Shopify | Success Diaries

Shopify’s Stock Price has grown ~85x since IPO
2
Copyright Success Diaries - Kalaari Capital 2021
Shopify Inc. (NYSE:SHOP)

Exponential Growth to IPO and Beyond
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2nd largest in
Canada
$140B
Valuation
$153B market
opportunity
$82.6M
MRR
175+
countries
YoY growth
of 72%
42K
Partners
YoY growth
of 96%
1.75M+
Merchants
6K
Apps on
Shop Store
YoY growth
of 86%
High-value
apps
$2.9B
Revenue
$120B
GMV
Source: Shopify Earnings Presentation FY 2020
Only 2nd to
Amazon (39%)
8.6%
of US online
retail sales

Shopify raised $112M from investors before dazzling on the first day of its IPO
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Source: Pitchbook
2007 2010 2011
2013 2015
Angel Investment – $250K Series A - $7M at pre-money
of $26M, Bessemer Venture
Series B - $15M at pre-money
of $112M, FirstMark Capital
Series C - $100M at pre-money of
$653M, OMERS, Insight Partners
IPO – valuation of $1.3B ($17/share)
Listing gains of >50% closed at $28/share

Early days of Shopify
💡 Fun Fact:
Shopify (initially – Snowdevil) started as an online store to sell snowboards. But the founders were disappointed
by the suite of tools available to them to build an online presence. So, they decided to build an online store
infrastructure themselves. They realized there was more opportunity in helping other merchants come online
rather than running their online snowboard store. They shelved Snowdevil and refocused on creating a product
(now Shopify) that would help people build their own online stores.

Online store software was only for corporations and was expensive
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Source: Investor Calls

Shopify Understood the pain points of E-commerce for SMBs very well
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2004 2006 2009
Tobais Lutke, Daniel Weinand
and Scott Luke establish
Snowdevil to sell snowboards
Frustrated with the available
platforms, Lutke, designs a
new platform through which
Snowdevil operates
The founders recognize the
potential of the SaaS platform
Enters e-commerce space for
SMB merchants as Jadedpixel
before rebranding as Shopify
Merchants on Shopify reach
$100M+ in sales
Shopify launches API and its
own app-store for partner
applications
By 2009, Shopify had established its value as a simpler, cheaper, and better e-commerce tool that
replaced old tools like Yahoo Stores and Microsoft Commerce
Source: Albert Wang’s Medium

Extending Competitive Positioning to make the Product Sticky
8
2010
Launches mobile app
on Apple App Store.
Launches “Build a
Business Competition”
2011
Launches Shopify
Experts, an online
directory of Shopify
professionals to
nurture the platform
2013
Launches a native
payment processing
capability
2014
Launches
Shopify Plus catering
to scaled commerce
platforms. Scales to
120K online retailers
2016 - 2017
Launches Wholesale,
Shopify Chip & Swipe
Reader. eBay, IG, FB
messenger partnership
2019
Launches Shopify
Capital to provide
merchant financing
& Shopify Fulfilment
Network for Logistics
2020
Launches marketplace
to cater to brands on
Shopify platform
& Facebook shops

Shopify is Different
💡 Fun Fact:
Instead of targeting enterprises, Shopify targeted first-time sellers and provided them with the building blocks
needed to establish an online store. By focusing on intuitive user interfaces and developing an extensive guides,
it provided first-time sellers the opportunity to set up a new store “within minutes.”

Shopify is an Invisible Selling Machine
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Shopify Shipping
Shopify Pay
Shopify Mail
Shopify Capital
Shopify POS
Shopify Balance
Store Builder
+
Merchant Solutions – 69% of total revenue
Subscription Solutions – 31% of total revenue Merchants
300 M
Online Shoppers
Dashboard &
Reports on
• 42K partners in
150+ countries
• $6.9B+ revenue
generated by
partners
Brand owned
by Merchant
Seamless
integration across
multi channels
⅔ Shopify’s
orders (App)s
Functionalities
+ themes +
cloud storage
Shopify
Source: Annual Report 2020

Shopify has a Merchant Driven Value Proposition
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Merchant Journey
Online Store
Current sales and visitors
Product Customer
Customer details + purchase
history
Reports
Powerful Analytics Available for
SMEs at No Cost
Track, monitor and
customer history
Merchant offerings
from Shopify Digital Marketing
like Social Media, SEM,
Email Marketing
Developer App Store
With 6K apps for extended
functionality + 42K developer
ecosystem
Support Different
Business Models
like Drop Ship, Hyper-local,
Influencer Led Sales
Payments
Accelerated checkout
facilities (comprise 46%
of FY 2020 GMV)
Shipping
Partnerships with 3PLs,
Investment of $1B in
fulfilment network
1 2 3 4 5
“Shopify should be the first thing that merchants open in the morning and the last thing that merchants close at
night.” - Shopify’s President Harley Finkelstein, during the 2018 Investor call

Shopify has been Mastering Omni-channel Sales
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+ + + +
Shopify
POS
Shopify
Marketplaces
Scale of 1M+ SMBs + value
offerings – shipping, capital,
distribution
Trickling down scale to SMBs Incentivising the developer
ecosystem
Mastering omni-channel
One Stop Shop for Omni-Channel
retailers =
Offline POS + Social Media + Online
Stores + Other Marketplaces
Shopify
Marketing
Shopify
Capital
Vendor financing, Invoice
discounting, WC Financing,
Byte size loans
Shopify
Logistics
$1B investment into the
new distribution network
Android like Open-source App store
+ Huge base of retailers à brings 3P
developers to build on the platform

The Shopify Experience
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• For SMEs simplifying the process is essential
• No code ecommerce that helps merchants with no technical background go-to-market faster
No Code Platform
• Simple non tech integration for merchants
• Store set up is simple and easy to use despite the vast database of functionalities + less
training of employees resulting in increased productivity
Simplicity
• Managing offline commerce – omni channel support
• Simple API for integration with Amazon for inventory tracking etc.
• Lower TDR + Analytics – Powerful solution for merchants
Functionality
• Includes all functionality required by merchants to service their requirements (one-stop shop)
• A one-stop shop helps avoid investment in cost, time and effort for online stores and avoid
technical debt (maintaining site) at $29/month
Cost Advantage

Shopify is the only platform that competes favorably in all three categories
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# Merchants 1.75M+ 60K+ 40K+ 400K+ 265K+ 250K
Merchant Startup
Growth Avenues
Expansion
Ecosystem
The E-Commerce industry’s main competitive factors can be bucketed into the following three categories:
• Merchant startup: Simple to use, cost-effective. secure and reliable, brand support
• Growth Avenues: Integration with other channels, breadth and depth of services, scalable
• Ecosystem expansion: Innovation, Vision and brand recognition

Shopify during COVID-19
💡 Fun Fact:
Shopify was handling Black Friday level traffic everyday in April 2020!

Handling Black Friday level Traffic every day during COVID-19
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Source: Twitter

Shopify used by all – small to large businesses during COVID-19
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Source: Company website
Lindt opened its first e-commerce store in 5
days to serve customers in a COVID-19 world
Pizza Pilgrims, a UK-based restaurant chain
pivoted to selling mailable pizza kits online
• Launched an online store through Shopify to sell pizza kits
• Used Shopify Payments and Shop Pay to process sales on its online store
• Sold 10,000 pizzas making a revenue of $250K in 1 month
Heinz’s new direct-to-consumer site launched
in 7 days during COVID-19
• Launch an online store in five days
• Enable curbside pickup across much of the country
• Reach shoppers directly during Lindt’s second-largest annual sales period
• Launch a direct-to-consumer offering in one week
• Lay the foundations of a new business model
• Make food products available to vulnerable populations and essential
workers
Staples re-platformed in half the time, for half the
cost, on its way to record sales
• The ability to run 4X more online sales promotions per day
• All-time sales records during Black Friday Cyber Monday
• No performance issues during COVID-19 as “Black Friday-like” sales
levels arrived for 30 days straight

Learnings from Shopify
💡 Fun Fact:
Tobi recently said “I work under the assumption that we have no idea how to build companies yet, and that 50
years from now people will look back at the companies of today and they will seem like the black-and-white
footage of the first hockey games. We have no idea how to build the best companies yet.”

Shopify derives its success from Four Key Tenets
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Strong unit
economics
Art of Network
effects
Comprehensive
offering
Merchant-led
Innovation
1 2
3
4
Rather than developing products based on own will, Shopify chose to
offer products based on constant feedback it got from merchants e.g.
Shopify Payments
Innovation
Removing all pain points of D2C sellers by introducing Shopify
Payments, Shopify Capital, Shopify Shipping in addition to its core
offering of Shopify’s e-commerce turnkey solution
Comprehensive offering with an ease of use
The larger Shopify became, more merchants were attracted to it, which
in turns attracted more partners on Shopify to build solutions for these
merchants, thus spinning the flywheel of network effects
Virtuous cycle of Network Effects
Shopify offers incredible unit economics, both for normal and Shopify
Plus customers. The growing demand of Plus merchants, which is still
small, will continue to drive future growth for Shopify
Focus on strong unit economics

Your success is directly proportional to customer’s success
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• One of Shopify’s greatest advantages is that its business model
is aligned with helping its customers (merchants) become
successful.
• This was achieved by opening its APIs to third party
application developers to build apps for its customers
• As more channels and partners came, they got more GMV,
which in turn got more merchants – which started the
flywheel of success
“Everyone in the world wants to be a platform, but you’re only really a platform if the value
of the ecosystem on top of a platform is larger than the company who owns the platform.”
- Tobi Lutke, 2018
Source: Shopify Annual Investor Presentation

Adapt to open-source architecture to scale faster
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Shopify established a strong open-source app store model where
partners could develop apps for Shopify’s merchants to grow their
brands.
Since Shopify facilitated various business models within the partner
ecosystem to succeed (e.g. drop shipping), the partner base grew,
which in turn grew the merchant base and network effects kicked
in.
Shopify’s goal was to “Give cost, time and effort advantage to
merchants”
Salesforce and Adobe are interesting analogies, like Shopify, as both have app stores, offer a
suite of solutions, and are both valued $250B+

Choose a single compass metric to define success
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• Choose a single compass metric, or the primary company-wide
metric used to measure growth.
• Shopify’s compass metric has been Committed Monthly Recurring
Revenue (CMRR). It gives a good indication of a happy and loyal
customer base
How to choose this metric?
• Choose the metric depending on the stage of the company and what
you’re trying to accomplish
• Choose a time frame that allows for a tight feedback loop
• Design the user interface that you’ll use to keep the team informed
“Committed Monthly Recurring Revenue is the motor of a fast-growing multi-million-
dollar venture backed business” - Tobi Lutke
Source: Product Habits
“5 C’s’ of SaaS metrics – Cash
Flow, Churn, Committed
Monthly Recurring Revenue,
Customer Acquisition Cost,
Customer Lifetime Value”

Focus on relentless prioritization of product
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Shopify Product Director Brandon Chu advises a quantitative
framework for product prioritization based on two data points:
• Amount of customer value
• Amount of time it takes to finish a project
Determining these two factors for each project will help determine
the customer value return on time investment to build.
Prioritization is critical, even if you’re still focused on building your product and have not
reached a larger platform or network stage
Source: Black box of PM

Embrace long-termism and think beyond next month’s MRR
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Shopify’s journey to $10B took time, but worth it. Shopify took 4
years to reach $1M ARR, and 8 years to reach $100M ARR.
• But along the way, they have always prioritized decisions that
benefit long-term relationships with their sellers rather than
those where they could turn a short-term profit
Building a product and a company always requires some trade-off
between long-term and short-term value.
Focus on questions like “What is the quickest way you can help
your customers win?”
“Great product people understand how a change in the way the world works will impact the
log files. And they can perceive that impact in real time.” - Tobi Lutke
Source: Product Habits

Creating multiple moats/revenue streams to create competitive advantage
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Shopify created an ecosystem around its customers
(i.e. Merchants) and focused on providing all the
services that would be required in a merchant
journey.
Hence, creating multiple moats around customers
is essential to create competitive advantage and
customer stickiness
“Shopify and its ecosystem provides value to its merchants by eliminating pain points
and reducing barriers to entrepreneurship” - Tobi Lutke
Source: Company press release

Learnings for startups
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Creating multiple moats/revenue streams to create competitive advantage
Focus on your customer’s success, which will inherently help you become successful
Choose any of the 5C’s of a SaaS business to define company-wide success
Focus on relentless prioritization of product
Prioritize decisions that benefit long-term relationships with clients
Adapt to open-source architecture to scale faster

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Kalaari Capital
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Shopify | Success Diaries

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