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Despite its outsized market value, Shopify maintains a ghostly presence in the capital region.

Despite its outsized market value, Shopify maintains a ghostly presence in ottawa region

- James Bagnall


Even now, 14 years after it built the product that launched a million electronic storefront­s, it is difficult to know what to make of Shopify.

The e-commerce specialist stormed to unaccustom­ed heights in 2020 when the market value of its shares tripled to more than C$ 190 billion. In so doing, Shopify raced past four of the country’s biggest banks, Canadian National Railway, Enbridge and other national business icons to claim top spot.

While much of this wealth is based on paper, Shopify managed, while the pandemic raged, to convert significan­t amounts into hard cash. The company this year raised US$3.7 billion by selling shares and convertibl­e debentures to investors. By Sept. 30, Shopify’s vaults held more than US$6 billion in cash.

The company’s top eight executives since mid- March have exercised stock options and settled restricted stock units for gross proceeds of US$ 240 million. On Sept. 30, the workforce as a whole held 2.8 million options to buy stock for an estimated net value of US$ 2.6 billion. About 1.3 million restricted stock units were outstandin­g, with an estimated worth of nearly US$1 billion.

Yet, despite the gusher of new wealth, a workforce estimated at more than 7,000 and customers in more than 150 countries, Shopify is an almost ethereal presence everywhere it operates.

That says a lot about the nature of this firm and the people who lead it.

Unlike e-commerce industry leader Amazon, Shopify does not sell directly to consumers — it builds and hosts websites for retailers who do. These retailers sell goods under their own brands, while the Shopify insignia is often buried in an obscure corner of the website, in a section reserved for software developers.

Shopify’s founder Tobi Lütke and his fellow executives have similarly avoided public spaces, eschewing personal interviews in favour of tweets about computer games, company milestones and greening the planet.

But Shopify’s surprising­ly low profile relative to its shareholde­r wealth is also a function of how it does its business.

Long before the company shut its office doors last spring in response to the virus, it had been honing a work- from- home model for a considerab­le chunk of its employees, many of them nearly invisible to the public.

In May 2018 — the last time Shopify provided comprehens­ive detail about where its employees worked — 1,400 employees did their job remotely, representi­ng 45 per cent of the company’s workers. The vast majority of these were in customer support, helping online merchants set up and run their Shopify- built storefront­s, through chat, phone and email.

The company’s customer support group has likely more than doubled to nearly 3,000 as the number of websites using Shopify technology has swelled to 1.6 million, according to a tabulation by Builtwith, an internet consulting firm.

Since spring, Shopify’s support workers have been joined in their work-at-home setting by 2,000 of the company’s engineers, along with a couple of thousand employees specializi­ng in sales, marketing, recruitmen­t and other jobs usually associated with a formal office.

Lütke characteri­zed this shift as “digital by default,” noting that Shopify’s network of offices would now be used to accommodat­e meetings and special events, not staff. “Most (employees) will permanentl­y work remotely,” Lütke tweeted last May.

This sort of transition is difficult enough for companies with employees that have a long history of working together. But Shopify has assembled its workforce so quickly that a majority have been there fewer than two years.

By moving them online, seemingly for good, Shopify has initiated a most unusual experiment in corporate behaviour and reorganiza­tion.

This transforma­t ion could wel l determine whether Lütke will be able to realize his goal, articulate­d in 2011, of building “one of Canada’s greatest success stories.”

Some might argue he’s already done it. But Lütke, who has talked more recently of laying the foundation for a 100- year company, would disagree. His firm is too fragile, too young yet to secure a lasting legacy.

For one thing, it is still relatively slight in global terms. Although merchants using its technology will generate somewhere between US$ 110 billion and US$ 120 billion in sales this year, less than US$ 3 billion of that finds its way back to Shopify in the form of monthly subscripti­ons and fees for services.

Amazon, by way of contrast, is expected to post revenues this year of US$ 380 billion, the vast majority of it courtesy of online sales direct to consumers.

Not only does Shopify lack heft, it is really many companies in one, each growing rapidly and facing sizable risks of its own.

The core of the firm is a retail operating system. Online merchants pay anywhere from US$ 29 to thousands of dollars for a monthly subscripti­on for setting up and maintainin­g their websites. Because Shopify’s technology is easy to set up, most of its customers are small retailers. The software platform includes a dashboard offering a single view of operations and sales across multiple channels, from Facebook to the retailers’ own websites.

Facilitati­ng online sales is a surprising­ly messy industry. Overall, it is growing quickly — emarketer estimates online retail revenues will reach US$ 1.2 trillion in the U. S. alone in 2024 compared to US$ 795 billion this year. But the journey is rife with shifts and failures.

Consider that since Shopify’s inception in 2006, more than half the websites that have used its technology are no longer active, according to Builtwith, in part because of business failures or a change of career. Shopify has also expelled tens of thousands of online merchants who have engaged in price- gouging or set up fake shops. The turmoil helps to explain why Shopify’s customer support group is so large.

Shopify added tens of thousands of net new subscriber­s in the year of the pandemic. Even so, company revenues from service fees grew faster — these include managing inventorie­s, processing payments, shipping products, analyzing online sales, among others.

Roughly two- thirds of Shopify’s revenues this year come courtesy of these extras, up from 59 per cent last year. Which presents two separate risks.

The first is that Shopify is increasing­ly exposed to a possible economic recession because the size of the fees for its services depends on how well the online retailers are doing. Of course, any potential drop in revenues for Shopify could be offset by the longer- term towards electronic storefront­s. But that’s not a given.

Shopify executives have said the coronaviru­s unexpected­ly brought forward several years of online growth. Shopify’s quarterly revenues pre- pandemic had been rising nearly 50 per cent year over year, then suddenly exploded to gains of nearly 100 per cent in the second and third quarters. It’s why the company’s share value raced to the moon.

But there’s a big unknown here. COVID- 19 vaccines have emerged sooner than expected, thus opening up the possibilit­y shoppers will soon rediscover the pleasures of in-store browsing. In which case, Shopify-powered websites could see revenues stall or, perhaps less likely, reverse.

Then there are more specific risks tied to research and company operations.

Shopify plans to hire 2,021 engineerin­g employees, roughly doubling its current complement. Their mission: to build out the businesses that underpin Shopify’s services.

Fulfilment, for instance, which involves building or acquiring robot- operated warehouses capable of taking orders from Shopify- powered storefront­s and getting the product into customers’ hands within 24 to 48 hours.

Little more than a year ago, Shopify shelled out US$ 450 million for a Boston-based fulfilment specialist, 6 River Systems. Shopify is investing US$ 200 million annually to develop a network of fulfilment warehouses it will operate on behalf of its customers.

“Fulfilment is one of the things merchants still struggle with,” Shopify president Harley Finkelstei­n noted during a recent fireside chat with RBC analysts. “We have to get it right,” he added in explaining why Shopify is being so deliberate in advancing the state of the art.

Shopify, which this year opened a fulfilment R& D lab in Ottawa, is fully aware Amazon has accumulate­d vast amounts of expertise in this niche. The Seattle-based leviathan operates hundreds of fulfilment centres across the globe, including one in Ottawa and another under constructi­on in Barrhaven.

In its drive to produce superior products for electronic storefront­s, Shopify is counting on an eclectic talent pool.

Pre- pandemic, the company announced now- obsolescen­t plans to more than double its leased office space in Toronto, Waterloo and Ottawa, and to open a new facility in Vancouver. Drilling into the Linkedin profiles of these employees reveals an astonishin­gly varied pedigree.

Jean- Michel Lemieux, Shopify’s chief technology officer, got his technical grounding at Objectime, the software developmen­t company founded by former employees of Bell- Northern Research.

Toby Shannan, the chief operating officer, was previously a senior executive at DNA Genotek, the Ottawa- based specialist in molecular diagnostic­s.

Three more recent senior hires — Manju Thomas, Aaron Brown and Morgan Brown — were drawn respective­ly from Paypal, Amazon and Facebook.

A key to hiring senior talent, as well as top tier engineers, has been the rapid rise of Shopify’s share price, which was first offered on a public stock exchange five years ago at US$17 per share.

New hires are usually offered options to buy stock ( or restricted stock units, a slightly different form of equity pay) to complement their salaries. Share- based compensati­on of this sort vests over three years — which has paid off extremely well for those hired prior to 2020.

Estimates provided by Glassdoor, a consulting firm, suggest software developers this year earned an average stock bonus of $ 30,000 on top of a six-figure base salary (based on a sample of 56 current and former Shopify employees). For product designers, the stock bonus ranged from $ 35,000 to $ 45,000 in addition to a base salary of $89,000.

Customers support employees didn’t do nearly as well. They averaged less than $ 42,000 in base pay and recorded minimal top up from stock options or restricted stock units.

As long as Shopify’s share value continues its upward trajectory, attracting talent likely won’t be an issue.

It is just possible that Lütke’s creation will beat the odds and become that 100- year company. Neverthele­ss, many in this region’s tech community can’t help but be nervous about its stunning market value, which implies Shopify will not set a foot wrong in the years to come.

The value of Shopify’s shares on Dec. 24 was roughly 40 times next year’s revenues. Even in the fast-moving world of high- tech, a ratio of 10 to 15 times revenue is usually considered expensive.

As a rough comparison, consider that during the height of the telecom boom in mid-2000, the annualized revenues ( most recent quarter times four) for fibre-optic components maker JDSU was US$ 2.1 billion — and these were growing a 173 per cent year over year.

JDSU’S market capitaliza­tion at the peak was 60 times revenues. The comparable ratio at Nortel Networks at the time was just eight times revenues. ( On the same annualized basis, Shopify is nearly 50 times revenue.)

JDSU and Nortel were not especially well known for what they did, but became recognized brands because their shares soared to ridiculous levels and were held by millions of individual investors. At their peaks in 2000, adjusted for inflation to today, these firms were valued at $265 billion and $525 billion respective­ly — still well above Shopify’s recent market capitaliza­tion.

JDSU and Nortel were also prominent locally because they managed a combined workforce of 26,000 and built millions of square feet of new offices and labs to accommodat­e them.

Shopify, of course, has closed its facility at 150 Elgin while intending to transform its only remaining leased facility in Ottawa, at 234 Laurier Ave., into a meeting and events location for employees and customers. While Ottawa continues to serve as the company’s headquarte­rs, it’s estimated just 1,200 employees are based in the area — less than 20 per cent of Shopify’s total.

This means Shopify’s presence here is less direct than that of the previous tech giant, but the power of its example may prove more enduring. Shopify is also proving much smarter than either JDSU or Nortel in its management of cash. It has enough on hand to withstand significan­t shifts in its markets, and there are no signs yet has finished stockpilin­g liquid assets.

Lütke is showing it’s possible to build a company from anywhere — with a workforce distribute­d everywhere. If he successful­ly confronts most of the risks in front of him, the result could be to create dozens of ambitious multi- millionair­es — and to create a more exuberant entreprene­urial push than the one that developed from the 2000 telecom boom.

Perhaps that is when Shopify’s profile will finally emerge.

 ?? JUSTIN TANG / BLOOMBERG FILES ?? While Ottawa serves as the headquarte­rs for Shopify, it is estimated that 1,200 employees are based
in the area of the nation’s capital — less than 20 per cent of the company’s total workforce.
JUSTIN TANG / BLOOMBERG FILES While Ottawa serves as the headquarte­rs for Shopify, it is estimated that 1,200 employees are based in the area of the nation’s capital — less than 20 per cent of the company’s total workforce.

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