Top 5 Keys to Shopify’s Success – an Interview with Tobias Lutke

by Benjamin Yoskovitz | December 22, 2010

Tobias LutkeIn an ongoing series of interviews with our advisors at Year One Labs (see: Mike Montero, Jeremy Edberg, Randy Smerik, Ash Maurya and Luc Levesque) we’re now speaking to Tobias Lutke, CEO and founder of Shopify. The company is based in Ottawa, Canada and extremely successful. Shopify provides an extremely robust but simple e-commerce platform to help people sell their wares online. And they’ve got some very well-known companies using their service including Rovio, makers of Angry Birds. Recently they raised $7M in funding from Bessemer Venture Partners, FirstMark Capital and Felicis Ventures. Tobias is a developer at heart, a Ruby on Rails core team member, and a supporter of open source technology. It seemed like the perfect time to speak with Tobias about Shopify, how they started and how they’ve been so successful.

1. What’s your entrepreneurial background? Please provide a quick summary.

There isn’t actually all that much. My background is mainly technical. I’m a programmer by trade (yep, Germany has that). I love to make things and I especially love solving tricky programming challenges.

I’m the kind of person who goes through a day thinking how I could improve every single tool or object that I come across. My tolerance for poor design in function and looks is almost non-existent.

Sometimes the above two paragraphs combine and it gives me the impetus to create something that solves a problem that I can’t stand to ignore. Shopify was created exactly like this.

2. Can you provide a bit of history on Shopify? Why you started it? How you got started? What it’s like now versus when you started?

In 2004, after immigrating to Canada I decided to start a Snowboarding and Winter sports gear store, with my friend Scott Lake. The idea of starting my own business came pretty naturally. During an apprenticeship in Germany I started a company with some friends to create a call center ticketing software. Naturally this fizzled out completely, but by then I had caught the bug. That, and I don’t do very well working for others.

Initially, I assumed that setting up the online store was going to be the smallest issue in this venue. To make a long story short, after trying a series of existing online store software packages I got so disgusted with the quality of the whole lot, that I wanted to do something about it just to spite them.

After a lot of pizza and late night coding, we re-launched Snowdevil in late 2004. This time it was powered by our own store system that I built in Ruby on Rails. We continued to sell our products for the rest of the season and then pivoted it to become a software company. The Shopify software is now exactly what I had hoped to find for myself in 2004. It continues to develop and improve all the time, making it better than I could have ever imagined. What used to take months in 2004, can now be done in about 20 minutes on Shopify.

3. Now that Shopify has announced the fundraising, can you share what that experience was like, since I believe it was your first in terms of raising capital? Why did you decide to do so at this point?

Traditionally most businesses raise outside capital to pay their staff. Employees tend to leave if there isn’t enough money to pay salaries. Obviously, Shopify doesn’t have this problem. We have been profitable for a few years now.

For us, we raised the money because we are too impatient. We run a SaaS business and it’s easy to accelerate growth through customer acquisition once your business model is proven.

Raising the money was fairly straightforward because we already had a proven business model. Considering the wealth of data and history with our business, there really wasn’t much hesitation by the investors to provide us with a term sheet.

Due diligence was just as much a pain in the ass as everyone says it is. In our case it lasted longer then expected, as a result of cross border issues. Luckily, the recent change in Section 116 of the Canadian Income Tax Act meant that we could remain a Canadian company without having to setup an American shell company. What a relief.

4. What are the top 5 keys to Shopify’s success to-date?

  • Being our own customers – Building software that we use ourselves.
  • Giving designers the ultimate power over the product, not sales or even developers.
  • When getting feature requests, saying no a lot more then saying yes.
  • Creating an API powerful enough to allow other people to implement all the features that we said no to.
  • Having a lot of fun doing what we are doing. Your product reflects it!

5. How important is company culture for a startup?

That’s impossible not to overstate. Every team member will spend a lot of time together, so they better enjoy themselves. If you don’t think that you can have tons of fun together, then don’t bother starting. I could list all the crazy stuff we do for having fun, but the point is that every company has a different DNA and I doubt that you can adopt another company’s culture wholesale to fix your own. If your company culture is mediocre you won’t fix it by having Street Fighter tournaments and nuggeting the interns.

It comes down to this: Your product is a manifestation of the company that built it, just like paintings are a manifestation of the painter behind them. No great product has ever been made by people who didn’t love their work. You have to create an environment that is conducive to creating great products. A fantastic company culture is not just important. It’s the price of admission.

6. Any key startup lessons learned from your experience with Shopify? Anecdotes? Stories?

I love products created by people who are trying to solve their own problems. I feel like the best software is made when the founders really have an itch to fix something. It takes a lot of time and dedication to make a great product. Disgust with the status quo is a powerful motivator.

Another undisputed lesson that I have learned is, if at all possible, you should base your business model on monthly recurring revenue. This is customary in modern SaaS businesses and I find it very beneficial. We experimented with other systems in our early years and really regretted it.

7. What are your thoughts on the changing landscape of venture capital and investment for startups?

I think it’s very exciting and really great for the founders. Talking to my friends in other industries, especially in the hardware business, there is still the sense that the financiers play the role of king maker. You can have the best idea in the world, but if you can’t find a VC to buy into your idea it won’t be made.

Luckily, many of the startups in the software industry can be built at a cheaper rate and there is capital available specifically for seeding. Let a thousand flowers bloom.

That being said, I think the value added within this new seed stage, of what level funding can bring to the table, will prove to be worth more than the money itself. The essential process of building a business has been discovered quite well over the years, but it’s far from common sense at times. Using this knowledge and sharing it at the right times with the founders, can make even more flowers bloom. Too many companies fail because of irrelevant issues, other than the quality of their products. My sincere hope is that this new startup funding environment will lead to more companies making it over the initial “hump”.

8. What are your goals for working with Year One Labs and the startups we bring in?

I’m a product guy, with a very technical background, that holds a ‘business’ job. I combine a lot of things that are usually done by dedicated people in normal business.

I hope to help Year One Labs’ startups with some sanity checking of their technology, especially in the early stages, their monetization and go-to-market strategy a little later on and if the founders are interested, transitioning from a pure technology play into a thriving business that is just as good at marketing and biz dev as they are at making the software.

What’s my real goal? Running and building a company is a blast. More people need to experience it. Perhaps I can help some people have as much fun building their companies as we have building Shopify.

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