Shopify’d

Shopify’d

How Canada’s newest tech star wants to change commerce forever.

When Harley Finkelstein first met his future boss at a coffee shop in Ottawa’s downtown Glebe neighbourhood in 2005, he was a young, struggling entrepreneur. He was putting himself through a joint law and MBA program at the University of Ottawa by running a business that sold customized T-shirts for colleges, but his class requirements made it tough to meet with customers face to face.

Finkelstein heard a group of smart young entrepreneurs hung out regularly at Bridgehead, a café in the area. Curious, he decided to visit. The person who stood out to him most was Tobias Lütke, a brilliant programmer from Germany who had just written new e-commerce software, so he could run his own online snowboard business better. Finkelstein wanted to try out the then-unnamed software himself.

Neither had an inkling that, within less than a decade, they’d have retired their T-shirts and snowboards, and would be on the team that leads one of Canada’s marquee tech companies – a business that is making life easier for small and medium-sized operations all over the world. Shopify, which launched in 2006, sells an e-commerce platform that gives anyone the tools to create and manage an online store.

The company was founded by Lütke, who is now its CEO, programmer Daniel Weinand, Lütke’s childhood friend, and businessman Scott Lake, who left in 2008. In 2009, Finkelstein had finished a year at a Toronto law firm and was pondering his next step. “I began to think about what to do as my life’s work,” says Finkelstein. “I kept coming back to the idea that what I had done with Shopify, many millions of others could do the same thing.” He called up Lütke and said he’d like to come join him at Shopify. He was working there by the next year.

The animated and extroverted Finkelstein and the reserved, cerebral Lütke have opposite personalities, but they found they complemented one another. “He was the hacker’s hacker, and I was the hustler’s hustler,” says Finkelstein. “You couldn’t find two people who are more different. He’s certainly a very deep thinker; I much prefer articulating myself with words.”

Today, Finkelstein’s old T-shirt company, Smoofer, is defunct – though preserved for the ages at Smoofer.myshopify.com – and he is chief platform officer of Shopify. Finkelstein’s job involves sales, business development and partnerships – hustling at a very high level.

He’s doing his job well. Shopify has become a rising star since it was founded and now has more than 175,000 merchants in about 150 countries racking up some $10-billion in total sales using the platform. According to many observers, as well as Finkelstein himself, it is doing more than just making money: it’s disrupting the way that business has traditionally been done by lowering the barrier to entry for anyone who wants to sell anything.

Making it easier to compete

Finkelstein speaks passionately about how Shopify helps businesses around the world work smarter and for less, whether they’re Google, the L.A. Lakers or Tesla Motors (a few of their biggest customers) or as small as someone selling homemade earrings in her spare time with nothing more than a laptop.

The software gives shops an extensive package of tools – a professional online storefront, marketing and SEO, Web hosting, analytics, store management functions, either a credit card payment solution with Shopify Payments or the ability to integrate with more than 70 payment gateways and much more – many of which only the largest retailers had the money and time to put in place in the days before Shopify.

“As a young entrepreneur, I was competing against some of the largest companies in the world, and I was inspired by that,” says Finkelstein, who has been an entrepreneur ever since he was 13, when he asked his father for a loan to run a DJ business. “[Lütke] was democratizing retail around the world,” he says.

An IPO that beat the hype

Most of Shopify’s customers are small to medium-sized businesses, but in the process of helping the little guy, Shopify has become big. In 2015, it had more than 600 staff and four offices: its massive headquarters at 150 Elgin St. in Ottawa, another in Montreal, one in Kitchener-Waterloo and the distinctive Toronto office it opened in April 2014.

According to Director of Product Satish Kanwar, the office at 80 Spadina Ave. in downtown Toronto was designed as a spatial “metaphor of commerce.” Its front reception area and office block are laid out like a pop-up shop that promotes its merchants’ products. With high ceilings inspired by warehouses, two crate-like enclosures for casual work and other touches, the rear office represents shipping and transport. The third floor, currently under development, will represent production and fabrication.

In 2014, Shopify launched Shopify Plus, a “white-glove” edition of its platform to meet the needs of larger merchants. It offers features such as dedicated project and account management, access to priority support and early access to beta features.

With this much growth and momentum, the company decided that it was time to go public and raise money, so it could grow even faster. With its self-assured presence and a leader who was named Report on Business’s 2014 CEO of the year, Shopify’s initial public offering this spring was highly anticipated, and it lived up to the hype. The firm dazzled in its May 21 debut on the New York Stock Exchange – it started trading at US$28, more than 60 per cent above its $17 offering price. Its IPO raised more than $131-million.

It’s the first Canadian e-commerce business to go public on an American stock exchange since 2001, according to data from market intelligence source Ipreo. Shopify’s wild success cemented it as a global hot commodity and positioned it closer to its peers (such as online craft and gift marketplace Etsy, which went public just days after Shopify) than with most Canadian tech firms. However, it did raise the hopes of other Canadian digital companies – now everyone’s talking about Vancouver’s Hootsuite and Waterloo’s D2L, an e-learning solutions company, as being next in line for IPOs. In any case, Shopify serves as proof that Canada’s tech industry has progressed far beyond its Nortel days.

Dominating digital markets

Shopify has become so successful, so quickly, in part because it smartly leverages a number of today’s central digital trends, such as cloud computing, mobile and social media. It also has a digital-age pricing plan. It’s a Software as a Service (SaaS) company, which means clients sign up for a monthly subscription (from $9 to $179 a month) to use its platform. This replaces the model of traditional software, which is usually sold as a license with a large, upfront payment.

This subscription-based model means the software is hosted centrally on the cloud – clients don’t to need store their own copy on their computers. Roughly 30 per cent of all application spending by businesses is now on this kind of SaaS model, and the segment has been growing approximately 20 per cent a year for quite some time, even as software spending as a whole has been on the decline, says David Wismer, managing director of technology investment and corporate banking at BMO Capital Markets.

Stock market investors like SaaS companies because of their predictability, says Wismer. Instead of getting a company to pay a one-time upfront fee, an SaaS business can charge, say, $25,000 a month over a three-year term. “You’ve got tremendous visibility into what the business will look like in the coming quarters or even years,” he says. “With the old licence model you just didn’t have that visibility.”

Shopping for all types

When Shopify started, its customers were mostly online stores, but it’s evolved significantly over the years. In 2013, it introduced Shopify POS, a point-of-sale system allowing anyone to sell in physical stores, as well as online. It has made bricks-and-mortar locations and pop-up shops avid users of its technology. Shopify merchants can even sell on sites such as Amazon and eBay, while still using Shopify as the back-end software that manages all aspects of their business. “Shopify is the platform behind all that,” says Finkelstein. “It’s the first thing you open in the morning and the last thing you close when you go home at night.”

Shopify’s strategy is simple: make itself indispensable. Its POS solution ensures merchants’ sales made in person – at a farmers’ market, for example – are integrated instantly with their online sales, meaning inventory and records are always harmonized across the board. This has made it a go-to solution for the growing world of pop-up stores, which often consist of little more than a table spread with handmade trinkets and an iPad for processing payments.

On June 2 of this year, Shopify announced that it was partnering with Pinterest, the photo-heavy social media site, to help monetize the huge streams of social media traffic that revolve around viewing, liking and sharing images of products, but which haven’t always translated to sales. With new “Buyable Pins” that have “Buy It” buttons above the image, Shopify merchants will be able to sell directly on the Pinterest iPhone or iPad app using Apple Pay or credit card. The potential impact is huge. Two million people pin products on Pinterest each day – 20 times more than there are daily shoppers at the Mall of America, according to Shopify.

Naturally, Finkelstein is excited about this recent development. “We did a deep graphic of all social channels, and some channels bring many people to stores, but checkout is low,” he says. “Pinterest is a great place where people show intent. You like the product, there’s some interest. On pictures, you are demonstrating intent to do something with that product. A natural next step is to allow people to purchase the item once it’s pinned.”

The average amount of a transaction referred by Pinterest is $50, higher than for any other social media channel. That might be because typical Pinterest products are nice to look at – and, thus, higher-end or collectible. “No one’s really going to pin toilet paper,” says Finkelstein. “Potentially, the products on Pinterest are more unique. [The higher price] might [also] be because of the interest the pin creates.”

Making sales in a mobile world

As with social media, one of the challenges sellers face with the growth of mobile traffic is converting browsing and interest into sales. Traffic from mobile is increasing. The phenomenon of “snacking” – people logging onto their smartphones whenever they have a few spare minutes, such as in a doctor’s waiting room or standing in a streetcar – is growing. But in the past, shoppers had to type in their address and credit card information manually in order to check out, meaning they’d wait until they got home to their desktops to complete a sale. That often meant sales would get lost in the process. Shopify is trying to make buying on a mobile device more “friction-free,” says Finkelstein, by partnering with the biggest social and mobile companies to enable easier payment through Apple Pay, Facebook and many other different formats. Shopify merchants can even accept Bitcoin.

Finkelstein believes that mobile will be the primary way we buy in the future. In Canada, mobile commerce is growing at more than double the rate of overall e-commerce, and 19 per cent of Canadian online shoppers said they had made a purchase from their smartphone in the last year, according to a 2015 Ipsos study commissioned by PayPal. Mobile spending in Canada reached $3.4-billion in 2013, and that figure is estimated to grow by 142 per cent next year.

Finkelstein doesn’t care if merchants sell on their phones, tablets, laptops or in person, however, as long as they’re selling. While he may prefer to do his shopping entirely online, he says, his mother, for instance, might want to “showroom” – touch and view products in a bricks-and-mortar shop – before she buys online, and his grandmother might prefer the old-fashioned physical shopping experience from beginning to end.

“The future of retail isn’t necessarily online versus offline,” he says. “It’s retail everywhere.”

Don’t fear the cloud

The special sauce of all Shopify’s solutions is the cloud. It is the fact that Shopify is a cloud application that allows the company to charge merchants a comparatively low price, says Finkelstein, because it keeps costs low from the beginning. “Because we’re taking advantage of cloud software, it allows us to make it affordable. Because it’s affordable for us to allow merchants to build online stores, it’s affordable for them to come online for the first time. For small businesses, before Shopify, there was nothing. We were competing with non-consumption. People using Shopify, for the most part, are people who didn’t have businesses prior to it. They couldn’t afford it, and it was too complicated.”

In 2011, Finkelstein told a reporter that he believed one day all computing would be done through an online connection. Now, cloud computing has shifted from a trend favoured by early adopters to a mainstream tool. “My grandparents write and e-mail using browsers,” he says.

In the past few years, concerns about processing payments or putting other secure information in the cloud has largely evaporated as trust grows, and the upside of not having to store data and applications locally grows more evident.

“The risk aversion that cloud online technology may have had once upon a time is now gone,” says Finkelstein. “Shopify takes security very seriously. We have one of the best security teams around. In terms of any apprehension that merchants may not want to use Shopify because we’re in the cloud, we don’t really see that at all anymore. I think that ship has sailed.”

He says traditional methods of doing transactions were also never completely secure. “Frankly, take a bricks-and-mortar retailer on Shopify, someone who was using a traditional point-of-sale [system] years ago, and their data wasn’t on the cloud, but it was sitting on a CPU next to their cash register. If they have any type of electrical issue, if they have a flood, if they get broken into, they lose their data. I think the fact that now all their data’s available 24-7 and backed up on the cloud means it’s actually safer.”

All these building blocks that put Shopify at the forefront of digital trends – software as a service, social, mobile and cloud technology – have made it a first choice for first-time merchants around the world.

First choice for first-time retailers

San Francisco artist Yelena Filipchuk never set out to open a store. But interest in her large-scale, six-foot geometric steel sculptures, called HYBYCOZO, that she created in 2014 was high, with fans asking when she would make smaller versions that they could buy as decor for their homes. That’s when her lighting side project, COZO Design (cozodesign.com), was born, featuring laser-cut wooden lights that cast intricate shadows.

Filipchuk weighed a few different selling platforms before settling on Shopify to set up a retail store. The reason she chose it? Simplicity. “Shopify had everything that every other platform had, but the ease of use was the deciding factor,” she says. The biggest test she faced was whether her site could handle preorders, which would allow her to only order the materials she needed – key, since she does everything out of her apartment. Shopify came with this capability.

Filipchuk says that Shopify lowered the barrier to entry for her small business. “Creating websites used to be such a pain,” she says. “How many half-created websites do you have registered to your name? I probably have at least 50. Shopify is easy, and they have really, really good and quick customer support, too.”

Even though most of its customers are based in the United States, Shopify has said it has no plans to move stateside, and that’s good for Canada. Their success while headquartered here has been a valuable morale booster for this country’s business community, says Wismer.

Democratizing business

While Shopify may be one of the most successful tech firms in the country at the moment, it has even loftier goals. Lütke and Finkelstein hope Shopify will do no less than transform commerce, lowering the barriers to entry, so that anyone, regardless of their circumstances, can start a business.

Finkelstein is evangelical on the subject. “The concept of trade is fundamental to the human condition,” he argues, and it should be easier for people to engage in it. “Twenty years ago, if you were a young law student like I was and you wanted to take your T-shirts and get them into the hands of consumers, you would have no choice but to go to a big retail store, a Walmart or a Sears. You’d have to convince a buyer at that store to take your products and put them on shelves. That retailer was taking half the margin. They were controlling the entire process. Your entire fate was in their hands.

“The reason you had to go through a large retailer was because they had distribution,” Finkelstein continues. “They can get your product in the hands of consumers. The Internet changed all that. The Internet gave all of us distribution to get any product or idea into the hands of people who can consume it,” he says.

“When Tobi looked at the online retail market, he saw a market that was broken. Unless you had a lot of money or were very technical, like an engineer, you could not build a business, and he felt that was wrong.”

Finkelstein has taken this idea of democratizing business beyond just helping people create websites. Since 2009, he has helped run Shopify’s Build-a-Business competition, which has become one of the most well-known entrepreneurial competitions around the world. The first contest lasted six months and invited people to start a new business on Shopify, promising $100,000 to the store with the highest sales in any two-month period. The contest was a massive hit, with its first winner, an iPad case maker called DODOcase, going on to become a multimillion-dollar business.

The most recent Build-a-Business competition, which ended in July 2015, awarded six winners a trip on a private jet to Richard Branson’s Virgin Islands hideaway, Necker Island, to spend five days with Branson and some of the world’s biggest entrepreneurs, such as Daymond John and Seth Godin.

“We’ve created tens of thousands of new businesses over the past five years of Build-a-Business competitions that may not have existed otherwise,” he says. “The reason most people don’t start their own business is fear – fear that it costs too much or it’s too complicated. We want to take that barrier down. If you know how to use e-mail, you can build a store on Shopify in a couple of hours.”

Building a long-lasting operation

It’s still early days for the company, but Lütke has said that he’d like Shopify to be around 100 years from now. Finkelstein thinks that’s possible, because the retail business is undergoing some major – and perhaps lasting – changes.

“Commerce has been kind of boring over the past couple of decades,” says Finkelstein. “We’ve seen a lot of the same strip malls and big-box stores and mega shopping malls with water slides in them. But it’s all the same stuff, and it’s mostly all run by the same group of companies.” Finkelstein believes that over the next couple of decades, we’ll see the power to sell products shift from big retailers back into the hands of the people who make those products.

“There’s this incredible energy around commerce and retail,” he says. “The next five, 10, maybe 20 years are going to be some of the most exciting times for retail and commerce in the last 100 years.” Shopify is aiming to make sure of that.

- Sarah Barmak / Photography by: Rémi Thériault