for Shopify was readily available on GoDaddy without the need to purchase it from someone else.

"Toby heads on over to GoDaddy's domain name generator, plugs in. I need a name. And comes up with"

This quote explains the origin of the company's initial name, Jaded Pixel, which was later changed.

"Scott at this point makes a major contribution to this budding software company right before they launched. And he's like, yeah, I don't know about this jaded pixel thing as the product name. Maybe we should reconsider that. And mercifully, he comes up with Shopify."

This quote highlights Scott's significant role in rebranding the company to Shopify, a name that better reflected the company's focus on simplifying shopping.

Initial Feature Set and Business Model

  • Shopify's initial feature set included customizable store templates, a shopping cart, order tracking, automated inventory organization, and the ability to plug in third-party payment processing.
  • The company initially adopted a freemium business model with no barrier to entry, monetizing by taking a cut of merchant transactions.
  • Shopify quickly realized the limitations of this model, as it either became too costly for successful merchants or deterred potential users who anticipated high sales volumes.

"The initial feature set that they ship with is pretty basic, and they're inspired by kind of the whole rails kind of design philosophy of minimalist functional, but have everything happen on the web in the browser."

This quote describes the simplicity and functionality of Shopify's initial product offerings, which were web-based and inspired by Ruby on Rails design philosophy.

"They figured this out pretty quickly. People started trying it and thinking like, oh, this is super cool. I can get set up. But then pretty quickly they realize either they start selling a lot and then they're like, wait a minute, I'm paying a lot of money to Shopify here because their fees are just scaling linearly with my sales."

This quote explains the initial challenges Shopify faced with its transaction-based business model, which was not well-aligned with merchant incentives.

Transition to SaaS Model

  • Shopify shifted from a transaction-based model to a flat monthly fee of $29 for a full-featured commerce package.
  • This pricing change was more attractive to both small and large businesses and allowed Shopify to align better with merchants' growth.
  • The change was implemented quickly, albeit with some customer dissatisfaction due to poor timing and communication.

"What if we look at this kind of SaaS idea and instead of charging on a usage basis, what if we just make it really simple? We'll charge $29 a month and you get a full featured commerce package in a box from us."

This quote details Shopify's strategic pivot to a SaaS model, which simplified pricing and offered a comprehensive commerce solution for a flat monthly fee.

Early Growth and Investment

  • Shopify's growth was rapid, with significant milestones such as attracting major customers like Tesla Motors.
  • Toby ran growth experiments, such as a referral program for web developers and a partnership with Tim Ferriss for a build-a-business competition, which drove substantial new merchant sign-ups.
  • The company launched the Shopify platform, allowing third-party developers to extend the core product's functionality.
  • Shopify's growth led to a $7 million Series A funding round led by Bessemer, marking a transition into full growth mode.

"They made over a million dollars in revenue in 2008. They also. Part of that was driven by they landed their first major customer that year, which was Tesla Motors, which started selling the roadster on Shopify."

This quote highlights Shopify's early success and the significance of securing Tesla Motors as a major customer.

"And what are these tests that he's running? They're super cool. So the first one is... they launch the build a business competition on Shopify."

This quote describes one of the growth experiments that contributed to Shopify's rapid expansion and user acquisition.

Scaling and Market Positioning

  • Shopify's growth continued with the introduction of new products like Shopify Point of Sale for offline sales and Shopify Plus for enterprise customers.
  • The company strategically segmented its offerings to cater to different market segments, from small entrepreneurs to large corporations.
  • Shopify's investments in sales and marketing were substantial, signifying the need for active business development efforts to fuel growth.

"In 2013, they launched Shopify point of sale for offline sales... syncing your online inventory with your offline inventory."

This quote explains Shopify's expansion into offline sales solutions, which was a strategic move to cater to merchants with physical storefronts.

"They start this whole other division that's going to go out and purely attack those. And so now Shopify plus and these big customers is over a quarter of the total revenue of the company."

This quote discusses the introduction of Shopify Plus and its focus on large enterprise customers, which became a significant revenue source for the company.

Going Public and Future Prospects

  • Shopify experienced exponential growth in merchant sales and net revenue, culminating in the company going public in April 2015.
  • The company's trajectory was marked by its ability to adapt to market needs and its founder's engineering-driven leadership approach.

"In 2014, they cross 100 million in net revenue... and then in April of 2015, the company files to go public."

This quote marks a major milestone for Shopify, indicating its financial success and the decision to become a publicly traded company.

Shopify IPO and Early Market Performance

  • Shopify listed on both the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX) with different tickers.
  • The company's IPO was priced at $17 per share on May 20, 2015, valuing the company at $1.3 billion.
  • Four years later, Shopify's market cap had grown to $35 billion.
  • On the first day of trading, shares opened at $28, a 60% increase from the IPO price.
  • The stock remained relatively flat for the rest of 2015.
  • Shopify reported a Gross Merchandise Volume (GMV) of $7.7 billion for 2015.
  • Net revenue for 2015 was $205 million.

"On May 20, 2015, they priced the IPO at $17 per share, which equates to pricing to a $1.3 billion market cap. Think about this, is a $35 billion market cap company today."

The quote explains the initial public offering (IPO) price of Shopify and its market cap at the time, highlighting the significant growth in market cap to $35 billion within four years.

Shopify's Growth in GMV

  • GMV in 2013 was $1.6 billion, growing to $7.7 billion in 2015.
  • This growth indicates a significant increase in the volume of merchandise being sold through Shopify's platform.

"In 2013, it was 1.6 billion."

The quote provides the GMV figure for Shopify in 2013, which is used to illustrate the rapid growth of the platform's usage by comparing it to the $7.7 billion GMV in 2015.

Criticism by Short Seller Andrew Left of Citron Capital

  • Andrew Left released a report accusing Shopify of being a "get rich quick scheme" with a "good software platform."
  • Left questioned the possibility of having 500,000 merchants and suggested it might be a Ponzi scheme.
  • The stock was trading at around $115 when Left predicted it would fall to $60.
  • Six months later, the stock was roughly flat, trading in the mid $120s.
  • In April 2019, despite Left's prediction, the stock was trading at $205.
  • Left adjusted his price target to $100 and promised a $200,000 charity donation if incorrect.
  • As of July 31, 2019, Shopify's stock closed at $317 per share, with a market cap of $36 billion.

"Shopify became the target of an activist hedge fund investor, a short seller named Andrew left at Citron. He released a report on Shopify decrying the company as a get rich quick scheme."

The quote describes the criticism faced by Shopify from short seller Andrew Left, who labeled the company as a scheme, reflecting the skepticism some investors had about Shopify's business model and rapid growth.

Statsig Sponsorship

  • Statsig is introduced as a new sponsor for the podcast.
  • Vijay Balasubramaniyan, CEO of Statsig, previously worked at Facebook and developed their mobile app ad product.
  • Statsig provides feature management and experimentation for product teams, enabling faster shipping of features and real-time impact analysis.
  • The platform is used by companies like Notion, Brex, OpenAI, Flipkart, Figma, Microsoft, and Cruise Automation.
  • Statsig is also useful for managing and testing AI product features.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate a b testing, and see the impact every feature is having on the core business metrics."

The quote introduces Statsig as a tool for product teams to improve their feature rollout process and understand the impact of changes on business metrics, highlighting the value proposition of the sponsor's product.

Bull and Bear Cases for Shopify

  • The discussion shifts to the bull and bear cases for Shopify stock.
  • The bear case revolves around concerns over Shopify's valuation and competition with Amazon.
  • Shopify's stock was trading at 35 times its trailing twelve months' revenue, which is considered expensive.
  • Despite high growth, Shopify was not yet profitable, with net losses reported.

"The stock is trading in the mid $120 a share."

This quote provides context for the stock's performance post-Andrew Left's report, indicating that the stock did not decline as predicted by the short seller.

Shopify's Relationship with Amazon

  • The discussion addresses Shopify's relationship with Amazon and the broader e-commerce market.
  • Shopify is seen as a platform for brands and merchants to sell products that do not have a barcode, typically not sold on Amazon.
  • The bull case suggests that Shopify empowers brands to sell directly to consumers, especially through social media.
  • Shopify's average customer value and sales efficiency have been increasing, indicating growing merchant success on the platform.

"Isn't Amazon going to just take over all of e-commerce?"

The quote captures the bear case concern that Amazon's dominance in e-commerce could overshadow Shopify's business model, questioning the long-term viability of Shopify's platform.

Shopify's Business Model and Future Prospects

  • Shopify makes money through subscription fees and merchant solutions like payment processing and transaction fees.
  • The company is exploring new revenue streams by offering additional services to merchants.
  • The Shopify Fulfillment Network is a recent initiative aimed at providing competitive shipping options to merchants.
  • The bull case is based on the belief that Shopify will continue to attract more merchants and expand its services, increasing its take rate on the GMV.

"Shopify did $14 billion last year in GMV... for every $14 spent, Shopify is able to capture a dollar of it."

The quote outlines Shopify's revenue generation in relation to the GMV, indicating the company's revenue model and potential for future growth based on the volume of sales processed through the platform.

Aggregator Business Model and Shopify's Differentiation

  • Aggregators like Amazon have dominated the market, but Shopify competes by offering a distinct product and business model.
  • Shopify's success is an example that challenges the dominance of large aggregators.
  • Shopify's model supports a different customer segment, which is brand-first merchants.

"This is the first chink in that armor, right, where the actual business model of an aggregator being Amazon could be maybe not the seeds of its own undoing, but Shopify is able to successfully compete precisely because it has a different product and business model."

The quote explains that Shopify's unique approach is making a significant impact in a market largely controlled by aggregators such as Amazon. Shopify's different product and business model cater to a specific customer segment, allowing it to compete effectively.

Market Opportunity and Valuation

  • There is a significant market opportunity that aggregators like Amazon cannot address, which Shopify capitalizes on.
  • Shopify's valuation reflects its potential to tap into this large, unaddressed market.

"So really what we're saying is there is an unaddressable opportunity by the aggregator in this market that also happens to be very large."

This quote indicates that Shopify is tapping into a large market opportunity that is not fully served by existing aggregators, highlighting the potential for growth and significant valuation.

The Importance of Timing and Market Position

  • Shopify's origin as a snowboard seller and the transition to an e-commerce platform was almost accidental.
  • The market lacked a low-end disruptive e-commerce provider for a significant period, allowing Shopify to fill that void.
  • Competitors like Magento did not target the same market, missing the opportunity that Shopify capitalized on.

"It was a strangely empty space... there wasn't really anyone who would have come in and done exactly what they did when they did it otherwise."

This quote reflects on the lack of competition and the unique market position that allowed Shopify to thrive when it entered the market, highlighting the importance of timing and market gaps.

Magento's Misalignment with Market Needs

  • Magento, which started after Shopify, is an open-source platform that did not address the same market needs as Shopify.
  • Shopify's SaaS model provided ease of use compared to Magento's requirement for users to host and manage the software themselves.

"But the problem with open source software like that, with how they were doing it was people had to take the software and host it and install it either on Prem or whatever, where Shopify was just like, yeah, we host, we're SaaS, you don't have to deal with that."

The quote contrasts Magento's open-source model with Shopify's SaaS model, emphasizing the convenience and simplicity of Shopify's approach, which better suited the market's needs.

Shopify's Evolving Value Proposition

  • Shopify's value proposition has evolved from focusing on hosting, bandwidth, and security to offering a suite of modern e-commerce tools.
  • The company's ability to adapt to the changing needs of its customers has been a key factor in its growth.

"Selling online with Shopify is easy. We take care of hosting, bandwidth and security so you can focus on your business."

This quote from Shopify's early days shows the initial value proposition that focused on simplifying online selling for businesses, which has since evolved to include a broader range of services.

Competitive Advantage through Community and Development

  • Toby Lütke's involvement with the Ruby on Rails community and his creation of Typo gave Shopify a competitive edge.
  • Being part of a developer community provided Shopify with early adopters and a distribution advantage.

"Such a huge competitive advantage."

This quote refers to the strategic advantage Shopify gained by being embedded in the developer community, which helped in the early adoption and spread of their e-commerce platform.

Value Creation and Capture by Shopify

  • Shopify's business model allows it to earn more as its customers grow, aligning its success with that of its merchants.
  • The company has avoided the pitfall of losing customers as they scale by providing additional value through integrated services.

"Merchants pay for advanced services as they become larger and more sophisticated. So the effective take rate for Shopify actually goes up as their customers grow the business."

The quote explains how Shopify's revenue model benefits from the growth of its customers, as they tend to use more advanced, and thus more expensive, services over time.

Shopify's Platform Strategy

  • Shopify considers itself a platform company, creating an ecosystem where the value of services on the platform exceeds the value of Shopify itself.
  • The platform strategy allows Shopify to scale its value capture as merchants grow, without relying on network effects between customers.

"You're only really a platform if the value of the ecosystem on top of the platform is larger than the company that owns the platform."

This quote, referencing Toby Lütke's view influenced by Bill Gates, defines a true platform as one where the ecosystem's value surpasses the platform owner's value, illustrating Shopify's strategic approach.

Grading Shopify's IPO

  • Going public when they did was immensely beneficial for Shopify, increasing visibility and credibility.
  • The IPO allowed Shopify to capitalize on the rise of direct-to-consumer brands and influencer marketing.

"This is no brainer. At least a solid A in terms of what they were able to get out of going public when they did."

The quote assesses Shopify's IPO timing as highly successful, suggesting that the benefits of increased visibility and market timing outweigh potential drawbacks like earlier dilution.

Shopify's Impact on Entrepreneurship and Innovation

  • Shopify has been a net positive force in the world by enabling entrepreneurship and lowering the barriers to entry for merchants.
  • The company's platform has facilitated the creation of value and innovation in the e-commerce space.

"Shopify has enabled so much innovation and so many creative entrepreneurs to become merchants and lower the barrier for entrepreneurship."

This quote highlights the positive impact Shopify has had on the broader economy by empowering entrepreneurs and promoting innovation through its e-commerce platform.

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