INTRO: Following the dotcom crash, as money dried
up and the company’s stock crashed 95%, the executives set up an emergency meeting.
While their eCommerce business was still growing rapidly, it was far from being profitable.
So, they decided to launch a platform that helped other companies to build their own
eCommerce websites called Merchant.com.
Hearing this story, you probably thought that this is how Shopify got started right?
Well, this was actually the story of Amazon and their diversification effort after the
dot-com crash.
But, this wasn’t actually all that successful.
You see, Amazon’s rapid growth throughout the 1990s had led to a rather unorganized
business environment which made it extremely difficult for them successfully launch merchant.com.
So, Amazon quickly dropped the idea started testing out other paths for diversification.
6 years later though, in 2006, Shopify, leveraged the same business model as merchant.com, and
they knocked it out of the park.
So, here’s the story of Shopify and how they showed up Amazon at their own game.
TOBIAS LÜTKE: Taking a look back, the story of Shopify circles
back to a man named Tobias Lutke who was born in 1981 in Koblenz, West Germany.
His father was an internal medicine doctor while his mother was a teacher for disabled
children.
From a very young age, Tobi had a massive interest in modifying computer hardware and
coding.
So, when he was 6 years old, his parents bought him a computer similar to the Commodore 64.
And within the next few years, Tobi taught himself how to write code and develop simple
games.
Despite this innate curiosity to experiment and learn by himself, it doesn’t seem like
Tobi was a big fan of school.
Whenever a teacher asked him a question, Tobi preferred to give them smart witty responses
instead of actually answering the question.
And he took shortcuts whenever possible and tried to pass his classes by spending the
least amount of effort possible.
In my opinion, I think Tobi simply had his priorities straight from a very young age,
but from his parents’ and teachers’ perspectives, this was quite concerning.
So, they had Tobi take a bunch of psychoanalysis exams to identify if he had any learning disabilities,
but they were never able to diagnose anything.
And as Tobi grew older, his behavior from a traditional perspective simply got worse
and worse.
Tobi says that he had a serious authority problem and hated answering to teachers.
So, as soon as he could drop out of school, he did at age 16 from 10th grade.
Tobi went ahead and joined a computer science apprentice program at Siemens, but he didn’t
like this very much either.
You see, the apprenticeship required him to use Java which he felt was a super restrictive
programming language.
In this world of restrictions and limitations, Tobi felt that there was only one true escape
which was snowboarding.
Tobi would regularly go on snowboarding trips and one of these trips took him to Whistler,
British Columbia where he met a girl named Fiona Mckean.
As you would guess, these two would fall in love, and due to the great distance between
Germany and Canada, they would have to figure out a living situation.
Initially, they agreed to live in each other’s countries in alternating years.
First, Fiona came to Germany and lived with Tobi for a year, and then Tobi moved to Canada
to live with Fiona for a year, but he never came.
SNOWBOARDING BUSINESS: Despite finding the love of his life, Tobi
was still kind of a bum.
At the end of the day, he was still a high school dropout that had no idea what he wanted
to do, so he started networking with people in Canada.
One of the first people he ran into was a man named Scott Lake.
Scott was a family friend of Fiona and would regularly come to family events, and this
is when he would meet Tobi.
Tobi was significantly younger than Scott coming in at 12 years younger, but the two
had several similar interests, and soon enough, they decided to start a business together
in 2004.
The initial plan wasn’t anything crazy or revolutionary.
The duo just wanted to sell something that they were both passionate about, snowboards,
through the internet.
Though the idea was simple, they wanted it to be personal.
In other words, they didn’t want to just flip snowboards on eBay.
So, they decided to launch their own eCommerce website, but all the eCommerce software available
at the time was absolute crap according to Tobi.
So, Tobi decided to develop his own.
As you might expect with Tobi though, he refused to use any of the popular programming languages
because he thought all of them were too restricting.
So, instead, he used an obscure Japanese programming language called Ruby.
Ruby was so obscure that it didn’t even have written documentation in English.
Luckily for Tobi though, a Danish programmer named David Hansson would develop a new framework
for Ruby around the same time which made it much easier for Tobi to code.
This new framework also generated a lot of interest within the coding space regarding
Ruby which got Tobi involved in several online forums relating to Ruby.
Tobi shared a lot of his software on these forums such as his software for processing
credit cards, and he quickly became a leading voice within the community.
In the meantime, Tobi and Scott were also packaging up snowboards and sending them to
customers.
But, given all the interest online surrounding Tobi’s software, it became pretty clear
to Tobi and Scott that selling software was the way to go.
SHOPIFY: Despite this grand vision, neither Tobi nor
Scott had much money, so they started raising money from their friends and family.
They were able to raise a total of $200,000 from 10 people the biggest investors being
Fiona’s father Bruce McKean and Tobi’s uncle.
Fun fact, this investment would end up making Bruce a billionaire.
Anyway, using these funds, our duo went ahead and hired a German programmer named Daniel
Weinand who they consider to be a cofounder of Shopify.
The name Shopify has actually been around since the start of the company, but the company
wasn’t actually originally called Shopify.
The company was actually called Jaded Pixel and Shopify was just the name of the software.
Given the clout Tobi had amongst online forums, they were quickly able to build up a base
use of customers and start pulling in monthly revenue of about $8000.
Over the next two years, this number would grow almost 10 fold to $60,000 per month,
but this also forced Tobi to raise a lot more money which he didn’t really want to do.
It’s not that Tobi didn’t want to bring on investors, but rather that he didn’t
want to bring on venture capitalists who he thought would ruin the company.
Scott strongly disagreed with this perspective and felt that venture capital was the way
to go.
And given the company’s desperate need for cash, Tobi gave in and started pitching to
VCs, but no VC really wanted to invest in an eCommerce business.
They felt like they had already tried that in the 1990s which resulted in the dot-com
crash and massive losses, so why would they try that again.
After failing to raise more capital, Scott would leave the company, and Tobi would become
the CEO of Shopify.
Tobi didn’t really want to be CEO, he just wanted to code great software, but with the
future of the company at stake, Tobi would try to teach himself business.
He started meeting with a lot more VCs, but these meetings just exposed how clueless he
was.
Tobi wasn’t familiar with technical business terminology like margin ratios, so he struggled
to answer these questions when VCs asked him.
But, Tobi didn’t let this stop him.
After every VC meeting, Tobi would learn about the terms that he didn’t know which allowed
him to approach the next meeting with just a bit more knowledge.
Slowly, Tobi’s VC meetings started to get better and better, but then the 2008 financial
recession hit which basically made it impossible for an eCommerce company to raise money.
And with that, Tobi knew that he was truly on his own.
REFORMATION: The next two years would end up being the
roughest years of Shopify’s history.
Tobi and Fiona had to live with Fiona’s parents, and her father had to fund payroll
from savings.
Tobi says that the situation was extremely demoralizing.
Every day at meetings, Tobi discussed the long-term goals and vision of Shopify, but
the truth was that it wasn’t clear if Shopify would even survive the next few months.
Tobi refused to focus on the short term though.
He was adamant that they needed to think long-term for the company to truly be successful.
And since he couldn’t do too much about the company’s financial situation for the
time being, he decided to focus on building a phenomenal team.
You would think that Tobi was looking for genius programmers that were willing to go
all-in on Shopify, but this couldn’t be further from the truth.
Tobi says that he would hire a team player over a brilliant jerk any day of the week.
Also, despite all this hardship, Tobi never pulled an Elon.
He refused to work 100 hour weeks and he refused to force employees to do that either.
Tobi strongly believes with creative work, you can’t cheat.
He says that everyone only has 5 creative hours per day, and trying to work for longer
hours doesn’t lead to better results.
While this strongly goes against all the beliefs of Silicon Valley, Tobi stuck with it even
during the worst of times.
And as the world slowly recovered from the financial recession, the interest in eCommerce
started to come back to life, and Shopify was finally able to achieve profitability
by 2010.
Around the same time, VCs became more open to investing in eCommerce once again and Bessemer
Venture Partners would agree to invest $7 million into Shopify for 20% of the company
in December of 2010.
The following year, Shopify would raise another $15 million and in 2013, they would raise
$100 million.
Tobi would top all of this off by taking Shopify public in 2015 which valued the company at
just over $1 billion.
Tobi had successfully navigated the company through the recession and built a team that
was stronger than ever before, but Shopify was yet to even receive their biggest push.
DROPSHIPPING: Up until this point, Shopify mainly appealed
to small business owners who wanted to expand their business through the internet.
But in 2017 and 2018, we saw the rise of one of the most infamous get-rich-quick schemes
of all time: dropshipping.
If you’re not familiar with dropshipping, it’s basically the idea to start an online
store using Shopify, sourcing products on Alibaba or Aliexpress, and then linking the
two together.
This way, you don’t have to physically deal with the product and your job is to just market
it.
While it sounds simple in theory, it’s actually extremely difficult.
Now, this isn’t to say that you can’t make great money through dropshipping, but
like with any business, the vast majority fail and it’s not nearly as easy as the
dropshipping gurus make it out to be.
Nonetheless, this explosive trend towards dropshipping was extremely lucrative for Shopify
and sent them to the moon.
Shopify reached a peak market cap of $212 billion.
Since then, Shopify stock has actually gotten destroyed along with the rest of the market
dropping over 60%.
This has crumbled Shopify’s market cap down to just over $80 billion, but this is really
nothing to worry about.
If we look at Shopify’s revenue and gross profit graphs, they haven’t even had a single
negative quarter.
So, I find it hard to believe that Shopify will be fundamentally struggling any time
soon.
As for Tobi, his net worth peaked at over $10 billion, but it has since cooled down
to just under $6 billion.
Tobi doesn’t really care that much about these numbers though.
While he’s super passionate about Shopify and grateful that he’s able to work on what
he loves, he also believes that at the end of the day, Shopify is just a job.
And no job will ever take priority over his family or personal health.
Just like at the beginning, it looks like Tobi still has his priorities straight.
What do you guys think about Tobi’s approach to business?
Do you agree that humans shouldn’t work past a certain point regardless of the situation?
Comment that down below.
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