On 2021’s very first podcast, myself and Robin Li sat down with Harley Finkelstein, the 36-year-old Chief Operating Officer at Shopify to find out how it all started, how Shopify evolved, their recent response during COVID-19, and future growth.
Here’s the excerpt from our conversation.
Hans Tung: Harley, you joined Shopify in 2010 and now it is your 11th year. What was Shopify like back then? What made you decide to join the company?
Harley Finkelstein: I was born in Canada, but I grew up in the United States. I went to McGill University in Montreal for my undergrad. Around that time, the September 11 attacks took place, markets went sideways, and my parents weren’t able to support me anymore. So I started a little t-shirt business while I was a student at McGill. I became an entrepreneur, really out of necessity to support myself.
Following that, a mentor of mine convinced me to consider going to law school, not to become a lawyer, but rather to become a better entrepreneur. His hypothesis was that law school would be like finishing school for an entrepreneur. I would learn how to write and think critically and articulate my thoughts well. He was also teaching law at the University of Ottawa.
I applied to only one school, the University of Ottawa law school, and moved there. I had no friends nor family there but found my ‘tribe’ in the entrepreneurial community in Ottawa. It was in a little coffee shop that I met Tobias Lütke (current CEO and co-founder of Shopify) or Tobi. He was in the middle of transitioning from a snowboard business to a software business.
I loved what he was doing. I loved the fact that he was basically democratizing e-commerce. He made it easy for everyone to start a beautiful, scalable online store. I was one of the first stores on Shopify and spent the rest of my law degree not really studying, but rather, running an online business. After I finished grad school, I called Tobi and asked him if I could join him as the first non-engineer in Shopify. That was 11 years ago, and it’s been the ride of my life.
Hans Tung: What a great story. During my first year at Stanford, I had to sell Cutco knives in order to earn tuition for the next quarter, so I can relate to your beginnings a little.
Harley Finkelstein: Whether it’s Cutco or selling anything door-to-door like that, it’s a wonderful experience because it forces you to learn how to sell and to figure out possible restrictions or barriers to success. The good thing is that anyone can sell Cutco knives. It has a low barrier to entry.
Back in 2005, most people could not start a direct-to-consumer business. Either you had to sell in a marketplace like eBay or Amazon, which was inexpensive. But effectively you were renting customers from those marketplaces. The flip side of it is you could pay a million dollars and have Oracle or Magento build you an online store, but small business owners don’t have that kind of money.
The reason why I was so attracted to Shopify in the very early days was it felt like it had a low barrier to entry. But it also had an unlimited ceiling in terms of what I could possibly do with a piece of software like this.
Robin Li: Many people think Shopify is just a SaaS company that helps small businesses launch their e-commerce, but it’s actually more of a retail operating system.
Harley Finkelstein: That is an accurate term. Shopify is trying to build the world’s first retail operating system.
The reason that’s interesting is that no one’s searching for a retail operating system. No one knows that’s what they need until they actually see or experience it.
When I think about the timeline of Shopify, back to when I started, we were a small company, helping small businesses sell online. Then we noticed some patterns emerging
One, small businesses that started out at their mom’s kitchen table grew to be category leaders, they became the GymSharks and the AllBirds, Kylie Cosmetics, they became incumbents. Two, these category leaders did not leave our platform. Usually, as businesses grow they graduate from one system to another. But we were watching merchants go from zero sales to new business to hundreds of millions of dollars, and they were not leaving Shopify.
That was the first realization. We could help with much larger brands. That was the start of Shopify Plus.
Second, we realized that the future of retail and eCommerce was agnostic and dictated by the consumer. It wouldn’t be limited to pure online or offline. If we were to be the most important piece of software in retail, we had to enable entrepreneurs and businesses, and brands to sell everywhere. So we introduced things like Shopify point-of-sale for brick-and-mortar stores, we became the launch partner with Facebook and Instagram, we connected to walmart.com, and Amazon and eBay to enable merchants to sell wherever they want.
Finally, we made use of our combined size to reap the benefits of economies of scale. Think about it – if we were to aggregate our stores, Shopify would be the second-largest online retailer in America. So every small business that uses Shopify gets better payment rates, access to capital, and functionality. The result was a levelling of the eCommerce playing field.
Hans Tung: Three words stand out to me so far, democratization, retail OS, and scale. Obviously during COVID-19, with offline being unavailable, we saw an eCommerce boom.
Can you share with us how some of these merchants weathered through the global health pandemic? How did they overcome some of the difficulties or thrive during this time?
Harley Finkelstein: We immediately focused our efforts on releasing new products and new functionalities, so that small businesses can not only survive but in some cases may be able to thrive through this.
Very early on in the pandemic, we did the following things:
- Increased capital availability. We added $200 million to the pot of available capital for merchants
- We expanded beyond just the U.S. for capital, to places like Canada, UK.
- Added new functionality for brick and mortar stores like local pickup and delivery so that every brick and mortar store that had to close their doors can now operate as a fulfillment center, and can now actually focus more on digital commerce.
- Created a gift card product. Service-based businesses like hair salons who traditionally don’t use Shopify could come on board. Their regular customers could then buy gift cards, which gives the business immediate cash flow during those challenging times.
Shopify really adapted quickly to this new environment. During this time I witnessed new categories of merchants come to Shopify which I’d never seen before. Grocery stores for one.
We also saw examples of incredible resilience from our existing merchant base. One of my favourite stories is what Ben Francis, the founder of a company called GymShark, did. The biggest motivator for GymShark purchases is obviously, going to the gym. During the global pandemic, GymShark realized that people were no longer heading to gyms.
GymShark completely changed their approach to marketing – they called themselves HomeShark as opposed to GymShark to demonstrate empathy and a pivot towards everyone who started exercising at home.
Another amazing example is another non-direct-to-consumer brand Heinz. They launched ‘Heinz At Home’, a direct-to-consumer condiment online store on Shopify. It was all done in a matter of days, too.
Robin Li: You’ve talked about new entrepreneurs as merchants on your platform. I want to find out more about all the entrepreneurs building apps on your platform. You have already 600 apps, right? And over what, like 30,000 developers?
Harley Finkelstein: Our ecosystem is unequivocally committed to Shopify. We, in the early days of Shopify, began to get lists of feature requests from our merchants. Really good suggestions. They asked, can you guys create your own payment gateway so we can get better rates, or have it integrated into the onboarding? Some of the feature requests were very specific to a particular type of business. They wanted a tool that converts shoe sizes, from U.S. shoe sizes to European shoe sizes. I can see that for some merchants, that is incredibly important. But that is not what most people need most of the time.
We made this decision early on that Shopify’s core offering will do what most people need, most of the time, full stop. Anything beyond that, that might be specific to a vertical or a particular industry or a particular need of a business, we would leverage and create an entire platform so that third parties from all over the world can build on top of us.
That has turned out to be one of the largest partner ecosystems in tech and software. Even as we’re having this interesting conversation, there are 1000s of developers and freelancers, and companies all over the world, thinking of new applications and new functionality to make Shopify better.
At the same time, we’ve created an entire ecosystem of agencies and freelancers. If you were to walk into an agency in Oklahoma, or Budapest, or Tel Aviv or Brazil, and you were to say ‘I want an online store’, there’s a very good chance by default, they will build it on Shopify.
The reason why we’ve had long-term success with this ecosystem strategy is that we have really tried to create more value for our partners than we capture for ourselves. We want them to make more money. Now, in some cases, we ended up going into their space.
In the case of fulfillment, we are now doing a Shopify fulfillment network. In that case, we are very upfront and transparent with those partners to say, look, this has crossed the threshold of what most people need most of the time, and therefore, Shopify has the responsibility to build this ourselves.
However, we will let them know of any opportunities going forward. So in the same example, even though you see us going into fulfillment, we’ll tell them – we are not going to do refrigerated fulfillment, we’re not going to touch perishables, we’re not going outside of the US. I’d say we’ve always been thinking about that relationship and dynamic with these third parties. There’s incredible trust in those relationships. We don’t take that for granted.
Hans Tung: Can you elaborate on the evolution of Shopify’s business model?
Harley Finkelstein: Merchant solutions didn’t exist back when we were first getting started. However, the pricing model for Shopify is quite simple. We want to make it extremely easy to get started – it should be affordable, value-for-money.
As the merchant becomes more successful, the aim is to get them to look to Shopify for more solutions: Payments, capital, shipping, etc.
In the case of Shopify Plus, it was a way for the most successful direct-to-consumer brands (who were already on Shopify) to graduate and aspire to. Now, Shopify Plus has many amazing brands on it – TOMS shoes, Rebecca Minkoff, Steve Madden, Budweiser, Snickers. The initial pricing was $995 a month. Over time we have moved it to a model that still holds enormous value. At $2,000 a month or 25 basis points, it provides far more value than any other enterprise eCommerce platform out there.
The truth is, the enterprise eCommerce space was simply ripe for disruption. The idea of RFPs, six months sales cycles, trade shows, wining, and dining – the existing enterprise eCommerce market felt dated and the pricing was honestly astronomical.
At the end of the day, we still maintain our focus on entrepreneurs. That’s who Shopify fundamentally cares about. Interestingly, some of these larger companies want things that are fast and adaptable. They want to be able to integrate ShopPay or Apple Pay or cross-sell on Instagram, or Walmart.com. They can do all that from Shopify, at a price that feels fair, but also allows us to share in the upside as they go really big.
Hans Tung: What is it like working with Facebook or Walmart, or Affirm? Can you talk through the logic you have in rolling out each of these major partnerships and features?
Harley Finkelstein: Old-school retail used to operate by its own playbook. Retailers made the decision on how, when, and what was on the shelves.
eCommerce completely democratized the distribution of retail and commerce. Now, retailers are taking instruction from the consumer. The consumer is now dictating how he or she wants to purchase.
In the early days of Shopify, it was still something that people were skeptical about. Now, for you to be successful as a brand in 2021 and beyond, you need to be able to sell wherever your customers are. These days, consumers are hanging out in marketplaces. They’re hanging out in places like Walmart. They’re spending time on Instagram and Facebook and Pinterest. Or they’re at pop-up shops and farmer’s markets. We believe our responsibility is to enable merchants to sell anywhere that they potentially could have the consumer, and enable more channels. Of course, this also increases complexity.
That’s what makes Shopify so valuable, we continuously simplify all that complexity. AR and VR are popular, it’ll probably become a much more popular channel. If this was 10 years ago, MySpace would probably be a channel, we are agnostic to what the channels are. The onus is on Shopify to make sure that we integrate and make it really easy for even a single person operation to sell at 20 different channels.
If you think about it as a hub-and-spoke model, there are about five to eight channels that are valuable to most merchants. There may be 150 channels in the future. We have a channel software development kit (SDK) so that anyone can also add a Shopify channel and our merchants can easily push products there. But the idea is everything feeds back into one centralized back office. And that’s where you see in a single view, your entire retail operations.
Hans Tung: Yes. That’s the ‘retail OS’. When we look at Square or Alipay, they introduce capital or pay or a way to work with their merchants beyond just the flow of goods. You have been making a lot of inroads with Shop Pay (payment method and checkout solution by Shopify) and Shopify Capital. Can you chat a bit more about that?
Harley Finkelstein: Relative to other software companies, the relationship that Shopify has with over 1 million merchants is quite unique. When a merchant says that they are going to ‘work’, and they run a Shopify store, it means that they are in the Shopify admin. For most of our merchants, going on Shopify is synonymous with them doing their work.
Where possible we try to identify opportunities for cost savings. We noticed that it was noticeably harder for many of the smaller merchants on Shopify to get capital. Banks didn’t want to lend to them either. If they were getting some sort of lending or some sort of cash advance, the rates were astronomical.
This was mainly because no one understood the nature of their business and thus could not make effective, efficient, timely underwriting decisions. But Shopify has all this data. We know the quality of their traffic, what they’re selling, how much they’re selling, how many employees they have, and therefore we were able to perform instant underwriting. As a result, we have sufficient capital on our balance sheet, we can lend and provide cash advances to the tune of over a billion dollars to small businesses. These small businesses could then buy inventory, invest in advertising.
These days, consumer expectations for fulfillment have evolved. We want things fast, within 48 hours, and with affordable shipping prices. That’s one of the things we’re trying to do with Shop Pay to help maintain that expectation level that consumers have.
We also realize that your favorite brands on the Internet are largely on Shopify. If you’re a consumer, you may want to buy sneakers from AllBirds, or lipstick from Kylie or Jeffree Star. All of those stores are on Shopify – we’re the brand behind the brand. However, my aim is to still make the payment experience incredibly effective, efficient, and frictionless.
In a pre-COVID world, when I used to give talks, I would often do an experiment on stage in front of hundreds of people. I would tell them, “I’m going to check out of AllBirds in 12 seconds.” If I can’t do it – and they would time me – I would buy everyone in the room AllBirds. Of course, I would do it in like four seconds because Shop Pay is so fast and so easy to use.
With Shop Pay, we were leveling the playing field. No matter if you were a one-person operation in your own home, you can now offer a similar checkout to what Amazon offers. You also get access to capital and payment options. That’s what I mean when you hear us say we’re arming the rebels.
We want to give the ‘rebels’ i.e. the independent businesses, a real advantage so that they can compete even against some of the biggest businesses in the world.
Robin Li: You also have a Shopify app now for consumers. Can you tell us about that and how it came to be?
Harley Finkelstein: Like I said, Shopify is a brand behind the brand. We like making our merchants and brands look good. And for the most part, most consumers that are buying off a Shopify store don’t even know it’s a Shopify store. It’s intentional.
Just a sidebar related to this – we used to have another app called Arrive that we later integrated into the Shop App. The idea was to help consumers track their packages across every store – across eBay, Walmart, Amazon. We wanted to connect the tracking of packages across stores. The Arrive app, which started really as a hack day project at Shopify, was just something that allowed you to track your packages. Regardless of where you’ve purchased, you’ll be able to see where your packages are and when they’re getting delivered, because of the integration of Arrive into the Shop App.
We also made it possible to have a relationship post-sale with those particular merchants. A shop that I purchased from a week ago, can send me something this week that says, hey, you bought, you know that pair of shorts, we actually have a T-shirt to go with that. It allows for a richer experience.
During COVID-19, we also added functionality to find local businesses in your city. The difference between us and other shopping apps is that the sale still belongs to the merchant. We don’t want to create a marketplace. We want to create a shopping companion.
Robin Li: This is actually a question for Hans. GGV Capital is a very early investor of Alibaba. You saw the evolution of their business model going from a C2C platform Taobao to a very successful B2C platform Tmall. What’s your take on the competition between Shopify and Amazon?
Hans Tung: Amazon started with B2C and then they came up with other innovations.
These days, while merchants on Amazon might initially do well, there’s always a risk of white-label products coming out of the platform. Whereas with Shopify, you don’t have to worry about that – it’s the brand behind the brand. If you think of Amazon as the iOS of e-commerce, and I’m aware this may be a crude analogy, Shopify seems to be the Android OS of e-commerce.
We all know that Android is much bigger worldwide than iOS. So as Shopify, initially, you’re going after the bottom 70% of the pyramid, but increasingly, even the top 30% are reaching out because they need more than one channel. They need more help and they need to move faster. And you can roll it out faster with Shopify.
Harley Finkelstein: Totally agree with you. Consumers have begun to vote with their wallets to buy from independent brands. It used to be – the only reason I’m buying something is that it’s fast and cheap. That’s changed dramatically.
There’s almost a revival of consumers wanting to buy from their local baker or cobbler. Consumers are voting with their wallets to support independent brands in a way that I don’t think we’ve seen, at least in my career before.
If a consumer is able to have a great shopping experience – similar to that provided by a very large brand – they might actually prefer to buy directly from the brand.
I know GGV thinks a ton about direct to consumer. What I find fascinating about direct to consumer is that it’s almost spoken of as a fad or trend. The thing is that that’s always the way it should have been!
The only problem was that these independent brands and entrepreneurs didn’t have access to do that.
I always think about the Kylie Jenner example. Juxtapose that against what Michael Jordan did with his Michael Jordan brand. Both have sold billions of dollars of product. But Michael Jordan doesn’t own his brand. Whereas Kylie does 100%. Think about all the sponsorship deals, David Beckham, with Adidas, or you know any of these companies, no one owned their own brand, because no one had access to it. Kylie has (or had) 100% of Kylie Cosmetics. I think it is so amazing.
Hans Tung: There’s been a big difference in 30 years with the proliferation of tech and so many tools now available. Its concept has evolved dramatically over the last few decades.
Harley Finkelstein: Why do creators love YouTube so much? Because for the most part, they’re able to have a direct relationship with their fans. Obviously, YouTube is a platform and it’s in the picture.
But generally, there is some malleability there, these creators can move and draw their fanbase from YouTube to TikTok to Instagram. The fans move to where the creators are.
The idea that we’re actually putting more power in the hands of creators, entrepreneurs, makers, there is no way that anyone can think that’s a bad thing. That is a wonderful thing that’s happening.
Hans Tung: I’ve been involved with a few companies that ended up being over $50 or $100 billion dollar market cap. The common characteristics are always democratization, increasing consumerization of their offering. So it’s easier for a little guy to use some kind of OS in order to build that ecosystem around that OS, along the massive scale and channel and just making everyone richer. If you can do that, this ecosystem would be absolutely amazing.
Robin Li: Given that Shopify is so global these days, and more than 30% of Shopify revenues from outside of the US, how do you decide which markets to go into more or further?
Harley Finkelstein: Shopify really started as a product-focused on the English-speaking world. We always had the functionality to enable the storefront to be in any language you want. However up until two years ago, the backend of our system – Shopify admin – was only in English.
We had merchants in over 175 countries at the time of the IPO, which was more than five years ago. However, we were not localized.
In the US if you’re a merchant shop, you can push your products to Walmart’s marketplace. We weren’t thinking like that about Japan. And now we are. Now we have a relationship with the Rakuten channel in Japan. In the last couple of years, we’ve really taken a very conscientious approach to get the best product or best product-market fit in other countries.
We identified a number of geographies where we think Shopify could actually be the very best product in that region. If it couldn’t be the very best product in that region, we simply said, we’re going to leave that for a later date.
As a result, we’ve been able to make great headway in Asia, Western Europe, South America. But I think our approach now is very different just translating languages in those regions.
We really thought hard about localizing. For example in India, you have to have a really great way to do cash on delivery. In terms of payment methodology, and if you’re going to work great for merchants in China, you need to make sure that you’re able to connect with the right marketplaces there, which is very different from marketplaces that you’d see in the United States.
If we are able to establish a strong product-market fit in those regions by bringing together language, local payment methods plus partnerships, then we start investing heavily. We’d put people there and figure out a way to win the market.
In terms of international growth, we’ve got a long way to go. I do still think we’re the very best product for the English-speaking world. You can witness that just in terms of our penetration of those markets, and our market share in those geographies, but besides that, we also have strategies for international growth. It’s just we’re not exactly rushing head-on to conquer it.
I would say that approach comes from living in Canada. Canada is such an international country that we recognize diversity as our strength. I know it sounds cheesy but we tend to approach things with great empathy because we understand diversity. I think that makes for a good long-term strategy.