Why Shopify is Smarter Than Wall Street

A lesson in short-sightedness and short-selling.

First, a preamble…

In 2013, my partners and I sold our company to Shopify. Roughly speaking, I took 77% of my acquisition proceeds in the form of Shopify shares. Even now, more than 4 years later, I still hold about 80% of those shares. This despite my financial advisor begging me to diversify.

When I see a winning hand, I bet big.

As a second order of business, I want to make it abundantly clear that I no longer have any access to Shopify in a way that an employee would. I’m on to the next startup and I’m as much a spectator as the next investor now.

Having said that, I do still carry the lessons learned from working alongside some of the brightest systems thinkers I’ve ever had the pleasure of meeting.

And here’s why they’re smarter than Wall Street.

In case you missed it, someone with a history of getting it right once or twice, but getting it wrong on balance, decided to take a shot at Shopify’s business model a few weeks ago. The chief complaint was that Shopify is running a “get rich quick” scheme and selling business opportunities to entrepreneurs.

Naturally, skittish investors still new to the stock wanted an explanation. They wanted Shopify’s CEO, Tobi Lütke, to respond resoundingly. To open the books even further and demonstrate that revenue is not, in fact, churning unnecessarily. To prove to the world that these allegations have no basis.

And Tobi did nothing of the sort. Instead, he dismissed the allegations out of hand and went back to business as usual. This is the Shopify way — to Focus.

As we all saw, the market didn’t love that approach. Despite having their first profitable quarter and beating estimates for the 10th consecutive quarter since going public, the stock dropped another 12% over the next 48 hours (now 22% in total). Analysts wanted churn, and churn they did not get.

Thank. God.

Shopify is one of the easiest ways for entrepreneurs to start a company. It used to be that you’d have some kind of notion you were a good curator of products, or perhaps produced a product yourself, and then walked down Main Street looking for a shop to rent. If you succeeded, fantastic. If you failed, well that year-long lease might just bury you. Not anymore.

Now, if you’re an entrepreneur with some notion that you can curate a store, you’re clicks away from giving it a go. If it turns out you were wrong, you walk away. No harm, no foul. Entrepreneurs know that for every idea that worked, several others fall flat. The goal is still the same — minimize the cost of failure, and take full advantage of your successes.

This is why Shopify won’t report on churn. Because the number won’t be pretty. Businesses fail at an alarming rate. Shopify isn’t some magic bullet that makes your business idea successful. It just reduces the cost of failing.

What’s more, it reduces the likelihood of failure. And that’s all that you should need to know about churn. Though I haven’t worked there in some time, I do recall Shopify merchants succeeding more often than the average business. This shouldn’t come as a surprise. If you give an entrepreneur multiple swings for the same price that they used to get one, they will eventually succeed.

Perhaps more importantly though, Shopify has made it their mission to help entrepreneurs succeed. They work tirelessly to automate every part of running a business that doesn’t take talent, but does take time.

So why not just report on churn?

Here’s why…

If you report on churn, then you have to keep reporting on churn.

If you keep reporting on churn, then you have to improve churn.

If you’re too focused on improving churn, then you’re too focused on the wrong metric for a land-grab strategy.

Because the easiest way to improve churn is to move up-market where businesses have already shown that they can stay alive.

And if you move up-market, you lose your footing as the de facto place to start a business, at a time when more and more people are deciding to do just that.

This is why Shopify is smarter than you, Wall Street. They aren’t being smug by not reporting on churn. They are being polite AF by not mentioning how you’re ultimately trying to lead their stock into a long-term spiral.

Finally, and I say this with a great deal of pride… I do have one advantage over every other retail investor. I’ve worked with these people. I know them. They are my peers. My friends. My former business partners.

And they have character and integrity in spades. They value legacy. And you don’t create legacy by selling business opportunities. You do it by building up entrepreneurs. There’s a difference. So stop asking them to fuck it up.