Today I’m talking to Harley Finkelstein, president of Shopify. Shopify is one of those companies that makes the modern internet go — it makes software that allows businesses of all sizes to set up online stores, and from there it can handle everything from shipping orders to financing loans for expansion. The company went public in 2015, and as online commerce has exploded during the pandemic, it’s been on a tear ever since — it just posted $988 million in revenue in the first quarter of 2021, a 110 percent increase from last year.
But while things are going extremely well right now, I was very curious to talk to Finkelstein about how he sees competition from the tech giants — a lot of online shopping starts with targeted ads on Facebook, which is building out its own shopping platforms. Facebook and Apple are fighting over how those ads are tracked and served overall. Apple is, as of this week, also in the middle of a nasty trial with Epic Games about the cut it takes on digital purchases in iOS apps. And of course, there’s Amazon, which dominates online retail.
Finkelstein says that Shopify provides tools for businesses to compete with all of these giants, and that Shopify itself can sometimes act like a giant because it has so many customers to represent. The phrase he used was “being the empire vs. arming the rebels,” which, yeah, that’s pretty good. Except for the part where the empire routinely strikes back. Still, Finkelstein is a true believer in entrepreneurs, and that really came through in this conversation.
One thing to pay attention to: every time I talk to an executive from a platform company, we wind up talking about moderation issues, and Shopify did ban Donald Trump’s store after the January 6th Capitol riots. But Shopify doesn’t really fit into the same category of laws as Twitter or Facebook or other social media platforms — so it has a different set of moderation challenges, and it’s worth thinking about whether the enterprise software that powers online stores should have to meet the same moderation standards as TikTok or YouTube. It’s complicated, and Finkelstein and I wrestled with it a little.
Okay, Harley Finkelstein, president of Shopify. Here we go.
This transcript has been lightly edited for clarity.
Harley Finkelstein, you’re the president of Shopify, welcome to Decoder.
Thank you for having me. It’s a great pleasure to be here.
It’s a great time to talk to you. You just had earnings, which were great. Shopify is doing great as a company. We are also talking at the end of a quarter where every other major tech company announced their earnings. The economy is moving online. Shopify enables a bunch of that to happen. There’s also a giant antitrust trial starting off next week about the control Apple has over its platform, and all of the transactions you can make on that platform.
So I feel like you have a lot of insight into a lot of different things that are happening all at once. But let’s start at the start. Give people a rundown of what Shopify does, and importantly, how you all make money.
So the history of the company was, about 16 years ago, we wanted to do something very simple. We wanted to sell snowboards on the internet. And back in 2005 or so, there were really two ways to sell something online. You either listed it on a marketplace. At the time, eBay was a big one. There were a couple others, but a marketplace was really the place you sold something. And the advantages of that, of course, were that it was inexpensive, it was fairly easy to get up and running. But you were pretty much renting customers from that marketplace. You were not really building your own brand and you were not building your own business.
The other way, of course, was to spend, I think at the time, it was a couple of hundred grand or $1 million to have one of these large scale, enterprise e-commerce builds. You think about— Oracle had one, SAP had one, ATG, and Hybris, and IBM WebSphere, they were very expensive and very difficult to operate. So we didn’t like either of those options, and so we wrote this piece of software to sell our own snowboards.
And within a year, by 2006 or so, it became obvious that while the snowboard business was a good idea, the software behind the snowboard business was a great idea. And so I would say, the first six or seven years or so, we were focused on building the best, the easiest, the most scalable way for anyone with a product to build a beautiful, scalable online store.
And then around 2012 or so, we started realizing that a lot of our merchants wanted to also sell offline. They either had a brick-and-mortar store, or they wanted to set up a pop-up store, or they wanted to maybe just do it in person, cash and carry, farmer’s market type deal. And they came to us and said, “Hey, can we also use Shopify for that?” And so around 2012, we began thinking about this idea of really moving from single-point solution e-commerce to being an omni-channel solution where you can use us to sell anywhere you want.
And we went public around 2015 on the New York Stock Exchange and the Toronto Stock Exchange. And that’s really when I think most people began to understand Shopify. I think what also happened around that time beyond just moving from [a] single-point solution to being an omni-channel solution was some of those merchants that started on Shopify around their mom’s kitchen table got really, really big.
Fast forward to today, we have about 1.7 million merchants on Shopify. They make up about 9 percent of all e-commerce in the US. In the last quarter they sold more than $30 billion worth of GMV. And as we sit here right now, every 28 seconds or so, a brand new entrepreneur gets their first sale on Shopify.
GMV is gross market value?
Gross merchandise value, so the sales on the platform. We did about $988 million for the quarter in revenue. Our merchants did about $37 billion in sales for the quarter.
And so how does Shopify make money? You take a cut of every transaction, you charge a subscription fee. Where do you take your cut?
Yeah, so two sides. One is on the subscription side. So there’s a subscription fee. Starts at $29 a month, if you’re just getting started, and goes up to $2,000 a month for some of the larger merchants. But we also have a payments business. Shopify Payments powers a majority of, particularly in our main geographies, a majority of transactions. We have a capital business. We’ve now given out more than $2 billion of capital to small businesses. We have a fulfillment business and a shipping business. Actually, this is maybe a good point to pause on for a second.
If you were to pretend that Shopify was a retailer, we’re not a retailer, but pretend we were, we would be the second largest online retailer in America, after Amazon. The reason I say that is because the second largest online retailer in America, they’re entitled to massive economies of scale. And so what we try to do is, we try to go to the shipping companies and capital companies and the payment companies, and we negotiate as if we were the second largest retailer, except instead of keeping those economies of scale for ourself, we distribute those economies of scale and give those advantages to small businesses.
And we think what that does is a real leveling of the playing field so that these companies can get bigger, faster, at a pace that, frankly, we’ve never seen before. There’s rumors now that some of our biggest merchants are going public, are filing for IPOs. Some of them didn’t exist five years ago. In the history of commerce and retail, we’ve never seen that type of scale at that speed.
So I want to just pull back for one second, talk about Shopify as it’s something that you could look at as the second largest online retailer in America. You’re up against Google, Facebook, Amazon, Apple, the rest. This last quarter of earnings, these companies all did extraordinarily well. When I started Decoder, the question I would ask everybody is, “What are the trends you see in a pandemic? What’s going to snap back?”
Nothing’s snapping back, except maybe we’re not going to go work in offices the way that we used to. The economy has moved online in a real way. We are really dependent, in particular, on a handful of very large companies. I’ll pick on Apple because they have a lawsuit. They want to take a cut of every time you push a button on the iPhone.
Shopify enables small businesses to compete at that level. You have this economy of scale. You’re also partnered with those companies. You’re competitive with those companies. What is that relationship like? Where does Shopify slot in?
Shopify’s entire business model is predicated on: if small businesses do well, we do well. If they don’t do well, we don’t do well. And so the relationship we have, first of all, with small business, I think is very different than a lot of other technology companies where the small businesses, whether they sell a lot or not, they still need them for things like exposure and traffic and other all those things related to marketing and advertising. But the way we think about it is, the future of retail, in our view, is not going to be online, nor is it going to be offline. It’s not going to be on Instagram or TikTok or Facebook or Walmart.com, it’s going to be everywhere.
And the future of retail, in our view, is going to be about consumer choice. Now, that is very different. Commerce is about as old a construct as currency. We’re talking about since the beginning of time, you’ve had commerce and you’ve had currency, but it was always the retailer dictating to the consumer how to purchase.
So a great example is, go back when you were 10 years old or something and you wanted to go buy a video game at the video game store, There was a time it opened, at 9AM on a Saturday morning. Once you picked up the game on the shelf, you went into line. You had to use this credit card, but they didn’t accept that credit card. But basically, it’s always the same. It was always the retailer dictating to the consumer how to purchase.
The big shift that is happening that will exist long after the pandemic and, frankly, will be the future of retail, will be that consumers will simply say, “I want to buy however is most convenient for me.” And if you’re a really forward-thinking merchant like Allbirds, for example, and you know that it’s all about consumer choice, then you’re going to have a great physical store in San Francisco and New York City and a whole bunch of other places, you’re going to have a great online store, you’re going to cross-sell on things like Instagram and Facebook, you may also activate the TikTok ad channel because that’s when you can reach new potential customers. But what Shopify’s role in all that is, is that we want to integrate all of it into a centralized retail operating system.
So, think of Shopify as the hub of where you run your business day-to-day. When you say you’re going to work in the morning, you open up the Shopify admin, you have your inventory, your analytics, your reporting, you do fulfillment from there. One major spoke of that hub will be the online store. Another major spoke may be the offline store, but all the other spokes are going to be with Facebook and Google and Instagram and TikTok and all those companies.
And so our partnership with all these companies is predicated on this idea that we want to enable these merchants, these brands, to sell wherever they have customers. What is the modern-day town square? If you want to sell across a whole variety of age brackets, you need to sell everywhere. And that is really what Shopify’s role is, and that’s the reason why we partner with all these companies.
That’s very optimistic, and I want to believe that that is true. And certainly, I buy some things in stores, and I buy some things online, and I am notorious for impulse buying things on Instagram, as listeners know.
But I was looking at some of your stats around Black Friday this past year. 71 percent of your purchases were on a phone. Almost all of those, I’m guessing, happened in someone else’s app, not in a browser. That’s just the nature of phones. And if you’re always mediated by a Facebook app or an Amazon app or some other kind of platform, if I’m a small business, I’m always worried about them more than I’m necessarily even worried about my business.
What you just described there makes the point of why independent retail and commerce is so important. Because look, we don’t know what’s going to happen in the future. If this was 10 years ago, we may be talking about our partnership with MySpace, where if merchants want to get exposure to that demographic, they sell on MySpace. A better way to think about retail is, you need to sell everywhere, not just one place.
And by the way, The 71 percent on the phone that you’re talking about during Black Friday, Cyber Monday, that week in 2020, the majority of that was actually on the individual online store, not on Instagram, not on any of these other platforms. The majority was direct. That, actually, what you’re describing is why direct-to-consumer, I think, is being misunderstood. Direct-to-consumer is being interpreted now as a bit of a trend. That it is very trendy right now to buy directly from the maker. It’s not a trend. That’s how commerce always should’ve been. The baker was the one you bought bread from and the cobbler is where you went to buy your shoes.
What happened was in the 1800s, you had all these department stores that popped up and they created this massive intermediation. And what is happening now is the internet has democratized distribution so that you don’t need intermediaries anymore. But I think what’s happening now is now, merchants and brands actually have more control and more independence than they did when they were locked on someone else’s marketplace or locked in the shelves of a department store.
So actually, I respectfully disagree that you’re locked on one particular app. Because if one of these apps does well and then begins to tax you, you have all these other places you can go. One of our most popular channels for a particular vertical is actually Pinterest or Houzz. If you’re selling home furniture on Shopify, it behooves you to unlock and activate the Houzz channel. But that would be completely irrelevant if you’re selling glasses, glasses that you wear. So I actually think that this is a more democratized time for commerce because you have more choice as a merchant.
So let’s walk through an example with, let’s call it a snowboard shop. I think that’s a good one you might be familiar with. Usually I use a flower shop, but let’s do snowboards. So I’ve got a snowboard shop here in Wisconsin. It’s very confusing.
Especially. right now as we talk, it’s probably beautiful outside, right?
Yeah, exactly. But I’m running my snowboard shop. I’m saying, “I want to grow my business.” Two basic pathways I can go. I’ve got an existing customer base, I’m just going to sell them more stuff. You are interested in snowboards, now I got gloves too. And we’re just going to sell more stuff to our existing customer base.
Or I can go find new customers and sell them snowboards, increase my volume of snowboard sales. If I’m really good, I might be able to do both things at once. But usually, you have to make one of those choices in sequence. Shopify feels like, “Okay, we’re going to help you. You have a store. You’ve got the physical presence. We’re going to help you grow the market. We’re going to let you sell snowboards in more places online at once.”
But you’ve got to go find those people. You’ve got to do the marketing to do that. And that marketing, right now, the most cost-efficient way of doing that is Facebook ads. And I look at Facebook, we had Adam Mosseri on the show, early on in our run, and I said, “Why don’t you just take my credit card and let me just buy directly from the Instagram ads? Because I’m already a sucker.” And he winks. And then a couple of weeks ago, they’re moving towards that space. Doesn’t that just constrain, when you collapse the, “I’ve got to do the marketing,” to, “Now, I’m just going to let Instagram handle my payments,” does that constrain what a business can do as it grows?
No, I think actually, it creates more opportunities. So first of all, you probably know this, and Adam may have mentioned this, but Shopify is the commerce partner for Instagram. So when you buy off Instagram Checkout, in many cases, you’re buying from a Shopify merchant and the order’s being fulfilled directly from the Shopify admin, first thing. Second thing is now, we announced three weeks ago that Shop Pay, which is our accelerated checkout, is now available directly on Facebook and Instagram. So let’s say you as a consumer on Instagram, you see this great ad for a snowboard, and you decide you want to buy that snowboard. You can do it directly on Instagram. It’s powered by Shopify. It’s a seamless experience.
But now the next time you want to actually go and buy a product from that store, because you love the brand, it was a great experience, you’re probably going to go directly to snowboardshop.com, whatever it’s called. You’re correct in that, yeah, the onus is on the merchant to acquire their customer. But there are so many ways to do that right now. Yes, you can buy ads on Facebook or buy ads on Instagram or buy ads on TikTok.
My wife owns an ice cream shop here in Canada, and she wanted to basically find a bunch of local people that would explore her ice cream shop. And so, she targeted moms living in our community. She just found a bunch of mom groups on Facebook, and started going in there and asking them about peanut allergies, and asking them about lactose intolerance allergies, just to get a sense of what they wanted. And now, she has this great business of all these moms that are coming to her ice cream shop. That didn’t cost her any money. All she did was go and find where those pockets of target demographic are hanging out. The reason, I think, whether it’s influencer marketing or content marketing, I know that people roll their eyes when you talk about, “Well, my business is based on content marketing. My business is based on influencers.”
But the reason those are so effective, is because capital is not the most important ingredient for that. What’s important is creativity, and frankly, hustle, and working really, really, really hard to build great content that’s very, very compelling. So, when you see a snowboard shop that happens to have a podcast, and you kind of laugh at, “why does this snowboard shop need their own podcast?” Well, maybe that is the most effective way for them to find new customers for that snowboard shop.
That was not possible 10 years ago. Ten years ago, if you wanted to get people into your physical store, you had to get a billboard, you had to advertise on TV or radio. Money was everything, and so those that had more money won. And now, it’s far more democratic, in that there are other ways to acquire customers. I think that’s a better model.
Do you see Shopify helping people acquire customers? Right now, you’ve got the Shop app, which I do want to talk about. That’s your most consumer-facing product. All the rest of your products are really enabling the business centers to operate. Do you see yourself headed in that more consumer direction, where you run basically a catalog for lots of independent businesses?
No. We have no plans to be a marketplace. Shop app for example, it truly is a shopping assistant, and allows you to do things like accelerated checkout, it allows you to track your packages. There’s a tab now where you can find and discover new local businesses, or you can discover Black-owned businesses, or you can discover women-owned businesses and stuff.
So there are ways to discover more types of businesses, but the idea really, there, is to create this amazing shopping companion for a modern consumer. We make it really easy for you as a merchant on Shopify, to buy ads on Facebook or Instagram or TikTok, directly from the Shopify admin. In fact, we will then tell you which are converting better, which products are selling best, so you can make better decisions.
But in terms of us giving you customers, no, we’re not going to do that. And in fact, that is the difference between a marketplace and having an independent business. While a marketplace may rent you their customers for a period of time, they are never going to be your customers. In fact, in some cases, if the marketplace sees you’re making too much money, they may set up a white-label version of what you’re doing. So, that’s what I mean when I say we are on a different side of the table than a lot of other technology companies or marketplaces, because we only do well when these merchants do well independently.
This is really interesting. A couple of weeks ago, as people listen to this, I had on Anjali Sud, the CEO of Vimeo. I asked her, “Why aren’t you competing with YouTube?” And the answer over and over again was, “We’re not going to find an audience for the creator. We’re going to sell tools that let the creator run a business.”
You just took a little dig at Amazon there — Amazon might make a white-label version of your product if you’re too successful on Amazon. We’re going to stay away from the market acquisition business, we’re not going to find you customers. We might help you do it, but we’re going to sell you tools that enable you to better sell to those customers.
There’s a part of me that — Again, we’re in the context of all of these earnings, watching the amount of money flowing through the biggest technology platform companies — in the Ben Thompson parlance, you might call them aggregators — who are aggregating all that demand, aggregating all that audience, and then funneling it wherever they want.
Is your play that there will just be an infinite supply of small businesses that haven’t been sucked up or killed yet? Or that Bonobos, or Warby Parker, or whatever, will become big enough brands to fight back and still use your platform? Because that’s the dynamic that I see. Either you have a huge long tail, or you’ve got a couple of whales that are able to compete.
Well, look, if you look at some of our larger stores, whether it’s Fashion Nova or Tommy John Underwear, Kylie Cosmetics, or Jeffree Star — So, we certainly have some large merchants as well, but I think the more important point that you’re making, which I agree with, is that there’s going to be a place you go as a consumer if you want to buy stuff that you need. If you’re out of toothpaste, or you’re out of detergent and you want it fast, you’re going to go to the marketplace, because it’s quick and it’s easy.
But for the stuff that you want, you can see me now, I’m not sure the listeners are able to see us, but I’m wearing a Blue Salt hoodie, my favorite hoodies made in California, and Sol Angeles pants right now. These products are never going to be sold on a marketplace. Why? Because when you talk to the founders of these brands, they want to have a direct relationship with them. And so, I think more and more consumers are voting with their wallets, to not only support independent businesses, but they’re choosing, and they prefer to buy from independent businesses.
Now, why did they not do it before? Well, beside the issue of discovery, one-click checkout, for a long time, was only available on one or two marketplaces; it’s now available everywhere. Affordable two-day shipping was only available in one or two places; it’s now available pretty much for anyone selling on Shopify.
So more and more, it is becoming more convenient, or just as convenient, for a consumer to buy direct. And when their favorite products are not available in those marketplaces — we talked about Allbirds a couple of times, but go search for Allbirds in some of these big marketplaces, you’re going to see knockoff Allbirds. I don’t want to buy knockoff Allbirds. I want to support Tim [Brown] and Joey [Zwillinger, the founders of Allbirds], and I want to vote with my wallet for more of those products to exist in the world.
Shopify obviously has a content policy. Trump’s store was taken down around the time of the insurrection. You’ve mentioned Jeffree Star a couple times. That’s somebody who is often involved in a controversy, as all YouTubers and influencers are. What are the lines for you? How does that work?
Well, the reason we have the acceptable use policy is so that we have very clear lines. So obviously, we firmly stand against anything relating to hate or violence. But we think that platform moderation is actually a critical part of any growing company, and certainly part of the digital landscape. So we have this team, they’re called Trust and Safety. And the entire team is dedicated to ensuring that our merchants follow the AUP, the acceptable use policy, and we don’t hesitate to enforce that.
So for example, in the last year, we’ve removed products and stores related to Proud Boys, and Boogaloo, and QAnon, and anyone else violating Shopify’s acceptable use policy. But the idea is to actually create a framework to say, “If it breaches this, it’s gone.” Now you can say, “Well, what about the law? Can you just rely on the law?” Unfortunately, the problem is, the law doesn’t operate at the same rate of change and pace as the internet does.
So for example, for a while, ghost guns were technically legal, a 3D printed gun was technically legal. But we did not believe that was acceptable on our platform. So we were very clear that that is not acceptable. And anytime we saw that, we were able to kick them off. So by creating this AUP, we think that — it’s not perfect and there’s still room to improve on that — but the AUP at least gives us a framework to say, “This crosses the line, and this does not.” And then we kick them off.
One of the most interesting things about this conversation with you in particular is that it’s not a free speech conversation. It’s not a Section 230 conversation. You’re not running a social media platform. You’re running a commerce platform. There are actually different rules and a different entire set of lawsuits happening around what online merchants can and can’t sell, and what they’re responsible for.
How big is your trust and safety team, and how much does it run into the trust and safety problems that a social media platform might have? Because, it seems like you need a big one that’s pointed in a different direction.
Our team is big enough that they can, like, it’s sufficiently staffed that they can do what they want. But also, a lot of it is based on machine learning and AI, whereby we know certain keywords or meta tags contravene the AUP, and they’re gone. In some cases, you get to a point where you actually have to really think about it. I mean, you mentioned the Trump store. I mean, the Trump store was taken off the platform when that trust and safety team believed that he was inciting violence in the Capitol. That contravened and went against the AUP policy.
So the team will keep growing, but actually over time, the algorithms get smarter at saying, “This is a store that’s flagged.” We can take a look at it and we can say, “Yes, this is appropriate.” Or, “It’s not appropriate.” And if it’s not, we kick them off the platform. That’s not to say that store is not going to exist elsewhere. We just don’t want it on Shopify.
So this comes back to, the kind of theme of this whole conversation is the power of different platforms expressed in different ways. Shopify is a big platform. That’s a lot of power to have over the economy, over entrepreneurship. What is the philosophical conversation around writing and rewriting that acceptable use policy?
Are these products that we believe should exist in the world, that we think consumers want in the world, that we are proud to say are powered by Shopify? And again, that’s the reason why we don’t want to be random.
Is it proud? Again, it is a different kind of conversation than I have with the social media companies. Social media companies are not out there saying, “I’m proud of this tweet.” But you’re saying, you want to be proud of your products.
You can use a bunch of different terms for it. If it incites violence, it’s off. If it’s illegal in the jurisdiction, it’s off. If it causes harm, like a ghost gun, it’s off. So it’s not necessarily just a pride or a personal pride about it. It is like, “This is a framework. You don’t have to agree with it, but this is the framework we’ve decided, of acceptable stores on the platform. And if you don’t like that, you can go to another platform.” In fact, some people that get kicked off go to other platforms.
But also, it’s not just about what they’re selling. Copyright infringement [is] allowed on other platforms. If we see a store that is infringing on any type of intellectual property, either on a trademark or a copyright or anything of that nature, it’s gone. We don’t allow it. We notify the merchants and say, “Here’s the reason why we’re taking these steps.” And we give them a chance to explain or provide us proof that they actually do own the IP. But they can go elsewhere. It’s just, on Shopify, these are the stores that are permitted.
Does this take up as much of your time, company, brain space, as it does for social media platform companies, where it seems like it’s the controversy they live in, that’s the choice they’ve made in their lives?
I’m not sure. I don’t know how many hours they spend in it. I think this is an important topic. I don’t think this is something to take lightly. And I think the responsibility of the platform is to take this seriously. But I think the right way to do it is to create a set of parameters that says, “This is okay, and this is not.” So this way, when an issue comes to you, you’re not immediately reacting to it on your heels. But rather, you say, “This is the framework. Put it through the framework.” And more times than not, the framework works.
Now, sometimes we may miss something, and we’ll get better at missing less and less over time. But the AUP, we think, is the best way for us to have a really good litmus test of what is acceptable and what is not.
I ask all the executives who come on the show about decision-making frameworks. You started at Shopify, you were actually a seller using some of Shopify’s software once upon a time, now you’re the president. This market has exploded, the company is now a public company. How has your decision-making framework changed, and how do you make some of the monumental decisions Shopify has to make, about where and when it will compete?
Well first of all, to your point, my introduction to Shopify was, I was one of the first merchants on the platform. I was in law school, and I needed to make some money. And my business that I had in college was able to, it was a T-shirt business, but it was more wholesale. I sold T-shirts to universities, like promotional T-shirts for frosh week and bookstore apparel and stuff. That worked great in college where you didn’t have to show up to class, you just showed up for the exam. But in law school, I assume it was the same case for you, they actually took attendance in law school. And so, I couldn’t run this business.
I had the really great fortune of meeting Tobi [Lutke] when I moved to Ottawa to go to law school; he’s the founder of Shopify. And so I met him and I said, “Look, I want to start a T-shirt business, direct-to-consumer, totally virtual. I need it to run concurrently while I’m in class.” And he told me about Shopify, so I became one of the first merchants. I’ve been at Shopify now for about a third of my life, just about 12 years.
And so, in the early days of any company, I think most early, early employees, you kind of play the role of a bit of a Swiss Army knife. Because you’re ingesting so much information, there’s so much to do. I don’t think you have the freedom, or at least I didn’t have the sophistication, to really think about decision-making frameworks. It was like drinking from a fire hose, and you just have to react as quickly as possible.
Today as we sit here in 2021, when I’m given a decision, the nice part of Shopify is we can test almost every assumption. We can test it anecdotally, because we can have a set of merchants that we say, “Hey, look, we’re thinking of doing this thing called Shopify Capital. We think that capital would be very useful, we think you can use it for inventory or marketing or what have you. So, we’re going to start this program, this alpha called Shopify Capital. And if it works and we hit these metrics, we’re going to scale. And if it doesn’t, we’re not going to do that sort of thing too.”
I also think that having a company that has a deep growth mindset, to use Carol Dweck’s term of growth mindset, whereby we’re constantly getting really comfortable with being uncomfortable, that has created an environment for those of us that work at Shopify, whereby we have strong opinions, but they’re weakly held. So, I may come in with this assumption that I know exactly how this experiment’s going to go. And I may say so with conviction, because I think I’ve seen it before, but if you’ve got a better idea or you can challenge me with either data or evidence, I’m going to change my mind fairly quickly. And that’s worked out really well.
And on a personal level, I know a lot of other entrepreneurs and leaders of companies, they use books. And books are great because I can get an insight into some brilliant person’s mindset and how they think about things, but actually mentorship for me has been far more valuable in terms of growing my own understanding of how to run a company.
And when I got married, this is super weird, but before I got married, I called the four or five people that I knew and felt had the best relationship with their spouse. And I said, “I’d like to talk to you for the next couple of weeks, every couple of days, about how to be a great spouse.” When I became a father, I called people that I thought were really great fathers and dads, and said, “Hey, what do you do?” So, mentorship for me has been a really valuable way to scale my own abilities.
And it’s fairly well known that what got you to where you are, is not going to necessarily get you to the next phase there. It’s like the Red Queen race, do you know that concept?
No, I don’t.
Oh, I think it’s an Alice in Wonderland reference, but effectively it’s like a treadmill. In order for you to actually go faster than the treadmill, you actually have to outpace it. So, if you were going at the same pace as the person next to you in the race, you’re actually standing still.
Oh, that’s really interesting. The reason I ask that is, Shopify is growing really fast. You were there in the early days. I keep coming back to this theme, you are now enabling companies to compete with the giants. You are yourself, in some ways competing with the giants. You are in some ways partnered with them.
As you have to make decisions there, you’re up against a lot of capital, a lot of market power, I’m definitely going to ask you about this Apple-Epic lawsuit. Sometimes you’re just up against other people controlling the interface, and just saying what you can and can’t do. How do you use your overall framework to make a decision, like we’re not going to have the Shop App become an actual marketplace for customers?
That’s actually an easier answer, because when you’re specific about that, you ask yourself, “What is best for the merchant?” Forget everything else. What is best for the merchant? During COVID, when COVID first hit, it hit hard in Canada around mid-March. We extended our trial from 14 days to 90 days. That’s a big change. There’s a real cost to moving a trial from 14 days to 90 days, nine zero.
But that was the right thing to do, even if it wasn’t the easy thing to do. Because it meant that more people that may have been on the fence about whether or not to digitalize their brick-and-mortar store, or to commercialize their hobby, or to enter the entrepreneurship ring, were able to do so with less risk, with less cost. That’s an easy decision, because you say, “What is best for the merchant there?”
The other thing is, we use a lens around Shopify, which is the idea of, we want to build a 100-year company. And we’re about 15 years in, so we have like 85 years left to go. When you use a long-term horizon of a 100-year company, you tend to not necessarily focus on short-term metrics or short-term results. You’re able to actually think a lot longer about what you’re trying to do here. And ultimately, just to be clear, what we’re trying to do here, is we want to be the world’s entrepreneurship company.
There is a company that owns search, and it’s Google, and they’ve done an amazing job organizing the world’s content and information. And there’s a company that owns social, and for the most part right now, it’s Facebook. But no company has yet to really own and make entrepreneurship something that is accessible by everyone, and we think we have the best shot at that.
So using that lens, it’s a lot easier to make decisions for the long run. It also means in some cases, that we will do something that maybe in the short run is not great for Shopify, but in the long run is great for the merchant. Or in the short run, it’s also great for the merchant, in the long run may eventually be good for Shopify. We can take these long-term bets, because we’re playing this ridiculously long game of a 100-year company.
So, let’s talk about some of the big competitors directly. Let’s start with Apple. As people listen to this, they will be in the middle of their trial with Epic; I’m sure we’re all going to be watching it carefully. That trial is specifically about what you are and are not allowed to purchase on an iPhone, and give Apple a cut. Specifically in-app purchases, so in this case Fortnite emotes and outfits for your character.
There is a burgeoning marketplace of digital goods right now. There’s an NFT conversation happening all around us, I could see how I might want to be an entrepreneur that just sells digital goods. Shopify, right now, if you wanted to enable that for me, you would run face-first into Apple’s restrictions and face-first into the same problems that Fortnite is running into. Have you thought about that kind of market expansion?
So, we do have merchants that sell digital goods. I think Taylor Swift put out her last album on Shopify; Kanye has sold all his last bunch of albums on Shopify digitally, all his merch as well. It’s not really about Apple per se, but I think what it raises for me, is that if you’re going to be a future-proofed business long-term, you need to have your tentacles in a lot of different places.
I used the term “digital town square” earlier, but let me double click on that. The digital town square of 2021 is not one town square, it’s like 15 different town squares, and it may become 30 town squares. And AR or VR may also be a town square that hasn’t really come out, the next TikTok might be as well, and Clubhouse. There’s no commerce on Clubhouse right now, I suspect at some point there will be some form of commerce on Clubhouse. That doesn’t mean you as a merchant, or you as a brand, or you as a game company, should focus on one particular channel.
Your app that sits on an iPhone, if you’re Epic Games for example, you’re selling merch or selling digital goods, that may be one particular channel. But if you also have Epic Games powered by Shopify, or you’re also cross-selling on Instagram, now you have more leverage, but you also have more optionality, that if one of those channels doesn’t become as lucrative or as impactful to your business as it once was — I use the MySpace example — it’s still okay, because you have all these other channels as well.
I hear what you’re saying. And I think you are framing Shopify as one solution for entrepreneurs trying to make their way across all these platforms. I want to talk about Shopify though.
You run a business that takes payment very much from people’s phones. There are two platform vendors that are very much in control of what happens on people’s phones. You, as the president of Shopify, how do you perceive the threat to your business or the opportunity for your business as those platform walls expand and contract?
I don’t view that as a big threat to our business per se. I mean, I use an iPhone, and the fact that it’s someone else’s platform, I believe that there is a way for you as a merchant to build an app, for example, on Apple. Let’s say you’re a clothing company and you build a workout app. You can still make money, even though you are on someone else’s platform.
I appreciate the walled-garden kind of scenario that you’re painting, but I actually think there are other ways to do it. If you can no longer as a merchant make money on one of these platforms or one of these pieces of hardware, or Shopify merchants have more difficulty now selling in-app purchases on the iPhone, I think entrepreneurs at their core are resilient, and they’re going to find other ways to monetize outside of those walled gardens.
But I guess the reason that I come to this with a maybe more optimistic answer than what you expected is that I’ve seen the resilience of entrepreneurs, and when one channel closes or one piece of hardware platform closes, they find another one, and I think that’s how it’s going to continue. Now that being said, I do think some of the restrictions on things like ads for small businesses, that some of the platforms are discussing, are going to be in the short term, it’s going to make it more difficult.
But I think in the long run, what it’s going to do is it’s going to force more of these brands to be a lot more wider-reaching in how they acquire customers, how they build their business because they realize now that that is not going to be good enough. And so now I’m like, all right, I’m going to experiment with TikTok ads, or I’m going to find some influencers. But I think the resilience is actually what, I guess, gives me hope that it’s not going to create a mass problem for all entrepreneurs and all small businesses. It’s going to force them to be more creative and find new channels.
But let me paint the most pessimistic version of that picture. I’ve heard from a few places, in particular from Facebook. Apple is going to do ad tracking transparency on the iPhone, it’s all rolled out. I’ve said no to every request to track me across multiple apps. That means Facebook’s first-party data is going to get more and more valuable. And so they’re going to want to keep you in that app more often, they’re already doing stuff in that direction.
They’re saying, “Here’s a podcast player.” “Here’s a set of creator tools.” We’re just going to hold you inside of this app so the ads are valuable here. And then their next move, and I know they’re currently partnered with you, is to have people transact more often in that app because they can’t track you as effectively elsewhere.
Off that app.
Off the app. Off Facebook apps, it can certainly track you across this set of apps they have. As Facebook wants to grow, and I’ll pick on Facebook, but it could be any of the companies that are doing this kind of marketing; TikTok. As they grow they’re going to just try to take more and more volume down into Shopify’s part of the stack. And so you can use Shopify here, but we’re Facebook, we can just subsidize a better deal, a lower cut of the transaction fee.
And that to me is where you see Apple made this move, ostensibly, to protect their users, they seem very ideological about it. But in some other way, they’ve actually just bolstered Facebook’s position and Facebook’s desire to hold people in their app and eventually transact in the app in a way that might cut directly your business and you had nothing to do with it.
Well, I don’t think in 2021, anyone is setting up a single channel of commerce. I’m serious. The data backs it up. No one really has a single channel indefinitely in 2021. You immediately want to have multi-channel right away. Even the idea of omni-channel now, it’s like calling it a color TV, you don’t call it a color TV. It’s just commerce. Commerce should be everywhere. But in terms of the ads, specifically, because I want to address it.
So near term, some of the changes, the Apple changes will reduce the efficacy of some ads, but it will further incentivize merchants to try other ways to connect with buyers on top of ads getting increasingly expensive. So longer term, merchants may actually benefit from further embedding commerce into every surface, like from retargeting, to using Shop, to using some random social media platform in some particular niche.
That is why I’m optimistic, because I don’t think that when that happens, entrepreneurs are going to close their windows and their doors and say, “We’re out of business now.” I think they’re going to say, “Okay, where are we going to be able to find new consumers?” And when one of those opportunities close, Clubhouse or TikTok or someone’s going to say, “Great, we now can help you with that.” And I think that is a better way to think about what is happening in retail. Not talking about the tech wars per se, but in retail.
I think my question there is if your highest-converting marketing channel changes its terms in some way, and you have to actually go find another marketing channel. Entrepreneurs are very creative, that’s why I have a show where I mostly talk to entrepreneurs, I like that. But that is a very disruptive and often devastating change for some people when your marketing spend suddenly goes very high.
Before the pandemic, one of the stories that I thought was most interesting was that direct-to-consumer brands across the industry were finding their digital marketing spends skyrocketing so fast. It was more cost-effective to open stores in New York City. Which is completely upside down.
There was an arbitrage opportunity. There was an arbitrage opportunity on physical retail in, like, Soho.
Which is crazy to me. It used to be the most expensive real estate in the world. And it was cheaper than acquiring customers on Facebook, which is nuts. Like I would try to explain this to people and people wouldn’t believe me. The pandemic has happened, I don’t know that there’s quite as much of that opportunity in Soho anymore. But it feels like that dominance is even more solidified.
And as the platforms do get into these wars, that the collateral damage for the entrepreneurs trying to build a business is really just a tax on, A, you have to figure it out instead of operating your business and making better products. And B, your money is definitely not going as far as it used to.
Yeah. But that assumes that the only way you’re able to acquire a customer and get attention is by spending money on it. When I look at Gymshark, do you know Gymshark, the company?
So, billion-dollar brand; Ben Francis, pizza delivery guy in the UK, builds it in like 2014 in a dorm room. I don’t know this for sure, but I suspect that some major sporting goods companies, in the board meetings, are talking about Gymshark and the challenge they’re bringing. The entirety of that business was built on simply finding amazing personal trainers who don’t work out in big gyms, but actually work out in their homes, and creating relationships with them. And then they become this leverage, this force multiplier for attention. They didn’t need any money for that, they just needed creativity for that.
Or another one is email marketing. For a lot of our merchants, a lot of merchants in general and some of the biggest brands, their email list is the most valuable thing that they use for marketing and they own it. You own your online store and you own your email list, you don’t rent that from somebody else.
And so again, there are other levers of that but you know, when one of those marketing channels closes another one will come up. And there’s always going to be an early-stage arbitrage opportunity before everyone sort of realizes, hey, this is a really good ROI. But those eventually will mature and some of them may close and there’ll be another one that comes up. That’s where resilience is almost more important than any one particular strategic direction.
Let me shift my attention to Amazon a little bit. One of the frames you have for Shopify is, you are not competing with Amazon. In fact, Shopify is partnered with Amazon in some ways. But you are creating a network of independent sellers who might then provide real competition to Amazon. I think that’s a really interesting frame. But you are partnered with Amazon. It’s almost two years on Shopify Fulfillment Network. How is that going?
It’s going great. And the reason that SFN is so important, to actually bring it right back to your introduction of this question was, it’s one of those additional pain points that the big companies, the big marketplaces, have had an unfair advantage on. That consumer expectation’s been completely reset, everybody wants affordable two-day shipping. And any individual merchant on Shopify that’s just getting started cannot properly do that.
But when you aggregate, when you take a lot of tiny little lights and you bring them together, you get the sun. When you aggregate those merchants, you actually start seeing, wow, there’s some scale here, and now you can actually offer affordable two-day shipping. So SFN, it’s about a five-year plan, we’re about a year and a half or two years into it now. We think that we can connect third-party logistics warehouses, 3PLs, all over the US using great software, to the effect that a merchant starting on Shopify, after 30 days of sales data, we can say, “Send your products to our node in Atlanta, our node in Reno, Nevada.” And then on your behalf, we will ship out your products with your own branding, in your own boxes, not in some sort of third-party logistics, branded boxes.
So the reason that SFN, the fulfillment network, is important is the same reason the payments product is important, the capital product’s important. These entrepreneurs on their own cannot necessarily compete at the level they need to. But when we aggregate them, we talked about, some companies are building empires, we’re arming the rebels. When we arm the rebels, the result of it is that the rebels become the most beloved brands for consumers and that, I think, is what’s happening.
So you’re actually building fulfillment centers, shipping, you’re doing all that work?
We are. Our business model around fulfillment is we believe that there are tons of empty warehouses all over the US, that’s where we’re starting right now. Think of the 3PLs that used to supply J.Crew, or used to do all the logistics for Forever 21. You have all these buildings all over the US with great people there. In fact, some of them are actually small businesses that run these fulfillment warehouses. The problem is none of them are connected. And so [what] we’re trying to do with SFN, with the fulfillment network, is connect them all using software.
We also acquired a company called 6 River Systems out of Waltham, Massachusetts, which makes robots to make these warehouses more efficient. We think we can actually make it so that it feels like you’re buying from a really, really big marketplace, even though you’re buying from an entrepreneur who’s a single mom and runs the business from her kitchen table.
But the fulfillment center, is that owned and operated by Shopify, or is that a franchise agreement? How does it work?
No it’s not. It’s a partnership. It’s our software; it’ll be our robots, but they own it, it’s their business. We do have one that we own ourselves. It’s almost like a laboratory, it’s here in Ottawa, so we can do some testing. But those fulfillment centers, those nodes are all third-party owned.
So what does that deal look like? I happen to own a warehouse. I’m like, “Man, I’m getting crushed. I gotta call Shopify.” Do I just one-click order a robot and you take it over? How does that work?
You own a warehouse. You have all this capacity. You call Shopify, or we call you because you’re in a particular region that we really like. And we say, “Hey, we think you’re a perfect candidate to be in the fulfillment network.” We go in there, we make sure the quality control is a certain level. We make sure that you have all the capacity. And then we start sending you products and you get paid a fee for every product that you store, that you pick, you package, you fulfill. You no longer have to do any of the marketing if you’re one of these 3PLs.
Who bears the cost for the robots that end up in the factory? Is that you or is that the warehouse center?
Those are all different, depends on the warehouse. In some cases they want them anyway, because they have other customers. And so they’re paying for it. In other cases, we decide that it’s such a strategic warehouse that we want to put those in there. And in other cases, it’s one merchant that has the whole warehouse and so we’ll have to deal with the merchant itself.
One of the things that’s really interesting about this is, obviously, Amazon is a big competitor here. They own and operate a lot of their own warehouses. They have a lot of different kinds of deals. They have a lot of contractors as delivery drivers with Amazon logos on the vans. It’s almost impossible to figure out.
But one constant is the people who work in these warehouses, who drive the trucks, are not always in love with working for Amazon. There’s a lot of labor unrest at Amazon to enable the amount of volume they do, to enable their shipping speed. There was just a failed union drive in Alabama, there’s going to be more. Internationally there’s more labor unrest against Amazon, we hear the stories every day.
You’re trying to enable the same thing at scale, maybe using a different model. Have you thought about the people who actually put the stuff in boxes, drive the trucks, enable the two-day shipping?
One of the things that’s so cool about the fulfillment network is that, I kind of hinted at this but let me just say it bluntly, a lot of these fulfillment warehouses are actually owned and operated by small businesses in our case. They’re in some town, it’s a family-run business, they’ve been in the family, for like two generations they’ve been doing some sort of fulfillment. And so we actually get to know these folks and it’s working out really well. I don’t think the two are mutually exclusive. I don’t think you have to have a tense relationship with the people fulfilling these orders in order to have affordable two-day shipping. You can do good and fulfill things in a timely manner and affordable price. The two are not mutually exclusive.
Now, again, the other difference is that we care first and foremost about merchants, and other companies, they care sometimes about the end consumer. And so merchants are sort of this annoyance in the middle, but our entire mandate, we care about these merchants here. But to your point, I don’t think you need to necessarily be ruthless with the people that are doing this fulfillment, in order to have great fulfillment.
How do you maintain the cost curve though? Because now you’ve got a lot of different vendors in every part of your stack. You’ve got merchants on one side who are selling things to consumers, you’re in the middle, you’ve got a whole network of logistics operators that the merchants are coming through. How do you keep that all consistent without that level of ruthlessness? Because consistency at that scale tends to require pressure.
Yeah, but efficiency and ruthlessness — you don’t have to be ruthless to be efficient, or to be effective. First of all, consumers, believe it or not, are happy to pay for great shipping, they’re happy to pay for good products. So at first I think the consumer is certainly happy to pay for two-day shipping. I don’t think you have to go beyond two-day shipping, I don’t think anyone needs something within an hour. If you do, you can use something like Instacart or something like that.
Now, speaking specifically about the fulfillment warehouses, again, a lot of these warehouses have been decimated. They had this huge customer like American Eagle or something or Forever 21 or something. And now those warehouses are empty. One of the reasons that we also want to acquire 6 River Systems — which is, again, this robotics company — one of the things it doesn’t do is, it doesn’t replace humans in the warehouse. It just makes a human in the warehouse far more efficient. So in some cases, you’re actually able to get really great cost efficiencies and reduce the cost, because now you’re not running around the warehouse in some random sort of pattern but you actually know exactly where to go, how to go, and what’s going to be the most efficient route.
I want to take just a step back and end on a very much more expansive question. One of the dreams of the internet is that you could do the thing you’re describing. You’d hang a shingle. You got a snowboard shop. People are going to find you. Now you’re running the best online snowboard shop, off you go.
A thing I’ve noticed from a lot of entrepreneurs I’ve talked to on the show, people who’ve started companies, they quickly realized that the software it took to build that early business was much more lucrative than the business itself. And I’m wondering if you see that turn for the generation of businesses that are coming up on Shopify, where they have more tools, they can streamline the operation of their business, they can start quickly. But there’s some looming problem, where actually being first to building the software to solve that problem is more lucrative than the businesses that can run now.
That’s a good question. I think about some of the big merchants on Shopify that are homegrown stories, Fashion Nova, for example, or Jeffree Star Cosmetics. A lot of them have had to create, they’ve created custom apps on Shopify. They’ll take the Shopify API and they’ll build something that’s really unique for their business.
In some cases, they actually do publish those apps in the Shopify app store, to enable other merchants to use it, as well. That’s one of the cool parts of having an ecosystem. I mentioned on the earnings call that last year, Shopify made about $3 billion, in 2020. But our partners made about four times that, about $12 billion, with this massive app ecosystem and massive referral program.
And sometimes they do that, but for the most part, I haven’t seen too much of a merchant building this great business and then realizing some tool they made. It’s like the Slack story.
Obviously Stewart [Butterfield, Slack co-founder], another great Canadian entrepreneur, he wanted to build a gaming company, and as part of that, ended up building Slack. I haven’t seen too much of that. What I have seen, though, is extension. So you start with just making shoes, and now you’re making luggage. Or you start by just making one lipstick in Kylie’s case, Kylie Cosmetics, and now you have an entire range of cosmetics that rivals L’Oreal. That vertical expansion tends to happen a lot more than, “Hey, there’s a tool we built to run the business, and now that tool is more valuable than the business itself.”
Do you think that era of internet companies is over, then? That’s kind of where I’m headed; have we reached that maturation point, where there are great core tools to build businesses, and you don’t need to reinvent Slack because you can just use Slack?
I think there’s a lot of great tools right now available. It’s kind of shocking. And if the tool that you want is not available, I think the technical literacy of most entrepreneurs and founders in 2021 is so high. You don’t have to be an engineer to read a bunch of API docs and figure out, “Oh, I can connect my ERP system to my shipping system just like this.” You can just go to one of these connectors, remember If This Then That?
You have all these sort of connection tools where, you as a non-engineer, two ex-lawyers like you and I, or two entrepreneurs, we can just kind of go and figure it out on our own. I think it actually is getting much easier.
To answer your question directly though, I do think the tools right now are so good that pretty much you can build almost whatever you need, and if you can’t, there’s open source that’s available. If you can’t, you can go hire an engineer to come in, you can hire a developer, you can go to Fiverr to get something built for you pretty quickly. It’s actually, in many ways, it’s the best time to be an entrepreneur, like maybe ever.
I’m a child of immigrants. When my family came from Eastern Europe to Canada in ‘56, they became entrepreneurs because they had no choice. In fact, the reason I think I went to law school was because my parents wanted a better life for me, quote unquote, than they had for themselves.
And they’re like, “Entrepreneur is what you do when you can’t do anything else.” And actually now, I realize that they’re wrong about that, that their reason for being an entrepreneur or small business was to put food on the table, survival. But for many of us, it’s really to self-actualize that we want to do something. We want our personal passions and our professional passions to meet up. We don’t want work-life balance. We want to sort of live this incredible life where we share our gifts with the world. And if you make great soup, you should start a soup store, and not necessarily work at some job that you hate.
How many soup stores are there on Shopify? That’s a real tongue twister.
Yeah. I don’t know. Probably a lot. I mean, 1.7 million stores, you can pretty much pick any category, and there’s like thousands of stores in that category. Yeah. Randomly, someone showed me a store that makes hats for cats on Shopify that does really, really well.
I’m doing the fact check after this and we’re going to find out if there’s any soup stores on Shopify.
One other thing that might be interesting for you, just relative to COVID and stuff, is how many stores, like how many restaurants now have stores, with either meal kits or cookbooks. It’s quite amazing to see how many service-based businesses in the pandemic, having to close their doors, changed and pivoted their business to sell a physical product. Some of my favorite restaurants are now online stores. The French Laundry is on Shopify. It’s so crazy.
The next turn for me, we’re out of time, but I would say the next turn of that for me is, that it’s still so dependent on the open web existing. We’ve talked about threats to this kind of digital merchant class over and over again.
That, to me, is the threat, especially as more of this happens on the phone. However, you’ve given me too much time already. So I’m going to end how I always end. What is next for Shopify? What should people be looking for?
I still think entrepreneurship is not accessible enough. If you look at our 1.7 million merchants, most of them are in the English-speaking world. They’re in sort of our core geographies. I think there is so much opportunity for us to help people put food on their table, or whatever their unique, individual version of success might be, make a million dollars, take a company public, feed their family, put their kids through ballet lessons, whatever that is for them, I think entrepreneurship is still inaccessible to many. Andy Warhol has that famous quote that, in the future, I think everyone will be famous for 15 minutes. I would love in the future for everyone to try their hand at entrepreneurship.
I’ll give credit to Nike. Nike did this amazing thing where they convinced the world that if you have a body, like a physical body, you are an athlete. And therefore, they made their products accessible to everybody. We would like to convince anyone that has ambition that they could be an entrepreneur, and they could probably be successful at that. That’s the future for Shopify, can we turn the whole world into entrepreneurs?