Aydin Senkut is the Founder and Managing Partner at Felicis. He invested in Shopify's Series A in 2010 at a $25M valuation. He joins us to tell the story of how Shopify found product market fit.
Shopify is now a $100B company. But as Founder & CEO Tobi Lutke said, in the early days, his goal was "to build a 20-person company". Shopify is not a story of explosive, 10x growth and massive funding rounds. Shopify is a story of consistent growth. Of doubling year after year, from 0 to over $7B in revenue and a $100B valuation.
If your goal is to build a generational company, you won't want to miss this episode.
Aydin Senkut is the Founder and Managing Partner at Felicis. He invested in Shopify's Series A in 2010 at a $25M valuation. He joins us to tell the story of how Shopify found product market fit.
Shopify is now a $100B company. But as Founder & CEO Tobi Lutke said, in the early days, his goal was "to build a 20-person company". Shopify is not a story of explosive, 10x growth and massive funding rounds. Shopify is a story of consistent growth. Of doubling year after year, from 0 to over $7B in revenue and a $100B valuation.
If your goal is to build a generational company, you won't want to miss this episode.
Aydin (00:00):
Tobi was a special person. He was like a savant. I felt like I was talking to an outlier founder and it's very difficult to explain. I feel one of the real privileges and benefits in my job is once you start finding some of these outlier founders, the way they speak, the way they make decisions, the way they do things does not fit status quo. It's borderline crazy, borderline insane; they do things that make you scratch your head, but somehow it works.
Pablo (00:30):
Welcome to the Product Market Fit Show, brought to you by Mistral, a seed-stage firm based in Canada. I'm Pablo. I'm a founder turned VC. My goal is to help early stage founders like you find product market fit.
Pablo (00:45):
I'm so excited for this episode today because more than anything, we have an amazing guest who has joined us. Aydin Senkut. is the founder and managing director of Felicis, which is one of the best seed-stage and early stage funds in the world. They've invested in companies like Canva, Notion and of course Shopify at their series A when it was $25 million company. By the way, I was just looking this up before recording. Shopify today is $100 billion company. If you bought Shopify stock when they went public in 2015, we're talking about eight and a half years ago, let's say you put $20,000 in Shopify stock at IPO, which you could have done, you would've gone a 50X return; that 20,000 would be a million dollars today. Shopify has fared quite well, not just for the VCs, but also for the retail investors that have believed in this company from the early days. One of the things that I think is just so interesting about Shopify's story is that right in the world of these 10 billion, 100 billion, trillion dollar companies, we're also obsessed with exceptional growth. Exceptional growth in this context is like 10X growth.
Pablo (01:53):
We want things to grow so fast. Shopify, even though it became $100 billion company today, never had that kind of growth. Shopify is not a story of 10X growth. Shopify is a story of 2X growth for 10 plus years. That's what they've done. In fact, if you look at Shopify's path from zero to $100 million in revenue, 100 million ARR, their average growth rate was 110%. In the world of venture, 110% oftentimes doesn't even put you in the top quartile and this became one of the best companies of our time. Again, I think this just hammers home the point that the most important thing is not how fast you grow, but for how long you grow. It's all about consistency, and that's really the story of Shopify Aydin joining us to tell us a bit about not just how he found out about Shopify, but what it was he saw in Tobi and the Shopify team back then that made him so sure it was a bet worth taking.
Of course it all starts with Tobi, the founder and CEO. Tobi is a developer at heart. He's been a coder effectively since he could write. I mean, he's been coding since he was six years old. He was born in Germany in 1981. Fast forwarding through the early life because that's not really what this pod is about, he moves to Ottawa in 2002. At this point he's about 20 years old. Not a founder, not an entrepreneur really in terms of what he's spending his time on. I mean, he is a coder and so he's working as a software programmer infected like an accounting company. Nothing necessarily that exciting is happening at this point in his life. Obviously Tobi is super smart person, but you would not and I don't think anyone would've been able to point him out at this point in his life and figure out that he was going to become a billionaire and one of the most respected founders in the world and certainly number one in Canada.
Tobi's working at this company as a developer and and all of a sudden the company goes bankrupt. Tobi is out of a job and his first move, and this is already interesting, he doesn't think to himself, "Okay, you know what? I'm out of a job. Now is the perfect time to start a startup." He's just like, "Okay, cool, let's go find another job." This is where his mindset was at, at the time. He starts actually looking for different jobs he can take on, different companies he can join as a developer. He runs into the first obstacle, which is basically that for different immigration related issues, his papers are just not in the right order. It's actually hard for him to get another normal job.
This is when you can see serendipity playing in this context of him trying to figure out what he wants to do next. He gets introduced to one of the other players that are very important in the founding of Shopify, this guy Scott Lake. Scott Lake is like the yang to Tobi's yang. If Tobi is a product type, tech type, Scott Lake is the business half. They start talking about different things they could do. They start exploring potential business ideas. It was a bit of a perfect match between the two of them, but to be clear neither of them have an actual startup idea. They start to manufacture it. They start to think about, okay, well, if you're the business half and I'm the technical half, okay, that's cool, what could we build?
At that point, both of them were very into snowboarding. They decide, well, what if we launched a snowboarding company? What if we sell snowboards, but what if we do it a bit differently like we don't sell the standard snowboards, we sell different, more unique snowboards and we just do it in a bit of a different way? That's the seed that starts them off this entrepreneurial path. They say constraints set you free or there's power in constraints. It's very clear here because the first constraint he hits – I mean the first constraint is he's out of a job, which even puts him down this path in the first place. The second one, they don't have a lot of money. Their first idea is actually like, okay, we're going to start a store.
We need a brick and mortar location. This is 2004, by the way. This is not today's world. This is 20 years ago. The problem is they each only have $20,000 to put into it and it's just not really enough to get a store launched. They start looking at, okay, well what if we did this online? What about e-commerce? That e-commerce idea starts to make more and more sense to them. Okay, you know what? Let's do that. Let's start an online store. We'll sell snowboards online. Okay, cool, Tobi's in charge of product. He's in charge of tech, so he starts looking around to see, well, how are they going to build this store? Which platforms can they use? To be clear, it's not like there was nothing back then. There were options that you could use.
There was Yahoo! Stores, there was eBay Stores, there was osCommerce, there were others, and played around with a bunch of them. None of them really let him do what he wanted to do. Yahoo! Stores was too hard to customize; eBay Stores, I mean, was really suited for auctions; osCommerce was just too old and just too rigid. None of them were really the platform for selling online. Actually, if you think about that, Yahoo! Stores first and foremost is a search engine; eBay first and foremost is an auctions marketplace. They were both doing stores, but neither of them had the vision to become platform for commerce. You can start getting a sense of the opportunity I'm foreshadowing here. Tobi didn't see it like that at that time, but you can understand how there was kind of a gap in the market. Tobi's faced with a bit of a problem because they actually have a pretty clear idea of the store that they want to build, of the experience that they want to build online. Here's exactly how Tobi saw the choice as he explained on the podcast called How I Build This.
Tobi (08:16):
I was like, there's only two ways forward. I compromise my idea and do something that's very undifferentiated except for snowboards, or I'm going to fall back on my programming skills and I would build something that hopefully would be able to power this business.
Pablo (08:33):
That's the choice that he faced too. Easy road, just work with what's out there and just find a way to sell snowboards online or maybe a more exciting path, do what you imagined and put in the work. In a sense because he took that second path, this is like a matrix, red pill versus blue pill situation. Clearly Tobi takes the red pill. I think in a sense that's what makes him a founder. That's what makes him special. I asked Aydin, the founder of Felicis who invested in Shopify back in 2010, what he thought of Tobi when he first met him.
Aydin (09:11):
Tobi was a special person. He was like a Savant. I felt like I was talking to an outlier founder and it's very difficult to explain. I feel one of the real privileges and benefits in my job is once you start finding some of these outlier founders, the way they speak, the way they make decisions, the way they do things does not fit status quo. It's borderline crazy, borderline insane; they do things that make you scratch your head, but somehow it works.
Pablo (09:41):
One of the things that make Tobi very different, I think one of the things that gave him an edge is that he went really deep on problems that he was interested in. He had this innate curiosity. He let that curiosity take him wherever it took him. It's actually through this that he ends up landing earlier. This is not down the snowboard store path. This is before. He lands on this language called Ruby on Rails. He starts working with this language Ruby on Rails for the simple reason that he's interested in it. He actually gets very, very deep. As far as the founding of Ruby on Rails in the early development, he played a really big role in that. This is where things start to come together. His interest in snowboards, in entrepreneurship and in Ruby on Rails come together because he then realizes, wait a second, this language Ruby on Rails is perfect to build a platform that can power this snowboard store that I want to build. I won't get into the technical reasons, but bottom line, Ruby on Rails just makes it easier and faster to build. It's just more scalable right at the outset. There's aspects about database management that just make it really perfectly suited for what Tobi wanted to build, but the bottom line is that Tobi decides to go all in on this. Just on a quick tangent here, Tobi didn't start with Ruby on Rails and then say, oh, this is a really cool tool, really cool new technology, which he understood well, what can I build with it? Tobi started with a problem which was, I really want to sell snowboards online but I can't find a way to build a store. Then backed into, oh, you know what? Ruby on Rails will be a really good solution for that.
Fundamentally, a technology is really just a tool. Until you have a problem, it's really hard to start from a tool and figure out what you could use that for. That's exactly what we see here. Tobi gets to work. Tobi wants to get some done. He gets some done. He spends two and a half months, 16 hour days building this e-commerce store for snowboards. Literally, by the way, he's not thinking about building a platform. He's literally scratching his own itch. We've spoken in other times about different ways you can start an idea. I think here there's four different frameworks we've spoken about. The one that's clearly at play here, scratch your own itch. Tobi has an actual problem and he just goes out to solve it. To do it, he has to go all in 16 hour days, two and a half months.
I mean, that's what it takes to start. He has to go from zero to one, from running to something. I mean, if you just think about the force it takes to get an airplane off the ground versus just to keep it in the air, that's the difference between zero to one and one to X. When you're going zero to one, you need to push extremely hard because the second you take your foot off the pedal, it's a grinding halt
After two and a half months, they launched this snowboard store online called Snow Devil. It does pretty well. They're definitely selling snowboards, they're making money, they're not millionaires by any point, but things are working out. Then what happens, it starts to change the course of history, let's say; is that when spring comes, it's off season. People are not thinking about snowboarding at that time. They've got to figure out how to adjust to that. At the same time as they're having these discussions about, okay, what are we going to do now that we're no longer in season. Tobi starts to get these questions from people who have seen his online store. They're asking him, "Tobi, what platform are you using to build the store?"
"The store looks awesome, it works so well, I wanted to build a store for whatever, what did you use?" Tobi's like, "Well, actually I built it. As he's getting this more and more, they get to this crossroads where they're like, look, there seems to be a lot of interest in the actual tech, in the actual platform, maybe more so than in the snowboards. By the way, the snowboards, that's a tough business. It can't really scale. Scott and Tobi have this discussion about, well, you know what? Maybe the game is in Snow Devil; maybe the game, the real opportunity here is this e-commerce platform. I think just as important as what he did do is what he didn't do. Neither he nor Scott started strategizing from here. They didn't build a full roadmap, they didn't build a deck, they didn't try to predict the future and start thinking backwards from, okay, if we want to be a billion dollar company, here's what we have to do. Literally they're just taking one foot in front of the other. They're in pre-product market fit mode, and so all those like grand visions just don't matter all that much. What really matters is creating and delivering real value, understanding the opportunity, the market size, the tam that comes way later.
Aydin (13:38):
Look, I think this is the biggest mistake, is basically try to estimate correctly what the market size is. You just need to know that if it works, it's going to be big enough. I will tell you funny stories also. When I was at Google, I'm like, oh God, please let this be a billion dollar company. Everybody thinks I'm crazy. Google became a trillion dollar company. I was off by three zeroes, three orders of magnitude. I think the most important thing that people don't realize is that when we look at market size, we're looking at the market size with the existing product. I maybe older; I remember the days of nine, 12 key telephones. Until Apple came up with iPhone that had no keys and an App Store, people thought telecom market is X and Apple took it like 100 times, maybe 1000 times larger. What ends up happening is we look at existing market and we're like, well, because of these incumbents, this is as big as the market gets. What it does not take into consideration is what if, if all of a sudden you had something 10X better, 10X cheaper, and this is really important in terms of product market fit.
Pablo (14:40):
That's exactly what ended up happening here. Shopify just made it so much easier to start an e-commerce store, an e-commerce store of your dream. What you want to build, you can more or less build with Shopify and it's at a click of a button you can be selling globally. He made it so much easier. He drastically lowered the constraints to get selling online, and by doing that, grew the market. That's actually what happened. That's the story of Shopify. Millions of merchants now we're obviously getting a bit ahead of ourself. Backing up, now we're in 2005, all Tobi's really doing at this point is a bit cliche but it's real. I mean, he's literally just listening to customers who are telling him this platform that he's built could solve their problems. They're pulling it out of his hand and he's just letting that market demand pull him into the right direction.
Now the nice thing is that because he started off by scratching his own itch. That was the framework he effectively used to start this idea. The upside of scratching your own itch is that Tobi was just so intimately aware of the pain point. He deeply understood the pain point because it was his own pain point. Tobi has a quote. He said, "I meet Shopify customers and I often ask them, hey, where were you when you got that first order?" Everyone can remember it. That feeling of actually generating orders; you don't get that unless you went through it. When you go through it and you understand the pain points so deeply, you obviously end up building better products.
I'm pretty sure that Tobi actually even to this day or at least for a long time after going public, was still running his own e-commerce stores just to use his own platform and stay really close to his customers. Staying so close to his customers is what ultimately made the product so much better than everything else. That was one thing that Tobi was exceptional at. The other thing that Tobi is excellent at is positioning. I don't mean positioning in the sense of market positioning. I mean it at a broader level. Just to back up for a second, there's this concept that the most successful people are excellent decision makers. That's not untrue, but it misses the point. The most exceptional, most achieving outliers, what they're actually doing is not so much making the best decisions but positioning themselves so that their choices of available decisions are all great. Because you might be the best decision maker, if your back's against the wall and your set of available choices are go from back to worse, even the best decision maker can't do much about that.
The real game here is to put yourself in places where you basically can't lose. Tobi was so good at that. He in a way followed Paul Graham's advice before Paul Graham even gave this advice. Paul Graham, who's the founder of YC, says, "You should learn a lot about things that matter, work on problems that interest you with people you like and respect." The bottom line is that if you're doing that, you're just increasing the odds that good things are going to happen. You are putting yourself in a better and better position. Clearly this is exactly what Tobi was doing. He spends so much time on Ruby on Rails. He spends time following the snowboard dream and things just start to come together and it goes well beyond that. Here's another example. Tobi doesn't decide to go out and just build this huge team. He stays very lean. He brings on Dan Weinand, who is a good friend of his that Tobi had coded with before. He knows him from Germany. He brings him on and it's literally the three of them. It's Scott Lake, it's Dan, and it's Tobi. There's no overhead, there's no misalignment, there's no management, there's no waste on communication, there's no need to go and fundraise and raise big rounds so you can pay all these people, none of that. That is great positioning for that stage of the company because your set of available choices are great. You only need a tiny little bit of money and you have the perfect team to just execute and deliver. He even decides to move in with his wife's parents. By doing that, it might seem like a trivial choice, but if you think about it from a positioning perspective, what you can see is that what Tobi's doing is aligning his life to a startup. He's not putting himself in a position where, oh, if I don't raise $5 million, I won't be able to pay myself a salary and I'll get kicked out because I won't be able to pay my mortgage. He doesn't take on all these burdens that could have made his set of available choices much worse. Instead he lowers his cost of living as much as humanly possible, and that just makes a set of available choices so much better. He didn't need to fundraise. He didn't even have a personal runway. There wasn't this ticking clock. If we don't get this done by then, it's over. That is excellent positioning. It might seem like a detail, but that really speaks to Tobi's ability to constantly put himself in the best position possible.
Aydin (19:24):
One of the things that I've seen at Google is Larry and Sergei did some very unusual things. When we add less than 50 people, they took three people away and said, "Look, you're going to work on crazy research stuff that we might not even need for three years, but if we basically wait, we're never going to have that." Some people in the company were dedicated. Very expensive, very tough decision before we even had revenue to say, look, work on crazy stuff one day we're going to need it, but we cannot start building it the day that we know that we're going to need it. I had that an epiphany that when I showed up in Ottawa, Tobi told me that, hey, they had these amazing engineers and the team was, by the way, less than 50 people or barely 50 people. He said, "I took two of my best engineers and we're building a real time data warehouse." Even when the company had a few millions of revenue and it was very small, Tobi was thinking 15 chess moves ahead.
Pablo (20:19):
Now Dan and Tobi, they're spending time just redeveloping the platform. Tobi had built this e-commerce store to sell snowboards. He hadn't built this e-commerce platform that others could build on top of. He had to obviously rebuild a lot of it and add a bunch of functionality. As they're doing this though, they don't go on pure stealth mode. I think this is very interesting. They use the Snow Devil website as a demo of the Shopify platform and they use it to collect interest. They take 18 months to build out Shopify. In those 18 months, they collect 5,000 email addresses prelaunch. That's excellent validation. He then between this time raises about $200,000 from friends and families. This is 2005. I mean, inflation hasn't changed that much, so $200,000 is not a lot of money, but that's all the money. Because of the way that he had positioned, that was all the money that he truly needed back then.
Frankly, it helped because it set these constraints; made Shopify have to be lean. That culture of leanness really penetrates your entire organization. There was actually Tobi – I just remember listening to Jeff Bezos in the early days of Amazon being so worried about spending that he didn't even Tobi – he was packing on the floor with knee pads because he hadn't even thought about buying a table. One of his employees says, "Hey, you should maybe buy a table, then you can stand up." He does it because he sees ROI. My point is that he's ingraining and Tobi's ingraining this idea of staying lean, of being resourceful, of not overspending. Maybe it's by necessity. I don't know that he was thinking about all this, but the result of raising small rounds, of having small teams is that people think that every dollar matters. That's obviously a great attribute to have in a company.
Now 2006 comes around and they finally built the first MVP. They launched this with a blast email. They have 5,000 emails that they've collected. His MVP, by the way, this minimum viable product was actually pretty sizable. You had a customizable store template, a shopping card, order tracking, inventory, you had a plug and play payment processing; there's a lot of features in there. If you think about it, I mean part of it is you have to think about MVP as the minimum way to deliver that value. If you want people to build a real store on your platform, well the bar is pretty high. It's not the same thing as disappearing images or a newsfeed. You really need people to be able to operate entire businesses on your platform.
I think the other thing though is that Tobi is effectively a product genius. He has a very clear idea of how well the product needs to work. This is another thing that's interesting to think about. He's selling to someone who's also going to be the user. In some instances, you sell to a VP of X and the VP of X might make the buying decision but he or she's not the one who uses the product. In those cases, product might not matter that much. In Shopify, the person who buys the platform, especially in the early days when these are SMBs, is going to be the person who also builds the store. The product really mattered. Having a 10X product is extremely important to get demand.
Aydin (23:38):
You're not going to get a great company that basically takes something that is existing and makes it 5% different or 10% better. It's another thing that I learned from Google is that if you're going to do something and it's going to be meaningful, it needs to be an order of magnitude, better, faster, cheaper. Marginal improvement is not going to create an amazing product and an amazing company. The biggest learning from that is not that Tobi – of course, when you hear it, it sounds obvious, is that the non-obvious aspect of it is that the only way you can make it happen is by doing something that is very unconventional. 10%, 20%, you can push through the margins with a marginal improvement. To be able to get to a 10X better, 10X faster or 10X cheaper, you have to completely change the way you think. You have to redo things in a way that it needs to be almost reimagined. Only that level of innovation is going to result in a great product in a truly enduring great company.
Pablo (24:40):
When they launch, they make the platform free for the first year with a pretty high 3.75% take rate. That was the original business model and made sense just to get people in there but obviously had a bit of a moral hazard. I mean, who signs up to something that's free but takes a big percentage of your sales? Those are, generally speaking, businesses who are high risk. They're just not sure if it's going to work. They don't like the idea of paying upfront, but they don't mind the idea of you taking a big cut if it works. That isn't, let's say, the perfect alignment between Shopify and its customers. They change that and they add a monthly SaaS of about $100 and they lower the take rate. As they do that, the sorts of businesses that start launching on Shopify are better businesses, businesses that are actually going to generally speaking, work out and grow sales. About at this point, this is 2007 or so, they raise $250,000 from an angel investor in Ottawa called John Phillips. At this point, they have a bit more money, not a lot, but they have a bit more money, they have a few hundred accounts or so and they're growing, but it's a slow burn. Like I said, this is not a 10X story. This doesn't just take off. This is a slow burn. They're doing maybe a few $100,000 in revenue plus some percentage of revenue that they're getting. Maybe in total it's about $200,000 in revenue or so. We talk about how companies, the top desa goes from zero to a million in a year. Shopify was not top desa, but it's $100 billion company today because it's a story of consistent growth. The simple way of putting it is that if you 10X for two years, that's 100X, but if you 2X for 10 years, that's 100X. Consistency is going to get you way further and that's exactly what we see with with Shopify. Now again getting ahead of ourselves because at this 2007, Tobi's ambition is still pretty limited. He said that his goal in those early days was for Shopify to be a 20 person company that was super-efficient.
Tobi (26:48):
My intention was to build 20 people company. That's what I wanted to do.
Pablo (29:03):
That was his goal. He now has 12,000 employees. They do $6.5 billion in revenue. He did not have this goal of a unicorn. He just wanted the small efficient company. That's what he was thinking about back then. At the end of the day, what you have is somebody who understood product, understood technology and consistently put themselves in the best position possible. He didn't necessarily predict the rise in e-commerce, but of course he benefited from it.
Aydin (27:19):
One of our big theses is if you are going to invest in a great company, the most important precursor is find a really important market. I always tell people that market is like gravity. You might dislike gravity, but gravity is not going away and you're always going to have to fight it. If you don't start with a great market, it's very difficult to find a great company.
Pablo (27:40):
Then what he did is he just started to amplify that. If you look at it, for example, he worked on partnerships with agency. He would go to an agency that would help you with your website and say, "Look, if you build on Shopify, we'll give you 20% of the lifetime revenue of that account." That obviously started to bring in more customers, but there was true product market fit here. There was a poll and then there's the amplification of that poll. One of the most important pieces when you think about amplifying something that's working is getting the right people on the bus. Frankly, probably one of the most important people that Tobi brought on in the early days is Harley Finkelstein. Harley Finkelstein joined as Chief legal officer and overtime became chief operating officer. And now is the president of Shopify, so he’s been with the company for 14 years. And Harley’s role really was evangelizing and telling the story of Shopify. And the way that Harley joined the company is quite interesting. Harley was one of the first users of Shopify. Harley had this T-shirt business and at one point he basically meets Tobi in Ottawa at a coffee shop and learns a bit of the platform. Decides to use the Shopify platform to make his business fully virtual. And that’s how learns about it and he grows his business and that’s happening on the side. And John Philips who was the main angle for Shopify. Tells Tobi that “I think you got a lot of people on your team that are like you and you should hire someone different”. And that’s how Tobi ends up bringing Harley into the equation. And they become that Yin and Yang, if Tobi is more the product type introverted type and Harley is more the extroverted type.
I think between Tobi and Harley, the vision just kept getting bigger and bigger. Obviously, they have this market pull that just keeps pulling them. Then now we're end of 2009, they're doing $2.5 million in revenue up from a million dollars the year before. They're a cashflow positive company, they're doing well, but they start thinking about what they need to do to go even bigger. One of the things that Harley and Tobi start to think about is maybe going out and raising some real money, not a few $100,000 but a few million dollars. Before they do that, they want to understand if they can actually use that capital to drive real growth. They don't want to raise capital for the hype, for the PR, they don't want to do it just for the sake of it. The idea is to raise capital in order to grow faster.
What they want to do first and foremost is to see do they actually have growth levers? Do they have places where they can spend that capital and spend a dollar and get five out thing. What they do is they take $50,000 and they decide to run five different growth tests right at $10,000 each. All of them work. All of them produce good results. They do Google ad words, they do an ebook, they do a bunch of different things, but they all produce a pretty clear ROI. By 2009, it's clear that they have engines that they can lean into in order to grow faster. Another thing that actually is quite interesting that they did back in 2010 is that they launched what became known as the build a business competition.
The story is that Tobi had met Tim Ferris a few years back, 2008, 2009, Tim Ferris even back then was a big deal. He'd put out the book 4-Hour Workweek, which became a bestseller and so on. He'd met Tobi at a conference. Tim Ferriss had heard about Shopify because obviously his whole thing is build these simple online businesses that produce cash flow and a lot of readers, a lot of people had told Tim that the best platform to use for e-commerce was Shopify. He had heard about Shopify, he meets Tobi, they start talking, and effectively Tim becomes an advisor to Shopify. In one of these advisor calls, Tobi's telling him that he wants to do different things from a PR perspective, from a marketing perspective.
One of these ideas is a build a business competition. Tobi's idea is, listen, let's run a competition where people build businesses on Shopify and the winner wins a MacBook. Tim is like, "This is a pretty good idea but nobody cares about a MacBook. You got to change that up. We got to get more aggressive." After some back and forth Tobi's like, "Okay, fine, what about a $10,000 prize, so the winner gets $10,000 cash?" Tim again pushes back and he's like, "Look, 10,000, you're just not thinking big enough. Add a zero to that." After some convincing, Tobi comes around and says, "Okay, fine, let's do it, $100,000, build a business competition." At this point, Shopify hadn't raised the series A. They had only raised a few $100,000 in total.
$100,000 back then was all of the money that they had in their balance sheet. That was all the cash that they had. They put it all on the line to launch this build a business competition. I think it's interesting because Tobi is seen as this product tech maybe introvert type but he is clearly a bold risk taker. He's willing to take big risks when they make real sense. In this case, it played out exceptionally well because what happened was by going with a really big price of $100,000, it was actually the biggest business competition ever at the time. He got so much free PR as a result because all the media outlets wanted to write about it, not specifically to promote Shopify but because $100,000 cash grant prize for the winner of a competition, that's a story in of itself.
He created this media story and got tons of pre-PR, which led to the business competition really working because a lot of people signed up, used Shopify in order to build these businesses. Actually, he got 1,350 new businesses created on Shopify through this build a business competition. That generated $3.5 million in gross sales. By the way, if you just do the quick math, at this point, they're charging about $100 a month. 1350 new businesses, that's $135,000 in month one. The payback period of this is negative because the way it worked was people have six months to build a business and the biggest business gets $100,000 on month six. By that point, he had over 1,000 businesses using Shopify, presumably for those six months. That's $600,000 in cash that he generated from free PR that he caught because the headline was so powerful. Then he just used a little bit of that money that he got from those businesses ahead of time to give to the biggest business that won that competition.
That was an exceptional PR marketing play that worked really well because it was simple and it resonated with his core audience. These are entrepreneurs. Most of the time they want to earn, they want to make money, and so when you offer them up to $100,000 if they build the best business, that's an extremely attractive price. That really clicked together and worked super well. Anyways, after trying out all these different tactics, it was clear they had these levers. Tobi and Harley decide to go out and raise a series A. They're in Ottawa; that's where Shopify's based. Aydin from Felicis is on the other side of the continent in California. Shopify was not really a well-known entity. I asked Aydin how the round came together in 2010.
Aydin (34:42):
That's a really funny story. I was actually tracking another company. I was in Vegas. I believe the company was called 37signals. Things didn't go that well. They were very anti VC. I went back to my hotel room in defeat thinking, oh great, I missed this fantastic company. Again, I don't know. It's like the immigrant hustle. We had a new fund and we need to find big winners. One of the theses that we had was, hey, commerce is taking off and there's going to be a big commerce platform. Then I found this blog post with Tobi and I'm like, what is this company Shopify? I'm very intrigued; sounded very interesting. Then I basically nonstop trying to connect with Tobi, I think it was maybe the seventh or eighth intro request that he replied to. Maybe he's like, okay, if I don't reply, this crazy Turkish guy from California is going to keep emailing me until he somehow gets through.
He did come up with a test. He is like, “Look, it's January, it's one of the coldest days in Ottawa, are you willing to get on a plane and come here?” I did and just met him and Harley. It was one of the coolest conversations I ever had. Just based on that first meeting in Canada in Ottawa a couple months after me trying to break into the company, was an amazing conversation and became the foundation of us getting involved in their series A. Look, some investors are in their ivory tower. I remember this very vividly in the Shopify example. I'm not going to name names, but I know Tobi reached out to some VCs in Silicon Valley on Sandhill Road, and they had this imperious attitude of Tobi, like you're in Ottawa, there's no way you can build a company here, you need to come to the Bay Area. Tobi is like, "Dude, I live in Ottawa. I'm going to move to Bay Area."
I think this is one of these things that we always underestimate the incumbent and they told Tobi that it can't be done let alone in a place like Ottawa. Why am I telling you this? I think early on when everybody's also telling the founders no, when you show up and like, wow, this investor took the effort to ask eight different people to get an intro is willing to get on a plane and freezing cold. By the way, I'm married to a Canadian. I had to do the same thing to meet her father, buy my two coats, show up when it's negative 20 degrees out there. It's again, true love. It was one of those things why am I telling you this that founders are also like, you know what? This investor truly cares about my company.
Then when you are also like, hey, I really believe in what you're doing. We talk about product market fit, and sometimes I think for founders it's like, is this investor the right fit for me? Do they really believe in me? I think that's the misunderstood thing. A lot of people will say, you know what? I'm starting in VC, I'm going to copy a larger firm and I'm going to just go after the obvious companies, and then when a hard company presents itself, they hit a wall. Immediate reaction is this is never going to work, I'm going to give up, and that's actually when the game really begins.
Pablo (37:55):
In 2010, they raise a $7 million series A led by Bessemer with participation from Felicis. You can actually go online and read Bessemer's memo and how they thought about this investment. They had a lot to say about Shopify and obviously it's very positive. That's why they made the investment. They love the product. They love the team. One of the pieces that to me was really interesting was their exit analysis. This is this chart that VCs sometimes do to understand what the probabilities are of the company growing to different levels and what the outcomes would be if they did. I'm going through this, and so for example, they're saying there's a 30% probability that Shopify ends up exiting for $50 million. There's another 30% probability that Shopify ends up exiting for $100 million. The absolute peak that Bessemer thought of at the time of the investment was that Shopify might, in the best of cases, become a $400 million company and they assigned a 3% probability to that outcome. Shopify today is over $100 billion. They were off by about three orders of magnitude. This is not to say anything bad about Bessemer. This is to say the reality of market forecasting and just how impossible it is, even in the cases where you're right.
Aydin (39:20):
It feels like a joke. I mean, I think it was a $25 million valuation, five million investment. I don't even know how we made it to the mix. I think we almost didn't, but we somehow stuck in there. The main point is even when the company was small, when things were not obvious, Tobi was thinking about crazy things. I feel like in some ways I'm very grateful and lucky and fortunate to have worked for other outlier technical founders like Larry Page at Google, where he also did a lot of things that was not obvious. In hindsight, brilliant, at the moment, not obvious, a little crazy outlier moves that nobody Tobi – it was not conventional. It was very unconventional. It gave me the feel with the approach to a huge market in an unconventional way and doing unconventional things somehow in my mind.
I'm like, look, these people are underestimated just because in Ottawa everybody's telling them they can't do it. Somehow in my gut, I felt like this was the team to back. I felt that Shopify decently had a chance to become a billion dollar company. I did not want to fall into the trap of estimating the market size. Instead, we had a different philosophy, which is, look, commerce market, as long as there will be shops in the world, there is going to be a need for storefronts. It's just that we had physical storefronts. Now we need the online storefronts. Then you look at it honestly, if we talk about Shopify or some of our other hits like Canva or Notion, it's like you take a very complex product and look, if the product is really complex, fewer people are going to use it and you're charging a high price, you're also limiting the market.
If it was much cheaper, much easier to use, there might be ten hundred thousand times more people using it. That was our thinking that if you have an online store that is much better than every other alternative and it's subscription and not like this huge amount of money, all of a sudden market could be different than what we expected. The question is, do we have the fate that this is the company to do it? That's where some of the outlier thinking, some of this 10 chest move ahead strategy that Tobi and Harley had, that's what strike me as, okay, if they're already thinking about stuff like this, I have faith that they're going to figure it out.
Pablo (41:48):
What Bessemer and Felicis saw here was really just a very strong team with a very strong founder and exceptionally clear product market fit in a market that was not clear yet how big it could be but that potentially could be big. What happened after this investment is the company just didn't stop doubling. They went from zero in 2006 to about 200,000 in 2007, about a million in 2008, 2.5 million in 2009, and then they just doubled and doubled and doubled until they hit $6.5 billion in revenue today. Obviously today they're not doubling anymore but they're still growing like 20% or so per year, which is pretty crazy at those numbers. Overall, big picture, they grew 1200X in 13 years. One of the reasons that they were able to double so consistently year after year is that they just kept innovating. They kept adding new products and just kept expanding.
Aydin (49:19):
I think if you looked at the distribution of the revenue byproduct underneath, it was choppy and it was unpredictable but then you see that it was genius that every time they added a new product and products, over time, that resulted in a more predictable, more consistent, smoother growth curve. That was another brilliance. Another thing that was very unique is that they could have taken a lot more from the market, charged the higher price, changed their pricing, but they opted for the long term. They on purpose charge a very low price for the product.
Whenever they added a product, the way that they priced it was based on ROI for the customer. They made things in a way that if your usage went up, the price went down or you got into a different tier. They could easily have done something else under VC pressure to maximize short-term gains. Why am I telling this is that it's all these hard decisions similar to Tobi – again, I know we're talking about Shopify but not Apple but there is a great analogy there. I'm sure when they were launching iPhone, they're like, dude, what are you doing? We have this thing called iPod. Why are we doing this iPhone? We're going to kill this cash cow which ended up being like 100 times bigger. It's not an easy decision when you're like, well, there is easy money here, we're going to ignore it but we're going to do something hard and it's going to take longer to make returns. It's those decisions that then set it up to be that much bigger company.
Pablo (44:03):
The last thing I'll mention about Shopify. I think it's especially relevant today now that capital efficiency is all the rage, is that this company was exceptionally lean. From the time that they started to the time they went public, they raised $100 million in total. When they went public, they had $97 million on their balance sheet. The net cash to use in all that time was just $3 million. It was incredibly capital efficient. Tobi and his team, despite being so capital efficient, kept raising every 12 to 18 months. They raised an A and then a B, and then a series C before going public. Tobi wanted optionality, which is basically the result of great positioning. We've talked about positioning this whole time, but when you make the right moves ahead of time, you just end up in great positions. When you do that, you have way more options. They could have not raised and then they would've held onto a few more percentage points but what if things didn't go perfectly right? On the flip side, what if there was a big opportunity that they needed to lean into? He didn't need the money, but the opportunity was so big that it made sense for him and the Shopify team to trade cash for a little more dilution.
Pablo (53:19):
I just gave you content that you like so much. You actually listened to the end. Guess what? You didn't pay a single dollar. Not only that, I didn't even put any ads in your face, so you just got a bunch of content for free. Now that I've delivered that value, I'm asking for something in return. Open your app, open Apple Podcasts, open Spotify, open whatever app you use to listen to this and hit that Follow button. It's actually going to help you because it's going to help you make sure you don't miss out on the next episode, which you like so much that you listen to the whole thing.