By SEAN SILCOFF
Saturday, November 11, 2017
This has been a year of extremes for Shopify Inc. The stock of the retail merchant software provider more than doubled as the company continually exceeded forecasts and cemented its status as Canada's preeminent emerging technology company, with 500,000-plus merchant customers. But Shopify also faced its first external criticisms: It was targeted by protesters for hosting the online store of alt-right U.S. publication Breitbart News, and its stock sank 20 per cent in the days after short-seller Andrew Left of Citron Research attacked its business model and marketing practices, and said the company was overvalued, in early October. On Wednesday, chief executive Tobi Lutke was named chair of the federal government's economic strategy table on digital industries, a 15-member-group that will advise Ottawa on how to become a global innovation leader. He spoke with The Globe and Mail's Sean Silcoff about his new role and the company's recent challenges.
Tell me about why you accepted the invitation to chair the government's economic strategy table on digital industries.
I want Canada to win. To me, Canada is actually a startup. I think now is the right time to figure out what is the country's role in the world. A lot of the best technologists live and work in Canada, and every once in a while they are aggregated by a Canadian company and then suddenly they're not any more. But the people are still here, they're just working for American companies, to the benefit of American bottom lines.
You have a situation where Canada has built a very strong foundation for a technology ecosystem that only sometimes actually works to the benefit of the true Canadian economy. I think this is partly because there hasn't been the conversation about what Canada wants to become. The TSX is roughly 5 per cent tech companies in terms of value. [Information technology companies account for 2.3 per cent of the S&P/TSX 60 index, compared with 22 per cent of the U.S. S&P 500.] That's utterly anemic.
If you have a lot of the main ingredient and none of the outcome ... the forces acting on the space are slightly skewed in such a way that the outcomes aren't right. We need a massive pyramid of companies at all stages that are strong. At some point, most people in the tech industry in Canada should be employed by Canadian companies, because we need to own the things we bring to the world. That would create an enormous flywheel effect that's going to be really good for the country, having another real leg to stand on [besides] resources.
This has been a tough year for Shopify in some respects. You dealt with the Breitbart controversy, but now you have a shortseller calling you "dirtier than Herbalife." How are you managing this increased scrutiny and criticism?
A good friend who plays tennis and has fans tells me, "No matter what you do, you're going to have haters."
We were so in the background [as a business-to-business provider], so few people asked what we were doing, we ended up with fans and not haters. They came all at once.
Sometimes you're eased into your new reality over time and you can adjust. I entered this year and if someone said something egregious and wrong about me or the company I wanted to type out an essay deconstructing their argument. I had to learn that's probably not the right way. You learn a lot about yourself and every single stage requires you to become better as a person, more resilient and able to deal with more situations. I don't want to cherry-pick - only growing from good situations - because my most intense learning periods have been when things went not the way I wanted.
What key lessons have you learned about yourself and what do you want to improve?
One of the things I was a bit surprised by: I think we haven't done a really good job of actually really explaining Shopify. A part of what people are talking about and clearly what some people reacted to are just so far off the mark that anybody who actually understands the company shouldn't feel terribly affected by some of those claims.
[For example] I read about us being a multilevel marketing company.
But there's one level of marketing [whereby Shopify signs up merchants to operate stores using its software]. It's very easy to dispel this kind of idea that Shopify is engaged in something like this. I think we should just explain: Shopify is a business model that is built around a cause that, if it's successful, no one loses. I'm struggling to find another company you can say this about. People say Facebook connects the world. Facebook has 5,000 PhDs that think about how to make you click on ads you don't want to see. Their business model is about something that most people would not perceive as making the world better ... [It] is meant to be addictive and hold your attention. Shopify has so much more clear purity of intent. Every time we make it simpler for people to start businesses, more people start businesses. We are competing not against percentage points of market share, we are growing a market. When we grow a market, someone potentially has a completely different life for the rest of their lives, which is fundamentally good. This is the kind of thing I just want to help people understand.
Let's talk about Citron. Why was your initial response to the short-seller so muted?
I admit we were surprised by the reaction to it. To us, it seemed so preposterous. I just thought, "Okay, this isn't going to have much of an effect." The problem was then it had such media pickup [including commentary by TheStreet's Jim Cramer] and the effect it had became the story. The message became amplified and ran away from us, frankly.
But you also have to understand, [Citron] releases [its report] on Day 1 of our blackout period [following the quarter's end]. We're not allowed to talk about the company.
The playbook he's playing is ridiculously tuned.
Investor reaction has been cool since you addressed some of Citron's allegations during your earnings call last week. There's a number of ways to interpret investor response; Why do you think investors are hesitant?
We are at an enormously premium valuation, which means we are a massively trusted company that's performed really well. It was so easy to find [people who said] why the company is great, actually it was really quite difficult to find people to say what was wrong with the company, which was a void, which then got filled with a fairly extreme position. If you think about a company's value as this elastic band where [the fair market value] is somewhere in the middle, if everyone says "Yay," the elastic band gets stretched up high, and suddenly the first person shows up to say, "Hey, wait a second everybody." Shopify is a complex company. It's not designed to be easy for investors to understand. Even if there's no validity to the words, now you have a counterforce for the elastic band, and the elastic band probably goes to the middle point to where it should have been all along.
Do you think you went far enough with your commentary or do you think you might need to further address some of the concerns/criticisms raised?
We told people, "Hey, this is preposterous." Remember, the guy knows the companies he attacks really well and this is bad faith misrepresentation of a company. At a certain point, we can't really engage with that kind of thing, because it's a lot easier to make up things than trying to substantiate what's going on. [In an interview with The Globe last month, Citron's Mr. Left said Shopify "needs to get rid of the aggressive marketing (and) to be exactly what it is, a good SAAS (software-asa-service), e-commerce platform and let the valuation fall to where it is, and if it happens to be $4-billion, then it's a good $4-billion company."] We are trying to grow this market. Growing the market means picking up people who are trying this for the first time. That means the failure rates are significantly higher. ... He said, "Well, they're not disclosing unit churn [the amount of customers that stop using Shopify] because they're hiding something." No one in the software-asa-service industry would ever do as much as put unit churn on a screen, because it would lead to completely wrong behaviour ... the company itself doesn't look at the number.
It's well-known that the failure rate of small businesses is high.
What would be the harm in sharing that churn data point and explaining the number in a bigger context?
Subtlety has died on the Internet. If a number itself doesn't tell a story you can't disclose the number, because people take it out of context. More importantly, no one at Shopify looks at churn.
So it's not an important number for Shopify?
No, not at all. Retaining revenue is the thing. Shopify creates essentially a basket of sign-ups every month.
There's going to be Procter & Gamble in there and someone who wants to take their dad's leatherbelt business online. Over the next couple of months, they figure what will survive, what will retain. From our perspective, this is a balanced portfolio of people with different potential. They then start growing up on the platform. Some of them succeed, some of them churn. The ones who succeed end up consuming more of our services, and it's 100-per-cent retentive for revenue.
For us it's creating annuities that [generate] revenue.
Some analysts highlighted as a concern the fact that average gross merchandise value [GMV] per merchant went down last quarter. Could you provide more disclosure, cut those numbers up a bit more to address their concerns?
We could, but honestly - I have a dashboard with two numbers on it, [total] GMV and net customers.
That combines into a monthly recurring revenue number. That's the triangle, and that's the direction and growth of the company. What we disclose and tell people is the CEO dashboard. People are curious, but for the directional running of the company, those are the numbers that matter.
There were some concerns from analysts about operating margins last week. Your company has been talking for a long time about reaching operating profitability. You came in one quarter ahead of projections in the third quarter, with your first adjusted operating profit since going public. But your CFO, Russ Jones, said the company's focus going forward will be on revenue growth, not profit, suggesting the market will see a bumpier ride on the bottom line. What is the longer term view the Street should have about Shopify's intents with regard to achieving and sustaining profitability versus growing revenue?
We always said this is a growth company. We will periodically check in with profitability, while being on a growth journey. But we're not interested in building up a massive bank account right now and doing share buybacks. That would be a horrible way to invest money given the opportunities we have.
That's never been a concern for Amazon, either.
Exactly. We said from the beginning we're not going public to be public, we're going public because the most enduring companies are trusted public companies. So far, we've always done exactly what we said we'd do - in fact, slightly better.
We're not done building this trust yet. We just need people to hear us when we say this is an enormous opportunity.
This interview has been edited and condensed. Read more questions and answers from this interview at globeandmail.com.
Tobi Lutke, the CEO of retail-software-solutions provider Shopify and new chair of a federal advisory council on digital industry, says Canada needs to retain the tech ideas it brings into the world to become a leader in global innovation.
PAUL CHIASSON/THE CANADIAN PRESS