The Shopify IPO

Ben and David head north of the border to Ottawa, Canada to cover perhaps one of the greatest IPO success stories of the past 5 years, Shopify. From humble beginnings as a “lifestyle business” hawking hipster snowboard gear online to now routinely mentioned in the same breath as Amazon, the tale of Shopify and its incredible CEO Tobi Lütke’s ascent is not one to miss! Editor's note: Shopify actually powered $41b of sales, not $14b, in 2018, as discussed toward the end of the episode. $14b was the fourth-quarter number. While this changes the analysis of value captured at the end of the episode (Shopify only captures 2.5% of merchant sales as their own revenue, not 7%, which is admittedly very different), it doesn’t change overall sentiment on the company discussed in the episode. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26Links: https://www.snowdevil.cahttps://www.jadedpixel.comCitron’s “research” report: https://citronresearch.com/citron-exposes-the-dark-side-of-shopify/Carve Outs: Ben: Moment smartphone camera lenses: https://www.shopmoment.comDavid: Quoteapro engineering and head of product roles, Bill Gurley on Invest like the Best: http://investorfieldguide.com/gurley/ More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  Dan, you ready?

• 0:01Ben Gilbert?

  She's always ready.

• 0:02David Rosenthal?

  Always ready. She's got her own chair here now. She hopped out of my lap. She's just sitting in the chair.

• 0:10Ben Gilbert?

  All right, let's get started.

• 0:22Ben Gilbert?

  Welcome to season five, episode two of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert, and I am the co-founder of Pioneer Square Labs, a startup studio and early-stage venture fund in Seattle.

• 0:37David Rosenthal?

  And I'm David Rosenthal, and I am a general partner at Wave Capital, an early-stage venture capital firm that focuses on marketplaces based in San Francisco.

• 0:47Ben Gilbert?

  And we are your hosts. Today, we are doing an episode that we have gotten a ton of requests for, the Shopify IPO. Now, here's a few fun things to know about Shopify before we dive in today. The company IPO'd in May of 2015 with a market cap of $1.3 billion. In the ensuing four years, it has 27x'd that, and today has a market cap of $35 billion.

• 1:13David Rosenthal?

  Not bad for a pivot.

• 1:15Ben Gilbert?

  No, no, no. 218 million people have bought from a store powered by Shopify, the vast, vast majority of which do not have any awareness that they did that. And that is equivalent to almost all adults in the United States. Also not bad. The founder and CEO, Tobi Lutka, is an absolutely fascinating character that I can't wait to dive in on the history and facts here. To give you a quick sense before we dive in, he tweeted last year, "I firmly believe that I learned more about building businesses from playing StarCraft than I've learned from business books."

• 1:50David Rosenthal?

  He might be right. He might be right. Having read a lot of business books and played a lot of StarCraft in my day. Yeah, I was gonna say.

• 1:58Ben Gilbert?

  All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a sadic PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 2:17David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 2:38Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 3:00David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 3:18Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. If you like the show, you should come join the 2,500 person and growing Acquired fans that are hanging out in our Slack at acquired.fm. And if you want more Acquired than just this, you should consider becoming an Acquired Limited Partner. David and I

• 4:00Ben Gilbert?

  release about one LP show for every main show in addition, and we use those episodes to go deeper on company building topics. Now, I was really excited about how our last episode turned out, where we dove into Series A and how it is a way different thing than it used to be, how valuations are very different today than what they were, sort of what's market, what's not market, what determines market, how did we end up here? And all of this sort of tying into what we think the next major technology wave will be and when it will get here. So if you're a founder of a startup or a startup employee, this is one definitely not to miss. You can get started with a seven day free trial and listen right here in the podcast player of your choice by clicking the link in the

• 4:44Ben Gilbert?

  show notes or going to glow.fm/acquired. All right, David, I think we are ready to hit it.

• 4:50David Rosenthal?

  Are we ready to do this?

• 4:52Ben Gilbert?

  Let's do it.

• 4:53David Rosenthal?

  All right, let's blast off. So Ben, as you alluded to, you cannot talk about Shopify without talking about its co-founder and CEO, not its CEO at founding, but co-founder and now CEO Tobias Lutke. So who is Toby? Toby lives in Ottawa, Canada now with his wife and his children, because that is where Shopify is headquartered, where their world headquarters are and where he founded, co-founded the company. However, he was not born there. He, I believe he's a naturalized Canadian now. I think he's a Canadian citizen, but he was born-

• 5:32Ben Gilbert?

  But he's German, right?

• 5:33David Rosenthal?

  In Germany. He was born in Koblenz, Germany, which is a town about halfway between Cologne and Frankfurt. Toby, when he was growing up, he was quite the precocious young man. His parents gave him a Schneider CPC when he was six years old and a Schneider CPC.

• 5:55Ben Gilbert?

  Yeah, what is that?

• 5:57David Rosenthal?

  Was a computer. It was, to the best of my understanding, roughly like kind of the German equivalent of the Commodore 64 that helps place things. So this would have been 1986, Toby received this and he was enamored. And he was enamored with two things about it. One was that he could program it and hack it and build things for it. And he could take it apart and put it back together and add hardware to it. But the other thing he was really enamored by, you already foreshadowed Ben, was he could play video games on it. And so he started playing a lot of video games on his Schneider CPC and presumably future upgraded computers as

• 6:37David Rosenthal?

  well. So much so that by the time he was kind of 11 or 12, he was taking the games that he was playing on there and he was hacking into the code and he was rewriting the games. I don't know if he was writing to cheat or make it easier or build his own levels or just because like he was like, it was like Minecraft before Minecraft. In another world, he could have been, he could have been Notch.

• 6:57Ben Gilbert?

  And he has a lot in common with Notch 2.

• 7:00David Rosenthal?

  Totally, totally. Well, we're gonna have to do a Minecraft episode at some point here. He was so into it that his parents, you know, who were not techies, they were like, this is weird. They actually took him to a psychologist to like have his behavior analyzed. Like, is this normal? And it turns out, no, he just like, he's totally normal. He just really loves computers and video games.

• 7:19Ben Gilbert?

  This is like a Dilbert comic. Like, he's exhibiting signs of engineer. Should we be concerned?

• 7:24David Rosenthal?

  Exactly. And nobody is more engineer than Toby, as we shall see, or at least at this stage of his life. And Ben, as you alluded to, he still talks today about how, you know, gaming is great training for entrepreneurship. You have to do resource management. You know, you're playing against opponents. You're in this dynamic world that's evolving, especially multiplayer online games.

• 7:41Ben Gilbert?

  Making real time decisions.

• 7:43David Rosenthal?

  Yeah. And, you know, he has this great line in there. And one thing that becomes immediately evident about Toby, when you start studying him is he's highly intelligent. He has this great line in, I think it's on the Knowledge Project podcast where he says, you know, people get upset, they got upset about that tweet about Starcraft. People get upset, parents get upset if their kids are playing too many video games. Think about it this way. Would you be upset if your kid were playing chess all the time? Like, would you be, if I had tweeted about that, would you be like vilifying me? And really, what's the difference here?

• 8:12Ben Gilbert?

  It should be known, the tweet, I went to look it up, been prepped for this episode, has been deleted.

• 8:16David Rosenthal?

  Oh, interesting, interesting.

• 8:18Ben Gilbert?

  Yeah.

• 8:19David Rosenthal?

  Maybe he's changed his team. Maybe his kids were playing too many video games. That could be.

• 8:24David Rosenthal?

  Anyway, we digress. So what does Toby do? Is he, he's growing up, you know, he's really into computers. At 17, he does something very different from what a highly intelligent 17 year old would do in, in the US or in Canada, or in many other countries. Germany at the time has this pretty cool program to, I think the goal of which is to increase the number of programmers in the country, computer programmers. They allow kids to drop out of high school, not go to college and become apprentices to become programmers. And the idea is it's like, just like literally back to the middle ages. Like you're going to start as a trainee and then an apprentice, and then you're going to become a journeyman, and then you're going to become a, you know, programmer, and then you can become a, a master programmer.

• 9:08David Rosenthal?

  And so Toby drops out of high school, joins this, uh, this formal program, uh, through, I believe through the, through the German government and becomes a programmer, trainee, and he apprentices with Siemens, the huge technology company, uh, manufacturing and technology company in Germany. He grows up, he, he, you know, becomes a, a great programmer, but he's programming in Java, uh, which is, you know, for all of our engineer listeners will, will smile and laugh here. I learned to program in Java. You probably did, did you?

• 9:37Ben Gilbert?

  Dude, the AP Computer Science test was in Java.

• 9:39David Rosenthal?

  Totally, totally. And, you know, Toby's like, eh, all right.

• 9:43Ben Gilbert?

  Also, no, I learned to program in PHP, like let's.

• 9:45David Rosenthal?

  Really? Oh, that's awesome.

• 9:47Ben Gilbert?

  Of course, gotta make websites.

• 9:49David Rosenthal?

  See, I actually learned to program like in, uh, in college, like in actual computer science courses and, uh, I should have started just making websites earlier. Anyway, so he felt like it was pretty restrictive, but he still like loved programming. And as he gets a little older, you know, he's making money. He, he didn't go to college, he's, he's working. He develops another passion. He has some disposable income. He gets really into snowboarding. And, uh, this is, uh, trust us listeners, all of this is going to become.

• 10:15Ben Gilbert?

  It's gonna get super relevant.

• 10:16David Rosenthal?

  Very relevant, literally everything we're talking about here is going to become very relevant in just a minute. He's in his early twenties at this point, you know, like he's working as a programmer at Siemens and other companies, like making good income. Uh, he loves snowboarding. He goes to the best place in the world to go snowboarding and that's a place, uh, I've been to many times, I'm sure you probably have, uh, too been. I don't think we've been together, which is Whistler, Canada, in British Columbia.

• 10:40Ben Gilbert?

  I did tear an ACL there, so I have, I have mixed feelings as much as I love, love Whistler. Fun fact on tech nerd trivia, Whistler was the code name for Windows XP.

• 10:51David Rosenthal?

  Oh, no way.

• 10:52Ben Gilbert?

  Yeah.

• 10:53David Rosenthal?

  That's pretty cool. That's, yeah. So if you haven't been to Whistler and you are a skier or a snowboarder, you gotta go. It's like the best place in the world. So Toby's there on a snowboarding trip in his early twenties, and he meets a girl there, a woman named Fiona McKean. It's, you know, kind of love at first sight, budding romance. And unclear if this happens on the trip or, or later, he persuades her to move to Germany and come live with him. She's Canadian and she, she moves over, lives with him in Germany for a year.

• 11:24Ben Gilbert?

  Man.

• 11:25David Rosenthal?

  And.

• 11:25Ben Gilbert?

  Persuasive. It's like when we talk about on the LP show, like, you know, founders have to learn to sell because your job is always selling. And can you be compelling not only to pitch, but for, for hiring people? I can't imagine a more test of how compelling can you be than you should move to Germany with me?

• 11:40David Rosenthal?

  You should move to Germany for me. Well, it turns out that Toby's not quite ready to be CEO yet though, because he, he might've won the short game, but lost the long game here because she says, okay, I'm going to move over. She moves over for a year and then she persuades him to move back to her hometown of Ottawa, Canada. Ottawa, of course, in the province of Ontario is the capital of Canada, beautiful capital of Canada. So Toby moves with Fiona to Ottawa and he's still working for a smaller German company at this point, which does something really exciting. They make backend accounting software for companies. But Toby can, he's a great programmer. They let him work remotely. Shortly after he moves though, in 2004, this company goes bankrupt.

• 12:24David Rosenthal?

  And so Toby has now moved across the world to be with his soon to be wife and finds himself out of a job in Ottawa, Canada. So what does he do? He says, well, you know, that's all right. I didn't really like programming, financial accounting software in Java. Maybe I can like find some other way to support myself and Fiona, make, make some money here and, you know, maybe I can use programming, do it on the side. But like, really, I just want to kind of like make enough money that I can go snowboarding a lot. So he's kicking around ideas and he teams up with, he meets through Fiona, a family friend of theirs named Scott Lake. Now Scott is very different from Toby.

• 13:06David Rosenthal?

  He is not a programmer. He was a jock in high school. He's super outgoing. Unclear if he played Starcraft or not. Didn't find that in the research. But he also loves snowboarding and he had worked on a few quote unquote startups in town in Ottawa, not like tech startups, but more lifestyle businesses. And he also kind of had the itch to do this on his own.

• 13:27Ben Gilbert?

  You know what Toby's sort of doing in his free time at this point in sort of the programming world?

• 13:32David Rosenthal?

  Not yet.

• 13:33Ben Gilbert?

  Catch that?

• 13:33David Rosenthal?

  Not yet.

• 13:34Ben Gilbert?

  Okay.

• 13:35David Rosenthal?

  This is about to come up. So they decide like, okay, yeah, this is great. We love snowboarding. We're going to keep going together. Like let's, let's throw a small, you know, business together that we can do to fund our habit. Maybe what we should do, it's now 2004, web 2.0 is starting to become a thing. People are becoming more comfortable buying things online. Amazon's been a public company for a while now. What if we just started a website to sell snowboarding gear? Of course, you know, because we're really like elitist about this, like we would never, we would never ride on like mass market, you know, stuff that you could go buy at Sports Authority or something. Let's use the power of the internet. Let's find like really boutique, like artisanal gear and only sell that online.

• 14:17David Rosenthal?

  Like, perfect. Let's do it. They, they get together and Toby codes up a website. They call it snowdevil.ca. You can go there. We'll link to it in the show notes. It is still up. And if you read the about us section, it says, "Snowdevil is not your typical snowboard store. Instead, Snowdevil is a partnership among two riders who are only interested in selling boards and findings that they love to ride on. Nothing else."

• 14:42David Rosenthal?

  "If you want big brands like Burton or K2, you should try Walmart. If you want high-end, top-quality brands like Never Summer, Niddecker, Tech9 and others, you should try us. Yours truly, Scott and Toby." And then they list their personal gear setups for their snowboards.

• 14:57Ben Gilbert?

  Now, the funny thing, if you go to this website is they talk a big talk about how refined their taste is, but the website looks like absolute crap by today's standards. It's like, there's some mismatch there when you're looking at it. But, you know, 2004 is a very different time on the web.

• 15:11David Rosenthal?

  Yeah, totally. Well, and we're, so why do we tell this whole story? You know, two reasons. One, because it's super fun and just part of the lore of what becomes Shopify here in a sec. But also, it's just like, kind of amazing, this whole like ethos, this hipster ethos of like, we're going to curate like, the best artisanal like, you know, brands and sell the like, what is Shopify powering today? You know? All of these D to C brands and Instagram commerce and like, it all comes back to this same kind of ethos. They were way ahead of the curve here. So, in the process of setting this up, Toby, of course, is CTO of the company. Scott is CEO of newly formed Snow Devil. Toby is in charge of putting the website up and he gets it up.

• 15:54David Rosenthal?

  Like, he's a great programmer, but it's like, it's super hard. He has to go find all of these various tools to like, actually get like, a shopping cart, checkout and inventory and manage everything. And he's using tools like OS Commerce and Yahoo Stores and like, Miva and they're like, this is just not, he says, "All those systems made my skin crawl." This is a quote from him, because of how bad they were. And just at that very moment, as he's putting the site up, he gets an instant message one day.

• 16:23Ben Gilbert?

  And real quick, before we dive into this chapter, do you know the history of Yahoo Stores, David?

• 16:29David Rosenthal?

  No, I don't.

• 16:30Ben Gilbert?

  So Yahoo made an acquisition of a company in 1998 for $49 million that became Yahoo Stores. Do you know what that company was?

• 16:40David Rosenthal?

  Oh, was that PG's company?

• 16:42Ben Gilbert?

  It was VioWeb.

• 16:43David Rosenthal?

  VioWeb, oh my god. Wow. Of course, Paul Graham of, who would go on to found Y Combinator. Man, I didn't realize B O Web became Yahoo Stores.

• 16:53Ben Gilbert?

  Yep. Like many acquired episodes, the internet was a very small place when all this was getting going.

• 16:59David Rosenthal?

  Oh, my goodness. It's just crazy. It's just crazy. Well, so get this, Toby gets a gets an I M from a friend who's also a programmer right around this time in 2004 and says like, hey, man, I found out about this new web development framework. You should really check it out. It's called Ruby on Rails. Like, it's just getting started. There's this guy, David Heinemeier Hansen. He works at this place called 37 Signals. They make this thing called Basecamp. It's like pretty cool software and they make it in this this really obscure programming language called Ruby that, but they've built this framework for using it for the web. It's called Ruby on Rails. You should check it out.

• 17:37Ben Gilbert?

  These guys are like, what, too good for PHP?

• 17:39David Rosenthal?

  Yeah.

• 17:42David Rosenthal?

  Ben, if only you had started coding in Rails, then, you know, maybe there would be no acquired. You too could be CEO of a $35 billion public company right now. So Toby says like, okay, cool. Like, I'm gonna check it out. So he starts a side project, just hacking on Rails and he does what many, you know, hackers were doing in these days. He decides he's gonna build a blogging system. So he builds an open source blogging content management system for the web. He calls it Typo and it like kind of blows up. It gets over 10,000 installs of people running their blogs, hosting their blogs using Typo. And Toby becomes pretty well known. He gets in touch. He meets the 37 Signals guys. Yeah, he meets David. He meets Jason.

• 18:25David Rosenthal?

  And he ends up joining them, not joining 37 Signals, but he becomes a core contributor to the Rails open source framework.

• 18:33Ben Gilbert?

  The funny thing is, if you go to Toby's LinkedIn, this is still like in his about is like three lines. And one of the lines is about the creator of the Typo weblog engine. It's just great that like, you know, this guy's running a $35 billion company and that's still a big pride point.

• 18:49David Rosenthal?

  Yep. I mean, that's Toby. So of course, what does he do next? As you can imagine, he's fully enamored of the Rails framework and he's just been through this terrible experience. Setting up Snow Devil, the backend for Snow Devil, he says like, well, shoot, I'm just going to rewrite all of that from scratch and do it in Rails. And I bet I can get, rebuild our store and not use this crappy software that Paul Graham wrote for, and have it work pretty fast. So he does. And within two months, he's completely written the backend for Snow Devil and they have their own custom commerce engine that he's built in Rails that is powering the store. And it's like way better than what he had before. Somehow he and Scott start talking about this and they're like, wait a minute, we've

• 19:33David Rosenthal?

  got this snowboard site. You just built this thing in Rails that you can easily plug in and do the backend. Like this was hard for us. Maybe, maybe we can make it even better lifestyle business if instead of selling snowboards, we sold software. Better margins. Yeah, you know, we don't have to deal with shipping. Well, different kind of shipping. So yeah, they do that. And they're like, okay, let's shelve the, the snowboarding project. We can use it as a demo site, which it still is today for Shopify and start working on this software. So they spend a year and a half working on the software. Toby is a perfectionist, wants to make sure it's right. And of course, a big part of that is actually commercializing this. You know, it's one thing to build your own software for your own site.

• 20:16David Rosenthal?

  It's another thing to make it plug and play for commercial availability. And they have some money saved up from their sales at Snow Devil. Toby and Fiona move in with her parents. They raise about $200,000, mostly from, from Fiona's dad and from Toby's uncle, who himself was an entrepreneur who had immigrated to Canada. They use that money and they bring on a programmer that Toby knew named Daniel Wijnand. And he joins the team and he's considered a third co-founder of the company now. And he ends up taking over design. He's a programmer, but he's really interested in design and he helps design this product and make it like really easy to use and install and has a huge, huge contribution to this first version of the product.

• 20:59David Rosenthal?

  And, and I believe still to this day, I believe in interviews Toby has said he has veto power on any shipping, any feature of that is, that is. Shopify.

• 21:11Ben Gilbert?

  That's power. By the way, they're, they're doing all of this. So in 2004, they had created a Canadian entity to sell their snowboards. They're doing all of this new software business still in the same Canadian entity as the, uh, the, the snowboard business. So talk about a wild, like, actual pivot, not like shut that down, do this other thing. Like, it's in the same entity.

• 21:30David Rosenthal?

  Yeah, it's at the same entity. So when they're finally ready to release the, the, the software in 2006, they need a name for it. So they do the natural thing at the time. Toby heads on over to GoDaddy's domain name generator. Plugs in, I need a name and comes up with jadedpixel.com. Really, really rolls off the tongue, really catchy. And if you go to jadedpixel.com today, uh, we'll link to it in the show notes. It redirects to Toby's LinkedIn profile.

• 22:00Ben Gilbert?

  Yes. So then in, in 2006, they would formally rename the company from its sort of nameless Canada LTD. It was entity 4261607, uh, to formally in 2006, call it Jaded Pixel Inc.

• 22:15David Rosenthal?

  Yeah, Jaded Pixel Inc. Now fortunately, Scott at this point makes a major contribution to this budding software company, uh, right before they launched. And, um, and he's like, yeah, I don't know about this Jaded Pixel thing as the product name. Uh, maybe, maybe we should reconsider that. And, uh, mercifully, he comes up with Shopify. We're shopping and we're simplified. So simplify shopping Shopify.

• 22:42Ben Gilbert?

  I'm so jealous when you could just like do that and that domain was available.

• 22:46David Rosenthal?

  I know. Man, the mid 2000s were really, really a good time to build web companies.

• 22:52Ben Gilbert?

  It's amazing this didn't become shopper or like something with no vowel somewhere.

• 22:56David Rosenthal?

  Yeah. And amazingly, the domain was available. Uh, Toby talks about this. They just, they just registered on GoDaddy. They didn't have to buy it from anybody. They didn't have to do it. It was just there. Uh, man, times have changed. So the initial feature set that they ship with is pretty basic and they're inspired by, you know, kind of the, the whole rails kind of design philosophy of like minimalist, functional, uh,

• 23:20David Rosenthal?

  But have everything happen on the web in the browser. And so with the first version of Shopify, you can have a fully customizable store template. You have a shopping cart, you can track orders, you can get orders delivered to you as a merchant via an RSS feed. You have automated inventory organization and you also have the ability to plug in payment processing. So they're not doing payment processing natively at this point, but of course, taking payments is super important. And they make it really easy to just plug in PayPal or any other third party credit card processor that you'd like right there on your website. Pretty cool. Yeah, pretty cool and a far, far cry in terms of ease of use and ability to install and get set up.

• 24:04David Rosenthal?

  Then working with all of the huge, big software packages that Toby had to do when he was first setting up Snowdevil. So they needed a business model for this new software that they were going to sell or offer online. I think Chris Anderson from Wired hadn't yet written the book on freemium. I think that came out a couple of years later, but you know, percolating around in these rails kind of internet communities is this idea of like free software. And freemium and building business models around that. And they think like, okay, yeah, like, great, let's make this freemium and we should have, you know, no barrier to entry.

• 24:43David Rosenthal?

  Anybody can set up a store and just start selling and then we'll monetize with, we'll just take a cut of the merchants transactions as they sell. And it'll be really cool incentives will be aligned, it'll be great. Well, it turns out incentives weren't quite so aligned with that. And fortunately they figured this out pretty quickly. People started trying it and thinking like, oh, this is super cool. I can get set up, but then pretty quickly they realize either they start selling a lot and then they're like, wait a minute. I'm paying a lot of money to Shopify here because their fees are just scaling linearly with my sales. Or probably what's even more likely is people are making a decision about what platform they're going to use. And of course, everybody's very optimistic. When I sell my million things.

• 25:24David Rosenthal?

  Oh yeah, when I have a hundred million dollars in sales, I'm not going to want to pay Shopify, you know, $10 million a year. Whatever they were charging. And so the business model is really holding them back here. They figured that out and they decide, okay, we gotta, we gotta switch things up. How are we gonna do this instead? What if we, you know, SaaS is like sort of barely becoming a thing at this point. Salesforce, of course, exists. What if we look at this kind of SaaS idea? And instead of, instead of charging on a usage basis, what if we just make it like really, really simple? You know, we'll charge 29 bucks a month and you get a full featured commerce package in a box from us. It turns out that was pretty magical.

• 26:08Ben Gilbert?

  You know, obviously the reason that this worked well is because there are things that you can charge more for as people develop bigger and bigger businesses. It's not like every single, you know, I don't know the biggest business on Shopify, but there's enormous businesses on Shopify. They're not just paying $29 a month.

• 26:24David Rosenthal?

  I mean, at this point, Unilever is on Shopify, uh, Google is on Shopify, like, uh, enormous, enormous companies are on Shopify. But if Shopify were taking 10% of their revenue, of course, that wouldn't be possible. So, and this is a fun aside too. And it's, it's also like speaks to the, what the company was like in these early days and their like how Toby and Scott were thinking about things. They realized they knew they needed to make this change. And so they were just like, okay, yeah, like, let's change it. Let's like ship it and flip the switch. They did that. They didn't really talk to any of their customers before they did that. And, um, they did it the day before Toby and Fiona got married.

• 27:05David Rosenthal?

  That was probably not a good idea. Toby talks about how he spent, uh, like the whole night, the night before their wedding, just like taking calls from super angry customers who did not understand what was happening to their business.

• 27:17Ben Gilbert?

  Talk about never deploy to production on Fridays.

• 27:19David Rosenthal?

  Yeah, seriously.

• 27:22David Rosenthal?

  So another really fortuitous thing happens in, this was in 2007 when they made that switch in 2007, and that is a Toronto-based angel investor named John Phillips discovers the company and he invests $250,000 at a $3 million post-money valuation, which was pretty rich for, you know, I have to imagine a small company based in Ottawa, Canada back in those days. I would imagine everybody's pretty happy with that these days, given the the current market cap. But John was a lawyer based in Toronto and he had worked with a ton of companies. And he becomes a really important mentor to Toby, especially through what's about to happen in the next year in 2008. Scott kind of gets the early

• 28:06David Rosenthal?

  stage startup bug again and decides that, hey, you know, this company is scaling, it's a SaaS company, I'm not sure this is really what I want to do. And he leaves and Toby ends up having to take over the CEO role. So from, you know, a kid who is an apprentice programmer who loved playing video games and his parents thought, you know, is there something wrong with him? He doesn't talk to people or other kids. He just sits on his computer all day. All of a sudden now he's shoved into the role of being CEO of this company that is growing pretty incredibly quickly with all these customers.

• 28:39Ben Gilbert?

  As he becomes CEO of this company, he doesn't just do the job the same way that any other CEO would do it. He applies his engineering mindset to this. And so, you know, when you, when you listen to Toby in interviews, you can tell that he thinks about things in this extremely logical, extremely structured way. He's so low ego. He's all about measuring results and going back and revising past decisions, changing his mind when they're in the face of new data, being wildly structured about decision making. So he basically becomes like the engineer's engineer, you know, he's an amazing, amazing engineering leader. And it really leads to them being able to attract incredible talent

• 29:21Ben Gilbert?

  and that first set of employees, because the set of really talented technical people, many of them who had been open source contributors to the Ruby at Rail project, were, you know, dying to go and work with him.

• 29:32David Rosenthal?

  Yeah, totally. And you know, people are moving from Germany, from other places around the world to Ottawa to come and work at this company. But the other interesting thing is like, okay, so we take a step back and we now have like a fairly young CEO who was an engineer, has no management experience, in charge of a high-tech software company in Ottawa, Canada. Like, this doesn't seem like a recipe for success. But Ottawa actually has some interesting features. So there were plenty of old-school technology companies that were in Ottawa, and Ottawa's not far from Toronto. And Toronto, of course, has great engineering universities and technology companies. Nortel was in Ottawa. There were a few chip companies in Ottawa. But there was, there was nothing interesting happening

• 30:16David Rosenthal?

  on the technology front there until Shopify came along. And so all of a sudden, now here's this like

• 30:21Ben Gilbert?

  At least in software.

• 30:22David Rosenthal?

  In software, yes, on the software technology front. And I think Nortel had fallen on hard times by this point. And so now, all of a sudden, here's this super interesting hot web 2.0 software company based in Ottawa, and they're able to recruit just incredible, incredible technical talent. You know, you joked about Toby being like the engineer's engineer as a CEO. So all this is happening. And, you know, he was really wrestling with like, what do we do about this? We're growing. Should I raise venture capital? I think the market opportunity for this is big and getting bigger. Should we tick into, you know, being a kind of a growth company and put fuel on the fire? And he wasn't sure. And so he decided, you know what, I'm gonna run a test. And the company had become cash flow positive

• 31:07David Rosenthal?

  in 2008 with about 10-ish employees. They made over a million dollars in revenue in 2008. They also, part of that was driven by, they landed their first major customer that year, which was Tesla Motors, which started selling the Roadster on Shopify. And to this day, all of Tesla's online sales still run on Shopify.

• 31:31Ben Gilbert?

  That is incredible. That's a great find, David.

• 31:34David Rosenthal?

  Yeah.

• 31:34Ben Gilbert?

  That's really cool.

• 31:35David Rosenthal?

  I didn't go in the Wayback Machine, but I found in some articles about Shopify, images of the website in 2008, and they're listing Tesla Motors as one of their marquee merchants. It's pretty awesome.

• 31:45Ben Gilbert?

  I've got some Wayback Machine things to bring up later from the site.

• 31:49David Rosenthal?

  Oh, man. So Toby's like, okay, I'm gonna run this test. He saves up $50,000 in cash flow from the company, and he decides I'm gonna use this $50,000, and I'm gonna run five growth tests. And if maybe like two or more work, then like that's my answer that I should go raise venture capital and pour more fuel on the fire. And of course, all five out of five work. And what are these tests that he's running? They're super cool. So the first one is, or one of them is, they decide that, you know, there are all these like web design consulting firms out there, and they're making, you know, websites and commerce sites for a lot of their clients.

• 32:30David Rosenthal?

  What if we started marketing not just to people who wanna build businesses and merchant accounts, but to actually to them? And we take these designers, if we can get some of them, and we offer them, we say, hey, if you bring on a customer onto Shopify, we'll give you 20% of the lifetime revenue of that account. And that becomes a very compelling deal, as you would imagine, to these web developers of like, oh, you mean, you're giving me a tool that I can use for my clients to make my life easier, and I'm gonna make revenue from that? Great. That brings in a ton of customers.

• 33:03Ben Gilbert?

  If you think about the way that this is sort of born of the developer community, it makes so much sense. I asked David Zager, who's our head of design at PSL, and he used to run a design and dev agency and did for years, and was part of this program. And he sort of smiled when I was like, yeah, back in, you know, 06, 07, 08, they were doing really well. They were getting distributed through a lot of these web development agencies. And he just smiled, and he was like, yeah, they had this sweet referral program.

• 33:32Ben Gilbert?

  And it's so funny, because like, today, we would describe that in sort of the like, enterprise SaaS world as like, channel sales. Like, of course, you know, these people who are gonna be building 30 to 100 websites a year for people who wanna sell on the internet, you wanna be their vendor of choice, and you wanna figure out some relationship with them. But it was so pioneering at the time.

• 33:51David Rosenthal?

  Yeah. So the next test is even more fun. They launch what goes on, becomes like kind of a sort of internet sensation. They launched the build a business competition on Shopify. Do you remember this, Ben?

• 34:04Ben Gilbert?

  No.

• 34:05David Rosenthal?

  Do you remember the partner that they run this, run this competition with?

• 34:10Ben Gilbert?

  I do not.

• 34:11David Rosenthal?

  None other than Tim Ferriss.

• 34:14Ben Gilbert?

  No way.

• 34:15David Rosenthal?

  Yeah. Tim becomes an advisor to the company and Tim is like, hey, people love competitions. What if you gave away a hundred thousand dollars to the team that builds the biggest business within a like, you know, X month period on Shopify? And Toby's like, a hundred thousand, like, I don't have a hundred thousand dollars. I can't give away. And Tim's like, trust me, you'll make it back.

• 34:35Ben Gilbert?

  I hear, I hear Tim Ferriss is pretty good at growth marketing.

• 34:37David Rosenthal?

  Yeah. They launched this contest together and they get over a thousand new merchants signing up to the platform just through this contest and it generated over three million in revenue across those new stores.

• 34:51Ben Gilbert?

  Wow.

• 34:51David Rosenthal?

  It's pretty, pretty good ROI for that hundred thousand dollar growth investment.

• 34:55Ben Gilbert?

  I'd write those checks all day.

• 34:57David Rosenthal?

  Totally. And then, you know, what probably becomes the most important thing that they do during this time. In June 2009, they ship the Shopify platform. They build an API to allow third-party developers to plug in their existing tools or write tools right into Shopify merchant pages and accounts. And this really takes everything to the next level because again, if you think back to like building in Rails, it's very like minimalist, functional, design-oriented frameworks. And that's what Shopify had always been, you know, they, Toby talks about how the ethos at the company is think about features that most of our customers use most of the time and build those and features that some of our customers use some

• 35:42David Rosenthal?

  of the time or most of our customers use some of the time, we don't build those. But now the third-party ecosystem builds those and plugs in. This just massively increases the reach of types of merchants that could use Shopify for anything or add functionality or do subscription sales or Do whatever and without cluttering and muddying the messaging of the core product.

• 36:07Ben Gilbert?

  I guess the referrals were really the first piece of this, but this is really the second thing they do that starts to make this a really great scale business because while the intention of doing this, launching this platform is really around great. This is a way that we don't have to write code, but people can extend the functionality to attract more customers. What it really starts to do is build the moat where Shopify becomes the absolutely dominant platform because they've got all the apps. Like it's very much as like WordPress and blogging. Like it's really hard to shake that inertia because they have all the plugins. Shopify has exactly that in the e-commerce world.

• 36:43David Rosenthal?

  Totally. And we're in a minute, we're going to talk about Stripe in a sec, but you know, things like that, something like Stripe can get built, which is incredible and game changing for the ability for people to take payments online and it just plugs right into Shopify. So in 2009, the first year, they start really aiming for growth and running these tests. They pass a hundred million dollars of sales that merchant, gross sales that merchants do on Shopify. Remember this is like two and a half years into Shopify as a product in market. Sorry, in 2009, they pass a hundred million dollars of sales over the life of the company in the two and a half years that Shopify

• 37:20Ben Gilbert?

  Cumulatively, yeah.

• 37:21David Rosenthal?

  Has cumulatively. In 2010, they do a hundred and 24 million dollars in merchant sales just that year. And at the end of 2010, Toby finally gives it an, I assume probably ran a, knowing him, an exhaustive process in meeting everybody and optimizing for his venture capitalists. He finally raises a series A, a $7 million series A led by Bessemer with First Mark and Felices participating. And it's kind of off to the races to the company in full on growth mode after that.

• 37:51Ben Gilbert?

  What episode did we just do where First Mark was also, it was like one of their first checks? That's right. That's right.

• 37:57David Rosenthal?

  Yeah, right around the same time. First Mark had a couple of really, really great investments right at the beginning of their life as a firm, really super impressive.

• 38:06Ben Gilbert?

  You know, when you listen to Toby in interviews and he talks about the decision to take capital, you know, he had sort of long maintained this mindset that that's not the type of business this is. I think, I don't have the exact quote, but he said something like, "I want to be the best-run, most successful 20-person lifestyle business that there ever was." After these experiments, he sort of realizes, "Oh my God, we have enormous growth potential and we may actually be one of those rare types of businesses that are indeed a good fit to go and raise venture capital and try and grow like that." It's very telling about him as a person, how long he resisted that and the discipline that he had around trying to build the business the way that he wanted before realizing sort of what a massive opportunity it was in front of him and sort of then let the opportunity guide the decision-making.

• 38:51David Rosenthal?

  And I think what's even more telling about him, really this thing makes him such an admirable leader and CEO of a company, is now when he talks about, he says, "I was absolutely wrong. Like, I hurt the business. I set the business back by years, by not, by, for those first, you know, couple of years and then during the time when I was running, when he was running those experiments, not raising venture capital earlier and not seizing the opportunity." And obviously, you know, they've been lucky that they've, you know, still been able to kind of achieve dominance in the space and become a $35 billion public company.

• 39:25Ben Gilbert?

  Yeah, there's some survivorship bias here.

• 39:27David Rosenthal?

  Yeah, totally. But, uh, but yeah, like they, they could be two years further ahead of where they are now if he hadn't done that and he'll, he freely admits that, which is a very rare that you get that level of humility from a public tech company CEO these days. So the question at this point becomes like, okay, clearly this is a market and a wave that is huge and growing and Shopify is riding it better than anyone else. How big can it be? So, right after they raised that Series A in December of 2010, they only had about 20 employees at the company at that point. By the end of the next year in 2011, they had over 100 employees. They had passed. Ten thousand merchants on the platform.

• 40:11David Rosenthal?

  That year, they did 275 million in merchant sales. The following year, they go from 10,000 merchants on the platform to 40,000 and three quarters of a billion dollars of GMV. They make 24 million in net revenue from that, which obviously is a lot less. This is the first year from their, from their S1 that we have their net revenue. But that continues to just grow and grow. The next year, they have 80,000 stores, 1.6 billion dollars in GMV, 50 million in net revenue.

• 40:42Ben Gilbert?

  David, do you have a sense of what was powering growth for them at this point? Like, is it still this sort of referral engine through dev shops? Or, you know, is it word of mouth? Like, what is leading to just the flocks and flocks of merchants running to Shopify?

• 40:55David Rosenthal?

  It was around this year in 2013, when I think Toby and Shopify really kind of take the ambitions up to the next level. And that's like, okay, we've been this easy way for small, mostly small merchants to set up and run commerce businesses online. And we have some small merchants that have grown into large merchants like Tesla. We have some large merchants that have switched over from Magento or, you know, BigCommerce or whatever and like come to use us or CommerceOS. But maybe there's more we can do. So in 2013, they launched, maybe there's more we can do because if you become a big merchant, you don't just want to sell on a website online. You want to sell in a lot of places.

• 41:40David Rosenthal?

  And so in 2013, they launched Shopify Point of Sale for offline sales. They have devices that you can put in a physical storefront, use that to actually be your point of sale. But even more importantly, they're now syncing your online inventory with your offline inventory. And, you know, back in 2013, that was like probably kind of gee whiz. You think today about all of these D to C brands out there that now all of, have all of these, you can't even call them D to C brands anymore because they are internet brands because they have physical stores in major metro areas around the world. It's a like critical enabler for this. And of course, all of those brands were built on Shopify. Shopify and growing, starting to grow in these early days in 2013.

• 42:22David Rosenthal?

  The other thing that they do the next year in 2014 is they officially launch Shopify Plus. So what's Shopify Plus? It's basically the enterprise version of the core Shopify product. And I think it was really interesting that they segmented this out as a completely, it's a completely different business segment in a different office. It's based in Toronto, not in Ottawa. The concept behind this, kind of, I think, all coming from Toby, is that the core ethos of Shopify is these small merchants, these entrepreneurs, these startups selling on the platform. But when they try and go out and they sell to Unilever, they sell to Google, they sell to Anheuser-Busch, I think all of which are big customers using the platform. They want something different.

• 43:05David Rosenthal?

  They want, they want account managers, they want handholding, they want SLAs, they want uptime, all of these things. They start this whole other division that's going to go out and purely attack those. And so now Shopify Plus and these big customers is over a quarter of the total revenue of the company.

• 43:20Ben Gilbert?

  When I was asking that question about growth and you're talking about engaging with these really big customers, it is expensive to go and actually do the sales and marketing to get those accounts. So to give you a sense for today, where they're doing, they did about a billion dollars in revenue last year. They did spend 350 million on sales and marketing. So this business has never quite been, let's throw up a website and people will just come to it and we'll just sort of service themselves. It does actually require spending to go and get that business.

• 43:49David Rosenthal?

  So the net of all of these new initiatives is Shopify's growth just continues in the venture capital era. In 2014, they cross 100 million in net revenue. They do 105 million in net revenue. And then in April of 2015, the company files to go public on, interestingly, on both the New York Stock Exchange and the Toronto Stock Exchange in Canada, two different tickers. So you can take your pick, should you choose to invest in Shopify. On May 20th, 2015, they priced the IPO at $17 per share, which equates to a equated at pricing to a $1.3 billion market cap.

• 44:36David Rosenthal?

  Think about this as a $35 billion market cap company today, just about four years later. They start trading the next day at $28 a share, which is 60% higher. Actually, the stock stays relatively flat for the rest of the year. It would, it would pick up later the next year, but 2015, for the whole year, they do an amazing $7.7 billion in GMV of merchandise that merchants are selling on Shopify.

• 45:03Ben Gilbert?

  What's that up from the previous year?

• 45:04David Rosenthal?

  I didn't find what GMV was in 2014. In 2013, it was 1.6 billion.

• 45:10Ben Gilbert?

  So in two years, they 8xed it.

• 45:12David Rosenthal?

  Yeah.

• 45:13Ben Gilbert?

  Seven x.

• 45:14David Rosenthal?

  Seven, probably 5x, 1.6 to 7.7. But still incredibly impressive. Net revenue is 205 million for the year ended 2015. So we thought a fun coda, and you know, the, the topic of this show is the Shopify IPO, which we will grade in a minute, but a fun coda to sort of catch us up today, we thought would be in October of 2017. So not quite two years ago, Shopify became the target of a activist hedge fund investor, a short seller named Andrew Left at Citron, I believe it's Citron Capital. He released a report on Shopify

• 45:58David Rosenthal?

  decrying the company as a get rich quick scheme. That was, the title of his report is the hottest, this is all in all caps, the hottest stock on, he eventually has now changed it to the New York Stock Exchange. Originally, it said the hottest stock on the NASDAQ, they're not on the NASDAQ, they're on the New York Stock Exchange, is a completely illegal get rich quick scheme in parentheses with a good software platform. And he basically is accusing the company.

• 46:27Ben Gilbert?

  What's illegal about it?

• 46:29David Rosenthal?

  So he accused the company Shopify, he just didn't believe it like that at this point, this is in 2017, the company said they had 500,000 merchants on the platform. How could it even be possible that there are 500,000 different merchants in the world that would be selling online? That's ludicrous. Who are these people? It must be a multi-level marketing Ponzi scheme.

• 46:51Ben Gilbert?

  How can it be possible if there's 2 billion media outlets, you know, on the internet? But it's because of the internet, like.

• 46:57David Rosenthal?

  Yeah. How could it be possible that there are now, I don't know how many homes are on Airbnb, something like two, three million, four million, maybe.

• 47:04Ben Gilbert?

  A lot of hotels.

• 47:04David Rosenthal?

  How could that be possible, you know? So anyway, this is great. He releases this report, says the, you know, the FTC is definitely gonna, gonna come after Shopify. He puts a $60 price target on the stock. The stock had been trading at around $115 a share at this point in time. Six months later, the stock is, so we're now in spring of 2018, the stock is trading in the mid $120 a share. So like, okay, he didn't do so, so hot on his, on his shorts here.

• 47:37Ben Gilbert?

  It was at 115 before, right?

• 47:38David Rosenthal?

  It was at 115. So it was roughly, you know, roughly flat at this point. So like, okay, it's not down. He's not, he's not doing, not doing good on his, on his short position. Fast forward a little bit further to April of this year of 2019, just a few months ago, the stock is now trading at $205 a share. Remember back in October 2017, Citron had put a $60 price target on the stock. What did they do? What does Andrew and Citron do? They come out again with another research report, talking about how terrible Shopify is. And then he puts a price target of $100, up from 60 this time on the stock, says it will be down at $100 within 12 months. And then if it is not, he is going to donate $200,000 to charity.

• 48:22David Rosenthal?

  Well, we're not 12 months yet from there, but today-

• 48:25Ben Gilbert?

  All he can come up with is a $200,000 bounty with that kind of a claim?

• 48:30David Rosenthal?

  This is so amazing. Today, on July 31st, 2019, the stock closed at $317 a share for a $36 billion market cap.

• 48:41Ben Gilbert?

  You just wait till it hits 60, David.

• 48:43David Rosenthal?

  I know, I know. Well, we're gonna do our narratives and bulls and bears here in a minute. And certainly, no doubt, it is an expensive stock right now, but an illegal get-rich-click scheme that is probably not an accurate characterization of this company.

• 49:01Ben Gilbert?

  Yeah, yeah, yeah. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 49:17David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 49:31Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 49:41David Rosenthal?

  Yep, AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 49:58Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise: the workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 50:14David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 50:31Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 50:40David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 50:51Ben Gilbert?

  Well, let's do it. Let's dive into narratives and let's do this a little bit differently than we normally do, listeners. David and I were talking before the show. For companies like Facebook, we felt that it made a lot of sense to do the bulls and bears sort of in the press, leading up to the IPO. I think Uber was really exciting to do this. Shopify was less of an interesting media darling at that point, but now is really starting to heat up and get a lot of coverage. And so I think the interesting thing is, you know, what are the bull and bear cases to make about the stock now?

• 51:23David Rosenthal?

  So it's interesting. We just went through, you know, this whole acquired history and facts of the company. And there was one other company that some listeners out there might be wondering, man, why, why didn't Ben and David talk about a company that I usually think of when I think of Shopify and I hear people talking about it? And that is Amazon.

• 51:43Ben Gilbert?

  One would think if we had just spent an hour talking about the rise of e-commerce from 2004 to today, like, the company would be Amazon that we were talking about.

• 51:52David Rosenthal?

  Yeah. Well, let's start with the bear case here. It's relevant for both the bear and the bull. You know, all of this is like, great. And certainly, you can't take anything away from the incredible business that Toby and Shopify have built over the last 13 years. But isn't Amazon gonna just take over all of e-commerce? Like, why, why are people gonna be selling on their own channels anymore when like, eventually, everything's gonna end up on Amazon? And they're gonna have the best fulfillment, the best delivery, and the best pricing and everything?

• 52:22Ben Gilbert?

  What do these 800,000 merchants do not selling on Amazon third-party sellers and doing selling over on their own dot-coms powered by Shopify? It makes no sense to me, based on what everybody is, is saying about how dominant Amazon is.

• 52:35David Rosenthal?

  Yeah. And then you look at the price of Shopify. They did about a billion dollars in net revenue last year.

• 52:43Ben Gilbert?

  Which puts it at 35x, trailing 12 months revenue.

• 52:46David Rosenthal?

  Yeah. Which also, by the way, I mean, to take a step back and talk about, they ended 2015 with about 200 million in net revenue. Three years later, they end 2018 with a billion in net revenue. That's incredible growth. But yeah, like, that's a very expensive stock. You know, Amazon is cheaper than that. Why shouldn't I buy Amazon instead of Shopify?

• 53:06Ben Gilbert?

  And rarely do you hear Amazon is cheaper than that when people are talking about valuation multiples based on any company metric. This is a good point, I think, for less finance-y folks to talk about why 35x trailing 12 months revenue is, is big. First thing to point out is it's not 35x trailing 12 months income. In fact, the company is still a loss-making company. So it's not a big loss-making company. The 20, in 2018, they lost $64 million. In 2017, they lost $40 million. But you know, this company is not, at the end of the day, turning a profit on all this billion dollars of revenue that it's getting. Now, of course, there's lots of great reasons for that. The company's a high-growth company. But imagine

• 53:50Ben Gilbert?

  for a moment that it was a 35x trailing 12 months income, the profit that they were making. Like, you still would have to believe-

• 53:58David Rosenthal?

  Which, back in the day, when I started in finance, 35x earnings per share multiple, like, that was, that's, that was expensive. Now, we're talking about 35x revenue.

• 54:07Ben Gilbert?

  Right. Like, you would still have to believe, to believe that this valuation is correct, that, you know, if you were to do a discounted cash flow, so all the future years left of income that that stock was going to generate discounted to today, that it would be worth 35x as much as it's making now. And so, you know, that's still a big leap to make. Think, who knows what the world's going to be, let's assume, which is a stupid thing to assume, but just for a moment, that they're not going to grow anymore, which is what the entire thing's predicated on. There's 35 years' worth of cash flows that we're going to account for. Oh, and it's not even actually the profits, it's the revenues. So, like, it starts to give you a sense of why, like, wow, this is really being valued,

• 54:49Ben Gilbert?

  not only that it has a ton of growth in front of it, but that, you know, they're really going to find a way to, to turn this corner. And they're effectively break even. Right now, this net loss is so small relative to, to revenue, but that they're, they're going to find a way to flip that faucet and start becoming a very profitable company as well.

• 55:05David Rosenthal?

  If we were to, this is going to be very apt, we were to channel our, one of our recent CEOs of, one of our recent subjects here at Acquired, Eric Yuan at Zoom, he would say, "The price is too damn high."

• 55:19David Rosenthal?

  Which is ironic because of course Zoom itself is also trading at an extremely high revenue multiple right now. So it's extremely expensive, the stock. But then there's also like, there's this Amazon question out there like, how could you justify paying such a high price for a company that is, you know, competing in the same category as Amazon and is more expensive than Amazon? So I think unless you have anything else on the bear side.

• 55:44Ben Gilbert?

  Now, I'd, I'd, please paint me the picture.

• 55:48David Rosenthal?

  Let's flip to the bull side. And actually, I think for me, the topic here is still Amazon. So Toby has this really great quote, one of his interviews where he says, you know, look, if you assume Amazon is going to eat retail of everything that has a barcode on it, and basically you kind of like need to have a barcode to sell on Amazon, the question then is what happens to everything that doesn't have a barcode on it? Like, is Tesla going to sell on Amazon? Are of start D to C brands going to sell on Amazon? Like, maybe they will. And actually, you can now on Shopify sell, they have a plug into Amazon. You can easily sell on Amazon from Shopify. But I think there's a lot of stuff out there that isn't going to sell on Amazon.

• 56:33Ben Gilbert?

  Yeah. And I think the way that I think about this is sort of timing, that this company, the, the market for people selling things directly on the internet, or let's expand and say, selling things directly both on and off the internet, actually expanded dramatically in the years after their IPO. Like, we're in this, this era where, you know, people want to sell things in a bunch of different ways and subscription methods, using a strong storytelling component, using a strong brand component, all these things that Amazon is, is not good at.

• 57:08David Rosenthal?

  Not good at.

• 57:09Ben Gilbert?

  It makes sense. And, and not, and I don't mean not good at in a tactical way. It's not like, oh, darn, they just couldn't hire the people to figure the dang thing out. It's a structural problem. Like,

• 57:19David Rosenthal?

  Yeah, no, Amazon.com subordinates the brands of the products.

• 57:23Ben Gilbert?

  Exactly. You don't, when, when you're buying from a third party seller, like, David, can you name one third party seller that you've bought from on Amazon in the last year?

• 57:33Ben Gilbert?

  They come in an Amazon box.

• 57:34David Rosenthal?

  I think they all have a lot of LLCs in them.

• 57:36Ben Gilbert?

  Yes.

• 57:40David Rosenthal?

  But yeah, okay, so right, this is like, so we're saying like, okay, what doesn't have a barcode? What's not going to sell on Amazon? It's this, it's Instagram brands, it's, it's, you know, quote unquote, D to C internet brands. And you can think what you will and, you know, personally, I feel like there's so many out there and it's probably overhyped and like, you know, just like hashtag millennials, everything. But.

• 58:03Ben Gilbert?

  That's a direct David Rosenthal quotes, ladies and gentlemen. Hashtag millennials, everything.

• 58:07David Rosenthal?

  There we go, there we go. But, you know, Toby also talks about this in the same talk. He's like, look, Kylie Jenner launched a cosmetics line a couple of years ago and she launched it on Shopify and she has her audience, she sells to her audience. Her audience is primarily on Instagram, other, you know, social media properties as well. But most of what she's doing is selling on Instagram. It's estimated that Kylie's cosmetics brand did over $300 million in revenue last year. They have seven employees at the company. They don't sell on Amazon, at least as far as I know, I didn't check, but I'm pretty sure they don't sell on Amazon. So the question is like, okay, yeah, there's going to be a lot of stupid, you know, millennial brand startups that raise a lot of money out there and go bankrupt.

• 58:49David Rosenthal?

  But there's also going to be some companies that become really big, huge companies that are just fundamentally architected in a different way and have direct relationships with customers. And Shopify is the platform that they use to, to manage all that.

• 59:05Ben Gilbert?

  Yep. And if you look at the way this ends up manifesting from a metrics perspective, there's two things that increased after their IPO. Their sales efficiency increased as revenue continued to increase, which is kind of crazy. Like their, their return on sales and marketing spend actually got better, even though the company's revenue was growing. So if you were sort of saturating your market, that would go down because you're reaching worse and worse customers. They're still accelerating into product market fit, or at least as of, as of some data that I was looking at from 2016, still accelerating into an expanding market. And the ACV continues to grow. So that's the, the average customer value. Basically, the amount that any given Shopify customer is spending or giving to the company

• 59:49Ben Gilbert?

  is growing at about 14% a year. So it's not even like, you know, oh, man, we onboard someone and then or if you take the average across all of our merchants, any given merchant is increasing their business with us.

• 1:00:05David Rosenthal?

  Mm hmm. And that's things like going from regular Shopify up to Shopify Plus, which I think goes up to $2,000 a month, probably even more than that for the big accounts that they're directly managing. And then that's also, you know, the other part of Shopify's business that we haven't talked as much about. We alluded to Stripe earlier is through the both the platform and third-party services available on Stripe, as well as things like Shopify Point of Sale and other products that they offer. They do make money per transaction. It's not like the original business model where they're just taking a flat percentage of every transaction that you that you make as a merchant. But they're revenue sharing with Stripe, for instance, when Stripe is powering internet payments for their customers.

• 1:00:50Ben Gilbert?

  Yeah, it is worth taking a quick aside here and saying, so Shopify did $14 billion last year in GMV. So the amount of goods sold on Shopify was 14 billion. Stripe processed almost all of those payments. So a lot of money flown to Stripe from Shopify. And Shopify benefits from that in some way. So to kind of look at how to Shopify make money. Well, we've talked a lot about this subscription solution so that that's the SaaS fee that you're paying per month to Shopify. They have a what used to be equal, or actually what used to be smaller and is now a little bit larger, is their merchant solutions revenue. So that's payment processing fees, transaction fees, referral fees, sales of the point of sale hardware, David, exactly what you're talking about.

• 1:01:34Ben Gilbert?

  So half the business is actually other things that they can make money on from their merchants in addition to, of course, the SaaS fee. So the part of the thesis that you could form, if you are really excited about the future of this company, is there's going to be a lot more stuff that they could sell to them, too.

• 1:01:51David Rosenthal?

  A lot more stuff. I think the bull case to sum it up is there's going to be a lot more merchants that'll use Shopify in the future that are going to sell a lot more stuff to their own customers. And Shopify is going to be able to sell a lot more stuff to those merchants.

• 1:02:06Ben Gilbert?

  Yep. And I'm pulling forward from tech themes here for a minute, but I think it's totally, totally valid. If you think about that 14 billion in GMV, the goods that were purchased powered by Shopify and the billion dollars in revenue, that starts to paint this picture that for every $14 spent, Shopify is able to capture a dollar of it, which is pretty interesting because then you can start to really think about, well, what if that were a take rate? That's what about 7% of, they basically have a 7% take rate on the marketplace model. And the thing that you would kind of have to believe is they're going to be able to continue to expand that over time. The question that you then have to ask yourself is, okay, cool. Let's assume that it keeps growing and they keep getting more and more and more customers,

• 1:02:51Ben Gilbert?

  you know, more merchants onboarded to this thing and that TAM is indeed expanding. Well, what else could they do to make it easier to be a merchant in the world? And by providing more value there, can they then claim more value of those transactions that are sold? And that's exactly what they're doing right now. And so the, the, the very interesting thing that was recently announced is the Shopify Fulfillment Network, which is partnerships with third-party logistics providers. So people that have warehouses and manage shipping stuff to people with a common interface for merchants that, that is powered by Shopify. It's a Shopify interface, much like you interface with anything else on their,

• 1:03:30Ben Gilbert?

  their platform, using to sort of just the really nice Shopify tools or sort of the nice plugins in their ecosystem and their app store. So what that actually allows these merchants to do is be competitive with Amazon and do things like two-day shipping. But importantly, and this is where this sort of sits on the fence between bear and bull. This is very different than Amazon's approach. So with fulfillment by Amazon, Amazon actually owns the warehouses. So if you're a third-party merchant, you're saying, cool, I'm going to use FBA, you know, Amazon controls the whole stack. And they they own the warehouses. So from a business model perspective, Shopify's way is great because it's asset light. You know, it's it's it's software margins, baby. I love it. It's more like a software business, but they don't have control over

• 1:04:13Ben Gilbert?

  that whole experience. They're outsourcing it to a bunch of other third-party logistics providers, and they don't have ownership over that margin, the way that Amazon does. They they have to sort of share in the economics with those those three PL providers. So the question that I think you have to ask yourself is, can Shopify really make it as seamless for merchants to use their Shopify fulfillment network and those merchants' customers as sort of Amazon has made FBA?

• 1:04:41David Rosenthal?

  Yeah, it's interesting, though. Shopify must have thought through all this as they were launching and thinking about their their strategy. They need to be the anti-Amazon here because like they need to let the brands and the merchants be the stars because the more you start controlling the experience and the customer, the more those brands are going to get pushed down below Spotify and then you're in an Amazon world.

• 1:05:06Ben Gilbert?

  Shopify.

• 1:05:08David Rosenthal?

  Shopify-zon.

• 1:05:10Ben Gilbert?

  No, no, no. You said Spotify. I have a feeling I've already done that on this episode, and I think.

• 1:05:16David Rosenthal?

  Listeners, we apologize.

• 1:05:17Ben Gilbert?

  I was wondering how long it was going to take us to get into this.

• 1:05:19David Rosenthal?

  Oh, yeah.

• 1:05:23David Rosenthal?

  Spotify, also a great company.

• 1:05:26Ben Gilbert?

  But you raised you raised that really great point. It's exactly the one that, you know, we we absolutely owe mentioning it that Ben Thompson has covered so well on Stratechery, and that is, Amazon is much more like an aggregator where they're the brand, they control the whole experience, and and they aggregate all of the customers and the customers shop through them, independent of who the merchant is. Whereas, exactly as you said, Shopify is the anti-Amazon. They're a platform, and the bet there is, look, we're we're not going to control the whole experience. We're going to make picks and shovels. You're going to have the relationship with that customer, and their bet is that they're able to to make enough money off of, it's one out of every $14 that that gets purchased.

• 1:06:08Ben Gilbert?

  They're able to make enough money that that business model works, too, and it supports a a different customer segment.

• 1:06:15David Rosenthal?

  This is the first kind of example I think we've seen of a, if you believe Ben's aggregation theory and that that has led to the fangs or really Amazon and Facebook and Google, Apple's probably in a different category. This is the first chink in that armor, right? Like where the actual business model of a aggregator being Amazon could be maybe not the seeds of its own undoing, but like Shopify is able to successfully compete precisely because it has a different, you know, product and business model.

• 1:06:54Ben Gilbert?

  Yeah, but I think where I would really go with this is the big opportunity is the aggregator one. Like Amazon is a billion dollar market cap company and Shopify is richly valued at a, you know, supposedly rich at a 30. So really what we're saying is there, there is an unaddressable opportunity by the aggregator in this market that also happens to be very, very large.

• 1:07:17David Rosenthal?

  Well, it depends, I think, how large brand-first merchants continue to become.

• 1:07:23Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:07:36David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:07:53Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:08:08David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:08:32Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:08:51David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:09:21Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you.

• 1:09:46David Rosenthal?

  All right. So, real quick, you know, on what would have happened otherwise, before we move to playbook. I think the interesting thing here is like, we've seen this so often in the last, you know, well, always on acquired, but especially in the past year. This company almost didn't happen. You know, they were like, gonna sell snowboards on the internet was Toby and Scott's, you know, initial ambition. And so I think the interesting question is like, okay, if this company hadn't happened, like, what would have? I think it's, there's people selling on the internet in picks and shovels to do that. That certainly would have happened. Would Stripe be more? Than a payment processor, would it also be a merchant?

• 1:10:22Ben Gilbert?

  Storefront.

• 1:10:22David Rosenthal?

  Storefront. Would Square, which Square is now starting to try to compete with Shopify online? Would Square have done that earlier and so then online and offline? Or would it have been a totally, you know, different startup called Shopify started by someone else entirely? Yeah, I think that's interesting.

• 1:10:44Ben Gilbert?

  It was a strangely empty space. I mean, Toby talks about one of the hard things was that they didn't have a big competitor. Their competitors were these incumbents and really crappy experiences. So Yahoo stores and everyone else that he's ripped to pieces. And, and, you know, he, he kind of says like, we had to have a higher bar because we didn't have real competition. And so it is interesting. There was this strange lull in the market where like ViaWeb was started, sold to Yahoo. There were, Magento was around, but like, there wasn't another sort of like low end disruption ecommerce provider for like the better part of a decade. And now you have people trying to compete with Shopify because it looks like a very real market.

• 1:11:23Ben Gilbert?

  But yeah, there, there wasn't really anyone who would have come in and done exactly what they did when they did it otherwise.

• 1:11:31David Rosenthal?

  Yeah, it's interesting. You know, you mentioned Magento. We haven't talked about them on this episode. I had initially assumed Magento was an old school incumbent that Shopify was competing with back in the day.

• 1:11:43Ben Gilbert?

  Are they not?

• 1:11:43David Rosenthal?

  No.

• 1:11:44Ben Gilbert?

  In my head, they definitely are.

• 1:11:45David Rosenthal?

  Magento was started by the folks from OS Commerce in, I think, 2008, I want to say. But what they are, Magento, the, the strategy is, was not the right one.

• 1:11:54Ben Gilbert?

  I can't believe they started four years after Shopify.

• 1:11:57David Rosenthal?

  I know, I know. Well, what they did, I think, haven't fully researched this yet, but it's an open source platform. I think they basically took the OS Commerce tech, open sourced it, and then started an open source company around that. But the problem with open source software like that with how they were doing it was People had to take the software and host it and like install it like and like either on prem or like whatever. But like where Shopify was just like, yeah, we're we we host like we're the we're SaaS. Like you don't have to deal with all that. And so the people that were using Magento were like, they were trying to go sell to big existing retailers online. And so like, oh, use open source instead of closed source. But they missed this whole other bottoms up market that was getting started.

• 1:12:39Ben Gilbert?

  Right. It's not a low end disruption play in the way that sort of the classic Clayton Christensen idea of serving this new up and coming market as a, you know, crappier toy type thing. It wasn't that at all.

• 1:12:51David Rosenthal?

  Yeah, it wasn't that at all. I think it comes back to Toby saying like, we, we had this two year essentially delay where like, I wasn't ready to take venture capital and needed to prove it to myself and the company that we were truly a growth company. And yet still, nobody, no viable competitor popped up during that time. I really wonder why.

• 1:13:13Ben Gilbert?

  Yeah.

• 1:13:15Ben Gilbert?

  All right. Playbook?

• 1:13:17David Rosenthal?

  Playbook. Yeah, let's do it.

• 1:13:19Ben Gilbert?

  I mentioned the Wayback Machine. So I went and looked at their website from 2008. And I just had to share this quote, selling online with Shopify is easy. We take care of hosting, bandwidth, and security. So you can focus on your business. It is amazing to me how value propositions change over time. Like, if you were to start this company today, like, I surveyed some people who have started Shopify sites. And I said, why do you use Shopify? Like, why is it? Why is it so great? Why aren't you figuring out a different way to sell your stuff online? And people said, oh, my gosh, the templates, the really clean UI, the modern plugin ecosystem, the fact that payment processing is a total breeze. They have inventory management. I heard they're coming out with fulfillment. And like, in

• 1:14:00Ben Gilbert?

  2008, the way that they were billing it was security, hosting, and bandwidth. And I think it's just amazing that that you serve the needs of your customer as they grow, you know, and as your market grows.

• 1:14:12David Rosenthal?

  Totally. Well, well, back to you. I mean, what we were just talking about with Magento. Back in 2008, like hosting was a Man, if you, if you and I wanted to start a store selling acquired T-shirts, you know, and we had to spin up a server and install a Magento package, like, oh my, oof, we wouldn't do that.

• 1:14:28Ben Gilbert?

  I mean, we haven't even made it to install or set up a Shopify store, so.

• 1:14:32David Rosenthal?

  Yeah, right. Maybe this episode will inspire us. Okay, so my playbook on this one, it's struck, going through this history here, you know, so many twists and turns as always, but Toby joining the core Rails team and creating Typo and then Typo becoming a thing in the Rails community actually was a huge, huge competitive advantage that they had because when they then launched Shopify, all of these people who had blogs that were on Typo that like, you know, maybe they might want to sell stuff on their blog or create a business around

• 1:15:16David Rosenthal?

  it and all of these other developers that developers might want to start businesses and sell things online, they all knew of Toby and they all knew what he was working on. And then all of a sudden it was like, oh, cool. Like Toby's like just shipped this new thing that like lets us sell online. Like, maybe we should use that. Such a huge competitive advantage.

• 1:15:35Ben Gilbert?

  Yeah. Yeah, that's a great point.

• 1:15:38David Rosenthal?

  Like, distribution, we talked about, we talked about this a lot on the show and we think about it a lot as, you know, as venture capitalists, like, distribution and distribution advantages are not often talked about or thought through in the early stages of a startup, but they make the difference between becoming a big, successful company that starts to get traction and a flywheels bidding versus, you know, just spinning your wheels.

• 1:15:59Ben Gilbert?

  Yep. Yeah. If you build it, they will come is just so, so rare. All right. I had, I had one more and that's looking at the financials of this company. As customers sell more, Shopify makes more per dollar sold. And I just want to pause and we can think about that for a moment. The classic thing I'm always afraid of when we're starting a new company at PSL is, oh, man, are we building something that will be really great for someone to get started. And then when they have sufficient resources, they're going to build their own thing and they're going to move off of us. And like, it's a great business to get other people started, but then you don't get to keep their business over time. Well, as these businesses grow, Shopify actually makes more money off of them.

• 1:16:42Ben Gilbert?

  Like this is amazing. Merchants pay for advanced services as they become larger and more sophisticated. So the effective take rate for Shopify actually goes up as their customers grow the business. And so it's amazing that they can keep pricing power and keep layering on through the platform that they've woven with the App Store and with the incredible ease that they provide in taking on a lot of things that these companies don't ever want to do themselves. It's incredible that they can grow that take rate as those businesses scale.

• 1:17:14David Rosenthal?

  Yeah. Well, and it's so funny. I mean, going back to the, you know, the original marketplace take rate business model didn't work for exactly the reason, Ben, that, you know, early-stage startups who do that, you know, run a risk of that. And you're, you're always afraid of that of like, oh, man, will our best customers be incentivized to leave us as we grow. They've figured out a way to, and I think, just as you said, it's adding and layering in all these products and services and the platform and the point of sale and payments and all of that around, around the core offering where as you start growing, you need those. And then it's just, well, it's easy to, easy to plug in Shopify's solutions.

• 1:17:55Ben Gilbert?

  It's got to have a ceiling, right? Because I hadn't really thought about this till now, but there's not a network effect between customers, like between merchants. So the lock-in and the advantage all comes from customers, you know, merchants saying, we don't want to do this in-house. I think the thing that's, that's allowed them to generate so much revenue and, and sort of expand as their customers expand is that that is deceptively large and complex, the set of things that all these different plugins do, you know, hosting and security and payments, like all this stuff is, is stuff people don't want to do. But like, Apple would never host store.apple.com on Shopify. Like they actually,

• 1:18:39Ben Gilbert?

  there is some ceiling for which above that, you actually do have the resources to do 100% of it yourself, even including fulfillment. So it's, it's interesting thinking about, like it's, it's not a lock-in network effect, the way Facebook has a lock-in network effect. It's a platform network effect is actually, it's a little bit weaker, but it can support you up to a point.

• 1:19:02David Rosenthal?

  In my notes, I had a quote from Toby that I didn't talk about because it wasn't relevant as we were going through the story, but I think it's relevant here. I don't think Toby actually thinks about Shopify as a network effect company. I think he thinks about it as a platform company, and that's subtle but different. And so he talks about this. He says, "I read a book about Bill Gates pretty early in life when I was like 16 or so. And one thing that Bill said is that everyone in the world wants to be a platform." He's from back in the platform day, before network effects were popular. But Bill, obviously, and I've heard Bill say this too, "You're only really a platform if the value of the ecosystem on top of the platform is larger than the company that owns the platform."

• 1:19:45David Rosenthal?

  And I think that's what's going on here with the Shopify quote-unquote "platform," with payments powered by Stripe, with now logistics that they're adding on. They're adding all of this value. So why do Shopify's merchant customers allow Shopify to take more percentage of incremental dollars over time? It's because the value that those merchants are getting from those services is greater than the margin they are giving to Shopify. Like, if they would have to go do that, stitch all that together themselves, the amount of margin they would have to give up is significantly higher than the margin that they give to Shopify by doing it all as an integrated platform. I think that's how it happens.

• 1:20:25Ben Gilbert?

  So it ends up actually making the case for sort of the bundle economics of Shopify being the point of integration and the bundler of all these things.

• 1:20:33David Rosenthal?

  Exactly, exactly.

• 1:20:34Ben Gilbert?

  That's a different, that's a good way to slice it.

• 1:20:36David Rosenthal?

  All right. Should we do a quick value creation versus value capture here?

• 1:20:40Ben Gilbert?

  Yeah. And this is a section that has one name and means two things. The first of which is, are they able to capture a good amount of the value they create? Certainly. I mean, we keep talking about this 1/14th number. The second thing that I think is interesting is value creation in the world on an absolute basis. So a value creation versus value destruction. And the reason we added this section was because with a lot of businesses, particularly recently sharing economy businesses, a lot of our listeners had argued, "Hey, like, you keep talking about how these companies have created all this market cap for themselves." But like, there's a chance it's value destructive in the world and like the thing that they're destroying is actually greater than what they've created for themselves. This is not at all the case in this company.

• 1:21:22Ben Gilbert?

  Shopify has enabled so much innovation and so many creative entrepreneurs to, you know, become merchants and lower the barrier for entrepreneurship. I think it's undeniable that they have created net new value in the world.

• 1:21:38David Rosenthal?

  You'd really have to reach deep like Citron to argue that this is, yeah, not net value accretive to the world.

• 1:21:50Ben Gilbert?

  Yep.

• 1:21:51David Rosenthal?

  Yeah, I'm 100% with you.

• 1:21:53Ben Gilbert?

  Okay, let's grade the IPO.

• 1:21:56David Rosenthal?

  For me, I mean, this is, if we think about the value of doing the IPO and doing it when they did, to me is just like immense. This is an A bordering on A plus because you could argue, I guess, against it, that they IPO'd too early before this massive expansion and perceived expansion in the market. And thus they could have taken less dilution had they IPO'd, had they gone public later. However, I think by going public when they did and kind of getting on the map, most people didn't really know about Shopify out there. You know, certainly in the investor community, in the finance community, but I think also just broadly, your average person didn't know.

• 1:22:37David Rosenthal?

  And then by doing it right at the cusp of the world going into this like D to C brand, Instagram commerce, influencer marketing, and Shopify being at the center of all of that, by being a public company, that helped. Also then on the other side of that, by Shopify going up into the Unilevers and the Googles and the big companies out there, being a public company certainly helped them on that and launching Shopify Plus, and that's now a quarter of the business. This is a no brainer, at least a solid A in terms of what they were able to get out of going public when they did for me.

• 1:23:12Ben Gilbert?

  Yep, that's a great, great point. Then the only question is, did they make good use of the capital that they raised in the IPO? And then sort of what did that allow them to do? I don't think there's anything magical about it. I think they spent it on sales and marketing and accelerated the growth of the company and subsequently have done very, very, very well in the investor community, obviously, and then very well with customers too. So I don't disagree with anything you said.

• 1:23:39David Rosenthal?

  It's interesting. They've made some, a few small acquisitions over the years. They haven't made any meaningful acquisitions.

• 1:23:47Ben Gilbert?

  You would think, you would think they're going to make an all-stock acquisition a big way here soon. Like if you were, if you were a capital allocator who was running this business right now and it was valued where it was, I think you'd want to spend your stock on buying some interesting stuff.

• 1:24:02David Rosenthal?

  Yeah. Well, maybe that could be a future acquired episode.

• 1:24:06Ben Gilbert?

  Yep.

• 1:24:06David Rosenthal?

  Right.

• 1:24:07Ben Gilbert?

  Carve outs?

• 1:24:09David Rosenthal?

  Let's do it. So I have two carve outs. The first, we've never done this on acquired before, but our most recent investment here at Wave QuotaPro, I spoke about them on our latest LP show. They are hiring for a bunch of roles, both engineers and for a head of product. They are a tech-enabled brokerage for scrap metal recycling. So if you talk about value creation versus value capture in the world, like they are literally keeping, you know, metals of all types out of landfills. The company is less than a year old, is already doing millions of dollars a month in GMV. They are hiring the technical team here in San Francisco to build up

• 1:24:51David Rosenthal?

  the backend. So the company is like, if you think about Flexport, if you think about Convoy or Uber Freight, like very similar type businesses, we're super excited to help them grow. So if you are either an engineer and want to work on a really early-stage company in an exciting market that's grown quickly, hit me up in Slack and I'll send you on to the company. Or if you're an experienced products lead, ideally at a company like we were talking about, Uber, Flexport, Convoy, Lyft, we would love to, love to talk to you about QuotaPro.

• 1:25:23Ben Gilbert?

  Who would ever want to be a product lead at a fast-growing company started by, or you know, invested in by David Rosenthal?

• 1:25:32David Rosenthal?

  Well, there could certainly be worse things out there. And then my official carve out this time is Bill Gurley on Invest Like the Best.

• 1:25:40Ben Gilbert?

  No way, this is literally mine.

• 1:25:42David Rosenthal?

  No. That's great. All right. Well, I'll let you take it then.

• 1:25:45Ben Gilbert?

  No, no, no. Cause I came up with the second one. Cause I was like, I was thinking about it and I've recommended so many episodes of Invest Like the Best that I was like, ah, so it's literally the one I have a strike through through that one. Then I have a second one. So take it away. But it's so damn good.

• 1:25:59David Rosenthal?

  It's so good. I mean, anytime Bill speaks, it's worth listening, but in this one, he talks about a whole bunch of things, you know, a cross venture, the way he thinks about companies. He talks about a great kind of X, Y axis chart that he thinks about evaluating the scalability of companies and marketplaces. Very worth listening to. A masterclass as always.

• 1:26:24Ben Gilbert?

  Yep, absolutely. And actually especially relevant to this episode.

• 1:26:29David Rosenthal?

  Indeed.

• 1:26:30Ben Gilbert?

  My carve out is, David, the last time we did carve outs, you talked about a recent trip that you went on. Mine is a product that I use on a recent trip that I went on. I really like to ride my bike and I went on a trip to the San Juan Skyway. So it's a four day bike route, starting and ending in Telluride, Colorado. You're riding between eight and 11,000 feet and you're riding through the amazing southwestern Colorado mountains and Durango and Silverton and all these really incredible places. Of course I had a lot of fun, but one of the things that I really like to do when doing these bike trips is take pictures. Of course I lug my big Sony NE X6 around on my back and it's fun to bust that thing out.

• 1:27:11David Rosenthal?

  While you're riding those miles?

• 1:27:13Ben Gilbert?

  Dude, yeah, I mean, the telephoto, you know, you gotta get the, you gotta get that shot. But another thing that I brought this time for the first time was Moment lenses to put on my phone and take advantage of all the cool sort of phone apps that there are that number one, you can do the maybe dangerous thing of taking out your phone and taking some pictures while you're riding instead of me taking off my, you know, pack and busting out the big camera and doing, you know, the whole, the whole song and dance there. But also, it enables me to do things like HyperLapse, or you know, all the different, like Spectre is an app that does these cool time lapses. And Moment has a time lapse feature in their app. But to give folks an idea, Moment makes these really, really beautiful and really

• 1:27:58Ben Gilbert?

  high-quality glass lenses that do telephoto, that do wide angle. That's the two that I brought. But they have a series of other lenses, too, that really turn your phone into a camera that you thought it could never be and do some really cool, I would say, effects. But it's actually, it uses physics and optics to change the light that's hitting the sensor on your phone.

• 1:28:18David Rosenthal?

  That's super cool.

• 1:28:19Ben Gilbert?

  Yeah, they're super small. You can, I keep them in my backpack and I just use them in daily life. And I can't recommend getting some Moment lenses enough. I think they're, they're super fun. So that was my-

• 1:28:29David Rosenthal?

  Also a Seattle company, right?

• 1:28:31Ben Gilbert?

  It is, it is, led by a great CEO, Mark Barrows. And I know a super, super talented team over there. So can't recommend it enough. And that's been my, my toy of the month.

• 1:28:42David Rosenthal?

  I just can't believe that you lug your big DLSR on your bike chest.

• 1:28:47Ben Gilbert?

  So it's funny, it's a mirrorless, but it kind of doesn't matter that it's a mirrorless because I also have the telephoto lens on it. So it's big and heavy anyway.

• 1:28:53David Rosenthal?

  Oh, man, love it. All right. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:29:04Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:29:15David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:29:35Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system. So teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:29:48David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:29:59Ben Gilbert?

  All right, well, listeners, thanks so much. We hope you enjoyed this episode. If you want to become a limited partner, subscribing gets you access to our bonus show where we dive deeper into the nitty gritty of building companies. To listen, you can click the link in the show notes or go to glow.fm/acquired and all new listeners will get a seven day free trial and you can listen right here in the podcast player of your choice. So with that, we'll see you next time. We'll see you next time.