Shopify’s rising, but challenges loom
The capital region has not seen this for a long, long time. Shopify, born 14 years ago above an Elgin Street coffee shop, is busting out all over.
The firm, which develops software for helping entrepreneurs sell their wares online, has been hiring prodigiously, raising tons of cash and developing alliances with the biggest names in technology and social media.
This year Shopify will likely top $1 billion in revenues (all figures U.S.) and, as of last week, was worth $15 billion.
The company ’s strength is clever technology, built and supported by a rather unusual workforce.
Some of Shopify’s recent hires have included a beauty consultant, cook, photographer, television news traffic co-ordinator, arts centre manager, graduate in English literature, magazine editor and multiple retail clerks. The bulk of Shopify ’s workforce — now 3,080 strong — consists of support staff.
The latter usually work out of their homes and often carry the title of guru, an entry-level position with a base salary of $40,000 Cdn. plus perks and Shopify shares. They help Shopify’s 600,000-plus customers with online marketing, billing, technical issues, third-party software apps and design issues — advice offered by telephone, email and chat software.
The rest of Shopify’s staff includes software developers and people who manage the company ’s sales channels and technology partners.
“We don’t tend to hire too many industry insider experts,” Shopify chief executive and co-founder Tobias Lütke explained last year in an interview with Motley Fool, a financial services company.
“We tend to hire a lot of high-future-potential people, often straight out of university.”
But now Shopify ’s very success is creating its own problems — ones that other tech firms would love to have, but serious nonetheless.
For instance Shopify’s growing heft is attracting fresh competitors, as evident in the move last week by California legend Adobe to acquire Magenta Commerce, a Shopify rival. Adobe’s announcement (briefly) knocked four per cent from Shopify’s share price.
A more serious theme for Shopify has to do with how to keep its workforce motivated financially. Shopify needs to attract hundreds more employees every year to keep its technology fresh and support the growing legions of online businesses that rely on it.
It’s with this in mind that Shopify on Wednesday will ask shareholders to approve a plan that will allow employees to fully earn their stock awards over just three years instead of the usual four.
Awarding shares is an important part of the mix for most high-tech firms because it means they can offer attractive initial compensation while minimizing cash outlay. But this strategy depends on constantly rising share prices.
Here’s the problem now: Shopify’s rapid expansion has driven its share price to levels that can be sustained only through continued superlative performance. If you joined Shopify recently, your gain over the next several years will very likely be much less than for those who were hired in its formative years. Of course, this is how it’s supposed to work in high-tech: Those who join a startup early take big risks and likely will have contributed to building the base that supports later hires.
It’s the speed of the transformation at Shopify that’s problematic.
Three years ago Shopify shares traded at less than $30 a share on the New York Stock Exchange; last week they closed at $143.64. Great for employees who joined in 2015 or earlier; not so great for the latest cohort.
Consider what a fresh hire at Shopify will face this year. On May 22, Shopify’s enterprise value (the worth of all its shares minus cash, roughly what another firm would pay to buy Shopify) was $13 billion — or nearly 13 times the firm’s projected revenue.
This is nosebleed territory. Blair Abernethy, a Toronto analyst with iA Securities, calculated the comparable ratios for two of Shopify’s technology partners, HubSpot Inc. and Zendesk Inc., were 8.4 and 9.7 respectively. Shopify ’s revenues are growing faster, justifying a premium in its share price, according to Abernethy. Nevertheless, Shopify ’s multiple is the highest among nine software companies the Toronto analyst considers comparable, meaning it is the most expensive.
Company spokesperson Sheryl So doesn’t necessarily see this as a problem.
“Equity-based compensation is attractive because it’s a direct reward for employees’ efforts over the long term,” she said. “If the market is doing its job of valuing a company’s stock as it grows, the employees can still expect to be rewarded for their contributions.”
Abernethy still rates Shopify a buy, albeit with a share price target of $145, barely above last week’s close.
Working against Shopify is the fact that while stock-based pay does not involve shelling out actual cash, it still must be expensed, thus affecting the company’s financial results. It’s no small matter. In the first quarter alone this year, sharebased compensation was nearly $18 million, a major contributor to the company’s $15.9-million net loss.
Shopify offered a breakdown of which employees benefited the most. Fully 60 per cent of the share awards went to employees in the R&D group, which accounts for just 20 per cent of the company’s total costs.
“The competition for R&D talent is fierce,” So says. “You’ll find Shopify’s compensation roughly in line with that of the companies against whom we compete for talent, including Google, Facebook, Amazon, Apple, Etsy and Square. These companies offer pay packages that include both strong cash and equity opportunities and we do the same to compete with them.”
Lütke’s philosophy on financial rewards has been simple. He’s told colleagues that if they build a solid foundation, hire the best people and point them in the right direction, the rest will look after itself.
How does Lütke know whom to hire? It starts with identifying certain personal qualities — imagination, willingness to learn — he believes are more important than experience with a particular software skill or industry.
“All of us are on boats in very stormy waters in the industry today,” he told Motley Fool, “because there’s a million different micro trends that are all hitting us in the form of tidal waves at the same time.”
The ability to think on one’s feet is key. Flexibility is important because gurus spend much of their time helping online merchants solve myriad problems related to retailing, a business that is constantly changing.
Naturally, this means convincing merchants to buy Shopify software and services. Shopify employees also try to add new merchants and convince existing ones to upgrade to more expensive monthly subscriptions.
The Shopify environment is not for everyone. Employee reviews submitted to Glassdoor, an employment website, offer a wide array of sentiments. There are references to “amazing people” and “great benefits.” But former Shopify employees also complained about bottlenecks to promotion, difficult hours and a high school like atmosphere.
As is the case with other hightech firms, the fruits of success aren’t shared equally. However, the compensation gap at Shopify has been exacerbated by the nearly sixfold rise in the company’s share price during its first three years on the Toronto Stock Exchange.
It starts with the 10 or so most senior executives.
To date, Shopify’s top five current and former executives have sold roughly $180 million worth of stock in the past three years, at prices ranging from $24 to $137 per share. Most of these shares were acquired at less than $1 per share during the company’s formative stages.
As capital residents have seen so many times before — at Mitel in the 1970s, Newbridge, Corel and Cognos in the 1980s and 1990s, and Nortel and JDSU during the 2000 tech bubble — the new money at first finds its way into luxury cars and real estate, then into charities and new startups.
Lütke recently financed the multimillion-dollar restoration of Opinicon Resort. Daniel Weinand and Cody Fauser acquired impressive properties in Rockcliffe Park and Vancouver, respectively. JeanMichel Lemieux, Shopify’s senior vice-president of engineering, has built a million-dollar home along the Ottawa River in Westboro, employing Linebox Studio, the same architect that Shopify used to build its new global headquarters on Elgin Street.
The executives have also done well by stock options and restricted stock units — compensation earned in stages according to years served. The estimated value of stock options alone at year-end 2017 approached $190 million for the executive group.
But some of the company ’s more junior employees haven’t done badly either, at least the ones with seniority.
For instance, on April 30, 2015 — just prior to Shopify’s initial offering of shares to the public — 463 employees outside the executive group had the right to acquire 8.6 million shares at an average price of $1.57 each. The disposition of these options is unknown but had the employees sold at roughly the same time and price as did senior executives (who do report share sales), the group would have grossed close to $700 million.
Of course, it’s likely many of these options were forfeited thanks to the untimely exit of some of these employees. The Citizen took a snapshot four years ago of more than 40 Shopify employees who maintained LinkedIn profiles. These represented a significant chunk of a workforce then just a few hundred strong. Fully half the employees have since left the firm, most to pursue other business opportunities.
Shopify hired about 1,150 employees between March 2017 and May 2018, a 60-per-cent jump in its workforce. The company divides these into two categories. Support staff operating largely out of their homes increased by 800 (a rise of 133 per cent) while the number of employees operating from Shopify ’s offices jumped a comparatively modest 350 (up 26 per cent over the same period).
Ottawa, the headquarters, remains the single largest location, with 850 employees (up 100), while Toronto (400, up from 300), Kitchener-Waterloo (250, up from 170), Montreal (150, up from 90) and San Francisco (30, up from 20) make up the rest. The company declined to provide a geographical breakdown of its support staff.
“We have spent the last decade democratizing commerce, simplifying it, and making it accessible for businesses of all sizes,” Lütke wrote three years ago in a note to shareholders during Shopify’s initial public offering of company shares. “It takes tremendous care, discipline and craftsmanship to take something inherently complex like commerce and make it intuitive.”
Building a global enterprise from scratch at breakneck speed is a messy, exhilarating business.
Next year should begin to tell the tale if Lütke’s brought the right ones on board, and if the financial incentives in place are enough to do the job.