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Shopify CEO Tobi Lutke on a tumultuous year and nurturing innovation

Tobi Lutke, CEO of Shopify, at the company’s Montreal office, Feb.18, 2015.

Paul Chiasson/THE CANADIAN PRESS

This has been a year of extremes for Shopify Inc. The stock of the retail-merchant software provider more than doubled as the company continually exceeded forecasts and cemented its status as Canada's pre-eminent emerging technology company, with 500,000-plus merchant customers. But Shopify also faced its first external criticisms: It was targeted by protesters for hosting the online store of U.S. publication Breitbart News, and its stock sank 20 per cent in the days after short-seller Andrew Left of Citron Research attacked its business model and marketing practices, and said the company was overvalued, in early October. On Wednesday, CEO Tobi Lutke was named chair of the federal government's economic strategy table on digital industries, a 15-member-group that will advise Ottawa on how to become a global innovation leader. He spoke with The Globe and Mail's Sean Silcoff about his new role and the company's recent challenges.

Tell me about why you accepted the invitation to chair the government's economic strategy table on digital industries.

I want Canada to win. To me, Canada is actually a startup. I think now is the right time to figure out what is the country's role in the world. A lot of the best technologists live and work in Canada, and every once in a while they are aggregated by a Canadian company and then suddenly they're not any more. But the people are still here, they're just working for American companies, to the benefit of American bottom lines.

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You have a situation where Canada has built a very strong foundation for a technology ecosystem that only sometimes actually works to the benefit of the true Canadian economy. I think this is partly because there hasn't been the conversation about what Canada wants to become. The TSX is roughly 5 per cent tech companies in terms of value. [Editor's note: information technology companies account for 2.3 per cent of the S&P/TSX 60 Index, compared with 24.5 per cent of the U.S. S&P 500.] That's utterly anemic. If you have a lot of the main ingredient and none of the outcome … the forces acting on the space are slightly skewed in such a way that the outcomes aren't right. We need a massive pyramid of companies at all stages that are strong. At some point, most people in the tech industry in Canada should be employed by Canadian companies, because we need to own the things we bring to the world. That would create an enormous flywheel effect that's going to be really good for the country, having another real leg to stand on [besides] resources.

The government has pushed an innovation agenda and talked up domestic scale-ups. At the same time, the government seems enthusiastic about bringing foreign direct investment into Canada and is wrapping its arms around the likes of Facebook and Google, and governments across Canada are trying to get Amazon to locate a headquarters here, which would undoubtedly compete against companies like yours to hire talent. It seems there's a real split personality in the approach from government. What is your message about the best way to proceed?

This is the right question to discuss. Some American public companies are enormously big. We haven't seen companies like this since Standard Oil. That has all sorts of effects everywhere in the world. For instance, the Toronto Waterfront thing [Google's Sidewalk Labs has been tapped to develop a lakeside high-tech neighbourhood] is the opening shot of a new battle that's gone on the internet to the next platform, which is the city. These are manifestations of very powerful companies which are our neighbours, so they will usually try their tactics in Canada first [before taking them global]. I don't think that's negative, it all contributes. Where I think things could be better is that we are very reactive in this. We roughly know what we want but we don't know why we want it, and there's no source of decision making on all these things, we just jump on opportunities [like the Amazon headquarters proposals]. I think the goal of our digital table is, let's actually figure out … what do we want to be like in 20 years? And then make decisions which are in alignment with this.

There's a dial, and I think that dial is too far tweaked to being inviting and accepting right now [regarding the openness to foreign tech firms expanding in Canada]. I would like people to understand there's a Canadian economy and an American economy, and if some wunderkind ends up working for a Canadian company, that may be worth hundreds of millions of dollars in economic value, and that's going to accrue to the economy, depending on the location of the headquarters. So I would like Canada to be a bit more long-term greedy with its talent, frankly.

This has been a tough year for Shopify in some respects. You dealt with the Breitbart controversy, but now you have a short-seller calling you "dirtier than Herbalife." How are you managing this increased scrutiny and criticism?

A good friend who plays tennis and has fans tells me, "No matter what you do, you're going to have haters." We were so in the background [as a business-to-business provider], so few people asked what we were doing, we ended up with fans and not haters. They came all at once. Sometimes you're eased into your new reality over time and you can adjust. I entered this year and if someone said something egregious and wrong about me or the company, I wanted to type out an essay deconstructing their argument. I had to learn that's probably not the right way. You learn a lot about yourself and every single stage requires you to become better as a person, more resilient and able to deal with more situations. I don't want to cherry-pick – only growing from good situations – because my most intense learning periods have been when things went not the way I wanted.

What key lessons have you learned about yourself and what do you want to improve?

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One of the things I was a bit surprised by: I think we haven't done a really good job of actually really explaining Shopify. A part of what people are talking about and clearly what some people reacted to are just so far off the mark that anybody who actually understands the company shouldn't feel terribly affected by some of those claims. [For example] I read about us being a multilevel marketing company. But there's one level of marketing [whereby Shopify signs up merchants to operate stores using its software]. It's very easy to dispel this kind of idea that Shopify is engaged in something like this. I think we should just explain: Shopify is a business model that is built around a cause that, if it's successful, no one loses. I'm struggling to find another company you can say this about. People say Facebook connects the world. Facebook has 5,000 PhDs that think about how to make you click on ads you don't want to see. Their business model is about something that most people would not perceive as making the world better … [It] is meant to be addictive and hold your attention. Shopify has so much more clear purity of intent. Every time we make it simpler for people to start businesses, more people start businesses. We are competing not against percentage points of market share, we are growing a market. When we grow a market, someone potentially has a completely different life for the rest of their lives, which is fundamentally good. This is the kind of thing I just want to help people understand.

People in tech say, "Once you become big enough to matter, everyone starts coming at you."

Every phase of building a company is really hard. I think Shopify is the strongest it's ever been by far, in terms of ambition, roadmap, cohesion, alignment. It's amazing what you can accomplish in a company that celebrates changing itself, because it's a core value.

You've evolved from startup to a scale-up to a tech giant –

We're still a startup

– But the flipside is when I look at your board and management team, it's still a bit startuppy. You still have heavy representation of early financiers and you don't have a lot of women in senior roles (there is one woman on each of the six-person board and nine-member management team). Have you thought about making changes such as bringing in a seasoned president who has scaled a company to billions in revenues, and what efforts have you made to increase female representation at senior levels?

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You're right, almost everyone [on the board] has been there a long time. It's true that the crew of people who spent time with Shopify early on is very male. This is partly why the board is the way it is. I would love to make changes to it and it's a source of disappointment for me [that] it's not more equal and something I hope will evolve over time. There are a lot of amazing women in the company who are taking a lot of new leadership roles, especially in product line leadership. You're seeing this evolve as the company grows up. We are trying to create complete equality of opportunity right now because I think it's the cleanest and fairest way to sort these issues. And then if not, then eventually you can go to push for equality of outcome, but we haven't arrived at that point yet.

Let's talk about Citron. Why was your initial response to the short-seller so muted?

I admit we were surprised by the reaction to it. To us it seemed so preposterous. I just thought, "Okay, this isn't going to have much of an effect." The problem was then it had such media pickup [including commentary by TheStreet's Jim Cramer] and the effect it had became the story. The message became amplified and ran away from us, frankly. But you also have to understand, [Citron] releases [its report] on Day 1 of our blackout period [following the quarter's end]. We're not allowed to talk about the company. The playbook he's playing is ridiculously tuned.

Investor reaction has been cool since you addressed some of Citron's allegations during your earnings call last week. There's a number of ways to interpret investor response; why do you think investors are hesitant?

We are at an enormously premium valuation, which means we are a massively trusted company that's performed really well. It was so easy to find [people who said] why the company is great, actually it was really quite difficult to find people to say what was wrong with the company, which was a void, which then got filled with a fairly extreme position. If you think about a company's value as this elastic band where [the fair market value] is somewhere in the middle, if everyone says "yay," the elastic band gets stretched up high, and suddenly the first person shows up to say, "Hey, wait a second everybody." Shopify is a complex company. It's not designed to be easy for investors to understand. Even if there's no validity to the words, now you have a counterforce for the elastic band, and the elastic band probably goes to the middle point to where it should have been all along.

Do you think you went far enough with your commentary or do you think you might need to further address some of the concerns/criticisms raised?

We told people, "Hey, this is preposterous." Remember, the guy knows the companies he attacks really well and this is bad faith misrepresentation of a company. At a certain point, we can't really engage with that kind of thing, because it's a lot easier to make up things than trying to substantiate what's going on. [In an interview with The Globe last month, Citron's Mr. Left said Shopify "needs to get rid of the aggressive marketing (and) to be exactly what it is, a good SAAS (software-as-a-service), e-commerce platform and let the valuation fall to where it is and if it happens to be $4-billion, then it's a good $4-billion company"]. We are trying to grow this market. Growing the market means picking up people who are trying this for the first time. That means the failure rates are significantly higher … He said, "Well, they're not disclosing unit churn [the amount of customers that stop using Shopify] because they're hiding something." No one in the software-as-a-service industry would ever do as much as put unit churn on a screen, because it would lead to completely wrong behaviour … the company itself doesn't look at the number.

It's well-known that the failure rate of small businesses is high. What would be the harm in sharing that churn data point and explaining the number in a bigger context?

Subtlety has died on the internet. If a number itself doesn't tell a story, you can't disclose the number because people take it out of context. More importantly, no one at Shopify looks at churn.

So it's not an important number for Shopify?

No, not at all. Retaining revenue is the thing. Shopify creates essentially a basket of signups every month. There's going to be Procter & Gamble in there and someone who wants to take their dad's leather belt business online. Over the next couple of months, they figure what will survive, what will retain. From our perspective, this is a balanced portfolio of people with different potential. They then start growing up on the platform. Some of them succeed, some of them churn. The ones who succeed end up consuming more of our services, and it's 100 per cent retentive for revenue. For us it's creating annuities that [generate] revenue.

Citron accused Shopify of being a get-rich-quick scheme and Andrew Left zoomed in on your use of the term "millionaires" in your marketing, implying it created false hopes. Is this something you'd consider changing? Is there any legitimacy to the criticism?

To be fair, we do a lot of marketing, and these kinds of things are a tiny percentage of it. I think it matters what you link to. It's a one-two kind of thing with marketing: grab attention, which is interruptive, and then inform based on a click, and you have to look at what this links to. At no point do we ever claim this is easy or even automatic. We celebrate the perseverance of entrepreneurs to actually get through the complicated and difficult parts. This is a community which talks in that language. I think the more important thing is how do you represent yourself on your own property and how do you get attention?

Is affiliate marketing (using third-party online influencers and marketers to sign up customers) a necessary evil? I suspect some affiliate marketers promoting Shopify were selling Herbalife last month and next month will be promoting something else. Is this a murky world that companies marketing themselves online have to deal with?

You're asking me about the entire industry, but I can only talk about Shopify. You're right, affiliate marketing certainly can go too far. Our program was designed as a partner system. We actually police this very heavily.

Have you had to kick anyone out of the affiliate program for bad behaviour?

Sure, everyday. Hundreds, for sure [in total].

Some analysts highlighted as a concern the fact that average gross merchandise value [GMV] per merchant went down last quarter. Could you provide more disclosure, cut those numbers up a bit more to address their concerns?

We could, but honestly – I have a dashboard with two numbers on it, [total] GMV and net customers. That combines into a monthly recurring revenue number. That's the triangle, and that's the direction and growth of the company. What we disclose and tell people is the CEO dashboard. People are curious, but for the directional running of the company, those are the numbers that matter.

You maintain Shopify makes it easier to grow and scale businesses that require little upfront investment and provide a user-friendly experience. We haven't seen an economic downturn since Shopify really got going. What are the risks to encouraging many inexperienced entrepreneurs to get into a fairly risky business – e-commerce – and what do you see as the risks to Shopify when the economy inevitably weakens?

You're right, at scale [an economic downturn] hasn't happened, but we were around in 2008. Back then, lots of people paid $10,000 [for their websites] and they replaced what they had with Shopify. That happened last time. Shopify is much more on the side of a solution in most times rather than the side of problem. It's very affordable; no one is spending a lot of money on Shopify. When the market turns down, a lot of people lose jobs … and that's the time people become entrepreneurs. Downturns end up being the best times to start companies.

There were some concerns from analysts about operating margins last week. Your company has been talking for a long time about reaching operating profitability. You came in one quarter ahead of projections in the third quarter, with your first adjusted operating profit since going public. But your CFO Russ Jones said the company's focus going forward will be on revenue growth, not profit, suggesting the market will see a bumpier ride on the bottom line. What is the longer term view the Street should have about Shopify's intents with regard to achieving and sustaining profitability versus growing revenue?

We always said this is a growth company. We will periodically check in with profitability, while being on a growth journey. But we're not interested in building up a massive bank account right now and doing share buybacks. That would be a horrible way to invest money given the opportunities we have.

That's never been a concern for Amazon, either.

Exactly. We said from the beginning we're not going public to be public, we're going public because the most enduring companies are trusted public companies. So far, we've always done exactly what we said we'd do – in fact, slightly better. We're not done building this trust yet. We just need people to hear us when we say this is an enormous opportunity.

This interview has been edited and condensed.

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More

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