Shopify: The Story of Tobi Lutke
Shopify is one of the most incredible technology platforms to be built in the 21st century. Nearly 2 million businesses use Shopify to sell their products online, and that number is only growing. The company made nearly $3 billion dollars last year and is now the most valuable corporation in all of Canada. It’s an incredible growth story and at the heart of it all is the Shopify founder and CEO, Tobi Lutke.
Tobi isn’t like most big tech CEOs. Even though he’s worth billions of dollars, he’s somehow very relatable. When Mark Zuckerberg live streamed himself barbecuing in the backyard, pretty much everyone cringed and instantly turned it into a meme.
But when Tobi live streamed himself playing StarCraft, people loved it. He actually got invited to talk about StarCraft on The Pylon Show and spent 2 and a half hours just casually talking about the game he loves so much. It was remarkably refreshing in a world where so many CEOs only do press events when they’re launching new products, and avoid anything that could be off topic.
Whenever someone builds a massively successful business like Shopify, everyone wants to know the secret of how they did it. And Tobi has answered this question directly:
“Because I’m a computer programmer, I actually succeeded in this. But looking back, I was saying, I only succeeded in this because I was a computer programmer” - Tobi Lutke
But I don’t think that answer tells the full story. There are plenty of computer programmers who try to build great companies, only to crash and burn. Tobi clearly has a different mental model for building companies than most entrepreneurs, and I wanted to know exactly how he thinks, so I studied the history of Shopify and boiled his strategy down to a few key points.
In 1980, Tobi was born in a small town in Germany. Like lots of other successful technology entrepreneurs, he started playing with computers at a very young age. When he was just six years old, his parents gave him this computer. It looks ridiculously old by modern standards, but at the time, it was incredibly versatile. Not only could Tobi play games on this thing, but he could use it to program, and that’s exactly what he did.
By the time he was 11 years old, Tobi was hacking games and building his own levels. We basically saw this exact same story play out with Tim Sweeney in my video about Epic Games, it’s a really common path for entrepreneurs, and something I did myself when I was growing up.
Lots of tech entrepreneurs fall in love with computers while playing video games as children, but most of them grow out of it and start focusing entirely on business as they get older. Not Tobi though, he actually claims that video games taught him more about managing a business than anything else. And his gaming experience will become really important later in this story.
By the time Tobi turned 17 years old, he was completely obsessed with programming. Instead of preparing for college, he chose to drop out of high school and become an apprentice at one of the leading German tech companies, Siemens. This experience allowed him to develop some really solid programming skills and start making decent money, but he wasn’t very happy with the projects he was working on.
He was forced to build accounting software for old-school companies using Java and this just wasn’t scratching his itch to work on cutting edge technologies. But then he had an idea.
He’d been doing a lot of snowboarding in Canada and realized that there weren’t really any good online stores selling high quality snowboarding gear at the time. This was 2004 after all and Amazon was still pretty small. You could get basic gear at places like Sports Authority, but finding the best gear required a lot of hunting around.
So Tobi and a snowboarding buddy of his named Scott Lake decided to set up an online store where they could sell their favorite gear. They called it Snowdevil.ca, and the site is actually still online today. They have a funny quote in their about us section that says: “Snowdevil is not your typical snowboard store.” Which sounds an awful lot like many of the popular stores on Shopify today.
Building this site was not particularly easy though. Tobi had to cobble together a bunch of different legacy web technologies in order to get it all to work. He did eventually get the store online, but it was clear that a turnkey solution would have been a much better experience.
But then something really important happened. One of Tobi’s friends told him about a new open-source web project called Ruby on Rails. There was only a small team of developers working on it back in 2004, but Tobi saw the potential and started collaborating with the core team.
In order to test out what Ruby on Rails could do, and contribute to the ecosystem, Tobi built an open-source blogging platform called Typo. This wound up getting over 10,000 installs and becoming really popular in the Rails community. It’s funny because, even though Tobi now runs a company worth over $100 billion dollars, he still has “creator of the Typo weblog engine” listed on his LinkedIn profile.
With all of this positive experience using Ruby on Rails, Tobi decided to rebuild the Snow Devil ecommerce store from scratch. And this was a really crucial moment. Shopify still uses Ruby on Rails today and by picking Ruby as a programming language and Rails as a web framework, they were able to really accelerate their development for years to come. And this highlights one of Tobi’s key strengths as an entrepreneur: he’s a deeply technical founder.
Lots of entrepreneurs learn enough about programming to build a basic minimum viable product and start managing software engineers, but Tobi became a true expert in Ruby on Rails before launching Shopify.
See, Tobi knew that, even though Ruby on Rails could speed up the development time for new ecommerce sites, it wasn’t fast enough. Most people who wanted to sell things online didn’t want to write any code at all, so Tobi pivoted his snowboarding business into what would become Shopify.
Tobi and his co-founder Scott took all the money they had made selling snowboards, along with some small investments from family members, and started turning their snowboarding website into a proper ecommerce platform. They spent nearly 18 months developing the first version of Shopify, and when they launched it, Tobi used an online name generator to come up with the brand name. The company was originally called “Jaded Pixel” which, I think we can all agree is a lot less catchy than Shopify. But that name didn’t last very long. Scott had more experience than Tobi running businesses and knew that they needed something catchy, so he decided to combine the words “simplify” and “shopping” to create “Shopify”. Amazingly, the domain name was available, so they switched over immediately.
Their 2006 launch went fairly smoothly, although Tobi and his team didn’t really know exactly how big Shopify could get. They’d delivered a great product that allowed merchants to set up a website quickly, customize a theme, track their orders, and manage their inventory all without writing a single line of code. The only problem was the business model.
Instead of charging Shopify merchants a flat fee like they do now, Tobi wanted to take a percentage of revenue from each store. This model works great for small businesses, but as these companies start to grow, the Shopify fees can really add up. Customers had to pay 3% of their sales to Shopify and the cost of using the platform could skyrocket when businesses got big.
Now, there weren’t really all that many big companies using the platform at that time, but every entrepreneur is optimistic about their business, and the idea of paying Shopify millions of dollars in fees once their business got huge made them hesitant to sign up in the first place.
So Tobi changed the model. Shopify switched to flat-rate pricing in 2007 and merchants started using the platform in droves. The growth allowed them to raise $250 thousand dollars from an angel investor named John Phillips. This was a really critical moment for the company because, up until this point, Tobi had actually been the chief technology officer and Scott Lake had been CEO. But after this funding came through, Scott left the company to work on a new venture and Tobi had to take over as CEO.
This was a big shift for Tobi, who had never really been in a management position before and was primarily focused on just building great software. But John Phillips stepped in as a mentor to Tobi and the results have been really spectacular. Tobi has leveraged his deep understanding of software engineering into a successful leadership model. Developers want to work with people who understand the craft of software development and Tobi is the perfect engineering manager in this regard. Even though Tobi was still in his twenties, he became a great leader because of his ability to look at problems from an engineering perspective.
In his first year as CEO, Tobi did a great job: he grew the team to 10 people, got the company to a million dollars in revenue, and was able to become cash flow positive. They also landed Tesla as a customer, which is pretty crazy to think about considering how small both companies were back then and where they are now.
Even with all this success, Tobi was still unsure about where Shopify would go. He enjoyed running the Snowboarding store as a lifestyle business, and if they were growing profitably, maybe they didn’t need to go the traditional venture capital route, but then something incredible happened.
Raising venture capital only makes sense when you have a huge addressable market and are absolutely sure that more money can actually accelerate your growth. So, in a typical engineering fashion, Tobi ran an experiment to evaluate the impact additional capital would have on Shopify’s growth trajectory. He split a small marketing budget across a few different tests and they all outperformed expectations. One test was to incentivize web design agencies with a referral program. Shopify would give web designers a share of future profits if they used Shopify as their ecommerce platform of choice. Tobi also partnered with Tim Ferriss to run a business competition to promote the platform. Essentially, whoever built the biggest business on Shopify would get a $100 thousand dollar bonus from Shopify directly. Tobi really couldn’t spare the extra cash, since they hadn’t raised proper venture capital yet, but he took the risk anyway and it paid off massively. The companies that joined the competition wound up generating over $3 million dollars in revenue and brought a bunch of positive attention to the company.
These successful growth tests really changed Tobi’s perspective on the business. It was clear that there was room in the market for an ecommerce platform like Shopify. As big as Amazon was in 2010, companies still wanted to be able to own their customer relationship, and Shopify made this dead simple to do.
So, Tobi raised a $7 million dollar Series A, led by Bessemer Venture Partners. This cash injection allowed Tobi to really expand the vision for what Shopify could become. They developed an API that let 3rd party developers build apps and integrations to solve any problem a customer might have. This app store became incredibly important in making Shopify a real platform and Tobi actually mentioned that he got this idea from Bill Gates.
When he was just 16, Tobi read a book about Bill Gates and learned a pretty significant insight. See, back in 2010, every company wanted to be a “platform” company. All the hot social networks like Facebook and Twitter were platforms with network effects and had grown to enormous scale. With a company like Shopify, there isn’t really a network effect, but that’s where Bill Gates’ insight about platforms comes in. Bill said that “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.” That’s certainly true for Microsoft Windows, and it would quickly become true for Shopify.
And this is Tobi’s second key strength as an entrepreneur: he’s constantly evolving his product offering.
When Shopify first launched, the value propositions listed on their landing page were: hosting, bandwidth, and security. Today, that’s table stakes, so Shopify now focuses on featuring beautiful templates, smooth payment processing, and a world-class plugin ecosystem.
The idea that Shopify could be an ever evolving platform and eventually cater to every type of online store really changed the company’s trajectory. When Tobi raised his Series A at the end of 2010, the company had about 20 employees. One year later, Shopify had over 100 employees.
Sales growth took off as well. In just 12 months, they went from generating $275 million dollars across 10,000 merchants to more than $750 million dollars across 40,000 merchants. Now, Shopify only keeps a small percentage of that, but it was still enough for them to pull in $24 million in net revenue. But the growth didn’t stop there. Next year they were able to double their net revenue to $50 million dollars. This is exactly what you want to see if you’re running a venture backed Software-as-a-Service company.
You can’t stop at $50 million dollars though. When you’re venture backed, you’re aiming for an IPO, and Tobi knew that the market for Shopify was huge, so he kept expanding. In 2013, Shopify launched Point of Sale, which would allow merchants to run their physical retail stores using the same software that powered their website. More and more direct to consumer e-commerce companies were opening physical storefronts, so having a product that could handle both online and offline sales was a huge benefit.
Then, a year later, Tobi and his team launched Shopify Plus. I was actually one of the first Shopify merchants to join Plus, and it was a game changer for me. At the time, my company Soylent was growing really fast. We were scheduled to appear on the Colbert Report to discuss the product and we knew we needed our ecommerce site to perform under immense traffic. Appearing on national TV in front of an audience of millions drove an insane amount of customers to our site and keeping our own servers online would have been incredibly difficult, but because we were on Shopify, everything went smoothly and I was able to enjoy the show and the after party without worrying about the site going down.
Shopify Plus allowed bigger merchants to use the platform with confidence. Plus had uptime guarantees and a bunch of professional level features that were essential for larger organizations. They could still service small mom and pop shops, but now big companies like Unilever and Google could use Shopify as well. This propelled Shopify to an IPO in 2015, which valued them at $1.3 billion dollars. That was great for a relatively young company, but the stock has grown by more than 100x since the IPO. Incredible performance.
There are a few obvious reasons for this growth: Shopify was using the best technology, they rode the massive wave of ecommerce growth, and they didn’t have all that many significant competitors. But I think the true reason for Shopify’s success comes back to Tobi Lutke.
I’ve met a lot of successful entrepreneurs, but Tobi stands out to me as the most adaptable of them all. And there are a few great stories to illustrate this trait:
As he was scaling Shopify, Tobi needed to upgrade his office space in Ottawa to accommodate the next wave of hires. The lease was running out on his current building and the next place wasn’t move-in ready yet, so they were in a jam. As a plan B, Tobi prepared the team to work from home in case they got stuck without a place to work for a while. The new, bigger office wound up being ready on time, so they could have just moved in without any disruption, but Tobi had another idea. He wanted to see if working from home could be viable, so he told everyone to spend a month working remotely, even though they had a fully functioning office available. This was all before COVID, but the experience made the company more flexible and they learned a lot about how they collaborate.
This flexibility also played a big role during the Shopify Developer Conference in 2017. They were hosting the event in San Francisco and there was an unexpected power outage. The entire building was closed off to visitors, but instead of cancelling all the sessions for the day, they just held the conference outside in the parking lot.
Most people would be phased by unexpected events like this, but Tobi is at his best in these situations. And that’s Tobi’s third key advantage as an entrepreneur: he thrives on change.
This all comes back to his experience as a StarCraft player. Winning a competitive RTS game like StarCraft requires managing lots of different resources with imperfect information. And I’m not just talking about in-game resources like minerals. The most important resource is actually your own attention. The game is incredibly fast-paced, and where you spend your limited attention will determine whether or not you win.
Tobi is a master of allocating his attention to the highest value opportunity at Shopify, and that’s why the company is so successful today. So I encourage you to think like Tobi as you're building your startup, and maybe go play some StarCraft when you need to clear your head. I’m more of a Counter-Strike guy myself, but to each their own.
If you want to chat with me, you can always just DM me on Twitter.
This post is available as a YouTube video as well, check it out: