Opinion: Connecting with clients before foraging for funds

Shopify succeeds with customers first, then venture capitalists

I built my own Shopify store on the company’s platform in less than 10 minutes.

When I was having a problem understanding their back-end customization system, I sent an e-mail to them at 5:50 p.m. on a Saturday night. My wife and I were going out for dinner at 6. At 5:57, I got an answer from one of Shopify’s “gurus,” made the change and was ready by 6.

Most young people (the age range at Shopify is 22 to maybe 32) on a Saturday night want to party. The Shopify folks were still working.

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The company – one of Ottawa’s fastest growing startups – has made customer service one of its “secret weapons.” Shopify currently has thousands of stores using its platform, ranging from the invisibly small like mine to much bigger ones like DODOcase.com, which single-handedly resurrected the handmade bookbinding business in San Francisco. This was an old craft that had almost gone extinct before the aptly named DODOcase built its online store and won a $100,000 prize from Shopify for being the fastest-growing business on the platform over a six-month period.

Shopify’s director of customer success, Aurélien Leftick, and general counsel Harley Finkelstein, recently gave one of the best lectures yet in the University of Ottawa’s Magic from a Hat series.

The company closed a $7-million series-A round with Bessemer Ventures, the third largest and oldest venture-capital firm in the U.S., in December 2010. The Bessemer deal was straight equity – the investor bought preferred shares and the founders did not lose control of the business.

The reason Shopify got this sweet deal was it didn’t need the money: the firm was cash-flow positive from its first 12 months on, and thus it had some leverage in its negotiations with the VCs. If more startups first focused on acquiring real clients and building real cash flow, they would be much better off in every way.

Established by Tobi Lutke and Scott Lake in 2005, Shopify’s original mission was basically to fund the guys’ interest in snowboarding. They wanted to have their own snowboard shop and sell boards online.

Unhappy with the e-commerce offerings at the time, Mr. Lutke, a sophisticated developer from Germany, built a better mousetrap using Ruby on Rails. RoR is an open-source web framework that is “optimized for programmer happiness and sustainable productivity,” meaning just about anyone can learn it and use it competently in a relatively short period of time. It was an inspired choice – coding was no longer an indecipherable, exclusive priesthood.

It wasn’t long before friends started asking them if they could build online shops for them, after which the two fellows began to realize what business they were actually in.

This is so typical. I have yet to see one business plan or model introduced into real life that doesn’t transmogrify into something quite different when it greets its first customers, which is why I put so much stress on getting launch clients.

Pre-launch or launch clients will not only help entrepreneurs with things like credibility, confidence and cash flow, but they will also help redesign the business model, which is probably the most valuable thing anyone can do.

Shopify took Bessemer’s money because it found that every dollar invested in marketing, sales and its “guru” program returned four, and it made sense to “suivez l’argent.”

It also doesn’t hurt that Bessemer Ventures is superbly well-connected in Silicon Valley. This makes business development at Shopify a lot easier when the firm can get first-hand introductions to tech titans such as Twitter, Facebook and Google.

The company’s business model is based on software-as-a-service, and it has led to the promised land of tech companies – a place where the company has committed monthly recurring revenues. With a cost of goods sold of approximately zero, top-line growth powers profits since gross margins are so high because, basically, the platform is built. In other words, each new customer acquired is gravy.

Shopify is adding new stores at a prodigious rate (in the hundreds and hundreds per month) and it currently employs 45 people. About half of them are developers and staff numbers will go to about 60 this year. They have funky offices in the ByWard Market and every Friday afternoon, developers are expected to work on projects not related to their work, ones of their own choosing.

Basically, Shopify has built a great business model and followed it up with terrific execution. It’s shown you can think your way to success a lot faster than you can work your way there.

Professor Bruce M. Firestone is entrepreneur-in-residence of the University of Ottawa’s Telfer School of Management; founder of the Ottawa Senators; executive director of Exploriem.org; broker at Century 21 Explorer Realty.

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