Montreal Gazette

Shopify’s success could make platform a takeover target

Top-performing U.S.-listed tech firm besting rivals, but can it sustain growth?

- GERRIT DE VYNCK

Some students wait tables or landscape gardens to pay for college. Jack McCarthy scoured Midwestern vintage stores for the ugliest Christmas sweaters he could find.

McCarthy, 22, bought whatever he could get his hands on, usually for a few dollars apiece, then sold them online for more than US$20. At one point the operation was pulling in US$100,000 a year — money McCarthy used to graduate from Babson College debt-free.

Shopify Inc. helped him do it. The Ottawa-based company provides websites, payments, shipping and more for 500,000-plus online merchants and, less than three years after going public, has a market cap of US$10 billion — making it roughly the size of Twitter Inc. or Square Inc.

Shopify’s thesis is relatively simple: People all over the world have the brains and energy to start successful online businesses, but lack the tools. Shopify lets them try out online store ideas for US$29 a month, and the first couple weeks are free. Many fail, but those that find a market start to grow. The more successful they are, the more money Shopify makes through transactio­ns fees and higherpric­ed subscripti­on tiers.

“Such a minimal barrier to enter is one of the reasons why Shopify is growing like crazy,” McCarthy says by phone from Holland, where he’s travelling and doing e-commerce consulting on the side. Shopify is the best-performing U.S.-listed tech company with a US$1 billionplu­s market cap so far this year. And the shares have returned more than 500 per cent in the 27 months since Shopify’s initial public offering. By contrast, Facebook Inc. and Netflix Inc. returned about 100 per cent over the same period after their IPOs.

While Shopify has yet to post a profit, quarter after quarter it has beaten analysts’ sales estimates and raises its forecast like clockwork. The company seems to be dealing handily with its competitio­n, but that success could make it a ripe target for acquisitio­n by a Google or Amazon.com Inc., and could even prompt those companies to go after its business.

Tobi Lutke, a German software developer who moved to Ottawa to be with his Canadian girlfriend, founded Shopify in 2004. Lutke had tried building an online snowboard shop and realized easyto-use tools weren’t available. He raised money from Bessemer Venture Partners and Felicis Ventures, acquired a design studio to spruce up the sites available to users, and kept adding features like point-ofsale apps and a payments system. Since raising US$150.5 million in the IPO, Shopify has grown from 165,000 customers to half a million, outpacing competitor­s like Austin-based BigCommerc­e.

Over the years, an entire ecosystem has grown up around Shopify, much like the one enveloping Amazon. Groups and forums on Facebook and Reddit are dedicated to the arcana of search engine optimizati­on and conversion rates. Developers around the world have built hundreds of applicatio­ns that merchants can add to their stores, from shoe size converters to supply chain management tools.

And, of course, a cottage industry of consultant­s has sprung up to advise neophytes how best to sell online. In 2013, Ross Beyeler pivoted his Boston-based web design agency Growth Spark to focus almost exclusivel­y on helping Shopify merchants. Since then he’s increased his staff from four to 12 and won customers as big as headphone maker Bose. To Beyeler, the pool of 500,000 potential customers can only keep growing.

“The demand for Shopify is just so enormous,” he says.

The ease of selling online creates a lot of competitio­n for small merchants chasing the latest trends. McCarthy’s sweater business eventually unravelled when hundreds of rivals jumped in and giants like Wal-Mart and Target caught on. He switched gears and started selling tank-tops emblazoned with U.S. presidents and eagles to frat bros looking for some patriotic Fourth of July attire.

Realizing that printing the shirts himself wasn’t feasible, McCarthy turned to Printful, a company with offices in Latvia and the U.S. that, according to founder Davis Siksnans, has printed more than two million T-shirts since integratin­g with Shopify in 2013. One of Siksnans’s most memorable jobs: the “Nasty Woman” shirts that flooded the internet after Donald Trump used the epithet to describe Hillary Clinton.

Siksnans plans to take 300-person Printful public and expects a number of companies from the Shopify ecosystem to follow suit.

Inevitably, charlatans and counterfei­ters have used Shopify tools to open online storefront­s. Some use spammy pressure-tactics like pop-ups that threaten price increases if the consumer doesn’t buy right away. Merchants known as drop-shippers take orders, then buy the merchandis­e from someone else and ship it. In some cases, consumers wait weeks for their orders to arrive — if they arrive at all.

This activity poses less of a risk to Shopify’s reputation than you might expect because, unlike Amazon and eBay, the Canadian company isn’t a central marketplac­e where online merchants can hang a shingle. While the company reserves the right to stop bad actors from using its software, Shopify doesn’t police the merchants the way Amazon does.

Given the fierce competitio­n online, Shopify experience­s a lot of churn. The company won’t divulge how many merchants leave its embrace each month, but it’s probably fair to say that in an average week thousands of merchants sign on even as hundreds more disappear. Many merchants chase flash-in-the-pan trends like eclipse-viewing glasses or fidget spinners, which could mean some of the businesses undergirdi­ng Shopify’s success aren’t sustainabl­e for the long term.

The company argues that every bad or unsuccessf­ul store is an opportunit­y for growth. Many of Shopify’s new customers start out trying to make a quick buck by capitalizi­ng on a trend, says chief operating officer Harley Finkelstei­n. “If the way people are getting up and running is through dropshippi­ng fidget spinners and that teaches them about entreprene­urship, that teaches them how to sell, you better believe when that trend ends they’re going to go look for something else,’’ he says. “Capitalism tends to work itself out.”

As the current king of Canada’s tech scene, Shopify embodies the nation’s pride — and paranoia. No one has forgotten how Nortel and BlackBerry attained great heights, only to misjudge the market and find themselves overrun by U.S. rivals. Right now Shopify is stealing customers from the few rivals it has. A few years ago Amazon shut down its own store-building tools and moved existing customers over to Shopify’s platform.

But as the company matures, it will become harder to sustain yearover-year growth rates of more than 70 per cent, as the company has done for the past five years. Analysts have begun recommendi­ng investors hold the stock instead of buying more, with Jesse Hulsing of Goldman Sachs warning in June that “meaningful upside gets harder from here’’ because the company is already among the most expensive software stocks. Investors could sour if Shopify fails to deliver promised profit by the end of this year.

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Tobi Lutke

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