Canada's top emerging software success story Shopify Inc. on Tuesday beat earnings estimates for the ninth consecutive time since it went public in May, 2015. That morning CEO and co-founder Tobi Lutke spoke with The Globe and Mail about the company's results. The following is an edited and condensed transcript:
Shopify has successfully expanded its software offering beyond your core small and medium merchant customers and to target larger merchants. Do you think Shopify could someday power the retail operations of a merchant as large as Canadian Tire or even Wal-Mart?
From a capabilities [standpoint] – absolutely. If you sum the amount of products that are already in Shopify, it's one software powering 500,000 merchants. In terms of traffic … we are close to Wal-Mart or at higher numbers. There's nothing technical that prevents it. But there is an entire world of business processes that are built around existing solutions which would then have to be adjusted to use Shopify. So that is actually unlikely. But if there is ever a next Wal-Mart, absolutely, I don't think there's a reason why it shouldn't be possible to build on top of the Shopify that we are building. Yet I don't want to say the company is going to turn into something where Shopify Plus dominates.
You've gotten into the business of advancing cash to your merchant customers, and as a result you are probably one of the bigger fintech firms in Canada through this fast-growing side business. Are you concerned about the risks involved in financing your customers?
Russ [Jones, Shopify chief financial officer] is really careful. Export Development Canada is doing the insurance. That reduces our exposure quite a bit. Of all the companies that might give credit to small and young businesses, we are probably able to do it better and lower risk than anyone else because of the data we have. It's important for us to be able to give credit to creditworthy businesses. [Fundraising] is highly destructive [and time-consuming for] young companies. For what we want to accomplish with our platform, just eliminating that distraction and just giving people a button that says "Click me and I'll send you that money" is a remarkable way for us to essentially get people time. And because of all the data we have we can even do it at better rates. That just makes the whole thing kind of a no-brainer. We don't see it as a revenue-driver, we see it as a success amplifier.
What do you see as the next big trend in digital retail?
People still talk about some digitally native retail businesses. It's crazy. E-commerce is not an industry, e-commerce is a tactic. You need software which supports these things, which is why we're doing well. I think the biggest trend visible to consumers will be that retail will completely move from this chore and necessity to a form of entertainment. I think that might mean there will be more retail again. Maybe not in North America, because we overbuilt our malls. In the downtown core you might actually see a good deal of smaller retailers come back because they can build experience and expertise around problems people want to solve. We see a bit of this already. Apple has done it from the beginning, and there are great examples like Bonobos and Warby Parker.
What is the one thing that worries you most about your business?
I am a worrier. I tend to do something about what I worry about. I have a 100 per cent unbroken track record of underestimating how many people I need to build this company. Every time you add a significant percentage of people, which we do every couple of months, you really test what the company is made of and the culture.
Those are the things I'm spending most of my time on. We don't want to be No. 3, when completing the sentence "…like Nortel, Blackberry and…" [when talking about Canadian tech companies] that had an amazing opportunity and failed to seize it. That's important to us.
Your CFO talked about your capacity to make larger acquisitions. To date Shopify has bought six small companies. Bad or badly executed acquisitions have harmed many companies. Canadian software giants Open Text and Constellation Software have hired large deal teams, and acquiring other firms is part of their core expertise. What is your approach to avoiding problems that unsuccessful acquisitive firms have had?
It's something I think about a lot. We've always had lots of opportunities to buy companies and we've been very, very reluctant.
Our entire industry in general is really bad at acquiring companies. What a couple of companies like Open Text have figured out is how to acquire revenue and grow a business like this. The way I explain something like Open Text to myself is how I explain Berkshire Hathaway – their product is actually their stock, so they need to buy growth. That's a perfectly valid and good occupation, except it has nothing to do with what I'm doing.
Our mantra has been, "We will not buy a company unless we think the people that make up the company have a better job the day after the acquisition than before." This is what steers us to agencies. At the end of the day they have to fill out time sheets and throw all their work over a fence and hope another company does something with it. So there you need to say, "You never have to fill out another time sheet and you get to see the things that you've built evolve over years and be proud of it."
We are reluctant to do these bigger acquisitions that are then integrated, especially if they are committed to a certain product that they want to build that we can't guarantee we will keep evolving. We've restricted our M&A potential like this. We may get more sophisticated and dial down the bar a little bit, because there are a lot of things that make sense.
You should see my inbox. It's pretty remarkable how many people are interested in throwing in with us. I find it's better to spend the money you would otherwise spend on acquisitions and just hire people and train them for exactly the jobs you need … If we buy a company it [is] because it saves us an enormous amount of time. We are a road-map-driven company, not a financial opportunity-driven company. We have a lot of money, which I'm intending to use, especially if times get worse … we'll purchase essentially time so we can say, here's something that would take us a couple of years to build, someone has something you can spend half a year adopting and then we get something that is just as good or better, we'll do it.