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Tobi Lutke started Shopify after becoming dissatisfied with the software available to run his online snowboard business (DAVE CHAN FOR THE GLOBE AND MAIL)
Tobi Lutke started Shopify after becoming dissatisfied with the software available to run his online snowboard business (DAVE CHAN FOR THE GLOBE AND MAIL)

A rare startup success story: Shopify hits $1-billion milestone Add to ...

Shopify Inc. has become Canada’s first Internet startup since the dot-com crash to reach a billion-dollar valuation, thanks to one of the largest venture financings in Canadian history.

The Ottawa e-commerce software company, which enables small and medium-sized retailers to launch and manage online stores, announced Thursday that it has raised $100-million (U.S.) in a deal led by the venture investing arm of the Ontario Municipal Employees Retirement System (OMERS Ventures) and New York’s Insight Venture Partners.

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Past backers, including Boston-based Bessemer Venture Partners, also invested.

Sources familiar with the deal say it values the company at $1-billion.

“I think everyone in the company has a sense Shopify is doing well,” said Tobias Lütke, Shopify’s 33-year-old co-founder and CEO, noting that employees own more than 20 per cent of the firm.

“Most don’t realize how well it’s going.”

Reaching the $1-billion level is extremely rare. Website TechCrunch recently determined that only 39 tech firms born since 2003 in the U.S., including Facebook and Twitter, have reached the $1-billion level, as valued by public or private markets, making them members of the so-called “Unicorn Club.”

“Shopify has the potential to be as profitable and exciting as any investment we’ve ever made,” said Jeremy Levine, a partner with Bessemer, which invested early in Internet successes LinkedIn, Skype and Yelp. “It’s certainly on a trajectory to do that.”

Shopify has been doubling in size every year for the past four years. On Wednesday, it signed up its 80,000th customer, which range from the Amanda May lingerie shop in Ottawa to Tesla Motors.

The company recently began offering a comprehensive software system that enables retailers to run both physical and online operations on an iPad. Retailers who use Shopify software are on track to book more than $1.6-billion in sales this year, up from $132-million in 2010. The company is on pace to earn upwards of $50-million in revenues per year and has more than 300 employees, up from 140 a year ago.

Next year it expects to hire hundreds more and will move out of its crowded space in an aging Byward Market warehouse building to new downtown offices on Elgin Street. It plans to use the funds for acquisitions and to expand into foreign markets.

“For me, this deal represents the future of Canada,” said John Ruffolo, CEO of OMERS Ventures. “Focusing on extracting things out of the ground and selling them is not the path to future prosperity in this country – and not the path of where the future jobs are … Shopify is going to represent companies [that will build] a long-term sustainability in this country that they will be the acquirers, not the acquired.”

Shopify and its Canadian startup peers, including HootSuite, are beginning to fill the void left by the fall of former Canadian tech heavyweights Nortel Networks and BlackBerry, while Shopify has provided much-needed optimism to Ottawa, whose large technology sector is a shadow of itself during the peak of Internet mania in the late 1990s.

Shopify is one of several Canadian startups that have attracted significant financing from U.S. venture capital firms since 2010. But it has also emerged as the leader of a group of online software providers who have democratized e-commerce by substantially reducing how much it costs to set up and manage online stores.

A typical Shopify customer spends less than $100 per month to use the software, a tiny fraction of the cost to retailers just a few years ago to operate an e-commerce site. With online commerce representing less than 10 per cent of global retail sales, “Shopify is right in the heart of the massive transformation the whole retail and commerce sector is going through,” Mr. Ruffolo said.

German-born Mr. Lütke, who describes himself as a minimalist (he arrived in Canada in 2002 with just carry-on luggage and still buys his bicycles second-hand), started Shopify after becoming dissatisfied with the software available to run his online snowboard business, which he started in 2004. He built his own program, and soon other retailers were asking if they could license it, leading to the launch of Shopify in 2006.

Shopify was built to offer only core functions that “most customers need most of the time,” Mr. Lütke said. Other add-ons, such as inventory management programs are available through its third-party app store. The company’s success has had a knock-on effect: Two of its app providers, SumAll and Stitch Labs, have attracted venture financing.

It is also a signature deal for OMERS Ventures, which has established itself as the “first call” in Canada for start-up financing since it was established two years ago (the deal represents OMERS Ventures’ single largest investment, exceeding $30-million). For Mr. Ruffolo, investing in Shopify had become a mission since 2011, when it missed out on the last round of financing. “We’ve been doing due diligence for two years and knew everything we needed to know [about Shopify]” by the time the company called this fall and invited him to invest.

For Mr. Lütke, having a Canadian investor lead the latest fundraising was key; he had sought domestic money in previous fundraising efforts but was disappointed by an unwilling and risk-averse venture community that was still shell-shocked by the dot-com bust.

Silicon Valley funds were eager to invest early on but only on condition he move the company to the Bay area, something he resisted before teaming up with Bessemer, which imposed no such constraints. “I had an almost unreasonable desire to make this succeed in Canada,” said Mr. Lütke, who is married to a Canadian, has two children, and is a citizen of his adopted country. “Now I have a bit more of a mission: I want to show how much of a company I can build here.”

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U.S. INVESTORS IN CANADIAN TECH STARTUPS:

Shopify Inc.
Ottawa, e-commerce software
Raised $100-million (U.S.), November, 2013
Key U.S. investors*: Insight Venture Partners, Bessemer Venture Partners, FirstMark Capital, Felicis Ventures

Thalmic Labs Inc.
Waterloo, Ont., maker of wearable motion-controlled armband, MYO
Raised $14.5-million, June, 2013
Key U.S. investors: Spark Capital, Intel Capital

Kik Interactive
Waterloo, instant messaging application provider
Raised $19.5-million, April, 2013
Key U.S. investors: Foundation Capital, RRE Ventures, Spark Capital and Union Square Ventures

Modasuite Inc. (aka Frank & Oak)
Montreal, online fashion retailer
Raised $5-million, October, 2012
Key U.S. investors*: Lightbank, Bertelsmann Digital Media Investments

Desire2Learn Inc.
Kitchener, Ont., online education software
Raised $80-million, September, 2012
Key U.S. investor*: New Enterprise Associates

Fixmo Inc.
Toronto and Sterling, Va., security software for mobile devices
Raised $23.4-million, August, 2012
Key U.S. investors: Motorola Solutions, Paladin Capital Group, Kleiner Perkins Caufield & Byers

WP Technlogy Inc. (aka Wattpad)
Toronto, online community for writers and readers
Raised $17.3-million, June, 2012
Key U.S. investors*: Khosla Ventures, Jerry Yang (Yahoo), Union Square Ventures

Wave Accounting Inc.
Toronto, online accounting software for small- and medium-sized enterprises
Raised $12-million, May, 2012
Key U.S. investors*: Social+Capital Partnership, Charles River Ventures

*OMERS Ventures and/or other Canadian VCs also invested in HootSuite Media

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