Join us for a conversation with Shopify (SHOP 4.24%) founder and CEO Tobias Lutke about where great ideas come from, building a culture of intelligent risk-taking, and the future of business creation.
Jump to the discussion on:
- A Culture of Intelligent Risk-Taking
- Building Better Businesses
- Leading Thoughtfully
- What Success Means
Tom Gardner: Tobi Lutke from Shopify is joining us. Well, what I'd like to focus on, Tobi, for this conversation (I think the third time that we've spoken) is really about scale and about where the business is going, while also recognizing that there are a lot of things you can't talk about, and we don't want any forward-looking statements from this. But really philosophically how you think about growing your business from where it is today to something the size of Salesforce (CRM 1.85%) or businesses of that size and scope out there.
And so I guess I'd just like to start with your philosophy about putting merchants first and what that really means to you, and how that expression will play out in the way you think about your business over the next five-plus years.
Tobias Lutke: Yes, great, thanks for having me on again. That is a broad question. I tend to not look backwards from the externally valued multiples such as market cap. When I sat down to write the first lines of code, I did not say, "I'm going to build a Salesforce-size company."
What I did say is, "I'm going to do something that's going to be really valuable for merchants." In fact, you know I'm a merchant myself. I needed to do something that's much better for me, and after it was valuable for me, we decided to share it, and we called it Shopify because we realized there's lots of people out there who are probably going to look for something very similar to what they needed.
And it's funny. That kind of does the same thing that Shopify's doing to this day. It's fiercely interested in the problems that new merchants are facing, that growing merchants face. And we find that this work, especially this part of online entrepreneurship, is extremely constrained in terms of occupation simply by the amount of friction that people encounter when they attempt to build their businesses.
Because how many people do you think would want a profitable side business? Like if you would give everyone a big, red button and ask them to push it if they want one of those side businesses, literally everyone would push it, right?
Lutke: And so what we are going to try to do (and this is impossible to accomplish, but we are going to try to approximate it as much as possible) is to create that red button and get down to this kind of experience. And as we are learning more and more about our world -- talking with more of our merchants and seeing hundreds of thousands of success stories -- we learn more, we bring this back into the software, and we make it a little bit more likely for people to succeed. And every single time we do, we see success rates across the platform go up and expand the market size.
So it's not that I'm even trying to avoid future-looking things, but this is one of those situations where the past is actually a good predictor for the future. We are going to find, hopefully, very innovative ways and novel ways to further simplify the process, but every time we do, our market expands, especially now that we have more of a global reach, and this is what we're going to be doing now and [were] doing five years ago and will be doing five years from now.
Gardner: You talked about the beautiful place here and now with the ability to focus on multiple things at the same time, something you've been dreaming about being able to do for a while. How do you prioritize? I mean, how does an idea get evaluated? Maybe even where does it emerge from? Is it generally from somebody's intuition? Or their experience talking to merchants on the platform? Or looking over the data together? All of those above? Can you give an example or two of an important idea, and where it emerged, and how it was prioritized and invested and reinvested in?
Lutke: I think everything we are working on probably has a lineage which is slightly different, so everything we're working on. But one thing we emphasize is that everything we work on comes from a conversation with our customer base. And it works a little bit different than probably most people think. It's not really around our customers telling us what to do. Our conversations with our customers help us really understand problems very well.
I'll give you an example. This is something that, of course, is very mature at this point, but I think it illustrates the point. It's where our point-of-sale product came from. Initially, we were just online stores with online stores still being, by far, the biggest channel across the platform. It's still what we are best known for. But as we were talking to more and more of our customers as they were expanding, what we were seeing is that all these businesses -- you could call them digital native. I'm not sure that's the right term that I would use right now, but basically internet-first, newly created businesses.
Now even in the early part of this decade, people were dying to see just how expensive AdWords and increasingly social media marketing spend was becoming and, funny enough, in a very roundabout way brought opening point-of-sale locations back into play. So a lot of our customers were investing their marketing dollars into leases, arguing that a lease on a good street is really just a form of customer-acquisition spend, which, again, was a very new take on an old concept.
But they were building these stores, and they were telling us just how difficult it was to integrate. So we actually started a team and a project around this problem. We said, "You guys need to make it much easier to synchronize a point-of-sale system with Shopify, because the problems are always of the nature of overselling. Like that side sells sometimes very rapidly, and if you have even a five-minute cycle of synchronizing your inventory between your point-of-sale locations and your online store, you may very well end up overselling, and five minutes is extremely optimistic. It's usually more like 24 hours for these kinds of tools."
So we were saying, "OK, let's build a real-time synchronization platform," and that's how the project started. And as we went deeper and deeper into the problem, at some point we just realized that the entire premise of a point-of-sale system -- the systems that were being installed at our customers -- they had all sorts of additional issues because our customers [audio drops 00:07:31], and getting back up was really difficult and usually based on a hard drive in the basement of a store. So they wanted to use Shopify as the backup so that if anything went wrong, they could regenerate it. And at some point, it just dawned on us: You're solving the right problem but in the wrong way. What a point-of-sale obviously should be is something else that's connected to the same database as the online store.
And so through a very interactive process, you end up coming to the point where, I think, eventually you would solve the right problem, and then this is why we have a point-of-sale store which is now installed in over a hundred thousand merchant locations. But the beginnings of this was not, like we said, "Hey, here's a market that's interesting." It was the beginnings where, "Here's a very real problem that is part of the kinds of problems that we need to make go away," and we didn't actually have an opinion on how we should do this. We just solved a problem.
Gardner: And what happens when you find a problem that you're iterating in support of your merchants and identifying problems to solve, and then that problem does not emerge as really economically viable? Or not significant enough within the overall business to actively reinvest there?
Lutke: The economic viability doesn't tend to factor into it. Basically, money just sort of finds the people who do valuable things. I think this company has a fairly strong faith in this. It's just some things are easier to monetize than others and be monetized. If we see a good lineup, we have a good line of sight on how to do it, but it never is the starting point we do for anything.
Like the payment gateway component -- which is now the largest portion of merchant services and is half of all the revenue of Shopify -- was built because we needed to solve the problem that it was too hard to get a payment gateway. Then you started an online store not because of the revenue component. We just had the faith that the revenue side works out.
We don't build our business to make revenue, basically. I even wrote that in my letter which was filed with the S-1 during the IPO. Shopify is the kind of company that prioritizes business as the most valuable product in the world from the market it's in, and revenue is sort of a secondary priority. We want revenue so that we can invest more into our No. 1 priority, if you think about it this way around.
A Culture of Intelligent Risk-Taking
Gardner: Thank you. The last time we talked, we talked about 30 for 20 ideas or 10 for 100 ideas; namely, an idea that has a 30% chance of being a 20x or a 10% chance of being a 100x and how few established companies actually pursue those ideas. Is that a fear that you would have as your business, itself, grows to become an institution? That it might be harder to persuade people to take big risks inside of the culture?
Lutke: Oh, yes. This is the fear, I would say. Because basically you're working a little bit against human nature. Everyone has an assumption -- especially people who have joined an organization in their first couple years -- about what it takes to have a good career and be a celebrated member of the team that they care about. The idea of taking big risks that might not pan out and that that might be the kind of thing that leads to the best possible career is hugely unintuitive, and you really have to model to people before they believe it.
That makes perfect sense. That is actually not that difficult to do when you're a small company because you basically have to go all-in on every one of your bets even though they're obviously risky, and even just going all-in on anything is risky. So the early participants in any kind of journey that leads to a great company are very well versed in the fact that you have to take risks. That sometimes things don't play out. Then you just dust yourself off and try something else.
As the company gets bigger, it's harder to come by these kinds of model behaviors, so you have to figure out a way to get this into the company culture. The company lore. The stories that people tell each other. That's less direct and much harder to do. I hope you're succeeding with this, but it's very hard to do.
Gardner: For the fun of it, I'm going to challenge you on something that you're doing at Shopify, and I'm doing so from a position of, let's say, seated in the balcony of ignorance, which is one of my favorite places to be. You have made a few acquisitions. I know you don't talk about them very much. I'm not asking you to.
I'm wondering why Shopify, with the balance sheet you have and the size of your market opportunity, and likely a number of adjacencies to the very large business you're already in; why you would not be more acquisitive, let's say, over the next 5 to 10 years than you've been over the last five to 10 years? Again, not looking for any specifics. Just in theory, why not build up an acquisitions team and get pattern recognition that you have in your space and maybe learning from other companies that executed acquisitions very well? Why not be more acquisitive?
Lutke: I think that's a fair challenge. I would say that Shopify will likely be somewhat more acquisitive than it has been in the past. I think it was very valuable to explore all of this, because I think companies can get very distracted with acquisitions and the integration of an acquisition afterwards.
You sort of implied that there's good role models that have done this well that we could model ourselves after. I just would like to pose that Shopify was worth $1 billion about four years ago in the public market, and no one bought me, so I don't think these teams are nearly as good as people think.
Like, we've done a lot of talking and thinking with these teams. Honestly, a lot of M&A (a surprisingly high percentage) is more like trophy hunting than truly executing a very cohesive, strategic movement, so that feels like a waste of everyone's time. I hope that my board of directors will be so inspired as to replace me once I get into an ego-driven acquisition game.
And so I think it's one of those things which is just significantly harder to do well than I think a lot of folks are acknowledging, and that it's worthwhile to [go slower], pay your dues, and learn to do it well. Because I think what you want to try to become is the best company at acquiring and integrating afterwards.
To do that, you have to figure out how to be as founder friendly as possible. How to ensure that the kinds of people who build amazing companies that are worth buying have a better job the day after the acquisition than before, and how to keep the founders around in the company and make them very important ingredients in the future success of a combined entity. And all these are the kinds of things which I have not seen other people do well. I think these usually are things which are scarce, and therefore, I just don't think many people end up getting the value of what they paid [for].
Obviously, there are incredible acquisitions in tech history, but I think the list is actually fairly short, and so you want to figure out how to get there, but we're not quite ready yet.
Gardner: I will say that part of the reason I issue that challenge -- again from a position of ignorance -- but part of the reason I issue the challenge is because I believe in your principles, and so I, as an outsider, wouldn't be thinking that this company is all of a sudden going to be ego driven. It's going to be about authentic value, continuity, and sustainable growth, but thank you very much for that answer.
One of the interviews a few years ago I did [was] with Reid Hoffman at LinkedIn, [and] he said something that has really stuck with me. Now in a way, this does support LinkedIn's business model, but I thought it was a very genuine answer. He said he believes that 95% of what a company needs to know in order to be thriving 10 years from now presently exists outside of their company. Do you agree with that? And if so, is there a methodology for how Shopify learns about the world outside of your offices?
Lutke: I agree with that. I think one thing which probably is underappreciated [and has] contributed to the success that we've had is that it's always been outside our company. We've been outside our market. I made an e-commerce company right after the dot-com crash, if you can imagine. That wasn't the most popular idea.
So one thing that Shopify had to learn is how to pay attention to how the best people in the world do certain things, and do so from remote. Again, we did not grow up in Silicon Valley. We are in Ottawa, Canada, and so I, of course, didn't network in Silicon Valley. I came for trips. I talked with a lot of great CEOs there about how they do their things, and I took those lessons back. I figured out where they meet. Where we talked most to each other. What books they read, and all these kinds of things.
And all my colleagues did that, as well, in their own way, because one of our cultural values is to be a constant learner, and the best people to learn from are the people who currently are doing it the way you think it ought to be done. So this spotlight, of course, has been pointed at Silicon Valley significantly, because that's where people figured out how to build these modern tech companies that they all aspire to be.
But interestingly, I don't think the people in Silicon Valley ever had to truly build that capability, because you basically learned what all of the contemporary companies are thinking simply by osmosis. Simply by being there and simply by just networking and paying attention.
I think we all can recognize that people are doing super-interesting things around the world now. If you want to study the consumer internet, currently e-commerce, you actually don't spend that much time with your spotlight directed toward Silicon Valley. You probably look toward China right now.
And I think it's very good that we have these skills at this point, because we just know how to analyze a place. How to get information. How to incorporate most things into our own understanding. As William Gibson said, the future's already here. It's just not evenly distributed yet, which is actually just a different way of saying what we said here.
So the trick of building a world-beating company is not actually to invent the future. That's way too hard, or it's just way too dependent on lack of good fortune. The way to do it is to have a mental model of what the world currently is actually like and what the most up-to-date version of the world, across every single category, looks like.
And so that benefits the companies which are very critical witnesses to our virality [and] understand where people's thinking has gone the furthest, and then try to import this and incorporate this into the mental model they use to build software against. I think that's the way to do it, and I think it's something that we have some systemic advantages for.
Building Better Businesses
Gardner: We talked a little bit earlier about encouraging, particularly newer employees, to take risks and to model out for them the thinking of what type of reward would justify what type of risk. You don't get the beautiful rewards without taking the risks.
I'm wondering [about] the culture of Shopify and now the very active hiring that you're doing and the growth. Tom Peters, the business theorist and business writer, came to visit our offices a handful of years ago, and he likes to make some outrageous statements to make his mark, and in a good way. I think it's interesting he causes you to think.
I'm paraphrasing, but he said, "Once you have more than 250 employees, it may take decades, but you're already dead." And his supporting points for that were that at least for the companies that he had grown up studying over the prior 30 years, after even just a few hundred employees, it became impossible to see the individual and actually champion the adventure and the career and the growth, the progress, the challenges, the feedback, and the understanding needed to really support somebody to have a great career as you did when you were a team of 12.
Now we have more tools that we can use to scale culture, but I'm wondering how you measure engagement and satisfaction in your culture and how you think things are doing at this stage of continuing, rapid growth for you.
Lutke: I would offer that that's probably too cynical a view of organization building. I think you can do better, but it's interesting. Here's a really fun thing about company building. No one knows. Maybe it's true. Maybe the best organizations are 250 people, and that's what we're going to find out over the next 10 or 20 years. I mean, I would pose that would cause enormous problems for the economies of our countries if that were found out to be true.
The world is kind of in a wonderful, fun brainstorm about how to build companies. Because we finished building all the companies I think that can be usefully built across, let's call it, Frederick Taylor, Peter Drucker, Henry Ford's kind of [approach] of taking a very complicated problem and turning it into a series of simple steps. Then you put iron ore into one side of a factory and end up with a Model T on the other. That was the predominant organizational mechanism called scientific management, the substrate which underlies the building of almost every company until, maybe, 10 to 20 years ago.
If you look at a company that I greatly admire, like IBM for its longevity, it's a wonderful implementation of Frederick Taylor's ideas, even to the world of technology. Lots of good ideas, and it's remarkable how many companies and how good companies were built on these ideas.
I think what a lot of people attempt, now, or have seen is that there is a natural cap of how good companies built on this model can become. Like, if this is an unknowable scale -- and I think I might have told you this before -- my opinion is that at some point in human history, someone's going to build the perfect company. I would love to see what it's like. It's not going to happen in my lifetime, so it's not for me to worry about what it might look like, but let's call it a 10-out-of-10 company. It's a completely [doomed] company being 1 of 10 -- one which isn't surviving long.
So my assumption is that the best company you can build based on Frederick Taylor's ideas is maybe a 6 out of 10 on this scale. And I actually think that the best companies in the world that we've built so far, across all of business history, there's a few 6 out of 10s in there. I don't think anyone's managed to make a 7 out of 10 yet.
I think we're all thinking about how to build better companies. On what principles we build better companies. Just observing things like the emergence of something which is now so mundane like Wikipedia actually invalidates a lot of the core philosophy behind scientific management.
And so we know that motivation doesn't just work by people being coin operated. We know that people want to have something to do that has a bigger cause that they are looking toward. We know that people don't actually want to get their jobs [specified] out to exactly which degree and how long they can perform that one single step in that assembly line when they attach a certain gear to another widget. We know that if you give people a lot of whitespace, that you get simply better [results] with [that] than anything you might have imagined, and so on.
So building a company more as a complex adaptive system is clearly the direction that is my bias. [It's] my hope that building based on the principles of complex adaptive systems -- building companies that are modeled more like networks rather than traditional hierarchies -- is going to be the substrate idea that's going to unlock better versions of companies that might get into the 7 out of 10, if we are so lucky, and I think a lot of people are working on these ideas. I hope that Shopify can contribute to that journey.
Gardner: For some reason, that answer brings up for me an idea that I've had internally, which is to build a subsidiary of our business. We're 100% privately held. We bought all of our venture capitalists back and made the decision to remain private. We view that as being beneficial in many ways, [while it] provides some disadvantages in other ways. But one of the things that it does is it allows us to be a little bit more experimental, perhaps. To look around at the world, see where the world's going, and plant some seeds in different places. If they don't work, OK. And the best public companies can do that as well.
We've always said we want to run our private company as if we were public, and if we ever go public, run our public company as if we were private in the ways that meet the legal requirements of being a public business. But one of my ideas was to create a subsidiary that is a subscription so that our members can be a part of it and follow it. That is a Shopify store [where] we work with Upwork freelancers, pretty much exclusively use Zoom and Slack, and fully run a remote company. There are companies that exist like this. But to demonstrate to entrepreneurs that there are new ways to build companies today and that the resources may be less expensive and more available than people are aware of.
There are, as you said, multiple obstacles to somebody getting that big, red button; but I think that's another way that the world is shifting and how cultures will emerge, and how laws have to change, as well, to allow you to have contractors in different states without as many regulations, documentation, and tax issues that you have to go through. Do you see a lot of remote companies being created from the ground up on Shopify?
Lutke: I mean, this is a crazy thing. Forbes talked about Kylie's operation. They [employ] eight full-time staffers for a company that makes an invoice worth $900 million. This is really the essence of the William Gibson quote that the future's already there. It's just not evenly distributed yet.
If you put together all the latest things just like you said, right now, the way all these things [combine] into leverage and into the kind of organization that you can build; if you get the most out of the best stewards in the world, it's not just a bit better. It's significantly better. That 0-to-10 scale I'm talking about -- that's a logarhithmic scale. It's not the linear scale.
There's just so much power that comes from using the best approaches, or even combining a lot of the best approaches in a novel way so that you're doing something that's even better. And I think that's what makes company building so fast, because the end result can be a unique system with unique people for a unique problem that you care most about when you start it. This is why I think it's important to preserve this and important to build these kinds of tools that can end up being [innovators] like Shopify and getting the future's best companies off the ground, ideally without too much misery in the beginning.
Gardner: One of the more difficult sides of business, sometimes miserable, is arriving in a place where you are unable to resolve a disagreement or a dispute. And I would say really I'm talking here, in this question, about something that's strategic, let's say. Is there an example between you and Harley, or an example with you and leadership, or you and the board? You can go back a couple of years if there's anything that's not resolved now.
What's the methodology that you take to mediation and giving people space to prove out their belief while also trying to run a cohesive strategy? Any examples that emerge for you in that and how you resolve them?
Lutke: One thing about my leadership team is we've all been working for developers for a very long time now. The average tenure in our leadership team is just over five years, maybe even at this point. If you look through the list of IPOs that are currently going out, it's actually worth looking at the leadership teams.
These are amazing companies, and the executive teams' main officers are often, I want to say, mercenaries. That sounds like the wrong term. That's a term some people throw around. I think that's too derogative. I think it's just people who are really good at doing that one thing, which is taking companies public.
I think that would give a much more fruitful backdrop for a lot of conflict. We are very collegial in our team. Yes, there are differences of opinions. These never linger. They very immediately come out. We immediately talk about it. We might end up not resolving them, but we always commit to one course of action.
We've done this hundreds of times, [so] that everyone knows that that's perfectly fine, and some other time it's going to go some other way. And if it turns out that the thing we decided to commit to isn't the right thing, we'll switch anyways. Once an idea is committed to, it's a team thing, and there's no proxy for some individual person who then has to somehow tie their career to the idea. It's the team that decided. I think that's one way of getting potentially around it.
But, sure, every once in a while, I have to tell two people, "Hey, you two. Go in a room and don't come out until I know you figured it out. And start by listing all the things you agree on, like working for Shopify is a good idea. Number one. Check. Canada is a really cool country. Just go through a descending list of things you agree on so that you then arrive at the 2% last thing that you don't agree on and see how you can reconcile that last 2% in the situation." And by the time people enumerate all the things they already agree on, everyone is fine.
Gardner: I remember reading about [the use of] that process [during] the peace negotiations in Northern Ireland, and it provided a wonderful example that if people at such a high level of conflict can spend a day just finding a few things that they agree upon, and that can lead to some commitments, then those commitments can lead to almost a mandate for peace. For the few basic aspects of our human existence that we agree on that, therefore, employees in an organization, particularly a thriving company, should be able to go through a similar process.
I don't think I've ever turned and said, "You two need to go into a room and not come out," but I think that's language that we all know from our childhood, so it probably works.
Lutke: Sometimes it's the simple things that work.
Gardner: How are you scaling yourself? How has your daily schedule changed? You described yourself in the last conversation we had as a personal growth junkie. What are you trying to grow toward now?
Lutke: I try to stay a little bit ahead of what the company needs from me. I really just don't want to be the bottleneck of my business. I've always been more on the nerdy side. I'm somewhat bookish. I tend to learn a lot from reading biographies and these kinds of things. I usually try to find a time that was interesting. I can probably write a fairly good dissertation in one sitting about the Industrial Revolution at this point just because I like to find interesting events and just read as much about it, as there's many different people [to learn from]. I think this is how you reconstruct, again, not what happened but what problem needed solving and why they solved it that way.
So much of company building is that. It's figuring out what a problem is and then improving your ability to make good choices. I want to be as good as I can about this, so I find instances of the past and its most valuable skill and people [who] did a great job with that and then study them.
My day-to-day has not necessarily changed. Obviously, things are getting a lot busier. Like, there's more international traffic now. Again, we've put on our banners [declared ourselves] to be a much more global company. A lot of people would say it has been very overdue. Certainly my family in Germany is saying, "Finally, we're getting Shopify," so that's quite gratifying. But that comes with more travel.
I spend probably one-third of my time with product and engineering teams, and I really enjoy that. I feel it can be helpful to bring the totality of the perspective to bear. That I'm not going to [manage] them but [help figure] out what the best thing is to build. I sometimes am really excited because people are talking about making an area of Shopify better which I wrote somewhere a decade ago, and it's really fun because I can actually reason about it as well as a team that just looked at it because I remember writing the code.
I'm not sure that's the most leveraged part of my day, but it certainly ends up being the most fun. It's looking out for and making sure that there's a good balance of fun and high leverage. It's increasingly become more important to me, as well, just because Shopify, basically, was the first real job I had, and I hope I can spend my entire career here and eventually retire.
That's a marathon, not a sprint, so I have learned a little bit over the last year or year and a bit to treat it as such and make sure that I prioritize my personal physical and mental health and sprinkle enough parts into my calendar that I can just classify as immediately fun rather than fun a year from now when we finally get to release the thing. That balance has certainly made things better.
Gardner: And if we're looking for the greatest compounded returns for all of our stakeholders across everything that we're doing at the companies that we're creating, pacing ourselves and deriving enjoyment from our work may not get the best 18-month return. In some ways it won't. It's like a mathematical truth that every amount of time you spend doing something that's enjoyable and productive, but not the ultimate value driver for Shopify over the next 18 months, means that you're, in some way, reducing the potential return of the next 18 months, but you're doing so in order to create something great for the next 18 years.
I've thought a lot about that with Jim Sinegal at Costco (COST 0.32%) and then just thinking about Buffett at Berkshire Hathaway (BRK.A 1.01%) (BRK.B 0.93%) and the companies where there's tremendous longevity from the founder and continuity in tenure across leadership. My direct reports at the Fool have had about 10 years together, average tenure. Sometimes we're viewed as not maybe having enough disagreements, but it's because, exactly as you described, it's pretty collegial, and we're like puts and takes. This one. We'll go this way. We'll go that way. We'll figure it out together. Any ditch that we get into, we know we can get out of. We've been through more difficult times with fewer resources than we have now.
One of the things that Buffett said at a certain point -- we're not at that stage as a company now -- is that he began to spend more and more of his time on incentives and rewards because he had vastly more employees, more companies, more projects than he could stay on top of, and he really needed to make sure that he was able to understand the motivations for every individual, every team, and every company. Some of those were monetary and some of them weren't. How has the incentive and reward system evolved, or how will it need to evolve at scale at Shopify?
Lutke: I'm clearly, as the CEO, also the organization engineer. I built a company in which people can focus on the things that really can make a difference and hopefully simplify things to a degree that they can spend most of their creativity on the product they create.
I don't like finding myself on the other side of any argument from Warren Buffett, but I find that the coin-operated view of the world is also one of those things that the business community needs to bury, the Frederick Taylor ideas, if it wants to move along. Everyone wants to be of impact. Everyone wants to do the best thing. Having to necessarily create an incentive structure -- especially like a more salesy-style incentive structure -- to reinforce them doing the right thing, I think that comes from a place of ignorance on how human motivation truly works. Again, try to explain why Wikipedia is the best encyclopedia on the internet from a perspective of a coin-operated view of the world.
There's a great author by the name of Alfie Kohn who wrote a couple of books on that. Punished by Rewards is one I read pretty early in the journey of Shopify. Academia has largely turned its back on the idea that paying people for a certain task somehow positively affects performance in anything other than the very short term, with some long-term downside.
Gardner: Have you read Dan Pink at all?
Lutke: Yes. It's a very good book that talks about motivation and so on. I'm probably finding myself on that side of the argument. I think if you have a culture [in which] people celebrate the right things (like celebrate things that are of impact to your customers, make their lives better, help them succeed), I don't think you need to create a monetary structure that supports that. In fact, I think you would potentially betray that structure and you would betray that cultural value if you do that. That's the way I think about that.
Gardner: But how about equity granting? Are there any ways that cash and/or equity compensation has changed? I will say at our company, having a living wage and compensation that you can live on comfortably is a priority for us for everyone. We don't want the people at the bottom 10% or the bottom quintile to not really be able to live reasonably comfortably in the area that they're in. And then from there, the next five to six compensation or rewards factors for us are nonmonetary. And then the last one is financial upside, so equity ownership and the opportunity to participate in the success of the overall company.
I do agree very much with your thinking, and I look forward to reading Punished by Rewards. I'll go back, read the transcript, and get the exact title. Are there ways that compensation, itself, has changed? How do you think about equity granting at Shopify? Are you happy with what you've done so far, and do you think that's an important component of things going forward?
Lutke: I'm a big fan of equity compensation. It's funny. I don't know if it's too much context, but here in Ottawa, the biggest employer was a tech employer called Nortel Networks. The reason why [every index fund in] the Canadian stock market is called the TSX Capped is because at some point, Nortel got so big that they had to cap [every individual stock] at 25% of the entire stock market. So you can imagine that was a very important company, and then one thing or another happened, and suddenly it absolutely wasn't an important company anymore, and it was actually rather an embarrassment.
So in this city we are in, everyone has Nortel stock. No one started [with] stock from Shopify in the early days, and I always insisted, "Trust me. You might want it. At the worst case, it's a good story. Maybe there's some upside to this money." Over the last couple of years, I got a lot of nice emails about this compensation. That [they] had this.
Now we make sure that everyone in the company is somehow linked, because we all want to push the holistic total of Shopify forward. I talk about "Let's focus on the product," and revenue is the kind of thing which is sort of an external validation of people telling you that you're building a good product and how you're [regarded].
Absolutely, but we are a business. I don't want to stray too far from acknowledging that we are a business. We want to grow, ideally quickly. We have amazing people that join us on its journey here, and we want to ensure that they all have that Shopify place. An outsized grower in all of the lives of the people who are coming together, here, to share a couple of their most productive years together and hopefully some of the most exciting years together.
And equity does this so well, because it's so abstracted. It aligns everyone without anyone making bad choices because their compensation structure made them make bad choices.
That's the way I think about it. I'm a big fan of that.
What Success Means
Gardner: A couple of last questions. I know we're almost out of time. One of the things that you said recently that I really love, and it would be a great staple to the creation of, I'd say, any company but certainly any venture-funded company that's beginning to see a larger opportunity, and that is the suggestion that you have for any company at its inception to ask, "What happens if my company is successful? What will be the implications of my business model?"
You see the ad-funded, very large tech companies having to really aggressively pursue data and run into privacy issues. I look back on Microsoft, and I think Microsoft is a company today because of what it went through 15 to 20 years ago, and regulation has really changed their approach to business, and [Microsoft has] not gotten into regulatory issues.
What happens if Shopify is dramatically successful from here? What would be the most exciting thing about that for you, and what would be an area where you would be cautionary to leadership as you created that monstrous success over the next 10 to 20 years?
Lutke: I encourage everyone who's building companies, or at least after you get to a certain point of success, to have a good think on what the externalities are that would be caused by your success. "Externalities" is just the economic term to think about it, but it's a perfect way to think about it.
The basic problem we have with certain tech companies in the world is that it's not because of what they do -- their missions are incredibly noble -- but just the enormity of their success has caused some externalities that empower the kinds of people who previously couldn't do the kind of things that they're doing, and we have to make sure that we work around both. I hope Shopify will end up being an example of the kind of company that was actually designed holistically, including its own externalities. That they're sort of factored into the business decisions that come. Because you can make externalities invisible, like what the nicotine industry tried to do. Pollution has probably [many] more obvious externalities.
But I think, ideally, you should make them explicit, because many externalities are actually positive. Even Microsoft to the point [that] they ended up in the running. I agree that they learned a lot from where they ended up, but the externalities of their success have basically been the information age [audio dropped 00:53:42]. That's not bad.
I think it also depends on what kind of success you talk about, but I think the good news is that because Shopify has engaged mostly in market enlargement. Again, I once did a VC. They [many investors] weren't [keen] on VC. Didn't invest into Shopify because they estimated if there was a market fall, the product would be [audio dropped 00:54:11].
This is actually really funny to think about now. I recently realized they probably were right, but they were basing this on the market of 2008, and the success of Shopify has come completely from the expansion of this market, and then there's more than 800,000 stores on Shopify, partly because we're getting closer to this idea of a red button.
So part of the effects on the idea of Shopify will be around making entrepreneurship so easy and so straightforward that it actually becomes a major factor for employment for future generations, as it has been. And that would be, I think, incredibly valuable from an economic perspective and all sorts of good things.
There are some negative externalities that we have to wrestle with. I think a very obvious line of criticism is that it's a little crazy to not potentially [encourage] consumerism. This [is something] I have to think more about -- exactly what role we can play. My basic read on the matter is that people don't throw away all their stuff or buy too much stuff because they love products so much.
I think they do that because they don't love the products they're buying, and I think what Shopify often enables is [cases like] the family rescued denim factory in Wales that now just does such a good job and offers repairs for life. Those are the kind of stories that we see. They might actually be a positive effect on consumerism as you get more away from department stores and malls.
Gardner: And there may be some way for you and your system to reward that behavior by a merchant.
Lutke: Yes, and I'm personally a huge fan of "right to repair" bills that are making their way through some governments. It started in Scandinavia. And I think there might be a role for Shopify to play in their future should we get to the level of success that we can be on the helpful side. But I think it's worthwhile to be honest about the facts, and I think to ideally blend that into the business early rather than someone starts holding you to [task] on that. I think that would be a wonderful additional ingredient, especially in the world of technology, if people would start thinking along those lines.
Gardner: You may have heard of the philosophy of conscious capitalism. You may have encountered that somewhere in your reading, but in general, our involvement in the work being done by the organization is exactly as you're describing it. How do you make sure you have consciousness and enlightenment built in as early, continually, and repeatedly as possible so that you don't end up with knowing that you're doing a lot of damage and taking a portion of your profit and giving it to charities to try and clean up or repair what you've done or distract attention from what you've done and are still doing?
My last question, because we're out of time and I don't want to take any more time of yours, and this one's really a very selfish question of mine. And it's funny, Tobi. When we talk and have this time together, I don't really ask you details about the quarterly business numbers or the emerging competitive threats, because what I'm trying to understand is really the basic ingredients of decision making and time frame that are really the soul of Shopify.
My greatest investment returns and those of ours at The Motley Fool have come from finding those scenarios and repeatedly investing in them and learning, as I've said to Jeff Green, the CEO of The Trade Desk (TTD 4.22%). You're my university professor in this category now. Who better from me to learn from about programmatic advertising than The Trade Desk? Who better for me to learn about the future of retail and commerce than from you and your company?
I'm selfishly going to use my last question two minutes after, so you can give a 15-second answer. I'd like you to shoot this idea full of holes. We both have enthusiasm for creating more entrepreneurs. More creativity. More wealth. More value creation. More innovation. I'm not necessarily a big fan of universal basic income. I'm not an opponent of it. But I wonder if there shouldn't be universal basic investment.
So here's a little fun idea. I don't know if this has to be part of the interview. This could be after right now. It won't even be included. I just want to hear if you think this is a good idea or a bad idea for me to pursue. It is to raise a fund. Let's just take a round number. Raise a $500 million fund and make $50,000 investments into 10,000 start-ups, all through an app. And to have an online site that guides you how to use that capital and to give you some methodology. It gets more entrepreneurs in the game. It gets more people in the game of using capital and exploring. It's not embarrassing if you don't succeed. We actually present data that suggests the majority of these probably will not succeed, and there will be some fraud, unfortunately. Overall, 2% of all investments will drive 99% of the returns. We know that.
But what we want to do is to begin expanding the idea that there's capital available to you if you have an idea to test and learn and grow it, all through an application. So why would or would that not work?
Gardner: Free advice.
Lutke: I'm the kind of person who would love to walk away with an idea and actually just think about it for a couple of hours...
Gardner: That's great.
Lutke: ...to put it at the end of one of our meetings. I think this is like a brilliant thing to think about. I think there's challenges, but like, there's challenges with everything. I think this is going to be one of those areas where you basically talk about friction removal, where friction removal has two sides, especially when you're giving people money.
I think it would be fantastic to consider doing something like this. I really do think that [with] new business formation, all of our economies are going to be dependent on there being an enormously healthy SMB sphere. I mean, Microsoft (MSFT 0.57%) needed SMBs to buy their software. Buy Office.
At the end of the day, if that's not there anymore at some point, or if that gets too hard, stop them, and they start dying faster than being creative, or if people are just getting uninterested in the formation of new business, or somehow there's a societal mean that all the SMBs that were ever needed have already been created; then we're going to see a stunning retraction of our economies, because the people who spent money are gone, and the people who offer most of the employment in the world are in bad shape.
I'm a big fan of large ideas. But we all know it's amazing how much money our governments put into subsidies for very random industries. What you talk about is not that expensive from a governmental perspective. What would be accepted would be an experiment that you'd match whatever round-number level a society may be -- in their 60s -- rather than at the level of individuals.
I bemoan the change that's led to that kind of thing, but I think the next best thing we can do is actually run these experiments and try to de-risk these ideas at a private level, and hopefully that way, we can shoot them up to the larger economies and countries.
Gardner: I strongly agree. If something like this were created, that would be like the third expression of it, that would be pretty awesome after you've gotten through cleaning up the problems and the stakes that would naturally emerge in the early ones. Plus you would have a vibrant online community. Videos from entrepreneurs. Obviously CEOs as they hit semiretirement or retirement.
The conversations I'm having with them are that people want to have an enjoyable life, and they want to spend a certain amount of time hiking or fishing or spending time with their family. But in general, when you step down as CEO, or you're in your 60s, the knowledge and the enthusiasm for the business world has not diminished at all, and so providing more ways for them to engage and guide future entrepreneurs at scale, I think, is another potential benefit of the idea.
Anyway, muse on it. If you have any ideas about it, we'll talk about it when we next get a chance to talk. I've said this before once or twice, but I'm really looking forward to inviting myself to Shopify HQ, and thanks so much for spending this time.
Lutke: Great. It's always great. Thank you very much.
Gardner: Take care.