Just a short time ago, setting up an online store was cumbersome and cost-prohibitive enough that a digital component wasn’t even a viable option for many retailers. Today, it’s the default storefront for millions of brands all over the world.
For many, Shopify has been the driving force behind the phenomenon. Launched in the early 2000s, the e-commerce platform provides nearly every tool founders need to found, launch and scale online businesses. Beginning at a time when few commerce software options existed, the company struck a chord both with retail entrepreneurs in need of better solutions and app developers eager to build them. Today, Shopify works with more than a million businesses that collectively represent some 10% of e-commerce in the United States, providing tools for companies to set up, sell, market, and manage their products.
As the e-commerce industry has evolved, so, too, has Shopify. But it has never wavered from its original, core mission: empowering entrepreneurship.
“The fundamental reason I joined was because I thought it was the greatest catalyst I’d ever experienced as an entrepreneur,” says Shopify President Harley Finkelstein, when discussing what first drew him into working for the company in 2010. “[I wanted to] provide this tool and wrap it with superpowers that allow you to build things faster and at a much, much larger scale.”
Finkelstein joined me for a wide-ranging discussion on his personal entrepreneurial journey; the evolution of Shopify; his assessment of the current economic landscape and its impact on e-commerce businesses; and his predictions for the future of retail.
This interview is part of Greylock’s Iconversation series. You can watch the video of the interview on our YouTube channel here, and you can listen to the conversation at the link below or wherever you get your podcasts.
Thanks, everyone for joining. There’s a pretty good mix of folks in this room across brand founders, e-commerce infrastructure founders, B2B commerce, and stuff at web3.
And thanks to Harley for joining us and entertaining a slew of questions from the group and some topics I prepared on this.
I thought it would be interesting to first go into this by thinking a little bit about how you approach entrepreneurship in general. I think Shopify essentially as a platform for enabling entrepreneurship, and I’ve always admired how steadfast in the mission you’ve been.
I want to spend a few minutes on that and talk more deeply about some of the stuff going on the platform, and from the vantage point Shopify has, what the future of commerce looks like from your end.
But Harley, I guess, you know a good place to start would be [on the fact that] a big theme, it seems, through your life and career has been entrepreneurship and enabling it. Was there a moment in your life, or when was the moment when you kind of decided that this was your calling, this is what you’re going to dedicate your life to?
Quick show of hands. How many of you had sort of small little side hustle businesses when you were like 8 to 10 years old in the room? Yeah. I mean – my people! That was it. I mean, like growing up, I wasn’t really into sports. I wasn’t really into hobbies in the way most kids were.
I was kind of into this idea of starting little businesses and I like the idea of collecting sports cards – not because I thought it was cool to have something like a Michael Jordan rookie card – I thought it was cool to sell it for more money to my neighbor. I thought that was a great thing to hustle my neighbor into paying me all of his allowance.
Some of you know the story, but my first real kind of entrepreneurial thing was I was 13 years old. I’m Jewish. My background, I went to a lot of our mitzvahs. I think a bunch of you did. And I wanted to be a deejay. Nobody would hire me because I was like this big and didn’t want me to deejay. So I started my own DJ company and hired myself.
And after that, that year was the same year we moved from Canada to South Florida, and I ended up deejaying like something in the neighborhood – no exaggeration – like 500 bar and bat mitzvahs. And while even in high school, all my friends were like going out, you know, getting drunk and doing whatever we did. In high school. I was deejaying bar mitzvahs, which at the time – it seems really cool now when I said out loud – but it seemed super lame.
But that’s kind of what I was into. I was into this idea, and it wasn’t even about the music or about the entertainment. I just liked the idea that I was able to deliver some value and somebody would pay me for it.And I think a lot of it had to do with this idea of independence; that I can do whatever I wanted because I was able to make my own living.
Where this got really serious for me was in 2001. I moved from South Florida to Montreal to go to McGill. I was born in Montreal, it’s my hometown, went to McGill and things got really rough with my family. My dad was no longer around, my mom and younger sisters basically had no money.
And so a friend of mine was a student council at McGill University. And he told me that McGill at the time was spending somewhere in the neighborhood of $25,000 per semester on orientation or frosh apparel (the stuff you got the first day of school). Montreal, if any of you know about Montreal, has a rich history of the schmatta businesses, the clothing business, kind of like New York City. And the reason is, in fact, it’s a really interesting thought: if you look at the cities that have a disproportionate amount of immigrants, you will often see a massive textile trade, schmatta trade, apparel trade, because the barrier to entry is very, very low.
And I started selling t-shirts to McGill and then eventually sold them to a lot of other universities across Canada. And again, I wasn’t really into t-shirts per se. I was into the fact that this tool called entrepreneurship that I pulled out of my pocket for deejaying and also for apparel, it solved the problem. The problem when I was 13 was no one wanted to hire me.
The problem when I was 17 or 18 was my mom and sisters needed money and I needed to pay tuition.
I ended up moving to Ottawa at 25 because a really good mentor of mine convinced me that law school would be like finishing school for entrepreneurship, that I would learn certain skills and certain tools in that three year period that would be very valuable to me. So as an aspiring bigger entrepreneur, I moved to Ottawa.
I had no friends or family there and had never been there before. And so like many of you (and many of you have moved to new cities, I’m certain), I would ask where the entrepreneurs hang out. And I was directed to a small coffee shop in Ottawa and that’s where I met Tobi. And Tobi had just moved to Canada a year or two earlier. He met a girl – he was from Germany – and he met a girl who lived in Canada. He moved there and couldn’t get a job because he was a new immigrant.
So like, you know, any good aspiring entrepreneur, he started a company selling snowboards on the Internet. And in 2004, there were really two ways to sell products online. You either used a marketplace or you paid $1,000,000 for some ridiculous stack. So he was really into this new language called Ruby on Rails. He was a core developer with a few other people. There were few companies that were really thinking about Ruby on Rails and how we would build scalable software at a much faster pace. And he was one of them.
And so he wrote a piece of software to sell these snowboards and very quickly realized that other people may want to use the software for their own products and I was one of those people. I became one of the first merchants on Shopify, and I turned my sort of wholesale t-shirt business into a direct to consumer retail business.
And I spent the rest of law school and business school selling t-shirts. I went to practice law for all of ten months in Toronto. And I talked about this yesterday – it was just the worst experience of my entire life, the law firm environment. You were a good lawyer (points to someone in the audience). I think I was a really, really bad lawyer. I just hated the environment. I hated the fact that it wasn’t about how much value you added. It was about who you were, what your last name was, how long you’ve been there. It just wasn’t for me.
And so I called Tobi in 2009 and said, ”I would love to join you in a small group of others and help build this company called Shopify.”
And the fundamental reason for that was I thought Shopify was the greatest catalyst I’d ever experienced as an entrepreneur. I talked about that tool I pulled out – Shopify. It felt like it gave me superpowers, that I was able to use this tool for entrepreneurship and wrap it with this superpower. And I can build things faster and at a much, much larger scale.
And, you know, 13 years later, we have millions of stores on the platform. We’ve helped millions of stores start to scale and grow their businesses. And today we’re about 10% of all e-commerce in the U.S. and in other countries, even higher than that.
I want to come back to your personal story a bit. I think one of the topics that I think a lot of people here are interested in and that kind of ties to the early vision for Shopify is the platform piece. And I think what’s really notable is there’s a bunch of people I’m looking at here in the room today who have built significant at-scale businesses on the platform.
Can you raise your hand if you built an at-scale business? I’m wondering who to be nice to.
Yeah, I imagine early on, just the builder mentality of Tobi, and all you guys thinking about building as full of a solution as you can for entrepreneurs who want to get going. When did it become clear that the platform approach was the right one and what were some of the assumptions that you made kind of going into that?
In the early days of Shopify, we used to get this report from our support team of three, which sent us this report I think every Thursday or Friday, and it was basically a list of customer complaints that they had or voids in the product, things that were lacking in the product. And at a certain point, that list got longer and longer.
And I think most entrepreneurs and most founders would have had this experience. You have to make a decision: either you’re going to build everything or you’re going to need to find another way to supplement the platforms. Lack of, you know, the lack of product market fit that 100% of merchants are going to get.
So there was no way that we would ever be able to build every single feature request that was coming out of the support organization, and so it felt like the easiest thing to do would be: Why don’t we just create a bunch of APIs and let third parties come and build on top of it?
The problem was that none of you in this room wanted to build on Shopify in those days because you have a classic problem, which is chicken-egg, and you’re not going to build unless we have a lot of merchants and we’re not gonna get a lot of merchants unless you actually build to fill in the product gaps.
I remember when we launched the theme store, Danielle reminded me of the story earlier today. We launched a theme store. No one wants to build themes for Shopify because again, why would you spend any time building for a platform that has very few customers for your product? And so we created a competition. We gave out an iPod touch to the winner. And recently on Twitter, the person that won found me and said, “I still have the iPod Touch.” And it says like, you know, “Theme Store Winner,” or whatever was the theme store design winner.
So we did a lot of things in the early days that just didn’t simply scale. Like, I would call app developers myself and say, “Look, I know you’re building for Forbes.com or some big enterprise e-commerce company, I think you should build for Shopify.”
One of the cool parts of building for Shopify in like 2010 is there’s nobody else. We had such a small group of app developers that if you build something of actual value and you believe that our ability to scale the platform (in terms of get more merchants on) is going to continue, it’s going to grow, you will be like part of the future of this of the App Store program and and over time it got it got better and better.
We started realizing that for anyone that was really good at thinking about commerce and modern retail, we were giving them an opportunity to find as many customers as they wanted for their app. So in fact, we would become the go-to-market strategy. And in return, Shopify would provide 100% product-market-fit for anyone that uses the platform, regardless of what were the nuances of their particular business.
I remember there was an early story of a merchant on Shopify who was a European sneaker company who badly needed some sort of shoe size converter. And they were adamant that we should build it ourselves. And it was obvious it was like the worst thing we could have spent our time working on – building some sort of shoe size converter.
And I remember I had this conversation myself with this with this merchant, and eventually it turned out there were these there were a bunch of third party app developers in Europe, I think actually in the UK, in London at the time, who had just built a bunch of these sort of like free tools online, like just a website where you put in your U.S. shoe size and you got you got the European shoe size. We just contacted them and said,”Look, take everything you’ve built for the web and just put it into the App Store.”
And eventually, as they did and others did it, we actually built a real app program. And then over time, as the merchant base grew – we got 5,000 merchants and 10,000 merchants, 100,000 merchants – it became a lot easier to recruit more app developers.
I think the key, though, for us has been (as many of you have heard if you’ve listened to anything I’ve ever said, I talk a lot about this), but like that Bill Gates line: “To create a real platform is where you create more value for others than you capture for yourself.”
I think it’s called the Bill Gates line, he certainly has owned that sentence, but the thing that’s missing is the next sentence: Over time, the proportion of value should continue to grow on the side of the partner. And I think we’ve added a lot more to the core offering of Shopify. The definition of what most merchants need most of the time is what we built into core. But even if we build something like email marketing ourselves, we still leave room for Klaviyo and all these other email marketing companies to make lots of money to deliver, to create great value for our merchants.
I think that the relationship we’ve had with the merchant, with the merchant community and the partner community over time is something that I think is really quite unique. And part of it is because we’ve always left room for others to participate in the Shopify economy.
Yeah. It feels like with scale, the needs of merchants, of developer partners, and of Shopify have the potential to conflict more often or in more interesting ways. What are more instances where you feel like you maybe provided a suboptimal merchant experience ( an unintentionally suboptimal merchant experience) by having a partner serve that need versus Shopify having done it? Or, how are there instances where this balance has been hard to strike?
Yeah. I mean, in the early days of Shopify, we had third-party app developers that were basically doing mobile web optimizations of an online store. We saw this in like 2012 or ‘13, but what you saw was the traffic on the mobile web was increasing – not mobile apps; mobile web browser traffic was increasing, but transactions were not at this point. I mean, it was still pretty much like a way to browse, not a way to transact. It was years later where you saw more than 50% of transactions on Shopify were complete on a mobile device. But we had a bunch of these third party apps that their only value was they would take your online store on a desktop and optimize it for the mobile web.
And then that felt at a certain point, where we saw more and more traffic, we go, Okay, this has now crossed the threshold and now it is what most people do most of the time.
And we built that ourselves. So there’s going to be times where – we’ve been honest about that – and say that definition is dynamic. It’s going to change. The trends in commerce and retail are going to change. So there’s going to be times we’re going to add new products, new features. The best app developers that have been on the platform in some cases since day one, they’ve always found opportunities to add more value. There’s always surface area around. Every now and then I run into an app developer that sort of criticizes us and says, “Well, you’re building everything yourself.” And I direct them to like 8,000 apps in the App Store – some of which, by the way, I mean, we talk a lot about these IPOs that have happened on Shopify from the merchant perspective, whether it’s Oatly or it’s Allbirds or it’s Figs. My suspicion is we’re going to have a lot more app developers whose businesses were predominantly built on the Shopify API that will go public and that’ll be as exciting of a day for us as any of the merchants that have gone public.
Yeah, I think, you know, one of the areas that I think I hear the most chatter around in talking with merchants now (and this is kind of ties to my previous background running at-scale, paid marketing budgets) is just the cost of acquisition going up for a variety of reasons. But with ATT,and with measurement challenges, it seems to be more pronounced than ever.
At the same time I’ve heard Tobi and you state early on that playing kingmaker is not what Shopify does. It’s never pitting one merchant up against another, which kind of ties into (and you’re probably sick of getting asked this) this question of, “Will Shopify become a marketplace?” I think for our audience this is a really interesting effort to watch because it feels like merchants love this.
How have you guys thought about building out what is essentially a competitor to a Facebook lookalike audiences, or maybe a supplemental way for merchants to really drive traffic?
Yeah, I mean, it’s funny, there’s not a competitor because Facebook lookalike audiences were fundamentally a set of third party data. That is, it contravenes a bunch of some of the stuff that Apple’s putting out in the world.
I’ll answer the question directly: the reason the audience is opt-in is because we don’t want to default everyone to share their data. There’s going to be merchants on the platform that are going to say, “Fundamentally, I don’t want to share my information with anybody else.”
However, one of the things that audiences are doing – you guys know what audiences do, most people do, but for those that don’t, if you’re a Shopify Plus merchant, you have ten SKUs. You pick three SKUs, you want to put some more of them into the audience algorithm, we feed you back with the lookalike audience or a sample audience. And now when you’re buying ads on Facebook or Google or Instagram, when you upload your product descriptions and your data and your photography of the product, you also upload the sample audience. And we can pretty much guarantee you will have a higher return ad spend from that. So it’s opt-in, you don’t have to do it.
One of things we’re realizing is that we’re talking a lot more about audiences now because now we’re seeing it’s beginning to scale really well. The more people that opt into it, the richer the algorithm becomes, the more information we have, the better we can help you make decisions.
And so I think that two things are happening. One is merchants that may be hesitant to share their data are becoming a little more comfortable with it when they realize, one, it’s anonymized data, and two, modern retail is not zero sum. It’s positive sum. There’s so much business out there that it’s okay for you to participate in this because yes, you may be making another merchant somewhere else in a different category a little bit more money, but you’re also funneling, making yourself more money as well.
And the delta between you being somewhat uncomfortable, but sharing is offset by your return on ad spend. And over time we think that we want to get audiences to a point where it is a bad thing – it is a mistake to buy ads on a particular digital surface, digital network without actually first running your products through the audiences. We’re not there yet, but that’s where we want to get to. And we’re not a marketplace.
By the way, just to answer the first question very directly: that is something we can do, but the reason it’s opt-in is because you don’t have to participate in it. One of the things you get when you sell a product on a marketplace, you get to borrow the economies of scale from the marketplace and they charge you rent for that in the form of listing fees, but also transaction fees.
When you build a tech stack, a custom tech stack for your brand, you get full ownership, you get full independence. What we’re trying to give you at Shopify is both economies of scale because you are part of a community that is the second-largest online retailer in America, and at the same time, you get full independence. We don’t own your business. We don’t own your customers. We don’t own your data. It all belongs to you. Our job is to be good custodians of all those things so you can make better decisions. But if you decide you want to leave Shopify and you want to take all your customer data with you, you should do that. We hope you don’t. But that’s the role we want to play.
And I think one of the reasons that there are people in this room that have said to me in the last 2 hours, “I’ve been a shareholder of Shopify since day one, since the IPO,” most people in the world don’t really know Shopify because fundamentally we’ve been the brand behind the brand. The only thing that’s changed recently is Shopify Shop. It’s now put the Shopify business front and center in a way that just had not happened before. And a random New York person that’s walking this route right now, he or she is now seeing Shopify, the Shop Pay button across most of their favorite stores. And now they’re beginning to be like, “What is Shopify?”
But for the most part – and I think this is where being based in Canada has been quite helpful – we have played really nicely and we’ve been in a good position being the brand behind the brand and letting our merchants look really good, not us.
Yeah. So we’re talking about some of the at-scale stuff here in the audiences. If I go back to the beginning and think about what is the core competency of a merchant early on, or as a brand and founder trying to get started, in my view, the art is around finding your initial kind of audience, your initial 10,00 fans, if you will.
As you think about removing a lot of the other competencies that a merchant would have had to need to build in-house over time, and replacing those or kind of supplementing them with Shopify and its partner ecosystem, how do you think about the role you play in that core and that initial discovery for those fans? Would you say that is still ultimately on the brand founder to figure out?
Yeah, I mean there’s some things we do to sort of help them get found. It’s funny we all sort of take this for granted now, but like out of the box for $29, the SEO that you get with Shopify is equivalent to what someone was paying millions of dollars for eight years ago, five years ago.
Even so, we try to make it really easy, but ultimately we don’t do manufacturing for our merchants. It’s up to them, making the products. That’s up to them. And we don’t give them customers. We just don’t manage them.
Now, if they want to be given customers, a much better version of that business model is a marketplace. They will give you those customers. I think this is what people miss, but the marketplace model is that they are not your customers. You are renting customers from that marketplace. They belong to them and they will rent it to you until they decide they don’t want to rent to you anymore. But you are not actually building any direct relationships. And so your ability to build a brand, build an audience is up to you.
What we’re trying to do is find all the ways we can make it easier, whether that’s through audiences, through SEO or even through things that are simple, like the admin. When you’re looking at your analytics in your reporting dashboard and it says you were getting really high quality traffic from Pinterest randomly, you should go and buy Pinterest ads. Or you are getting incredible [data] that shows your best customers are coming from this geography. You should go buy ads in this particular geography.
And so we tried it like rather than,“give them the fish”, we try to, “teach them how to fish so they can feed themselves for a lifetime.” And not everyone likes it. Some people want to be given the fish and that’s just not our model.
One of the questions we were talking about before this dinner was around the tension between serving early stage entrepreneurs, upstarts, while also trying to scale an enterprise business. And I think that’s something that as I was kind of asking for feedback on questions beforehand, I think it’s a topic that a lot of founders in this room struggle with.
How have you thought about it? I know Plus has kind of been partitioned off and there’s kind of different ways you all approach this. What generalizable advice would you have for founders that are kind of trying to serve both ends of the spectrum?
That is one of the most difficult things for a piece of software, or frankly, a company to do. I mean, we’re in this beautiful restaurant and we’re enjoying this food and I don’t know who owns this restaurant, but presumably at some point, someone had a conversation about making the restaurant bigger and bigger and bigger. And eventually there’s a certain point where you’re going to get diminishing marginal returns on the restaurant size versus quality, the food, the quality, the service. Software is a bit different because software should fundamentally scale. It should make it easier for people of all sizes to use. But the problem is that years ago we had a bunch of competitors in that SMB space, I don’t think any of them exist anymore. Some of them do, but most of them don’t exist anymore. But there were all these SMB companies, e-commerce companies, and almost every single one of them, to a T, all moved, upmarket, every one of them big commerce even decided like somehow a year ago that that’s where they should be going.
Everyone moved upmarket because, one: upmarket you have higher customer lifetime value. The cost of acquisition is almost the same in many cases, but higher lifetime value and the churn is much lower. So what happened is you went from having a funnel that looked like this to a funnel that looked like this, but the quality of those of those merchants were much larger. And so they all moved up market to do that and they all struggled.
The reason they struggled was because what they missed was that the brands that we love today, like most of the brands we love and our favorite brands, they started just a few years ago in Shopify at their mom’s kitchen table. And if you don’t help those people that are at their mom’s kitchen table get started and make it really easy, and then once they get bigger and once they scale, you need the complexity to reveal itself over time.
So what I mean by that is that when people are getting started, nobody needs cross-border task complaints. When people are getting started, nobody needs to do ridiculous things like ERP integrations. But there’s going to be a point where they need that and when they need that. The “that”has to reveal itself.
One of the most challenging parts of Shopify is to make software that is so easy to use that anyone at their mom’s kitchen table could get started in a couple of hours and build a beautiful, independent, scalable online store. But when they grow, when they become larger companies, they can upgrade and they can take more merchant solutions payments, capital shipping, they can add balance, they can start selling across markets with either Shopify markets or even our partners at Globally. Maybe they add shopping installments, but all these things reveal themselves at the right time.
And that’s the reason why you see Shopify. Not only do we have these small little entrepreneurial startups, aspiring entrepreneurs who just had a story in the shower in the morning. But we also have these massive multi-billionaire companies, and the ones we like to talk about the most are the ones that have gone from that first sale to that to full scale.
But that is really one of the most challenging parts because at some point, every aspect, every segment, every cohort of merchants is going to say, “I want way more of this stuff also,” and you have to do it in a way that is scalable, that is easy to use, but it doesn’t overwhelm them at any stage. It’s one of the reasons why we think shipping is really important.
We didn’t really like the shipping. Logistics industry is difficult. One of the reasons that we think it was important for us to actually tackle that with SFN was because it felt like it was one of those areas where there was a natural exit offramp out of entrepreneurship. You got big enough where now you need to deal with a 3PL or you have to deal with some massive company who’s doing shipping on your behalf. It gets really challenging.
And so what we’re trying to do is – because now, again, if you were to pretend that we were a retailer, single retail, we’d be the second-largest retailer of online retail in America. We’re trying to use our economy of scale across every single problem point for an entrepreneur and for business and for a brand to reduce that barrier to success and doing so at the right time with the right set of features. But then also having things like Hydrogen, which is our, our version of headless, that is, you don’t see many companies that stretch.
You can just take a simple example of email marketing. Most people use email. This is pretty much across the board. Most people start with the BCC line freemium marketing, and then they move to some sort of free version they use, or some Gmail-like widget or app or plug-in, and then eventually move to like MailChimp, and then maybe the content contact, and eventually they get to ExactTarget, and then eventually it’s like some like massive enterprise Oracle SAP-type email system.
There is a natural graduation as you scale, which means you keep migrating from platform to platform as you grow. The fact that that doesn’t happen on our platform is one of the things that I’m most proud of.
Yeah. I’m glad you mentioned fulfillment because this also feels like an area that is not obvious from a cultural DNA standpoint. Just from a DNA and the company’s core competency, going from kind of bits to atoms, thinking about do you acquire into that? What do you build in-house? When was the moment you articulated why it was important to do that, as you thought about different ways to get into it to avoid distracting from your core, how did you guys make that decision?
So a couple of things on fulfillment. The first thing is no one really loves this fulfillment side of their business. No one’s in love with it. I mean, even the people that are the most operationally excellent founders and leaders I know still don’t love that aspect of the business. And the companies that we all believe do it well, they were kind of forced to do it really well because they had no choice.
Consumers have been completely recalibrated in terms of expectation. I actually don’t think consumers need one-day shipping, just to be clear. I think what consumers deeply need and have come to expect is the anticipation, the approximate anticipation of when my package is going to arrive.That is what matters most and is almost impossible for small businesses and even medium-sized businesses to do that. Even some very large companies that many of us shop from don’t tell you when your package is going to arrive. They sort of give you a five-day window. I mean, that is not what consumers want. They want to understand when it’s coming.
So we looked at the fulfillment space. It felt like there were sort of three blocks of fulfillment. The first block is from the manufacturer, from the factory, to making it to the port. We were watching what Ryan was doing and what Dave Clark was doing at Flexport for a long time. And frankly, it felt like they were taking a very modern, very scalable approach to a really difficult problem.
And so we decided for that first phase from factory to port, Flexport would be a great partner for us. We should build deep integrations so people can track that first phase.
The second phase is when it gets to the port, how does it go from the port to the fulfillment center? And most people refer to that phase as the balancing phase. You have to balance your inventory. And we were actually going to build software ourselves. We’d started building software ourselves. We bought a company a couple of years ago called Six River System. They were formerly the guys from Kiva. Amazon bought Kiva and didn’t you know, they all left. They started Six RS. We saw what they were doing with what they call Chucks, which is their robotics company. And the Chucks are a really wonderful way to make pretty much any warehouse, any fulfillment center more efficient.
So we were using, along with Six Rs, we were going to build that balancing software and then we began to ask merchants what they thought about it, who they were using, and it was obvious that all roads were pointing to this company called Deliver. Harish and his team had simply built something that was just unequivocally better than everybody else, and every merchant that was using Deliver for any part of their business, whether it’s crosstalk or was balancing, was delighted. Imagine that – being delighted by your balancing software. So in that case, it was obvious that if we had an opportunity to acquire Deliver, we should and we had an opportunity a couple of months ago, so we acquired them.
And so that second phase is really powered by Deliver. Okay, now that you know exactly how it’s in the fulfillment warehouse, how do you get it from the fulfillment warehouse to the actual end consumer?
And it turned out that there were all these warehouses or 3PL all over the U.S. that were half empty. Or they were not operationally efficient, did not have robotics, and did not have good software. And so we began to talk about this idea we like to call SFN, the shopping fulfillment network. All of these warehouses started contacting us and saying, “Hey look, we have excess space.”
We were doing fulfillment for Forever 21 or for Barneys or for online Neiman Marcus before bankruptcy. And have capacity. We can handle any of your merchants that want to use our warehouse. We can do so.
And so we started building FMF software (fulfillment management software), and we said to all these independent warehouses, “If you integrate with our software, if you’re ambitious, you should also integrate with the Chucks (the security system, the robots). We will make you part of this network. And you basically will never have to look for a customer for your warehouse ever again.”
So whether it’s from the manufacturer to the ports or from a port right to the end porch there are pieces of that that we felt we had to own, and there were pieces where there were just people that were doing it better, faster, more efficiently, like Harish, and we don’t really need to spend $10 billion because that’s not our model. Our model is asset light software. First, we don’t think any of our merchants require one-day delivery. If they do, they can, you know, they can figure it out on their own. What they really want is to be able to offer a proper expected delivery date to their consumers.
And what we think is really cool about delivery and fulfillment sort of as a whole is that by doing so, we think that actually we will give small businesses and smaller brands a fighting chance against the bigger companies, because this idea of of being able to anticipate when your order is coming is massive, not just for trust, but actual for business. Like it does change the conversion rates. So that’s what we do.
Yeah. This kind of ties to a point on future-proofing. I think one of the things I’ve heard you articulate that I love is that one role of Shopify is helping merchants essentially future-proof their business. And so I wanted to shift gears to talking about what the next decade-plus of e-commerce looks like. I think you are in a really unique vantage point – basically the best vantage point probably – in seeing where things might be going.
There’s a bunch of trends right now that myself and others in this room are spending time on or around, whether it be live video, creator-led commerce, all the way to token gated commerce, or other things in messaging. I guess if you look across everything that’s going on, in the next gen or future of commerce, if you will, what gets you most excited right now?
I think retail and commerce kind of go in waves, like there was a wave when everyone wanted crazy personalization. I remember talking to some brands here in New York, like Kit, for example, and they wanted to do the whole initials on your shoes, or on your sweatshirt. I walked in on this day to a Saturdays – great brand out of here, Shopify store, both online and offline. They had embroidery set up in the back. So like, “What’s that for?” “Well, you can personalize your shirt.”
There was sort of an era of personalization that was everywhere. And then there was sort of an era of dropshipping. And then there was an era of, you know, subscriptions. Every company had a subscription. Like you can do subscriptions on winter coats as if anyone needs that. There was an era where every single physical retailer – I kid you not – had a D.J. in there. Everyone had it. It wasn’t even on brand. It was like they’re selling asparagus and they have a D.J. in the back.
And so all of these things, I think for some merchants, some of the time these make a lot of sense. But not everyone needs a D.J., not everyone needs personalization, not everyone needs a subscription. The way that we think about all these things (I’ll go specific on my own opinion in a second), as a whole, is to make it so that when you come to Shopify we make the important things really, really easy: Check-out, inventory, ability to transact, and a beautiful storefront fast. If you have a massive flash sale because you got Jerry Seinfeld and Kith together – which I think is like the greatest collaboration ever – make it so that you can handle any traffic spikes. That’s important stuff. We make that really easy, but then we also make everything else possible.
And the reason I’m talking so much about future proofing is because there is no way for any brand that you’ve invested in – and you’ve invested, I know, in some of the best brands on the planet – there’s no way for them to anticipate exactly where commerce is going.
But the key is to find something that doesn’t require you ever have to migrate off of it. And if you look at a lot of the enterprise companies, enterprise e-commerce companies, I think all of them have been acquired by some big software company. That’s not how they’re building it. It’s not that they’re bad or good. It’s just they’ve built in a certain way, which is highly specific for a particular type of customer.
My personal opinion is that a lot of these very large companies are beginning to also act very much more entrepreneurial. They don’t want to have eight-month sales cycles and three month RFP. They want something that’s really, really great. And they want to know fundamentally that the platform they’re choosing today is future-proofed.
One of things I think is really cool, on a personal level, is this whole omni channel conflict stuff is going away. I think we have got to where we’ve now gone past it. Every modern brand, every brand that we love doesn’t really care where you buy from. They just want you to have a great experience. And I think that even the term omni channel will eventually (like in the next 12 months) be like talking about color TV. You just don’t say that because every TV is fundamentally a color TV, and I think that’s where omni channel is going, where it just doesn’t matter how you sell it. It is the modern day town square and it’s digital and it’s in-person.
And I think actually that may not be like the sexiest thing we can talk about – we can talk about NFTs or web3 if you want, because it’s probably far sexier to talk about – but that actually is the best version of retail I think of the last 50 years.
Yeah. I – as others in this room know – I’m very excited about wholesale and like the opportunity to actually help bring –
Wholesale is not sexy! Wholesale is pretty cool. And you can do wholesale from Shopify. I started a little side hustle during the pandemic called Fire Belly Tea, and part of it was I was drinking way too much coffee and I have anxiety. So coffee in the afternoon for me is like a really bad idea. As you can tell, I’m kind of hyper anyway. So I started drinking really good tea. One of my best friends is David Segal from David’s Tea and he started curating really good tea for me, like the best green tea. And so eventually we decided we’d actually set up a store and I want to trial the new shop with all the products. We set it up and it’s beautiful. We run it from the Shopify app. It’s an incredible experience. But we just got a note from Essence (Essence is a really amazing store), and they said they want to carry Fire Belly Tea.
So we have a whole different system for that and the fact that now the shop is B2B means I can run everything from Shopify and whether it’s wholesale, it’s on Instagram, it’s on TikToK. If I start producing music, it’s going to be on Spotify. It doesn’t matter where the sale is made. There is one central nervous system for my entire business. I think that’s what people are looking for. Forget all the bells and whistles. Maybe we do a token-gated NFT for tea at some point. But the fact that I can do it and not have to worry about whether my platform supports it, that is the key ingredient.
Yeah. I mean, it sounds like you’re seeing this anecdotally too, but it seems like the merchants start considering going to physical retail either via their own shops or via wholesale much sooner than in the past. I think one of the catalysts could be costs of traffic increasing or whatever, or B2B kind of infrastructure getting better through Shopify and others.
Because you’re not saying because no one’s walking around saying, “Oh, I’m an online-only merchant,” or, “I’m an offline merchant” or, “I’m a wholesale merchant, I’m a wholesale brand.” It just doesn’t happen. We are actually seeing now on Shopify manufacturing companies that traditionally manufacture for other brands that are actually setting up on Shopify and creating a random brand from scratch. They are going direct to consumer now. This sort of weird separation and these different categories of retail, it’s all kind of breaking down. And I think ultimately it’s going to be a very exciting time for retail in the next decade.
Yeah, I guess one way to distill a question around this topic is, if you look at the share of activity or the share of transactions that happen through a brand’s website versus other channels, it sounds to me like you think that’s going to look like the website will probably be less of a factor long term.
I think that website will still be very prominent. I think that until browsers become less and less relevant in our day to day lives, which I don’t think will be the case, I think the primary channel will be the online store.
But I think everything kind of feeds into that. Whereas I think if you go back even ten years ago, e-commerce was still big ten years ago, but the primary channel was the offline store.
One of the last areas I wanted to ask you about on this (and I know we’re kind of getting up against time), but is creator led e-commerce. I think, to me, it feels like the next crop of brands are creators or content creators. And you have some of the more notable ones, whether it be Mr. Beast or Kim K, etc. But there also seems to be much of a kind of a torso and longer tail of content creators that are becoming brands enabled by Shopify and others. You built collabs, there’s other stuff going on. What is the role you think Shopify should play in all of this, whether it be helping brands, helping creators kind of become their brands, or helping existing brands sell to creators, what does your activity there look like?
I think that we’re sort of like the dropshipping era of three or four years ago. You guys probably remember this. We had acquired something called Burlap. And dropshipping was like, you know, all the rage for like, I don’t know, 18 months or 20 months or so. And every time I went to a conference, whether it was a retail conference, an investor conference on Wall Street, there was sort of this judgment on drop shippers, like dropshippers were not a real business. And they would reference the fact that the profit margins were so damn low and they were here today, gone tomorrow.
And I actually think that they totally missed the point. Dropshippers and dropshipping as a business model was a gateway drug to entrepreneurship. It meant if you had a blog, a travel blog, then you could sell maps, if you wanted, in a risk-free way. If you had a soccer blog, you talked about, like, the Champions League, you could try your hand at selling actual soccer balls and in a risk-free way. It was a process improvement on retail. And if eventually you sold enough soccer balls, you probably went and bought inventory yourself.
Part of what we’re trying to do across – whether it was years ago with dropshipping, or what we’re doing today with some of the more creative stuff – is make it really easy to try your hand at these things. But there’s going to be a meaningful set of content creators who have incredible audiences, who have massive subscriptions in terms of being on YouTube, they have a lot of subscribers and they want to build a brand, but they just don’t. They don’t know how to, and they’re just not good at it.
On the other side, you have all these amazing brands that are amazing at building a brand and a product, that are trying to build YouTube channels and trying to build content, and they’re just not that great at it either. And right now it’s this ridiculous maze of complexity to try to connect really good brands with relevant content creators that are in their vertical.
And so we acquired a company called Dovetail a little while ago. Some of you probably know Dovetail, and they were doing something like this. And so what we did is we spent some time, did some work on it, and actually created Shopify Labs, which was effectively an algorithmic matchmaking service to connect great brands with relevant content creators. So content creators – that industry is a $100 billion industry. One hundred billion dollars and 4% participation rate. If you increase that by another 4%, you change the lives of millions of people in every community, in every country, but only 4% participate.
We love Feastables. I love Feastables as a concept, as a product. I have a three-year-old and a six-year-old. My six-year-old loves Mr. Beast videos, maybe shouldn’t be watching, but she does. The Feastable branding is great, the product is great, the delivery of it, it’s perfect. But not everyone is Mr. Beast.
And so what we’re trying to do is make it so that more content creators can actually monetize their audience and more brands can connect with that audience as well, and do so in a way that actually it’s simple, it’s convenient. And if they decide eventually that they’re going to hire or they’re going to partner with the content creator long term, make them a co-founder, which we’ve already seen a little bit of already. That’s cool.
But just like everything else we’ve done, our job is to be facilitators of commerce and retail and entrepreneurship. And right now it feels like there’s a huge opportunity connecting this group here with that group there, and they’re just not talking to each other again.
Yeah, so much to go into on this but I want to open it up to Q&A. I think the last question, which comes back to the beginning in your story with Shopify and that I want to ask on behalf of the founders in the room.
I think universally the number one issue in building companies is talent for developing and recruiting. I think it’s rare, frankly, to see an exec who joins as early as you. As you scale throughout every juncture of the company and continue to be just where you are, for other founders out there who might be seeking their Harley, I guess, what advice might you have and how should founders (specifically earlier stage ones like when Tobi brought you on) think about bringing on someone like yourself?
You know, Tobi is well-known for a lot of things. He’s a product genius. He’s one of the smartest humans I’ve ever met in my life. And I’ll work for him as long as he’ll have me. He’s just that good. And we’re all here having dinner and, like, having good wine. He’s right now at home thinking about Shopify and the product. I mean that’s his ground state. That’s what he thinks about in the shower. But one thing that doesn’t get talked about enough about him is that he is one of the most self-aware people I’ve ever met. And the reason I bring that up is because he has a clear view of not only what he is good at, and things he can be world class at, but also things he just doesn’t want to do or doesn’t like to do.
And so even early on, he identified certain parts of the company that he just wasn’t going to work on. And he certainly took a bet on me. He saw some potential in me.
One thing that founders and entrepreneurs don’t talk about is when to leave a company. There is a right time to leave a company, and also, you should make it as easy of an off-ramp as you once did on the on-ramp, where you spend all this time bringing people on. Like you give them these great onboarding kits and you send them great emails and they come in, you’re like, “This is going to be amazing – LFG!” But if you create an environment, a culture where it’s just as easy to leave if it’s the right time, you are actually able to offer people in a much more effective way.
Now, there’s also a zero to one, or there’s a one to N in different parts of Shopify, or in different stages. Like SFN and/or audiences is very much in that zero to one land. Right now, payments are at penetration, I think like 85% of the U.S. that is very much 1 to 10. That’s an at-scale company. And you may need different leaders, different times, different products. So, going back to my point about Tobi, we’re about 10,000 people at Shopify and he is incredibly self-aware about himself, and because he’s self-aware about what he’s good at, what he’s not good at, he’s created a culture where all of us are very honest about, “This is not what I’m good at, but this thing is.”
I think I can be a world class storyteller. And so I’m going to really focus on making sure this is what I am focusing on, making sure the entire world (investors, partners, merchants, the public media) knows that Shopify wants to become the entrepreneurship company, or the best place to build a business. And there’s been times where I’ve, you know, I ran Plus and I ran the App Store, and it got to a point where I was the wrong person to run it.
I wasn’t good enough for it anymore. It deserved someone better. And so I raised my hand and said, “I think we need to bring in someone who’s better, faster, smarter than me for this area of business.” Because in another area, I think one day – I’m certainly not there yet – I can be the best in the world at this thing. And I think that that is a really helpful cultural philosophy to have in any company of any size.
Awesome, that’s a phenomenal set of insights. Let’s thank Harley for spending the time with us. And if we have time, maybe for like 10 minutes of Q&A, a few questions from the group. Yeah.
I’m curious about your web3 experience so far. [Can you share] your thoughts behind funneling through a beta program – what are the bumps along the road, the learnings so far. Especially for those of us trying to get through the funnel. Then, [can you share] where you’re going in the future.
I mean, the best way to get through the funnel answer (that second part of the question), which is really relevant for a lot of people here. The best way to get our attention is to get our merchants attention. Years ago, we had something called Active Merchant, which was an open source payment library. Some of you may remember that Tobi actually wrote that himself and it was open source. And a bunch of our competitors (funny enough) were using it. But at a certain point the reason we did that was because, like every payment game we want to integrate with Shopify, we’re like, “Okay, just integrate yourself.”
And then eventually we were a little bit more opinionated about which payment gateways we thought Shopify merchants should be using. And so we began to suggest certain gateways in the onboarding process, and a lot of payment gateways wanted to be part of that.
The best thing is that these payment gateways that really made it to the top of the stack were not the ones that paid us the most amount of money. It was not the ones that we knew from college. It was those that our merchants were asking for. And I think that’s one of the biggest hacks to getting visibility, whether it’s in the App Store or it’s being part of the web3 roll out beta, or any category of the business, even. To be a capital partner is if our merchants are telling us, “This is who I want to use,” There’s really a chance we’re going to consider it.
So the first part of your question: Web3 had this massive run up. Then, I think given what happened the last six months with inflation, the economy, and the capital markets, it became a little bit more challenging to talk people into getting excited about fees and buying, and there were these crazy amounts of money [lost] when you saw people struggling. But I actually don’t think that I think this is just a temporary slowdown in sort of the hype cycle of NFTs and web3. I think actually this idea that you can create more loyalty and you can reward your most loyal customers or fans or community members through the use of technology.
In the case of something like token-gated commerce, for example, or token-gated events, I think that’s going to be a mainstay in commerce in the longer term. I think actually one of the cool parts that happened here is how in the last couple of months, a lot of the fakers and a lot of the phony people building websites that they really didn’t actually understand the community, they didn’t really care. They were just there riding the wave. And from October till December 2021 member companies started adding “crypto” to their names – like I’m not joking, they actually did like real companies. There’s a coffee company that added crypto to their name and immediately their stock would go up and like and then of course now that crypto is kind of come down, they got rid of those names.
But I think what we’ll see on the other side of this – which and by the way, I already I think this will be a really good Black Friday or certainly holiday season for great brands. But going into next year I think you’ll see the ones that are still in the game are the ones that are the real ones as opposed to the ones that were just kind of right in the hype cycle.
We’ve talked a little bit about how you carved out certain pieces of value for different participants in Shopify. So the customers belong to the merchant and there are certain things that belong to the developers. I’m curious to hear a little bit about how you think about where those boundaries are and how those shift over time.
Yeah, I mean, the merchant is the one we think about the most. I think with the merchant we are incredibly thoughtful about things like it’s their business, it’s their product, their customer, it’s their data. We are custodians and the only right we have is to make their lives better. On the app developer side, they are using our API, they’re in the apps or they’re in our community to add value to merchants.
And so the app developers that actually have had the most success have had this very focused intention of adding value to merchants. So when Shopify does something we add to it or to our core product that competes with some aspect of their app, the best app developers, in my opinion, don’t like to take their ball and leave the park and go home and leave the sandbox at home.
[Instead] they’re like, “Okay, well Shopify is doing this component now, but here’s all this other stuff they’re not doing.”
That is all available surface area (green space) for app developers to build on top of. So now that being said, you know, there are some app developers who, when a merchant leaves the platform – it doesn’t happen often –they will go and still work with the merchant longer term, we’re okay with that. Well, we much prefer to have this sort of symbiotic relationship whereby what is good for the app developer is good for the merchants, good for Shopify.
And that ecosystem of reciprocity, I think, is part of the reason why we have this incredible long term app ecosystem as opposed to one where, I mean, you’ve seen a lot of great companies that have just completely destroy their app.And I think we’ve tried to be a little more patient, which means, by the way, from a public company perspective, we leave a lot of like oil veins in the ground and don’t tap them because we want to play a much longer game, even though we know right now there are certain areas of the app ecosystem where if we built it right now, it would generate more revenue for us, but it would break trust at a foundational level with the app app developers.
That would be very bad longer term, and some investors may not like that we’re okay with that because the right investors understand the long term positive; some vision that we want to power commerce for everyone around the world.
So you just mentioned that, before the platform, I’m sure that Shopify was by far the source of truth for all the data that was happening for the merchants. Since you’ve built the platform, I’m sure you know you’ve got people clicking emails since that data is happening, you’ve got people writing reviews that’s happening outside the platform because you mentioned that you want, you know, the merchant to own the stock and the data that belongs to them.
But you also have these things like Shopify audiences that are built on top of your data. How do you think about all this data that’s flying around outside of the Shopify ecosystem and how that relates back to the merchant?
The merchants that are most successful on the platform, that I think have the most amount of insights and levers of growth at their disposal, have one centralized database where everything flows into and as much as possible. We’re trying to aim for that. It’s not because we want to have some sort of like, you know, we’re trying to be data greedy.
It’s because for most of these merchants, they’re selling across so many different platforms. They’re selling across so many different geographies, so many different channels that they have to have one view of their business, make good decisions. I think if you go back to like 2015, even if you were a Shopify merchant, you probably had four or five tabs open in your browser.
And over time we’re trying to collapse tabs into one single tab, which is the Shopify admin, the back office. It’s not because we want it to all be Shopify. It’s because we want to be able to give the merchants all the information they need at their fingertips. They can make better decisions and anything that sort of causes that to break, we’re going to be against.
Now we have talked about how leaders of Shopify require re-qualifying for their jobs. Shopify has to keep re-qualifying for our role as being the central nervous system or the retail operating system for our merchants, and there are times where we see a merchant that says, “I’m going to export my data over here and this is now my new retail operating system.”
And that’s a really valuable thing for us because that’s like the most motivating thing ever for us – for us to reexamine, “What are we doing wrong here?” If someone is actually leaving Shopify as admin to go run their business elsewhere, something we are doing is not working and that motivates us to figure out what it is. But the vast majority of Shopify, when they say they’re working, they go to work in the morning, what they mean is they’re opening up the admin, and that’s the enviable position we want to be in. But we have to want to qualify for that.
All right. You touched on this a little bit earlier, but we are in an inflationary environment, a very unique time. I think it’s been decades since, you know, we’ve seen this type of an economy in the U.S. globally. I’m curious how Shopify sees its role in this type of environment?
So a couple of things. It’s a great question. A couple of things that I think people maybe this group doesn’t doesn’t underestimate, but I think that the general public does. Do you know what the gross margin of Costco is, approximately?
The membership is like 100% and the rest is like…
It’s 10%. Yeah, it’s, it’s pretty much 10% across the products, the membership across products when inflation hits. By the way, I think Costco is one of the greatest retail stories and one of the greatest retail businesses on the planet. And they do it year after year. And even the small stuff that we all talk about like the $1.50 hot dog, $6 chicken, like, it’s brilliant.
There’s a lot we can all learn at my company, from those leaders, when they have to pay more on raw materials or on the supply chain. It is dramatic for them. It really, really hurts because they only are playing with 10%. For most merchants on Shopify that are direct to consumer (and most of them are direct to consumer), they have a lot larger profit margin, not entirely drop. Shippers obviously wouldn’t count here, but most of our merchants most of the time have a larger gross margin, meaning they’re able to absorb more of the shock, both from inflation, from supply chain, from raw materials going up in price. That is one thing that most people do understand.
And so actually one of things we’ve noticed in the last couple of months is that for the most part, our direct to consumer merchants that are vertically integrated, they’re having less of a difficult time.
On that particular issue of inflation, from my Shopify perspective: when the pandemic hit, we did a 90 day free trial because we wanted more people to come on. There is constantly this sort of pressure from Wall Street to increase pricing. We haven’t really done that. And so we’re trying to be like, “You can’t say you want to be THE entrepreneurship company, and when things are hard for entrepreneurs, you start raising prices and you start making it more difficult for them. There is a responsibility if you’re going to say you wear this thing when times are tough, you actually need to show up at this thing.
The way we’ve done that is not because we raise pricing, it’s because pretty much every company increases their attach rate. It’s by adding more value, it’s by adding more capital, it’s by adding more functionality to things like installments and markets and balance. And that’s kind of the way we want to kind of show up. We want to be valuable in every single situation, we even want to be disproportionately even more valuable when things are tough. And I think we’ve earned the right to say that we are the entrepreneurship company for a lot of them, not for everyone, but for a lot of them. Thank you for that question.
Awesome, this is a phenomenal set of insights.
Let’s thank Harley for spending the time with us. Thanks again, Harley. Thank you, everyone, for joining.
That’s great. I really appreciate that. Great questions.
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