Shopify Inc. SHOP-T has generated hundreds of millions of dollars in paper gains on the stock market – once again – by capitalizing on its clout as an e-commerce giant.
Marketing automation platform Klaviyo Inc. KVYO-N made its debut on the New York Stock Exchange on Wednesday, the latest in a rash of technology companies to list their shares in a suddenly receptive market after a nearly two-year drought for initial public offerings.
Klaviyo’s stock opened at US$36.75 but closed at US$32.76. That’s 9.2 per cent above its offering price of US$30, which had twice been increased by its underwriters in the face of strong demand.
Ottawa-based Shopify is one of the biggest shareholders of Klaviyo, thanks to a complex collection of deals it struck with the Boston-based company in July, 2022. Its 9.25 million shares of Klaviyo were worth over US$303-million at Wednesday’s closing price; it paid US$101-million for them 14 months ago.
Shopify has warrants to buy another 9.45 million Klaviyo shares for a penny apiece through mid-2027, worth another US$309.4-million at Wednesday’s close price, of which it can exercise 3.94 million by the end of September. The company also has the right to buy another 15.74 million Klaviyo shares for US$88.93 each at any time up to July 28, 2030.
The value of stock that Shopify now owns – and what it could obtain through its penny warrants – is worth more than six times what it paid last year. Shopify’s combined stake and rights add up to an 11.2-per-cent ownership of Klaviyo.
In congratulatory posts on social media, Shopify chief executive Tobias Lütke called Klaviyo “another star of the Shopify ecosystem.” Shopify would not comment further on the matter.
Klaviyo’s business is highly dependent on Shopify, as it provides data metrics and digital messaging for e-commerce merchants. By the end of 2022, Klaviyo derived 77.5 per cent of its annual recurring revenue from customers who use Shopify’s platform.
The deals with Shopify in 2022 established Klaviyo as the default e-mail solution for the Canadian company’s customers who use Shopify Plus, a premium offering for bigger brands. One agreement includes a revenue-sharing deal that paid US$16.2-million to Shopify in 2022, replacing earlier revenue-share agreements that provided it with US$13-million over the prior two years.
Klaviyo had revenue of US$585.1-million in the 12 months ended June 30, up 56 per cent over the same period a year earlier, from more than 130,000 customers. The company’s losses have been shrinking steadily, totalling US$9.5-million in the 12 months ended June 30, compared with a net loss of US$79.4-million during calendar 2021. According to Klaviyo, it has spent just US$15-million of the US$454.8-million in primary capital the company has raised since its inception in 2012.
Klaviyo is one of several startups to go public that has been built largely within Shopify’s ecosystem. Rick Watson, chief executive of New York-based RMW Commerce Consulting, suggested others may follow.
Shopify has taken pride in the past that its partners generate far more combined revenue than it does by offering its platform, which is used by nearly 1.75 million merchants to run their online businesses as of 2023. The company sells add-on offerings built primarily by third-party developers, such as Klaviyo, to customers through the Shopify app store.
Over the past few years, Shopify has entered into several lucrative arrangements with partner companies that have scaled up to become stalwarts in their own right, taking a larger share of their gains. Mr. Watson said this strategy has “similar economics” to many other venture capital models, “meaning there are going to be a lot of misses and a few big hits.”
“I think every Shopify app would do well to study the Klaviyo playbook, but in their own respective categories,” he said. Still, Shopify also benefits from reviewing the daily data that flow from its partners, as they sell through its platform, giving the company added insights beyond what many venture capitalists might consider when identifying firms that have the most momentum and potential upside.
Shopify has had better luck investing in partner companies than its attempt to build a logistics business to serve its customers. In May, Mr. Lütke referred to that ambitious venture as a “side quest” that was distracting from its core mission, leading to a divestiture of the entire warehousing and freight capabilities that Shopify spent billions of dollars building up. Shopify has since offloaded those delivery functions to third-party providers.
In 2020, Shopify agreed to make Affirm Holdings Inc. of San Francisco its exclusive provider of buy now, pay later financing options for its merchants to offer consumers. A year later, it reached a similar deal with Israel’s Global-E Online Ltd., making that company Shopify’s exclusive provider of cross-border solutions for merchants. Shopify received shares in both companies for pennies apiece before they went public in 2021. Shopify’s combined stakes in Affirm and Global-E were worth US$1.2-billion as of June 30.
Shopify also entered into a multiyear partnership with private Israeli marketing firm Yotpo Inc. in 2021. The company has invested more than US$1.1-billion in other firms that have benefited from their relationship with the e-commerce giant, such as its payment processor, Stripe Inc., and merchant-financing marketplace Pipe Technologies Inc. The total value of Shopify’s equity and other investments amounted to US$2.3-billion as of June 30, nearly 24 per cent of its total assets by value.