Shopify: Tobias Lütke. How a snowboarder built a $150 billion business (2019)

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2:47Hey, everyone. So this week we're revisiting one of our absolute favorite episodes from the archive. It's my conversation with Toby Lutka, co-founder and CEO of the e-commerce brand Shopify. Since launching 20 years ago, sales on Shopify have topped over $1 trillion. But as you'll hear, it all started back when Toby decided to move to Canada from Germany and start a snowboarding business.

3:20Here's my conversation with Toby from August 2019. Enjoy the show.

3:27So how are you doing as the CEO of the company? Not good. I mean, my team was very, very patient with me. There was a lot to learn. It's a very subtle job. You know, wonderful things about computers is when you tell them what to do, they'll keep doing it and they'll do it forever until you stop. Turns out humans are not like that. Humans are different. Yes. So there was a very large learning curve. Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built.

4:11I'm Guy Raz, and on the show today, how a young programmer's ambition to sell some snowboards on the Internet grew into Shopify, a platform that now powers billions of dollars of e-commerce every month.

4:30Shopify is an e-commerce software platform that works behind the scenes so that when you click add to cart or buy in an online store, that transaction is seamless from payment to fulfillment. And in 2015, when Shopify went public, many people outside of tech had never heard of it. But even so, lots of those people had already used it to buy something online, even if they didn't know it. Which, in a way, fits the personality of the company's co-founder and CEO, Toby Lutka.

5:00Toby's a low-key guy, the kind of guy who literally rode his bike to VC pitch meetings. And at a time when Shopify had already raised well over $100 million in funding, Toby was still living in a spare room at his in-law's house to save money. But before all of that, Toby grew up in Koblenz, Germany. And as a kid, it was pretty clear to his parents that Toby was bright, but he also struggled with learning. I mean, I got diagnosed with all sorts of learning disabilities, and it was very hard for me to perform well in the tests and so on.

5:38And I don't think I ended up getting a full diagnosis of it, but now it was a pretty clear-cut way of ADHD. I grew up dyslexic, so, you know, just reading was hard. Yeah. And it was always a big question about what exactly was going on, but basically I was bored. Back then, the way the curriculum in Germany was taught, it was really basically, here's all these solutions you might find useful later in life, with very, very little time spent talking about the particular problems that those solutions would help you with.

6:12And if I don't understand the problem I'm trying to solve, it's very hard for me to learn a solution to a problem. And so that just particularly didn't work well for me. So after he finished the 10th grade, Toby realized that school wasn't the right fit. So he left and joined a German apprenticeship program to learn how to become a software engineer. And he ended up starting as an apprentice on a small team at a subsidiary of the German manufacturing giant Siemens. I found this one team that just seemed really fun.

6:45We were sort of in the basement. And it was run by this wonderful guy. His name is Jürgen Saar, who is, like, a fantastic engineer, programmer. And he would always come on his, like, BMW motor cycle to work, and he would have long hair. And he was not wearing a suit like you were supposed to. And so it's like a total rebel, but so good that no one could complain, you know. And I just immediately gravitated to him and his little group of rebels. They were working on really interesting things.

7:15They were often prototyping new things for customers and so on. And so I wanted to be part of their group. And so starting with 16 or rather 17 in year two of my apprenticeship, I started getting paid to program all day. And that's all I did. And you loved it? I loved it. And I still love it. Computer programming is you can forget all time around you. You just can't, like, I can turn everything off if I'm working on an interesting problem. And there's another part of your life, which I'm curious how you got into, which is snowboarding, right?

7:48You were a snowboarder. Did you grow up snowboarding? Did you just come to it on your own? No. I mean, my parents had a place in the Alps we often drove to. There was a five-hour drive. And we skied. Yeah. You know, fast forward a little bit. I took some friends. We took this vacation. Initially tried to go to the United States, but then, like, the Canadian dollar was so low that we decided to go to Canada, to Whistler. This is like 2000. This is around 2000. Yeah. And so this was the first time I said, okay, I'm just going to snowboard.

8:22I'm not going to take skis. Like, this is spent all our time there. And that's really when I fell in love with snowboarding. And also, on that same trip, met my now wife. Yeah. How did you – this is Fiona, your wife. How did you meet her? Just there at the mountain? That's it, right? I mean, you meet her on the ski trip and what you say, I'm going back to Germany, but I think, like, I think there's something here. Yeah, exactly. I mean, we stayed in contact afterwards. And she just said, you know what? I'm done with my bachelor's degree. Why don't I just come to Germany?

8:52Her parents must have thought she was nuts. You meet this guy skiing and you're going to go move to Germany? I'm perpetually impressed by her parents, too. They are the most wonderful people. So she comes to Germany. You are working programming for who at that point? Yeah, that was a little startup in Dortmund, yeah. And what did she do during that year? She ended up getting a job editing, academic, writing. Yeah, we lived together for 10 months. And she said, okay, well, I need to go back and start my master's program in Ottawa.

9:25And she asked me if I want to come, and I said, yes. Because you could take what you know and do it anywhere. Yeah. Well, the reason why I went is because I grew up on American media. Like, everything cool in the world came from the United States. I always sort of figured that's where I want to end up. I would like to move. And then, you know, you arrive there and you figure out, oh, you know what? Canada is America for Europeans. And this is great. So, 2002, you moved to Canada.

9:56You're 22. You're like, whatever, let me try this. What was the job that you did there? So, I was working still with people from the startup, like, remotely. That was doomed to failure because the tools weren't there. There was no Slack. There was no, you know. It's just email, contact, right, yeah. What was the startup? It was an attempt at writing a different browser. Okay. And anyways, but it sort of, I basically ran out the clock. It was everyone, we knew it wasn't going to do anything.

10:28People were starting to leave. We're talking, like, after the dot-com crash. Well, that's what I'm wondering. I mean, you're 22, 23 at this point. Was any part of you nervous? Like, I'm in Canada. I'm living with this woman. Like, I don't really, you know, know what I'm going to do with my life. Like, were you feeling any anxiety to just, like, get something stable? I was, I would be lying if I say I wasn't. I knew I had very valuable skills. I could always do more of a thing I was doing recently or was doing for Siemens.

11:00I was just hoping I kind of didn't have to in some way. To work for a big company? Yeah. Why? Like, working for Siemens has been probably one of the most important things I've ever done in my life because it kind of taught me what I don't want. It was, in so many ways, a strange company culture in the way that it felt exceptionally mistrusting of everyone, right? Like, even, you know, fairly strict dress codes, which is basically the company saying, hey, we don't trust you guys to dress yourself.

11:31And there was so much of that which just felt wrong. And 20-year-old Toby would not have a career there. And so, over time, I was, it's up in Canada, we are in Ottawa, very cold place in the winter. Nine months out of the year, you basically, eight months out of the year, yeah. It's just cold. It's six months. Six months, all right. It might feel like nine months. Okay. But you can't run a strategy of waiting for summer. You really have to do something with the winter. Yeah. And for me, that was go to hills and snowboard,

12:03and I got increasingly into that. And as I do, I researched everything that was about snowboarding. I wanted to know every option that existed and build these big spreadsheets of every technology that you can use to build a snowboard. And at some point, it clicked and said, maybe using my technical skills to start an internet business selling snowboards would be the way to do it. An internet business selling snowboards. Yes. Like, I did get a job offer from a fun, small, local company

12:35that I was actually really interested in working for. But then I went to the, basically, to sign the papers. And one of the topics that came up was the topic of a work permit, which I, like, found out at this point that I needed a work permit. Yeah. You were not legal. Well, I was allowed to be there because I was in the process of getting a permanent residency. I wasn't illegal in the country, but my status didn't give me a work permit. Right. And I talked with a friend of family, an employment lawyer,

13:05and he said, that's going to take you a while, basically, until you get a permanent residency, until you get this. But just so you know, you can start a business. So you could not go work for this company. Right, right. But you were, you could, essentially, that was your only option. That basically was my only option. Like, I could try to work remotely again for a German company or something like this. Oddly enough, that's okay. But I couldn't work for a local company. And so what I ended up doing is that I used my technical skills. I was thinking of setting up some online store software

13:36because I figured that would exist. And then use that as a way to... To sell snowboards. Sell snowboards, make money while snowboarding, hopefully, and have a good life. All right, so there's a guy that you met around this time named Scott Lake who would go on to become your co-founder. How'd you meet him? So Scott worked for that company I almost got hired for. And so we kept talking, and he was a friend of her family. He was a friend of Fiona's family. Exactly, exactly. Who we were also living with at that time. You were living with where?

14:07With Fiona's parents. Oh, you were living with her parents in Ottawa? Yes, in Ottawa, exactly. Was that uncomfortable? I mean, you're like this German kid dating their daughter. You're living in their house. It must have been a little weird. They were amazingly supportive. And honestly, here's the reality. I don't think I could live with anyone's parents. But I can live with Dale and Bruce. They made it incredibly easy. They are just the most kind, genuine, and played massive roles.

14:38Like Dale, she was a diplomat for the Canadian government. This is your now mother-in-law. This is exactly my mother-in-law. And she ended up being our, like after we had an office, which is a bit later, she did all the payroll and accounting and everything. And Bruce ended up saving the company later. So entrepreneurship is messy, right? And it's a journey that you, like even if you make the choice yourself to embark in entrepreneurship, kind of everyone around you is coming onto the trip. There's a lot of people who end up mattering a lot.

15:09And I clearly was naive about it. I probably would never have committed my surrounding towards the craziness that ended up the journey of Shopify, but it worked out. All right. So you are, you're living with your parents. Yeah. You've got this snowboard idea. You meet this guy, Scott, who's working at this other company. What does he come to you and say, hey, Toby, I think I want to work with you. Yeah. We went snowboarding together. So he became like the person I, you know, I was saying, hey, you know, here's what I'm thinking. And he loved the idea and was super supportive.

15:41And it was really Scott who ended up developing the relationships with the vendors and doing a lot of a business setup and all these kind of things. Like, I mean, this is a classical co-founder situation. I was looking after the technology and Scott after the business. He was dealing with the business side. Yeah. And I guess your startup costs were not incredibly insanely high because you were doing all the code programming and you had to obviously invest money in snowboards. You had to keep some inventory or would you, was the idea to wait until orders came in?

16:15No. No, we had the inventory. We ran this pretty old school in that way. We really wanted to build a brand, right? We wanted to build something, something which we hoped would become big. What did you call it, by the way? It was called Snowdevil. Snowdevil. Okay. Like, how were you going to get this out into the world to like make sure people were aware of it? So, I mean, step number one was let's go find technology. This was, ended up being a really, really important moment. I didn't anticipate it because. Technology to like put it up on the internet.

16:46To start it. And so we were saying start online first, partly because it's cheaper. We didn't have a capital for signing a long-term lease. But we wanted to also have a physical store later on. Eventually. Okay. And I budgeted maybe a week to get the online store online. This was my expectation. That you would do it in a week. Yeah. And I first started with open source software. And again, this is 2004 we're talking about. So I looked at some commercial software, but mostly we couldn't afford it.

17:16And I just got really confused because I, in 2004, was sitting in front of my computer absolutely stunned realizing that we haven't figured out how to build online store software yet. I'm trying to go back to 2004. I mean, I would order books from Amazon. And so you needed a way to get photos of the snowboards up on the site. You needed a way for people to search what snowboards were available. You needed a way for people to pay for the snowboards and then get a message to you somehow

17:48that an order came through that you could fulfill. Exactly. And that wasn't easy to find off the shelf? There's no software that would make this easy, and especially the credit card part. And we also had, I think, novel or at least modern ideas about how we wanted the website to look. Like, we wanted to tell stories. Like, every snowboard that we sold, we actually took on a mountain. And we would chronicle the way we spent the day. You know, this is also the time of emergence of blogging. So what we had in mind was something that wrapped good storytelling around products that

18:20people are excited about. Like, trying to break away from the Sears catalog metaphor. Right. But they were just much too early. I'm curious, when you and Scott sort of sat down and said, yeah, let's do this snowboard company. Let's launch Snowdevil. Like, did you need, both of you need to put in money to start this? And do you remember how much money you needed? Yeah. We both put money into the company. I think we both took 20,000 Canadian dollars and put, that's the capital we had.

18:51Which was your savings from programming. It was all I had. It was all your money. Yeah. And one thing we did is we kept our costs really down, right? Like, no rent, no... Like, where was your office? Various coffee shops. Which is right. I tried to explore my new city of Ottawa by just taking random buses and walking until I found a coffee shop and working from there. And you were living rent-free, basically. Yeah. All right. So, you and Scott are working at a cafe's.

19:21You both put in about 20,000 bucks. You start sourcing the snowboards. But there's no off-the-shelf software to actually mount the company. So, you decide, I'm going to write this thing. I'm going to do it. So, exactly. I was like, there's only two ways forward. Like, I compromise my idea and do something that's very undifferentiated except for snowboards. Okay. Or, I'm going to fall back on my programming skills and I would build something that hopefully

19:52would be able to power this business. So, what did you... How did you start to build it? I mean, I guess there was a... I read about this sort of language that you found called Ruby on Rails. What was that and why was that so significant? So, I had this realization that I'm probably going to be the only programmer who will ever work on this. So, I don't actually have to choose something that lots of people know. I can actually choose just the best tool for the job. And so, I've always... There's been this programming language called Ruby, which I just absolutely loved. It was...

20:22People don't usually talk about programming languages like this, but I find... Like, I really, really love the process of constructing something in your brain, having this idea. It's a little bit also like painting. You have an idea for something and then the programming language ends up being the mechanism for translating this perfect picture you have in your head onto a canvas. Right. And so, you know, if you have like an amazing landscape and they give you crayons, it's possible to make a masterpiece with crayons, but it will be...

20:54It will always be a crayons painting. So, this is sort of in the way Java and others... They just didn't match the way my brain ended up constructing the relationships that make up software. And so, Ruby was this thing I sometimes played with. Open source. Open source Japanese. There's only Japanese documentation around this time for it. I learned the language by looking at the source code and... But the source code is in Latin characters. Latin characters, at least. Right. But the instruction manual was in Japanese.

21:25But exactly. So, and all the forms were in Japanese and all these kind of things. And, like, I remembered that, hey, I have the power to choose the tool. And so, why don't I go and use Ruby? Because that would be way more fun. Using this coding language, this programming language, to build the infrastructure that would allow you... How long did it take you to actually build the shopfront?

21:48Yeah, we launched... It's now about two and a half months later. So... This is fast. It was really good technology. And, I mean, I also admit I probably spent 16 hours a day doing that. So, a lot of Coca-Cola and pizza and very unhealthy lifestyle. But it didn't feel like I was doing crazy hours or anything like this. And I would never recommend anyone to do this. But, like, there was literally nothing more interesting in the world throughout this time. So, was it pretty quick from the time you launched the website to the time you got your

22:20first orders? It took... Let me just double click on this. Because, you know, I was working from coffee shops at this time. I had my first order. I actually remember almost, like, everything about that day. This actually ended up being a really profound experience. Because I wrote the software. At some point, during writing the software, I actually had to type the email that the software would send to me. And so, you know, I went to a coffee shop. I opened my laptop. And it was a real order from a gentleman in Pennsylvania.

22:54No one I ever met. And it really felt like I think that's what makes you an entrepreneur. Like, the first time you sell something or first time someone hires you for when the phone rings or something like this. Because until then, you're just someone who builds something, which is already great. But, like, it's that moment. And it's something when I meet Shopify customers, I often ask them, like, hey, where were you when you got that first order? And everyone can remember it. And you see your first order and you're thinking, oh, my God, some guy in Pennsylvania is ordering from me. Yeah, yeah, yeah.

23:25I actually had to walk home to call Scott because I didn't have a cell phone to say that we had an order. And it was a cool day. And how were people finding out about Snow Devil? I mean, we tried to do basic promotions. We tried flyers and stuff like this. But the entire of 2004 was so different, right? Like, there was Google AdWords was a new product. Those days, it turns out that the minimum bid for an ad for a click is $0.20. And we paid minimum bid for almost every search, which ended up converting on a $500 snowboard.

23:59So you could get the word out through Google Ads. And there were not that many online snowboard shops, presumably. So how did Snow Devil do as a business? It did really well. Snowboards have really good or had really good profit margins on them. And our biggest problem was keeping inventory and getting inventory back. And we were just basically out of stock the entire time. Wow. But we had an excellent season. I mean, you guys recouped your investment pretty quickly. Very quickly. And then we had a good amount of savings from that for the next phase.

24:36And it was just you and Scott? Or did you quickly have to grow and bring in other people to help you with inventory and shipping and fulfillment? No, it was just the two of us. And we did everything. Mostly Scott then brought snowboards to the post office. He was literally driving them to the post office. Yeah, or biking them. We figured out a way to put them. I'm imagining like a brown paper-wrapped snowboard on his shoulder. Yeah, yeah, exactly. That's exactly the picture. It was fun. It was really fun.

25:06Okay, so you're running the snowboard business with Scott. And it sounds like it's going pretty well. You guys are making money. And I mean, what happened next? Here's what happened. The sales slowed, obviously, in spring. And we sort of began the conversations around, you know, to make this a really sustainable year-round business, we need to either sell skateboards, surfboards, kiteboards, or do something else. So you were considering, hey, it's the spring. Maybe we should do kiteboards and skateboards and other things.

25:37Yeah, I mean, that would have been the natural thing to do, to go year-round. Again, Scott and I said we wanted to start a location in town. But I really, doing the development of it, I was now spending all this time, like I was tweaking the software. I did not stop programming. I was just, okay, now let me try things. Let me make it faster. Let me use different approaches. And so increasingly, I got people sending me emails and asking me if I would license Snowdevil to them because they wanted to start something similar.

26:10People were saying, hey, can you just license? You built this. Can we use it for our e-commerce shop? Right. And exactly, because it was just different. It wasn't a normal grid. It told stories. It was clearly modern. It was sort of Web 2.0-y. And so people were saying, I would love to just build my business based on that foundation. I mean, amazing. It reminds me so much of the story of Squarespace. And Squarespace was essentially started because the founder, he couldn't find a good way to do a blog and a website all in one.

26:42And so he basically created his own way to build a website, right? He did it himself. It's a similar story here. Similar story. What I needed was something that helps me in the journey of entrepreneurship from scratch. And I'm not that different from other people. Like, if I needed this at some point, there's going to be at least a couple thousand people who also need this. So this was like spring 2005. At some point, Scott and I just said, okay, skateboards or software?

27:14It was pretty obvious that we should go with software. When we come back in just a moment, Shopify starts to gain traction but still needs money. So Toby heads to the Bay Area, buys a used bicycle on Craigslist, and pedals over to Sand Hill Road. Stay with us. I'm Guy Raz, and you're listening to How I Built This. When it comes to your health and well-being, the right care can change everything.

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29:19The guide is free to you at NetSuite.com slash built. NetSuite.com slash built. When I meet a founder or someone pitches me an idea, one of the very first things I do is pull up their website. A great website is essential for any modern business. I'm not telling you anything you don't already know because it builds trust, it builds credibility, and it generates leads. And unlike social media, a website provides complete ownership. But if updates to your .com take too long or feel harder than they should be, Framer is the shortcut you've been looking for.

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30:25or get started building for free today at Framer.com slash built for 30% off a Framer Pro annual plan. That's Framer.com slash built for 30% off. Framer.com slash built. Rules and restrictions may apply. Okay. Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2005, and Toby and his co-founder Scott just made a huge decision to pivot their snowboarding company to a software company.

31:04And to help them do it, Toby calls up his friend, Daniel. Yeah, so we decided it's going to be software. And I called Daniel, who's a really good friend, my best friend, really, who was in Germany, and said, Hey, here's what I would like to do, and I think I need another half year to build this. Do you want to spend a summer in Canada, and we do this together? And, like, we could work together, and that would be fun. So you and Daniel spend that summer, I guess summer of 2005. That summer became like a year and a half, but yes. Okay, a year and a half, trying to build this software together.

31:37Exactly. At what point do you stop selling snowboards? Around that time. Kind of shuddered? It was basically the summer, and we didn't reopen afterwards. You just didn't reopen. How did you come up with the name Shopify for this software? It was Scott's idea. We talked about what we wanted it, and putting Shop and Simplify together was pretty straightforward. And then we went, I think, on GoDaddy and registered with .com. And there you go. That take people back and saying, oh, yeah, times were different. All right, so you've got Shopify.

32:09You're building this thing. And really, it sounds like from that moment, from the beginning, you're thinking, this is going to be our business. We're going to build the software that will enable people to open e-commerce sites easily and simply. Exactly. There's so much to building business. There's so much complexity. And if you get an order, how does this money make it to you? Where do you get shipping labels from? How do you make a truck show up to actually send it anywhere? Shopify just does all these things for you.

32:39That was the goal. Because, you know, that moment that I described there, I got my first sale. We got our first sale. From that point on, I can never get that again. But that was such a profound moment. Like, what I want to spend my time on is, like, can't I just have other people have that experience? That became sort of a guiding principle of how we built a company. And I have to imagine that you've got to, at some point, raise some money to pay for

33:09server space, pay for, you know, the kind of the costs associated with building this technology and then marketing it. When did you first start to think about bringing in some money? So around that time, we asked friends and family for money. This was like 2006, 2007? Yeah, 2005. We did a round. Like Fiona's parents? Anyone you knew with any cash? Exactly. People from my family. I mean, you know, amazing that people trusted us so much.

33:41And how much money did you think you needed at that time? It was $200,000. Which is a lot of money. A lot of money. And when people said, Toby, what do you need $200,000 for? What would you say? Here's the experience up to this point. This is valuable. I know it's valuable because I would have needed it and there are more people like me. But meantime, all these sort of like people were still asking you for this. And what were you saying to them? Were you saying, hang on, we're working on something. Just hold tight. We'll get it to you. Yeah, I kept a weblog where I sort of talked about my experience building it.

34:14I also had a landing page collecting emails, which is now, of course, part of the… And the landing page was Shopify.com or… Yeah. And here's like a demo which we pointed people to Snowdevil to explain why we were doing this. And by the time we launched in 2006, I think we had 4,000 or 5,000 emails. So, it's not… But that seemed like a lot. Wow. Yeah. All right. You've got the seed money. You've got… A small office. We ended up taking a very small office space. We actually moved above the coffee shop.

34:46I got that for sale. Okay. We actually… We never got internet line. We always used their Wi-Fi. Right. Built some desks and that's from where we worked. And it's time to launch. You've got 4,000 emails or so from the landing page. And did you just send like a blast of emails saying, Okay, we're live. We're here. We're ready to go. Is that how you launched it? That's exactly what we did. So, just a blast email. And what was the response? So, people signed up to just try it out, which was really, really exciting. And frankly, we are still business running on Shopify.

35:16That actually started on that day, which is remarkable. But it wasn't… It was a lot. I mean, you know, think about what an online store is. It's to most of our customers. This is their livelihood. If that thing is not there suddenly or something goes wrong, the business is defunct, which is a huge responsibility. And people were trusting free guys in Canada. And was it free initially? It started out free. The first year, we decided against the multiple-tier monthly cost because we figured that it's going to be so hard to get people to trust us that making it cheaper would be more likely for people to give it a try.

35:55And the model was, I think, we charged like 3.5% or 3.75% per sale. It was a complete failure of a business model because basically everyone who didn't expect to have sales thought it was amazing. And people who expected to sell a lot, that was way too much money. So, we ended up switching it a year after launch, actually the night before my wedding for a reason. I will never figure out why I did that. The night before your wedding, you switched to a subscription model? Yeah, and we grandfathered everyone, but suddenly everyone called us and said, hey, I promised my so-and-so that I can use this for free and suddenly it costs money.

36:31And so, I got all these phone calls like during my wedding. So, it was sort of a bit stressful. So, you changed the model in 2007, still living with your in-laws, but now married with your in-laws. Yeah, yeah. How many people, do you remember like in those early days, like the first year or so, actually signed up for the service? I mean, there's a couple of thousand accounts and I would say like maybe a hundred active. And in the year two, we had an interesting event.

37:05I mean, this is, I think the Indianapolis team won the Super Bowl around that time. And they actually had a, or a local newspaper actually had a Shopify store created, which they started like two days before the Super Bowl. And it just was selling T-shirts with the front page saying, we won the Super Bowl. Oh, wow. Like a front, like a picture of what the newspaper would look like if they actually happened to win. And then they ended up winning and they sold tens of thousands, I think hundreds of thousands of dollars worth of these T-shirts on that day.

37:38And that was like a stunning experience for us because that was, that was so, like someone just had a really good idea in an office and turned it into like a real economic event. You know, these events started accumulating, people were kind of experimenting more with online retail, the new businesses were starting instead of people coming to us saying, hey, we want to reduce costs and switch to you. It sounds like it was a slow burn though. It wasn't like an overwhelming rush. It was like incremental, you know, 2006, 2007.

38:10But you're still, at this point, you're still operating off of the seed money you raised and any revenue you were generating. How was the money situation? Were you, was it just self-generating? Were you? No, no. It was, we had paying customers, but we were going, trending towards zero fast. Yeah. So, like we eventually, I mean, we did basically run out of money around this time. We luckily met an angel investor who ended up putting, I think, $400,000 around 2007 and that saved us.

38:46This is an individual by the name of John Phillips. I think part of the reason why I invested is because his parents were in Ottawa and I think he wanted something else to do in town rather than just visit his parents. But he also really liked the business, so he ended up becoming our investor and basically mentor to the company. It was a very prescient investment because I think at that time the company was valued at $3 million. Around this time, 2008, Scott leaves. He decides, I want to move on. What do you remember about that decision?

39:19I mean, it was, he had the job of CEO. I think he just realized at some point that where the software industry was going is most of the people who were CEOs were actually highly technical parts of the founding teams. I think he also realized that I will end up being the person who will care most about this company in the long run. And so, you know, that was okay. We decided to part ways. Were you worried about it because he was a CEO? I was hugely worried about it because, like, I was not convinced that I should have a CEO job.

39:55But someone gave me, told me that if a great VC invests in your company, they would have a network to find the right kind of CEO. And so I was like, okay, well, maybe I really should talk to venture capitalists. And that was the time I traveled to Silicon Valley to talk with VCs. So just to be clear, this is 2008. You decide, I better go to Silicon Valley, find a venture investor who then can help me find a CEO. Yeah. So you fly out there in 2008 with a couple of appointments?

40:29Yeah, a couple of appointments and just drinks with friends and people I knew in Silicon Valley. It was the first time I came to Silicon Valley. Did you have a deck? Absolutely not. My intention was to build a 20-people company. That's what I wanted to do. A 20-person company, super efficient, providing the software to people, not a massive company. Because you wanted to have, you just wanted a sustainable, nice life. Yeah. I didn't need the money because I didn't think this was a venture I was building.

41:00And so I went, not really being too worried about the results. I was more worried about the amount of money it would cost for me to fly to and back. To fly to the Bay Area. And accommodations and so on. Where did you stay? I stayed at a little hostel. At a youth hostel? Yeah, yeah, yeah. Like in a bunk bedroom? Yeah, I had a roommate. Like incidentally, it was also a computer programmer, so it was actually great. I actually bought a bicycle on Craigslist. And did you go for a week or two weeks? I was scheduled to be there for a week. I ended up staying, I think, two and a half maybe, because what happened pretty quickly

41:36is, you know, I would have my first meeting. And again, this is me biking. From the youth hostel. From the youth hostel to down Central Road. And showing up and they probably already thought, who is this? And so I would have the first meeting and I had my notepad and they would ask me, it started out, I was sort of explaining the business and, but then they would ask me some questions about, you know, usage and market size and these kind of things.

42:07And some of those I could answer and they would get really interested. But the problem was that very quickly they asked me questions I couldn't answer. Like there was questions around CAC ratios and lifetime value and all these kind of things. I would write down the terms. I would then look up what we meant. Usually I would get an equation back because it's some equation that you're supposed to apply to a business. I would then go to our database and get all the relevant data, plug them in the equation, I would get the numbers.

42:38So I had one more question I could answer the next meeting. And so basically this is how I went through these meetings. I remember that, I mean, I ended up getting the kinds of term sheets people actually, frankly, dream about, which I was mostly, like I got benchmark offers. From that meeting, from that visit? Yeah, probably from meeting three by the time I kind of figured out. So people actually really were, there were some people who were interested. Some people were interested, but all the offers were always conditional on moving a

43:08company to Second Valley. They all said, we'll support you, you got to move it here. Yes. So I got the offers, I got term sheets, and some of them referred me to potential CEOs. I had a bunch of late night meetings with people who could take over as CEO of the company. Because you did not want to be CEO. Because I wanted to play with technology. That was what I was good at. That was my identity. So I said, okay, clearly, if you want to do this now, and if I get good numbers, you're going to give me this later. Eventually. So you figured, I don't need to... So I said, I'm like, let's slow this down.

43:39I go back. I talk with my team. I think about this. And how many people are on your team at this point? There's about just five people. I had someone for customer support. I was doing all the customer support initially. And then eventually, the rest of my team told me my English wasn't good enough. By the way, how are you paying people? This was now after we got angel investment. I still wasn't taking salary. But your runway was not very long. No. But there was income now. We were still burning, but it got slower and slower.

44:09Because there was income coming in from subscribers. Exactly. So I go back, and then we're talking 2008. So Lehman Brothers at some point. Now, the world was falling apart. Lehman Brothers collapsed. Markets collapsed. 2008. You've got term sheets that you've kind of rejected. And now you're about to face a global financial crisis. So basically, I got this, around this time, notice that term sheets will no longer be honored because everyone needs to tighten bells and so on.

44:41So basically, initially, I thought we were toast. When we come back after the break, how the global recession actually turned out to be a huge opportunity for Shopify. And how Toby Lutka learned to do the job of CEO. A job he never wanted in the first place. Stay with us. I'm Guy Raz, and you're listening to How I Built This.

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47:03Welcome back to How I Built This. I'm Guy Raz. So it's 2008 and the global financial crisis hits. At this point, Toby Lutka is the CEO of Shopify. The VCs who had been interested in investing weren't quite so interested anymore. And Shopify didn't have that much runway. The money was running out. But then something surprising happened. It turned out that lots of people who were newly laid off had lots of ideas about starting

47:34their own online stores. People who lost their jobs could reach for their own independence and engage in entrepreneurship using Shopify. And they said, why don't I give this a go? Like, I'm going to try this thing I always wanted to try, right? Wow. I'm going, like... I mean, did you see, start to see users and subscribers start to tick up? Yes. You saw a measurable change in 2008, 2009? We thought the numbers would fall off a cliff. And what they actually did is they started climbing and accelerating.

48:05So you just anticipated a completely different outcome. Yes. I was ready to think about how to tell people that I can't meet payroll at some point. And instead, basically in 2009, the company now hit first time sort of cash flow neutral. Like, we can write out whatever downturn this is and start thinking about long-term investment, like infrastructure projects and so on again. Okay. Meantime, you are the CEO.

48:36How are you doing as the CEO of the company? I don't... Not good. I mean, my team was very, very patient with me. There was a lot to learn. It's a tough... It's a very subtle job. And, you know, wonderful things about computers is when you tell them what to do, they'll keep doing it and they'll do it forever until you stop. Turns out humans are not like that. Humans are different. Yes. So there was a very large learning curve. And I would say 2009 to 2010, I truly held the company back from what it could have and

49:08should have probably become. You held it back? Yeah. What do you mean? Like, if you come from engineering, you know something is always a bottleneck. And the moment you remove that, something else becomes a bottleneck. And it's... Same goes for companies. At this point, I intentionally slowed down the growth of a company a little bit just because I needed it to be manageable for me.

49:29And I was wavering on the most important decision, which was, is this a lifestyle business or is this actually a venture? And by this point, your revenue is over a million dollars a year, right? But... Which sounds like a lot, but obviously you've got huge expenses. You've got a growing staff. Yeah. Did you ever get the feeling like, oh my God, all these programmers and people are now like working for me and they're depending on this thing. And I don't know if this is going to work. Guys, it's crushing. It's a crushing responsibility, right?

50:00Like it's... You're responsible for everyone who is there, right? Do people have families? People have families. People have kids. My family, like, it's not a wealthy family. Like it's... I mean, people gave me money they didn't really have. Like up till this point, it was really just money from John Phillips, from my family, and then for the last year, from my father-in-law who gave me money to meet payroll. He was giving you money to meet payroll. And we were living together and had dinner together.

50:32It's amazing that this worked. I mean, I just couldn't believe he was doing that because he's like... Like he was a bureaucrat. This was his savings. Basically, he was putting his life savings into this money bonfire. Everyone was just unbelievably supportive because they somehow believed in this idea. Did you have trouble sleeping at night? Pretty often, yeah. You know, like... So one thing I found about the entrepreneurial journey, or at least mine, is you basically exist

51:04in two different states. Because there's a state of things are coming together, and I think if we do this, we're unbeatable. And the state of complete dread, and we're dead. We're dead. We're dead tonight. And I don't think that actually ever went away. I still to this day have this. The thing that changed is it used to be like a month in one state, and a month in another, and then eventually became a week, and now a day, and now this can happen. Like I can switch three times before breakfast. You know, like, but at the bottoms, like the bottoms are deep, and the implications of

51:38what failure means is, it just means so much. It changes everyone's life story to a significant degree, right? How did you manage that? Did you go for long runs? Did you take Prozac? What did you do? I, um, no, I basically just programmed, which actually often wasn't the best use of my time. Did you talk, would you talk to Fiona about it, your wife? Yeah, she was unbelievable, so supportive. Yeah. So, I mean, around this 2009 period, you're, like, really wavering on this decision, right?

52:09Which is, like, do you build a nice, stable lifestyle business with Shopify? Or do you try again for, for big money, for VC money, and make this thing huge? So, what happened? Um, so I would look at my bank account, uh, multiple times a month, and just compare, you know, what it was last time. And, uh, I, if it was going up, basically, we said, okay, should we invest this in another team member, or should we attempt a marketing? Hmm. So, I finally said, okay, I'm going to save and try five different ideas for marketing

52:44programs. We said, if any of those meaningfully accelerate our growth, then I have to go fundraising again, and actually go on the clock towards an IPO or to eventual exit. Because the money really you needed for marketing at this point. At this point, we were held back by not engaging in marketing. You got five projects, and you went to your team, and you said, you guys come up with something? We need, we need ideas, we voted on the ideas, we, um, came up with things, and we tried them, um, and... And what worked?

53:14All of them. They all worked? Every single one of them. What were the ideas? We did adverts, we, uh, this, this took a little bit longer, but we released a book on, um, uh, the concept, um, we just tried to, like, we sponsored, um, actually a podcast, you know, like, every one of those, we, we tracked, and it's like, these were directly mathematically trackable, like, we made the money back in, like, five, six months of, of these investments. And then we were like, okay, now we're not talking about fundraising anymore based on,

53:45isn't it cool that we're going after this market? Right. Now we're talking about, I have a formula, and I need to plug bigger numbers into the formula. Yeah. And so, then picked up the phone, called the venture capitalist, which really impressed me, and said, okay, you were right, this is a venture, I have data. So you, you go back out to Silicon Valley, you convince a few VC firms to invest, you raised, I think, seven million dollars. Yeah, so fairly modest. I mean, it's, this, this sounds like massive numbers to those, to the years of those times.

54:17To you guys, it was insane. And do you remember what the valuation was? Like, 25? 25 million dollars. Yeah. At this point, once you, you're bringing in seven million dollars, those venture capitalists are also buying a seat on the board. You've got to develop a board, you're now, right, and there, you've got to have regular calls with them. If they email you, they're expecting you to get back to them. Was that stressful or overwhelming, or was it helpful? I thought it was very helpful. I've always had a fantastic relationship with all the people who invested in the company,

54:49partly because I told them straight off the bat, like, saying, like, I'm not going to pretend I know things I don't know, and I really hope you're going to help me in this journey.