Shopify Inc. has grown into an internet giant by encouraging people to turn their “side hustles” into e-commerce businesses. Now the Ottawa company has a lucrative side hustle of its own.
A month ago, on April 12, the Canadian e-commerce company signed a services and partnership agreement with Israel’s Global-E Online Ltd. , which helps online merchants conduct cross-border sales in the native language and currencies of their consumers globally.
Shopify agreed to make Global-E its exclusive outside provider, for at least three years, of cross-border solutions for the 1.7 million-plus merchants that run their stores on its platform. In return, Global-E agreed to pay an undisclosed fee equal to a percentage of merchandise volume transactions it processes on behalf of Shopify merchants.
Global-E, which was in the process of going public, gave Shopify something else: warrants to buy 19.6 million shares – 7.75 million right away, equal to a 6-per-cent stake, and the rest over 24 months. The price to turn a warrant into shares was a penny each, or US$196,000 in total.
On Wednesday, when Global-E went public at US$25 a share on Nasdaq, Shopify’s stake was worth US$490-million. The stock closed the day up 2 per cent.
The Global-E deal is actually Shopify’s second such partnership: Last July it reached a similar arrangement with Affirm Holdings Inc. in which the San Francisco startup became Shopify’s exclusive provider of “buy-now-pay-later” financing options for its merchants to offer consumers.
Shopify got 20.3 million shares, which cost US$203,000; they were worth almost US$2-billion the day Affirm went public in January. Shopify’s gain on its Affirm stake accounted for its entire US$1.26-billion profit in the first quarter – the biggest in its 17-year existence.
For all the hype about Shopify’s growth during the pandemic, the company has been muted about the significant strategic shift represented by the two deals: Since becoming the second-busiest e-commerce platform in the United States after Amazon.com Inc. , Shopify has started using its clout to take a bigger bite of the huge spinoff value it has generated.
“Shopify is saying, ‘Well, if we are helping you create this value, we should share in some of that,’ ” said Shubham Datta, a former member of Shopify’s corporate development team who left in 2020 to take an executive role with legal software provider Clio.
“Shopify is becoming more opinionated and more aggressive on certain commercial relationships [it is] structuring. In a world where those commercial relationships accrue a disproportionate amount of enterprise value to those companies, I think Shopify would want to participate in the enterprise value creation for those companies.”
Chief financial officer Amy Shapero made passing mention of the strategy during Shopify’s first-quarter earnings call two weeks ago, saying: “To further future-proof our offerings and capitalize on our position ... we are also stepping up our strategic partnerships. This includes investments in companies and technologies in our ecosystem that align with our mission and whose success at scale could positively impact our merchants.”
In addition to the Affirm and Global-E deals, Shopify has made a few notable venture capital investments. This year it participated in a $17.5-million investment in Swyft Technologies Inc., a Toronto online platform that connects merchants to local couriers to provide same-day deliveries. It also joined a US$50-million funding of Miami startup Pipe Technologies Inc., creator of an online merchant financing marketplace.
Shopify also disclosed last month it had invested US$200-million in the first quarter in an unidentified “private company that is a partner in its ecosystem.”
Shopify has taken pride in the past that its partners – such as Affirm and Global-E, as well as digital and service providers and other affiliates that service its merchants – generate far more revenue combined than it does. Last year, Shopify booked US$2.9-billion in revenue from subscription and merchant services fees such as payments processing. Meanwhile, its partners brought in US$12.5-billion
Many have become valuable as they have scaled up alongside Shopify, such as online marketing services providers Klaviyo Inc. and Yotpo Inc., and anti-fraud software seller Signifyd Inc., which each raised US$200-million-plus in recent months. Shopify’s exclusive payments processing partner Stripe Inc. was valued at US$95-billion when it raised US$600-million this year.
“Hindsight is 20/20 and I think if you could rewind the clock, there’s no doubt Shopify and Stripe could have tried to work out some kind of arrangement” like a warrants deal, Mr. Datta said.
In the past, Shopify made modest investments, buying app providers to merchants, such as Handshake and Return Magic. It has made one big acquisition, paying US$450-million for warehouse robotics company 6 River Systems Inc. in 2019. Shopify chief executive officer Tobi Lutke has indicated a reluctance to make large mergers and acquisitions, recently telling The Globe and Mail, “I honestly haven’t cracked the code on M&A yet.”
Instead, Shopify, which declined to comment for this article, appears to favour minority investments in companies it sees as the strongest providers of particular offerings to its merchants – and that help “accelerate the level of innovation,” said National Bank Financial analyst Richard Tse.
“These partnerships give them the opportunity to evaluate the ones they feel have the potential to bring the most value. It’s quite strategic the way they’re doing it. I wouldn’t rule it out that these could eventually be prospective acquisition candidates.”
The impact of the new strategy has been material. In the past three quarters, it has started breaking out “equity and other investments” as a separate line item on its balance sheet. The total value was US$2.5-billion at the end of 2019. On March 31, it stood at US$1.63-billion – mostly made up of its Affirm stake – or 15 per cent of all assets.
“Recent Shopify corporate development deals like Affirm are evidence of both how smart the Shopify team are and of how much leverage and clout they have with partners,” said Mark MacLeod, a past interim chief financial officer and adviser to Shopify. “While their emphasis will likely always be on internal product development, they have the smarts, leverage and balance sheet to do transformative deals any time.”
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