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

Tobi Lütke on This Week in Startups

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    • The old concept of the e-commerce market is outdated and incorrect.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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(The) Startup Depression

I wrote this to my email list on Saturday the 27th of 2008. Two days before the single largest drop in the history of the stock market. 

Now, I promised myself I was retired from blogging to focus on my email newsletter, but I’m getting pounded with so many requests for this essay that I’m giving up and posting it here. This does not mean my retirement from blogging is off, this means I’m posting this so I don’t have to respond to hundreds of emails asking for a copy. If you want future missives like this signup for Jason’s List: Jason’s List signup.

For background, the goal of this post was not to spread fear, but rather inspire folks at startup companies to get focused and to save as many as possible from hitting the wall. Myself? We’ll I funded Mahalo for the long-term and while the market down turn isn’t good for anyone, we’re largely immune from it because we are building on a five year plan that we’re only 18 months into.  

Doesn’t mean I’m not hyper focused, I am…. I’m just not panicking. Great entrepreneurs build value and market-share in down markets. They go to work seven days a week and the breakout when other folks check out. 

Location: CalaCompound, Brentwood, CA
Monday, September 27th, 5:15PM PST.
Word Count: 3,283
Jason’s List Subscriber Count: 6,992
List management: http://tinyurl.com/jasonslist
Message type: startups
Forwarding instructions: startups, VCs
Republishing rights: Please do not reprint

(The) Startup Depression
————————————
Since stock market gyrations and the elections seem to be making
everyone rightfully nauseous and depressed, I thought I would take
this email to discuss the biggest ramifications of these challenging
times: depression.

It’s my believe that the economic downturn will be much worse than it
is today, and that 50-80% of the venture-backed startups currently
operating will shut down or go on life-support (i.e. 3-4 folks working
on them) within the next 18 months.

Make a list of every Web 2.0 startup to raise an A or B round and
cross 80% of them off the list, because they will not make it to their
next round of funding or profitability.

Now, I could be totally wrong. No one can guess or time the markets
perfectly. However, planning for the worst is a virtuous idea, so I
encourage you to read on.

Everyone I talk to is feeling confused, paralyzed and anxious–many
are in full-blown depression. People are scared, and they should be.
This could be the start of a very difficult time for our country and
the rest of the world.

In this email, we’ll focus on the entrepreneurial and startup
depression and economic downturns/depressions–and how you can deal
with them.

Some background to get us started
————————————
Few things in the world are as exhilarating as starting a new company.
Metaphors abound, and we’ve all heard them: starting a company is like
having a baby, falling in love, and running a marathon. Few folks,
however, want to continue the metaphor when things go bad at a
startup. If they did, we would be having discussions about running a
startup being like divorcing your spouse, collapsing from exhaustion
in the 20th mile of the marathon, or–God forbid–losing a child.

Metaphors swing both ways.

Anxiety and depression from a failed, or failing, startup can be
intense–even debilitating. When outside factors such as markets or
buildings collapsing are added to the mix, I’ve seen great
entrepreneurs just fold.

Now, I’ve never folded, and I don’t say that as some badge of courage.
No, sometimes it’s really, really stupid to keep fighting. Most
consider it especially stupid to fight when you know you’re going to
lose. I don’t.

The result of never folding is that I’ve had my ass kicked pretty bad.
Multiple times.

Depending on your DNA, getting your ass kicked is either complete
torture or deviantly rewarding. Truth be told, I like getting my ass
kicked because it makes me angry, motivated and focused. If I look
back on the couple of moments of success I’ve been lucky enough to
have in my life, they all seem to come after a good ass-kicking.

The darkest hour is–in fact–right before the dawn.

Brief Disclaimer
————————————
I’d be lying if I said I understood the complexities of depression or
depressions. I’m not a psychologist nor am I an economist. I’ve never
suffered from clinical depression and I didn’t live through the last
depression. However, I do have a BA in Psychology, have read many
books about the psychology of happiness, and I’ve felt the sting of
the last huge correction (2000-2002).

Consider these one (hu)man’s notes on “entrepreneurial depression and
anxiety.” They are worth the price you’ve paid for them, but I hope
they are helpful to you–especially if you’re suffering right now. If
you are suffering from depression or anxiety, go see a professional.

Really, it’s the best thing to do. Feel free to print this out and
bring it with you and ask your newfound therapist what they think of
my observations and advice. Then email me back what they said… I’m
curious where my thoughts rank.

Kurnit’s Three Reasons Why Companies Fail
————————————
Scott Kurnit of the Mining Company (aka About.com) told me there are
three reasons why a business will fail: it’s a bad idea, bad execution
or outside factors. If you examine your business with these three
filters right now, you can baseline where you’re at: one, two or three
strikes.

His theory correlates well with the attribution theory in psychology.
The theory concerns itself with how an individual attributes the
things that happen to them (or others). For example, if you were
pulled over by a cop for speeding, you can attribute that to number of
factors, both internal and external.

Some folks might internalize the event and curse themselves for being
reckless: “I should have known better!” Others might blame an external
source, such as the cop or the bankrupt city they work for: “Gosh darn
Los Angeles cops! They’re just trying to balance the budget by
harassing us!”

Kurnit’s theory, as told to me, mentions two internal factors (bad
idea and execution) and one external (outside factors). When faced
with massive market uncertainty, like we are today, it’s a virtuous
idea to assess each of these factors.

Right now, every single one of us has HUGE outside factors we must
consider. The market collapse is going to make the next couple of
years impossible and frustrating for many entrepreneurs. Even the
great companies – like Google, Microsoft and Apple – are going to hit
hard times.

One of the most important philosophical minds of our time summed it up
best: “I never blame myself when I’m not hitting. I just blame the
bat, and if it keeps up, I change bats. After all, if I know it isn’t
my fault that I’m not hitting, how can I get mad at myself?” — Yogi
Berra.

Viktor Frankl’s Search for Meaning
————————————
John Brockman, my dear friend and agent (if I ever get around to
writing a book), handed me one of the most important books of my life:
“Authentic Happiness” by Marty Seligman. That book led me to the most
important book of my life: “Man’s Search for Meaning” by Viktor
Frankl.

Frankl was a psychologist and Holocaust survivor.

He studied how people react to horrible circumstances that are beyond
their control. He studied why some people give up and others carry on.
While few of us can understand the level of suffering of people during
the Holocaust, Nanking or the Killing Fields, Frankl put his theories
forward so that we could carry them into our daily lives.

Logotherapy was what Frankl called his theories, and their major
tenants are that we choose how to find meaning in our circumstances
and that our experiences all have meaning.

My interpretation of Frankl is that you actually get to choose how you
feel about your circumstances.

The Worst Year of my life
————————————
It’s still hard for me to talk about it seven years later–and I’m not
going to talk about it in too much detail right now. In the early
months of 2001, I watched my first business, Silicon Alley Reporter,
crash from 70 employees to 12. The $20m offer I’d received to buy the
business was a distant memory, as was the $11.6m in revenue we had in
2000.

Money was evaporating from the bank account, dotcoms were going bust
and we–the dotcom kids–went from visionaries to charlatans
overnight. I went from hosting multi-million dollar conferences, doing
Charlie Rose guest spots and being featured in a 6,000 word article in
the “New Yorker” to not being able to meet payroll.

Many folks said I was lucky with Silicon Alley Reporter, while others
said I was fraud who had finally been found out. I was broke, no one
cared about my work, and my life really sucked.

… and that was just the start.

Then, the stock market crashed and the accounting scandals set in.
Enron, Adelpia, Worldcom, and Arthur Andersen made the fallout from
the dotcom bust look like nothing.

… and that was still just the start.

While lying in bed listening to the radio, I heard that a private
pilot in a small plane had accidentally crashed into the World Trade
Center. Then, I watched the second one hit. Then, I watched them come
down.

To say things went from bad to worse would be a gross understatement.
As I started in disbelief with my fellow New Yorkers, I wondered where
my brother, a NYC Firefighter, was. Then it hit me: he was probably
dead.

Due to a simple twist of fate, he wasn’t dead–but many of his friends
were. It was at that time I really took a deep look inside and found
meaning in what happened that day and what happened to me when my
first business collapsed.

In my mind, I was being tested. Horrible things happen in life and I
was faced with several at the same time. From that point forward, my
goal was to not only get back to the level I was at when I was at the
top of my game, but to exceed it.

My goal was to be truly happy every day doing what I loved: running a
startup company. A year later, we started Weblogs, Inc., and 18 months
after that, we sold it. The darkest hour became the dawn, and it was
glorious.

If you’re failing right now, and if you’re suffering, you need to take
Kurnit’s test. You need to access where you’re at and you need to
fight on. You can give up, sure, but the truth is that when you give
up, you have to live with that fact for the rest of your life. For me,
living with having given up in tough times is a much worse fate than
certain failure.

If you fail, then by definition you have tried. But if you give up,
you didn’t.

Step One: How are you executing
————————————
It’s fairly easy to tell how well you’re executing, so let’s tackle
that up front. First, take a look at your plan and see where you are
in executing against it. Are you ahead, behind or on schedule? Second,
you can have everyone in your organization rank your product and its
various features on a scale of one to ten. Third, you have an outsider
rank your product and features.

If you’re executing at an seven or eight or above, then you know
you’re doing well, but could be doing a little bit better. If you’re
executing under a seven, your problems could be execution-based. You
just may not be delivering the goods. If you were a restaurant, the
analogy would be that you’ve got the right ingredients and product,
but you’re just not preparing them well. This means you need to focus
on making the product better.

Another way to get a handle on how you’re executing is to take your
product and put it up against your two top competitors and do the
one-to-ten rating process. Rate yourself and your competitors on the
top 10 features of all three offerings. How many are you winning? If
you’re winning more than three, you’re ahead of the game. If you’re
three or behind, then you’re average or losing.

Execution is the easiest thing to fix, and you can do it one of two
ways: get the people in your organization to perform at a higher
level, or get higher-level folks into your organization.

It really is that simple: folks can either step up or step out.

Step Two: How good is your idea
————————————
Determining if you have the right idea is a little more complicated
since most great businesses do not finish where they start. Google
started as a search engine but bought Applied Semantics in order to
create their real business: text-based advertising.

Microsoft started by building programming software (Altair Basic), but
went on to make it’s business in operating systems, Microsoft Office
and servers.

If you’re idea is wrong, it really doesn’t matter. What matters is if
the original ideas allows you to evolve into your big idea.

In order to evolve, you must think like Darwin. Ask yourself: have you
adapted to your market? Have your customers asked you for something
different than you’re currently providing? Have you given it to them?
After you give them what they want, can you anticipate what they’ll
ask for next? Are those items following a theme?

At Silicon Alley Reporter, we started with a magazine and people loved
it. However, they wanted to get more frequent updates and asked us to
make it weekly. We reflected on this “ask” and came back with
something they didn’t even know they wanted: “the Silicon Alley Daily”
email newsletter. 40,000 folks subscribed to it in the first year and
it was a much more usable product than the magazine or the requested
weekly print newsletter that we passed on doing.

The market will tell you what it wants.  You just have to really
listen. Clearly, there was a market for the DEMO conference since it’s
being going on for years. However, they never listened to the “ask” of
the market: let the companies be selected based on merit, not their
ability to pay almost $20,000. Yes, I know it’s a self-serving
example, but those are the best ones. 🙂

When Mike Arrington and I founded the TechCrunch50 event, we didn’t
think it would grow to be 2-3x as large as DEMO after only one
year–but it did. The market had MASSIVE pent up demand for a
merit-based show and we tapped it. We evolved DEMO’s business model,
not our own.

Now, I’m left asking myself, “if I was trying to evolve TechCrunch50,
what would I do?”

Another example from personal experience with start up evolution has
been with Mahalo. When we started, we were just doing hand-curated
links. The pages had very little actual content on them. In our user
lab, folks told us they loved the links, but they kept asking for more
content.

We studied the situation and realized that we could evolve and help
our customers more by writing more content on each page. To do this,
we studied what were the 10-15 things people wanted to know when they
did a search–then we put them on the page. Doing this drove our
traffic from 300k monthly users last year to 4.6m uniques in August (a
record month).

Bottom line: Your first idea is rarely your best.

The first step in a journey is never the best either! Most folks hit
their stride two hours into the marathon. Don’t be afraid to nuke your
first idea and run with your second–or third, forth or fifth.

Evolution is the revolution.

Step Three: Outside Factors
————————————
Outside factors are the toughest to deal with because, by definition,
they are outside of your control. Despite our deepest wishes, we can’t
reverse the housing bubble, put the Towers back up or reverse the
accounting scandals.

All we can do is deal with outside factors, and knowing how to deal
with them is critical.

When the market is in the middle of correcting, as I believe it is
currently doing, people tend to underestimate everything including:

a) how bad it will be
b) how quickly it will get worse
c) how long it will take to recover

Chances are the market will get worse and that will happen sooner
rather than later. Watching folks on CNBC last month talking about a
two or three quarters of down market was just sad. It takes just as
long to clean up a mess as it does to make it–typically longer.

The housing mess took two or three years to develop (2004-2006). It
will take three years to unravel (2008-2010) from what I can see.
We’re gonna be dealing with a bad market for at least two years.

10 Specific things you can do
——————————————
Since the outside market is out of your control, the best you can do
is focus your energy inward. Here are some things you can do after
you’ve assessed where you company is at.

1. Execute better: This is fairly simple, as I describe above. Rank
yourself and your performance and improve it.

2. Grow the talent you have: When the market is down, it’s a great
time to get your team educated and to the next level. Invest in
training and education of your top people, because they are the ones
who will lead your company through this mess.

3. Firing the average people: Again, it’s totally politically
incorrect, but I highly recommend firing anyone who is good or
average. Startups are an Olympic sport and every slot on your team is
critical. You wouldn’t put a “good” swimmer in a relay, would you?
Don’t have one in your startup. Fire the good and replace them with
the great.

4. Cut spending every where you can: Recurring costs like
connectivity, phones, rent and insurance are things that you can
easily cut. Go to each of your providers and ask for 20% relief
immediately or you’re leaving. Most, not all, will give it to you.

5. Find a revenue stream and ride it: If you don’t have a revenue
stream right now, you’d better find one on Monday. Seriously, by the
end of the day. Once you find this revenue stream, ride it. Put at
least 25% of your effort into bringing in revenue.

6. Focus on your profitable clients: If you have revenue, start
focusing on which clients are most profitable. Take them to lunch and
figure out how you can over-service them and sell them another product
(or more of your current product). You’re gonna want to protect these
accounts because the folks reading Point Five are going to be calling
them!

7. Make your top ten 10% better: Look at the top ten aspects of your
business and come up with a plan to make each 10% better in the next
30 days. Ask everyone in your company to make suggestions for the 10%
better program and execute on the ones that will provide the most bang
for the buck. Sometimes, there are things you can do today that will
make something 10% better for free–you just haven’t brainstormed
enough.

8. Hold an optional off-site breakfast meeting on a Sunday and see who
shows up: If folks don’t show up for you to grow/save the company on a
Sunday for a two hour breakfast, they probably aren’t going to step up
when the sh#$%t really hits the fan. You need to know who the real
killers on your team are and you need to get close with them now.
Again, it’s fine to have 9-5ers on your team–if you’re the Post
Office. You can’t have them at a startup company. Note: if you reading
this and saying I’m anti-family, save it. Folks don’t have to work at
startups and some of the hardest working folks I’ve met have families
and figure out how to balance things.

9. Build marketshare: One of the best things to do in the down market
is build marketshare. Look for competitors that are going out of
business and buy them or just “steal” their clients and talent (i.e.
pick them up).

10. Raise money: I know I said above most folks won’t be able to raise
money in the down market, but that’s not because the money isn’t out
there–clearly it is. The issue is that the big money out there
doesn’t want to fund small ideas that are in the death spiral. Build a
plan based on revenue and taking market share and folks will consider
funding you.

What ideas do you have for winning in a down market?

How do you stay inspired in bad times?

Send me your response and if you would like it quoted in a follow up
email, attributed or not.

all the best

Jason