Update: This was originally posted as part of our “Profitable & Proud” series but commenters rightly pointed out that Shopify’s angel investor broke the “no funding” rule that is part of the series. We’ll leave the interview up but we’re removing it from the P&P series. We’re sorry about confusing our readers and Shopify (we are the ones who originally approached them about participating). Thanks to all who pointed out the error and stay tuned for another P&P profile that fits the bill.
Q&A with Tobias Lütke of Shopify:
What does Shopify do?
The short version is that Shopify allows people with great products to create awesome online stores that do those products justice.
The long version is that Shopify is our idea of how an online store should be run. We originally started the company not to create an online store system, but rather to sell snowboards. Back in the day, we hoped we would find software that would allow us to run our store on the Internet; we never found anything close to what we wanted, so we built it ourselves.
How successful is your business?
Certainly, we’ve always been pretty transparent with our numbers. We have about 6000 active merchants ( selling products this week ) from over 60 different countries. Collectively, they have sold over $100m in products in the last year.
In terms of our own business; I can’t really share our actual revenues but it’s in the multiple millions. We recently won some recognition as Ottawa’s fastest growing company. We have been profitable since 2008.
Cody Fauser, Tobi Lütke, Daniel Weinand.
You originally started a snowboard business called Snowdevil. How did you decide to start that? How did that lead to Shopify?
To tell you the truth, the main reason I wanted to start a retail store was because of programming burnout. I had just moved to Canada a year before and was still working for a startup company in Germany. I disliked remote work and found the job isolating, not to mention we did a lot of software development in Java. We mainly worked on financial backend software – the driest of the dry kind of stuff. What I was drawn to was retail and the margins that could be had in the right niches. I also thought that online retail had been implemented poorly thus far. This was in 2004.
So the idea was to use my technical expertise to give me some leverage in creating an online store. The idea at the time was that this would eventually let me earn my money, without having to do any programming. I loved programming, but I decided back then that I wanted to recover it as a hobby, instead of a day job.
I set up our online store based on a variety of different systems such as Miva, OsCommerce and Yahoo stores. Truth be told, all those systems made my skin crawl because of how bad they were. The final straw was when I got a custom design made for my snowboard store and I couldn’t get it to work in Yahoo stores. We had this great CSS based layout done with all these new fanged “web standards” and the customizability of Yahoo Stores barely allowed me to change the background color of the top frame (!!!).
In a moment of utter disgust, I got an IM from a friend who told me about this Ruby on Rails thing that David just released. I downloaded it, fell in love with it, and decided it wasn’t programming that I was burned out on; it was programming in uninspired programming languages. With my newfound enthusiasm and tools, I spent 2 months building our own Snowdevil store software.
We had a great season of sales in 2004 and turned a profit, but at this point we had the itch to fix the broken e-commerce industry and create a software that merchants and designers would truly love. I’d say we spent slightly too long working on Shopify before its first release, but ecommerce is complicated, so it took about 1 1/2 years from this point until Shopify’s release in 2006.
In the end, Shopify is the software that I hoped to find in 2004 for Snowdevil.
How did you fund yourself at first? Did you ever consider taking on any investors?
We had a tiny bit of money from the profit of the Snowboard sales. Other than that we essentially funded it by ignoring money. My co-founder Scott and I didn’t take salaries until well after the launch. My wife and I moved in with her parents and kept costs down. I also had some savings from my job in Germany, and friends & family chipped in a bit in exchange for some equity.
We ended up taking an investment from an angel investor, who just called us up one day because he heard about our company. This is certainly an outlier, but taking this investment from John H. Phillips was probably the best decision we ever made. Apart from allowing us to meet payroll for the first year, he has spent countless hours teaching me all the things I needed to know about running a company. Without him, we simply could not have survived the years and would not be around today.
We use Ruby on Rails, we are in the ecommerce space, and we are profitable. That seems to make us a Perfect 10 in the VC world. I’ve spent a lot of time talking to potential investors and meeting with them in person. Contrary to their reputation, I’ve found VCs to be some of the nicest, insightful and kindest people I’ve met. Many of them made introductions that have lead to lasting business advantages, even without any immediate benefit to themselves.
That said, at the end of the day, our company has been built and bootstrapped. We won this battle. This is the battle that VCs usually help you win. I see private equity as a tool – probably one of the most sophisticated and effective tools if you happen to have the particular problem it solves – but still only one among many options. Luckily, we are at the point where we can self-finance our ambitions. I don’t rule out that we might take an investment in the future, especially if we are up to something particularly costly, but I have no immediate plans.
A lot of people expect “overnight success” in business. Was that how it happened for you?
Has there ever been an overnight success? I really don’t think these things happen. For a moment I thought Groupon was one, but then I started reading up about this company’s fascinating history and it was anything but.
To me it was very surprising how slow the start was. Humans are demonstrably bad at understanding compounding numbers. We overestimate things in the short term and underestimate them in the long term. This applies to startup finance as well.
It took us 4 years from the incorporation of our Snowboard business to hit profitability. We had 13 employees at the time.
A look at a Shopify customer: Sugar Baking.
What is your culture/work environment like?
This is the most important topic for any startup. A company’s success starts and ends with a great product. I firmly believe that the only way to get a great product is to have a company that is having fun. Your product is a manifestation of the sum total of its contributors. If your corporate culture is nondescript you will end up with nondescript software.
We just moved to a new building in the center of the Byward market, located downtown Ottawa. We wanted to avoid the office parks that most companies in Ottawa move to. We are all relatively young, other then our 71 year old office manager (she is awesome). I’m amongst the oldest at 30. We love to play video games at the office and have regular tournaments in Street Fighter 4 and NHL Hockey. We do daily stand-up meetings to keep everyone in the loop. We do this to discuss what everyone is working on and find this the best way to quickly resolve issues when people are stuck.
Every full-time employee also receives stock options and takes part in our bonus system called Unicorn. The way Unicorn works is that twice a month we deposit money into the Unicorn system as a revenue share with all employees. The system automatically splits it evenly amongst all employees. However, no one can simply take the money out. You can only “invest” it in other employees as a thank you and bonus for accomplishments. This means that bonuses are paid where the company (being the employees) thinks they are due. Sometimes this leads to odd results (I recently got a $13 bonus for successfully nuggeting jesse) but who am I to argue if the company decides that this is worth rewarding?
We work very ordinary hours, usually 10am to 5-6pm. We fund conference travel for all employees, have a great benefits package, give everyone the latest Apple gear, and so on. We also started paying baby money and help with child care costs. It seems we are all getting around that age :-)
How many employees do you have? What do you look for in people you hire?
We currently employ 28 people: 4 remote and the rest in the Ottawa office.
Our hiring is based on the assumption that there are fundamentally two groups of people in the tech industry: there are left brained science type programmers who can write amazing amounts of complicated code with ease; and then there are the right brained creative types. While left brained programmers may be 2-3x as fast when writing code, the right brained programmers can use their creativity to come up with elegant solutions that only require 1/5th of the work. Based on this understanding, we hire the creative types.
There is a good deal of junk science in this, but It’s a convenient way to filter job applications. The creative types are easy to recognize as they tend to play music, do photography, or similar things. One of the most important questions that we ask during an interview is “What do you do for fun?” In short, we look for independent, creative, fun-loving and resourceful people. If we come across one then we go ahead and make them an offer.
I think it’s a good idea to just pick up great people and let them find their own niche. If you are a rock band and you are looking for a pianist but this amazing ukulele guy comes along, you just bring him on and adjust. I bet you that your next ukulele song will blow everything else you have done out of the water. Run with it.
A walkthrough of Shopify’s office.
You’ve mentioned that in a small company everyone has to wear many hats. Why is that? What are the different hats you’ve worn?
The early days of a new company are a really exhilarating time. There is no one to delegate anything to, so you have to do everything yourself. Me and my co-founder both covered customer support for the first 3 years. We were the marketing team, the channel development team, the programming team, the pitchmen, the accountants, and the community managers.
I think it’s a fantastic idea to try to do every job in a startup yourself, at least for a while. It helps tremendously when hiring for the position later on. Once you have an employee in sales, for example, how do you evaluate the performance? You have to know the position well.
This is nothing new. Just like good software is built from the bottom up, good companies are built from the bottom up as well. There are no managers until there are people to manage, there is no CEO until there needs to be a leader of executives.
What’s it like being outside Silicon Valley? Has it helped or hurt your business?
Obviously I have no grounds for comparison here because I’ve never started a company in Silicon Valley. I don’t think it makes much sense to dwell on this. You get your cards dealt and they are your constraints. Constraints are good. Ottawa turns out to be a brilliant place for hiring technical people but it lacks in other areas such as experienced BizDev people. There simply are no people in town who have built multi-million dollar tech companies in recent years. This means that we had to double down on making the best product possible and use our product to do the business development for us.
Our financial pressure and lack of experience in traditional BizDev also required us to come up with cheap and scalable ways to grow channels for our business. For example, the most successful initiative that we have done is create a partner system with design companies. If you are a design company you usually get a certain amount of money per design job and that’s it. Every design company on the planet wants to be more like the software guys and transition into monthly re-occurring revenue. So we created our Partner system in such a way that design companies (or anyone else) who bring us a customer will receive a 20% for-life profit share of that account.
There are now several design companies that get cheques from us, which in turn allows them to pay full time employees to do even more ecommerce work and therefore generate more monthly revenue. It’s a great system and everyone wins.
Anyways, Silicon Valley is an amazing place. Many things would have been a lot easier over there, but overall I’m glad we built it outside of the area. The pressure we endured in the begining forced us to become profitable without spending a lot of money to get there. As a result, that’s what we are really good at now.
A lot of the other products in your category look, well, ugly. How much has focusing on UI and aesthetics helped Shopify?
This is really interesting to me. So my theory of what happened in the ecommerce industry is that Netscape is to blame. Let me explain.
When Netscape filed for the first big Internet IPO they needed to convince Wall Street and the rest of the world that the Internet would be successful. When you are trying to pitch something new to people you always have to explain it in the context of something old. People understood commerce, everyone sees it around them every day, so Netscape convinced the world that the Internet would be big because of ecommerce. They did such a good job of convincing everyone that a lot of companies were created to supply the software for this imminent gold rush.
This meant that most software in the ecommerce space was written in the 90s, long before we figured out how to make a good web application. Merchants went through these insane 7 day workshops with the ecommerce vendors to learn complicated software and they dumped tens of thousands of dollars to bring their products online. They hated the experience. Everything was complicated and needed explaining. Then once they had their catalogs online there were no buyers! Buyers were absolutely not ready to part with their credit cards and personal information, and so ecommerce crashed hard.
The net result is that you have two things: a lot of merchants with post traumatic ecommerce stress syndrome, and a lot of software that is stagnant because of lack of growth. This nuclear winter existed until well into the last decade.
I like to believe that Shopify broke the stagnant mold.
Were you worried about charging customers while competing against free open-source platforms?
I don’t see the market as a zero sum game. If someone wants to use open source stores then that’s great. My agenda is to improve all of ecommerce. As long as people find software they like I’m happy. If that software is made by me and we earn money in the process, then I’m twice as happy :-)
In all seriousness though, open source systems end up being fairly expensive. Online stores host your livelihood; you can’t simply put that on some shared host. You have to at least pay for two servers or VMs to host it for failover which will run you at least $60 a month, then you add backup, loadbalancer, ssl, etc. Truly, you also have to hire or be a techy to keep all this stuff up. To get a setup comparable to what Shopify gives you, you would have to spend $1000 a month (and that’s being conservative), plus salaries. After all that money, you still wouldn’t have stuff like access to our Akamai CDN, which ensures that your store is fast no matter where it is accessed around the world, in addition to all the other things that we give our clients for free. Our product produces a lot more value for its clients than it consumes.
What’s your biggest fear with competitors?
That they stop being fun to compete with. We have seen a lot of our competitors go from very friendly to outright nasty when they didn’t have the growth they were hoping for. Again, it’s not a zero sum game, we all do a great job convincing more merchants to take their products online. We need as many people as we can get to work on expanding the market.
What’s your goal with the company?
My goal is that every single employee, at the end of their careers, will say that working on Shopify was one of the best times of their lives.
What advice do you have for someone considering starting a business?
Go for it :-)
There really isn’t much else I can say. One of the advisers to Shopify is Tim Ferriss who has probably convinced more people to start businesses than anyone else in recent years. Together we are running a Build a Business contest where we are giving out $120k to the people who can build the biggest business in half a year. Unfortunately the contest is almost over now, but the results are incredible. There are several stores that managed to make it to half a million in sales in half a year. These people have built life-changing businesses using Shopify and wouldn’t have done so without the extra motivation from the contest.
It’s easier than ever to build something beautiful.
Are there other aspects of your company that would be interesting to readers of Signal vs. Noise?
I could easily write an entire essay about this but I’ll focus on one thing here. We have a pretty unique twist on the underdoing the competition idea that I’d like to share:
When you build your product ask yourself “What do most of your customers need most of the time?” We test any idea we have against this simple sentence and if it doesn’t check out we don’t add it to Shopify.
This doesn’t mean it won’t ever be done. Ecommerce is complicated and big. Every merchant has different requirements (“Some customer most of the time”) and there are things that are only rarely needed like tax reporting (”Most customers some of the time”). For great ideas that fall into these categories we built the Shopify Platform that allows third parties to create extension “Apps” that our merchants can use for the speciality things that they need. There’s now a healthy third party development community that continues to populate the Shopify App store.