Innovation

Canada's Smartest Company: Shopify

The Ottawa firm's software is shaking up the retail industry by ushering small operators into the vast opportunities of e-commerce. And then there are its entrepreneur contests, its venture fund, the company-provided maid service€¦

Written by Mark Anderson

Back in 2004, Tobias Lütke was a 24-year-old German immigrant with a snowboard shop in Ottawa and a problem: no easy, efficient and cost-effective way to sell his boards online, hence no way to reach customers beyond the city limits. Sure, he could give an enterprise developer $100,000 or more to build an electronic storefront from scratch (where would he get that kind of dough?!). Or he could plug into existing e-commerce platforms from the likes of eBay or Yahoo (feature-impoverished, unscalable—in short, not good enough). “We did a lot of online retail using Yahoo stores, but it really wasn’t very good,” recalls the slightly built, soft-spoken Lütke with a sad shake of his head.

In the end, he did what any frustrated entrepreneur with world-class smarts and mad programming skills would do: he wrote his own software that would allow him to upload photos and prices for his boards, track inventory and accept credit-card payments.

Doing his own fix was smart—he’s a trained and gifted coder, having apprenticed with German tech companies from the age of 16. Genius, though, was realizing that he had created something new and potentially massive. Something he could build a multimillion-dollar company around.

Eight years later, as CEO of Ottawa-based Shopify, Lütke sits at the helm of a soaring industry star that churns out e-commerce software enabling independent retailers to set up digital storefronts quickly and cheaply. “Shopify was one of the first companies to recognize that more and more small businesses are moving sales online and need an easy-to-use and inexpensive platform to do so,” says Boris Wertz of Version One Ventures, a Vancouver-based VC firm. “Being an early entrant in this space helped them initially, but they also are the company that has executed the best. They build great product, pursue aggressive sales strategies and are extremely metrics-driven.”

Those metrics are impressive. From the original three co-founders, Shopify’s head count has increased to 130, while its customer base and sales have both more than doubled in each of the past three years. By the end of 2012, the company expects to have 40,000 clients selling $600 million worth of product in 90 countries worldwide. Moreover, the market for Shopify’s do-it-yourself web stores is seemingly insatiable: in North America, only 10% of retail is currently conducted online, but the sales volume is increasing by 14% annually.

Gold-plated metrics aren’t the only things recommending Shopify, however. By eliminating the barriers of cost and complexity and allowing almost anyone to sell over the Internet, Shopify is potentially transformative, enabling a whole new cadre of micro-businesses to sprout, while providing additional sales channels for existing companies—including such current clients as Pixar and Tesla Motors. For this work in “democratizing” online retail, Shopify was named one of the world’s most innovative retail companies by Fast Company magazine last year.

It is also a key reason why Shopify is PROFIT’s inaugural pick as Canada’s Smartest Company—this year’s most inventive and visionary entrepreneurial outfit, one from which all businesses can learn. Here are a few things that particularly impress us.

THE BIG BRAINS

Did we mention that these guys are smart? “Tobi is just kind of off-the-charts brilliant,” says Mark MacLeod, who was Shopify’s first chief financial officer before leaving in 2010 to start a venture-capital firm in Montreal. Lütke’s deep understanding of the technology is paired with high seriousness about his role as leader and chief strategist, says MacLeod. What’s more, Lütke will likely get stronger, thanks to an almost preternatural discipline and drive. “He has a very high level of self-awareness, which is common to introverts, and that gives him the ability to replay his day in detail,” says MacLeod. “His thesis is: if he does that enough days in a row, and if he can get his management team to do that enough days in a row, they’ll become unstoppable.”

Shopify’s other founding partners—chief culture officer Daniel Weinand and chief technology officer Cody Fauser—are no lightweights, either. “It’s pretty rare to see an entire founding team continue to be involved at the top level of a company that’s growing at the rate and scale of Shopify,” says MacLeod. “And yet, they’re all at the top of their game and completely in charge of their functions.”

The rest of the executive team includes chief platform officer Harley Finkelstein, a 29-year-old lawyer, MBA and entrepreneur who joined in 2010, and chief financial officer Russ Jones, who came on board last year. Of these, the hyperkinetic Finkelstein has emerged as the public face of the company, and the de facto No. 2—the extroverted yang to Lütke’s cerebral and introspective yin.

Interestingly, while the team is long on smarts, it’s conspicuously short on experience. “Tobi is a first-time CEO, and very few of his executive team have €˜been there, done that’ when it comes to running a company,” notes New York-based venture capitalist Trevor Oelschig of Bessemer Venture Partners, which led two rounds of equity investment in Shopify totalling $22 million. But Oelschig believes that can be an advantage, “because you figure out how to do things in ways others haven’t.”

THE CULTURE

The creativity that comes from navigating without a compass—and from having, let’s face it, serious VC cash to play with—is immediately apparent to anyone visiting Shopify’s headquarters, which occupies two floors (and growing) of a stately building in Ottawa’s ByWard Market, the city’s hippest enclave. Befitting a young tech shop, the workspace itself looks like a cross of a sci-fi movie set, an avant-garde art gallery and a Toys “R” Us outlet. Floor-to-ceiling chalkboards line the hallway and are covered with murals, doodles and slogans—whatever anyone wants to draw on any given day. The offices and conference rooms are named after video games and are elaborately decorated, employees receive annual allowances to tart up their spaces as they see fit, and individual expression is encouraged. Staff also get memberships to one of Ottawa’s toniest health clubs, catered gourmet lunches each day, $250 a year to spend on sports gear (the “Sportify” program) and a maid service that’s dispatched twice monthly to clean employee homes. Seriously.

Who wouldn’t want to work here?

Which, of course, is the point. Lütke and Finkelstein are keenly aware that technology companies are engaged in a ferocious global war for talent, and that Shopify has to be at least as attractive as the Googles and the Apples if it’s going to compete. The housekeeping program is particularly costly—both in dollars and administrative hassle—but as with most of Shopify’s initiatives, it’s thoughtfully conceived. “It’s really hard to justify as a line item,” admits Lütke, “but one of the biggest parts of employee buy-in we were missing were the spouses.” The reality, he says, is that Shopify has to be “incrementally better” than the companies in Silicon Valley, because Ottawa winters are so much worse. “That’s why I directed Daniel [Weinand], literally one of my biggest guns, to take the role of chief culture officer. The only thing he’s working on is making sure people are happy here, that we do interesting events, that everyone feels part of this.

If you want to know who the truly valuable people in your organization are, put a bucket of paint at the front door, have everyone step in it, then, at the end of the day, see whose office most of the tracks lead to.

— TOBI LÜTKE

THE EMPLOYEE ENGAGEMENT

Two initiatives illustrate just how seriously and creatively Shopify tackles employee retention. The first is its unique bonus structure, wherein literally every staffer is eligible for monthly bonuses based not on rank or job title but on how helpful they are to customers, partners and fellow workers. “Someone who taught me programming in Germany once told me that if you want to know who the truly valuable people in your organization are, put a bucket of paint at the front door, have everyone step in it, then, at the end of the day, see whose office most of the tracks lead to,” says Lütke. “We had to figure out a way to approximate that without tracking paint all over the place.”

What Shopify came up with is an internal, Twitter-like communication platform dubbed Unicorn that allows employees to talk to one another about their projects, triumphs and tribulations. Data from Unicorn is tabulated monthly, and bonuses are distributed to those who’ve been the most engaged and helpful. “If you look at who gets most of the bonuses over the course of a year, it’s really amazing,” says Finkelstein. “It’s not top down. It’s peer to peer, it’s up and down, it’s a meritocracy. And that’s very rare. Technology companies that get to the size we are now typically don’t remain meritocracies.”

The second initiative is something called Hacker Days: all staff get two days each quarter to form teams and work on projects entirely unrelated to their day-to-day jobs. Not only do Hacker Days allow employees to get creative, they’ve resulted in some useful spinoff products, such as a digital dashboard that was written in open-source code and has been downloaded by more than 1,500 companies. A more whimsical example is an app that sends text messages when the office beer keg gets low, so the receptionist can re-order before it runs dry. “That’s cool, right?” says Finkelstein. “But it turns out there’s actually nothing like this in the bar and restaurant industry. It’s potentially a business.”

Taken together, all the perks and programs have helped Shopify attract talent from around the world, with virtually zero attrition—just two employees quit in the past two years—compared with 30% average annual turnover for Silicon Valley companies.

THE CONTEST

It so happened that back in 2010, Lütke met one of the Valley’s entrepreneur-celebs, 4-Hour Workweek author Tim Ferriss. Ferriss expressed skepticism about Lütke’s claim that anyone could use Shopify to get a digital storefront up and running quickly. “Ferris essentially said, €˜Prove it’,” recalls Finkelstein.

From that challenge came Shopify’s first Build-a-Business contest, offering $100,000 to the retailer that launched a new Shopify site and sold the most product through it over an eight-month period. “Back then, that was a lot of money for us, but we knew the prize had to be really substantial to garner widespread interest,” says Finkelstein.

That first competition generated 1,400 new Shopify customers who signed onto the platform specifically to enter the contest; San Francisco-based DODOcase, maker of iPad cases, took the prize. This year, Shopify is bestowing $50,000 on winners in four retail categories in return for 5% of their companies, based on a $1-million valuation for each winning business. There’s a twist, though: the investment is actually being made by high-powered industry leaders in each of the verticals, who will act as mentors during the months of the competition and become equity partners after it’s over. “So, you get the $50,000, but you also get someone like [Fubu founder and Shark Tank star] Daymond John as an investor, which might be even more valuable,” says Finkelstein. “If you decide you don’t want to give up 5% of your company, you can take the $50,000 in cash and move on.”

Thanks in large part to the calibre of the mentor-investors—which also include Ferriss, Swissmiss founder Tina Roth Eisenberg and Lean Startup leader Eric Ries—this year’s contest has generated media buzz across North America. More important, it has driven more than 6,000 new users to the Shopify product.

THE EXPERTS AND APPS

Lütke’s vision is to turn Shopify into a true all-in-one platform, the sole point of contact a retailer needs to power its entire web presence. To do that, the company has been building a network of thousands of so-called Shopify Experts: third-party web designers, developers and marketing gurus throughout the world who can help Shopify customers with basic setup for a flat fee of $500. They also can customize the look, feel and functionality of digital storefronts for specialized applications.

Not only does the expert program allow retailers to create more sophisticated sites, but it’s turned out to be quite lucrative for Shopify. “These experts end up generating a lot of business because if a customer walks into one of their agencies and says he wants an online store, they’re going to build it using Shopify,” says Finkelstein. To make sure Shopify is the experts’ preferred platform, the company pays them a commission on referrals.

Shopify also encourages third-party developers to build apps and extensions for the core product, some 200 of which are already available through Shopify’s app store. “Let’s say you want something sophisticated to market your business or manage inventory,” says Finkelstein. “You can buy that from the store and integrate it with a click of a button.” Lots of companies use third-party app developers, of course. Few, however, have created a $1-million fund to finance cash advances against future app sales. “That’s for developers who maybe can’t afford to take a couple days off work to develop their app,” says Finkelstein. “We want to mitigate that by offering, say, $5,000 up front.” Shopify keeps all the revenue from app sales until the advance is paid off, after which the developer gets to keep 80% of ongoing sales.

THE MENTORSHIP

Ottawa’s once robust tech community, dubbed Silicon Valley North in the heady days of the late 1990s, is in transition. All the big players, such as Nortel, Corel and Cognos, have either folded or been sold, and the companies remaining are mostly early-stage startups that have little, if any, revenue.

What they do have are eager mentors at Shopify, which at any given time hosts one or more of these outfits at its office, sharing resources, knowledge and experience. “And the best part is, they’re encouraging other companies to follow their example, so the transfer of knowledge and energy is contagious,” says Bruce Lazenby of Invest Ottawa, the city’s economic-development arm.

Recently, Shopify hosted a 52-Hour Entrepreneur contest, during which 100 developers, designers and other business hopefuls occupied Shopify’s headquarters over a weekend, vying to see who could build the best company from scratch. “It was packed,” says Finkelstein. “People built their own workspaces, and they essentially worked in teams from Friday to Sunday straight.” The winner—a website that allows users to upload their own tattoo designs, then have local tattoo artists submit bids for the work—will now compete against 52-Hour Entrepreneur winners from other cities throughout North America.

It’s a nice give-back to the community, but also a useful profile-building exercise. “Of course, all this mentorship benefits Shopify,” says Lazenby. “They get to see talent first-hand, and maybe plug some of these people into their recruitment pipeline.”

THE DREAM

No one is going to accuse Shopify of thinking small: Lütke’ objective is an IPO on the New York Stock Exchange by 2015—at the latest. “It’s an audacious goal,” he concedes, “but to take Shopify public is a long-standing dream of mine. I love this idea of participating in the full spectrum of what capitalism has to offer.”

Can it be done so soon? “The business definitely has the potential,” says Wertz of Version One. Oelschig, an investor, is more bullish. “We’re lucky enough to be invested in some of the best companies in Silicon Valley, and Shopify is as good as any of those,” he says. “When products work as well as Shopify’s do, companies tend to grow very, very quickly.”

Originally appeared on PROFITguide.com