Lessons from Shopify CEO Tobi Lütke: what he learned from scaling Shopify through the pandemic | This Week in Startups Blog

Top Insights

  • Removing friction creates new opportunities and increases market size.
  • Shared priorities of some of the best companies in the world:
    • Priority #1: Go build the best product you can possibly build
    • Priority #2: Make some revenue so that you can do more of Priority #1
    • Priority #3: Never do #2 at the expense of #1
  • Important technologies of the future look trivial today (like games or toys), just like the Internet did in the ’90s.
    • Examples: Crypto, NFTs, Biohacking sensors
  • Software innovation compounds.
  • Going forward, the best companies in the world will be built fully-remote, with in-person events deliberately distributed (all-hands gatherings, etc.)

Watch / Listen to the full episode:

Background / Intro

  • Tobi created Shopify to solve his own problem: running his online snowboard store was really hard, and the only reason he could do it successfully was due to his background in software development.
  • Jason first interviewed Tobi on TWiST at Accelerate Ottawa in 2013
    • At the time, Shopify had ~200 employees with a “crazy” thesis: Amazon would not win it all, and some retailers would want to run their own online stores
    • Jason was originally in Canada to interview Chamath Palihapitiya
  • In their initial interview, Jason was struck by Tobi’s laser-like focus and thought Shopify had huge potential.
    • He remembered:

“… in that interview [Jason made] some statements about the potential size of [Shopify] being hundreds of millions. I thought ‘I’m gonna roll with this but I’m not entirely sure if Jason is serious or not.'”

Tobi Lütke

Shopify’s growth & comparing ecosystems with Amazon

“I have an unbroken track record of underestimating the potential of my own company, which I hope will continue.”

Tobi Lütke

Jump to this part of the episode on Youtube – 4:57

  • 85-90% of all the world’s money exists in databases. The world economy is almost fully digital.
    • The old concept of the e-commerce market is outdated and incorrect.
  • Shopify mainly differs from Amazon regarding direct-to-consumer brands
    • How? By giving them a “home base”, so they can own their storefront on the Internet, rather than “renting” shelf space from someone else.
  • Amazon has a very good sales channel for certain products, and people should use it if it’s appropriate.
  • Shopify’s App Store has helped fuel their growth “Commerce is complex, it’s very hard to build software that can address a lot of different use cases. The inspiration [for the app store] was operating systems.  An operating system that does a good job modeling the primitives can then be used for everything.” – Tobi

“Commerce is complex, it’s very hard to build software that can address a lot of different use cases. The inspiration [for the app store] was operating systems.  An operating system that does a good job modeling the primitives can then be used for everything.”

Tobi Lütke


Removing friction creates new opportunities

“Friction shapes the world a lot more than policy in most cases.”

Tobi Lütke

Jump to this part of the Episode on Youtube – 9:42

  • There were roughly 40,000 online stores in the early 2000s. This was because it was so difficult to run an Internet business due to payment processing, order fulfillment, software development, etc.
  • When Tobi started fundraising, investors that said “no” would point to Shopify’s “low” Total Addressable Market (TAM) of 40,000 stores.
  • Shopify grew its TAM by greatly reducing the friction of setting up an online store, thus encouraging more and more people to either start new online businesses or to create a digital version of their physical store.
  • How’d they do it? Initially by building a payment gateway to make it easier to deal with merchants and collect payments.
    • The goal was to allow sellers to collect payments easily, and once they made sales, the entrepreneur could tell Shopify where to send the orders for fulfillment.
  • Like e-commerce, setting up a blog also used to be time-consuming and difficult, involving servers and coding. Now it’s been made nearly frictionless by companies like Squarespace or WordPress, and their markets have expanded as well.

“Every time an entrepreneur makes it easier, more people participate.”

Jason

Lessons learned during the pandemic

“Almost every model and theory I had about how to work together [and] how to build things got either invalidated or got a significantly higher resolution. For instance, I believed that there was no way to replace proximity as a factor in building fantastic products, the proximity of a team is just so powerful, and so multi-dimensional… clearly that was incorrect.”

Tobi Lütke

Jump to this part of the episode on Youtube – 31:28

  • Early remote work pioneers like Matt Mullenweg (Angel S5 E7), and Jason Fried (E1099) were right. Business efficiency increasing while remote proved Jason and Tobi wrong.
  • The problem with pre-pandemic distributed work was that companies needed 100% remote participation, which was very hard to achieve before lockdowns were enforced.
  • High-quality product creation comes from high-fidelity teamwork, which proximity inherently creates.
    • However, this can also be created by great video conferencing software (Zoom), a solid setup (strong internet, good camera/microphone), and a way to mimic a whiteboard (productivity apps, screen sharing).
  • We are still in the early days of remote work, and the software will only become more seamless in the future.

“This is the worst the software will ever be for remote work, it will only get better from here.”

Tobi Lütke
  • Jason’s remote management checklist (SOD > EOD > EOW)
    • Start of Day (SOD): At the start of the day put in Slack what you’re working on in 1-3 bullet points
    • End of Day (EOD): At the end of the day when you’re done working, reply to that same post with what you got done and what you need help with
    • End of Week (EOW): On Friday, taking no more than five minutes, share the most important things you got done during the week

“It’s a contest to see who can inform everybody and how in sync we can be with the least amount of meetings.”

Jason

According to Tobi, the best companies in the world going forward will be fully remote:

“I think I think the best companies in the world will be built completely remotely, at least with no stated headquarters. Being together in person is still going to be very important, but more deliberate.”

Tobi Lütke

Forced focus of lockdowns

Jump to this part of the episode on Youtube – 1:05:39

  • Shopify zero-budgeted at the start of the pandemic and realized how unfocused they were.
    • Zero-based budgeting entails redoing an entire budget from scratch, rather than just modifying the previous year’s numbers
  • Due to the initial pandemic scare, Tobi became focused on building an “antifragile” business
    • An antifragile business is one that performs better under duress or in times of uncertainty
    • Antifragile is a book by Nassim Nicholas Taleb
    • Examples:
      • Uber – When people went into lockdown and stopped ordering rides, the demand for UberEats went up. When people come out of lockdown, demand for rides will rise.
      • Disney – When parks shut down, they centered their business around Disney Plus. They surpassed 100M subscribers in the first 16 months after launching in Nov. 2019.
  • Antifragility in practice: Many businesses will take the e-commerce lessons they learned during the pandemic and apply more software when running their physical locations.

Compounding nature of software innovation

“The narrative around programming is more interesting than people realize.  Since blacksmithing, we haven’t had a craft where the craftsmen actually make their own tools.

Tobi

Jump to this part of the episode on Youtube – 47:00

  • Humans are genetically the same as we were 75,000 years ago. The main difference between then and now are the tools we have available that and the stories we tell each other.
  • Innovation compounds when creators build on the innovations of others Hardware example: Battery revolution
    1. Billions of smartphones are produced, competition leads to fast-charging and long-lasting battery technology
    2. Tesla uses batteries in their cars and makes them cheaper and more effective
    3. Battery-driven Vertical Takeoff and Landing (VTOL) aircraft are now made possible due to the advancements in battery technology
  • Software is the ultimate play of leverage for innovation because it combines zero marginal cost with infrastructure that everyone on Earth can add to and constantly improve.

1,000 True Fans

“We want to make entrepreneurship trivial on the Internet.”

Tobi

Jump to this part of the episode on Youtube – 1:06:40

  • Spending money on creators via the Internet can now be seen as voting for something to exist.
    • Everyone can now be a “Digital Medici” and sponsor the art/artists/products they want to see exist.
  • The promise of Kevin Kelly’s 1,000 True Fans essay becomes more attainable for a broader set of people with each new technological commerce innovation.

“…there is a home for creatives in between poverty and stardom. Somewhere lower than stratospheric bestsellerdom, but higher than the obscurity of the long tail. I don’t know the actual true number, but I think a dedicated artist could cultivate 1,000 True Fans, and by their direct support using new technology, make an honest living.”

Kevin Kelly
  • Shopify’s Fulfillment Network abstracts logistics away from the seller (just like the Payments Network did before it).
    • they reduce complexity by removing unnecessary information/hassle/steps
  • Jason claims to have seen a 100x increase in high-quality direct-to-consumer companies in the past few years, largely due to Shopify making it easier to run an e-commerce business by handling the technical and fulfillment aspects and allowing entrepreneurs to focus on the product.
  • Example: One founder is selling ~$60K worth of hoodies per month with minimal effort on the fulfillment side. Here’s how she does it:
    • Uses influencer partnerships to market the product
    • Takes orders through a Shopify storefront, which handles payments processing
    • Orders hoodies from a contract manufacturer and routes them to a Shopify fulfillment center because the logistical side of the business was automated, the founder was able to focus on perfecting the product, and is now building her own version of “1,000 True Fans”.
  • Most of the modern Internet has been condensed into 3-5 major players. According to Tobi, it’s important to preserve the opportunity space so that achieving “1,000 True Fans” can still be possible.

Watch / Listen to the full episode:

Fan notes about this episode

@abhishek – Added some great links for exploring the creator economy


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