Tobias Lutke on How to make sure your business is on the right side of history through code & culture

Tobias Lutke, founder and CEO of Shopify, wants people to make sure their business is on the right side of history through code and culture. Quietly spoken, Tobias offered one of the most thought provoking talks of Business of Software 2011 by asking the question, “How we can build businesses that people won’t be embarrassed by in 100 years?”

Tobias is CEO and co-founder of Shopify, the marquee shopping cart system of the e-commerce industry. As a programmer Tobias has served on the core team of the Ruby on Rails framework and has created many popular open source libraries such as the Typo weblog engine, Liquid and Active Merchant. He maintains a popular tech weblog at http://blog.leetsoft.com/.

Find Tobias’ talk video, transcript, and more from Tobias below.

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Video

Transcript

Thank you, so let’s see, I just got this. I have no idea where to click, hey, that looks, that looks like it looks. Alright, so, this is a little bit about me. Um I am originally from Germany. I moved to um Canada about eight, nine years ago. And, I’m really I’m really a programmer, through and through. I, in fact, dropped, dropped out of high school to focus more on programming and figured that that is the one thing and the only thing I will be doing for the rest of my life and that was totally okay because I really, really do love that. Now where was I going with that? So, the funny thing is, so I came to Canada and then, I started a business which broke but I closed and later on I started another business which I’m still doing and the business is the one I am talking about here today. By way, the funny thing is, so, I mean, what a tough act to follow, what a fantastic day of talks. I think this is a just absolutely an amazing conference. And I love some of the, you know, humility which was here. Where we have people who will go her and say, “I’m a bit nervous, I’m not a professional speaker, and, so bear with me” and they will go on to be like amazing professional speakers (speaker giggles) so, we’ll see how I’m doing on it.

Okay, so, Shopify. Shopify is the easiest way to create scalable and beautiful online stores. And, obviously, this is one of our sentences, and, especially after we talked about how to be honest, I went back to my slides and said “okay, is this still something I can say?” And, (speaker giggles) but as each sentences go you know that’s there’s word processing, I mean, everyone tries to get at these things, you know everyone tries to, you know, can’t we put a platform in, like they are really applaud form as well. And, then people use us for their CRM systems and CMS and stuff like, how can we work this thing. Now, the point is, you have to have one of those sentences which really is going to you know, guide you through these times where you just have to say no to features. And you know, ideally, it kind of describes about why you initially even went ahead to build the business.

So, at, this is sort of how it starts. You know, this is very much, as Jeff puts it. This is “hot SAS”, like you go to this website, you click the big green button, and then in a couple of minutes you end up in different online store. This is for retailers, this is for people who have physical ship of goods. And they set this up and they are up and running. So, one of my favorite examples is a company called Dodocase. It started with us in, just last year, just beginning of last year, really, really recently. In fact, at the time they Had this contest running, They were trying to find who can build the biggest business in this shortest time span and that’s how they got signed up. Then they built this beautiful store and I can’t really give this justice so here is a really neat video here. (VIDEO)

How cool is that? So, it’s easy to miss this but they said, they have projected revenue of $4 million. That was their first year in business and spoiler: they actually beat that. It’s an absolutely incredible business and the formula here it’s rather simple. I mean, clearly they have great product. I mean, what they’ve done is just something, which, you just have to feel good about. I talked to Greg recently and he told me the story that when they started and came up with this idea, they wanted to talk to actual book binders. And this is San Francisco. San Francisco actually has a guild of book binders. Most places don’t have guilds. Like, I mean, how cool is that to begin with? (laughter) But the problem was the guild only had two people binding books anymore so those are the only two people in all of San Francisco that are actually actively doing this. So, they met with both of them and they described what they wanted to do and they got this initial sort of almost fliers made but they got them bound. It looked sort of like just a piece of paper but it looked like the back of a moldskin typed on, and it was sort of showing what these cases will be like and they will go around during the time of the iPad launch to hand that to all the people waiting in line and that was how they got their initial customers. The amazing thing about this is, now they have 40 full time book binders in San Fransisco again. So, all these guys they called, you know, their daughters and nieces like that, extended family to come back to San Fransisco going back into the trade, people can make for retirement so on and so on. They’ve actually created something amazing over there. And this is the, and of course, timing was a big component when it was launched, I mean this is what entrepreneurship is all about. So these things combine to something we call ‘critical success’. And,  this is what we are trying to enable. So, there are lots more of these stores and this is the last slide of our virtual company.

For more context, we started in 2005. We became a profitable company in 2008. Then, sort of a year ago, we completely shifted gears and raised now $22 million in funding and we have 16,000 stores in 70 countries and we grew from 30 to 80 people now in this year. And, I also realize I’m in the way of beers, so I am so sorry about this (laugh) they will keep this light. This is the topic of this talk. And, this is completely opening the bait. I absolutely don’t say I have any answers really. I just have data points. But I feel like this is what we all should be thinking about. I think what a lot of people don’t realize about what’s going on right now like the news and, you know, what going on with conferences and so on, except it seem like there’s this phenomenal interesting global brainstorm going on about what a company actually is. They started out with sole proprietorships and family run businesses eventually came up with public corporation. Then around in the 70s, there was something called the agency problem, where shareholders weren’t enough quite sure whether the CEOs of public corporations were fully representing shareholders while they are actually maximizing with share holders value and so there was the shift of aligning CEOs of stock options directed to the fortunes of the businesses and from then there that has been straight line of businesses becoming sort of this solo entities that some of them are now, but this is a ground rule. There’s tones and tonnes of examples of business like that. They’ve been really kind of seeing the insurgence of this. Dodocase is a fantastic example because they are reviving an entire industry. Now, you have to also, especially because of current events, look at Apple, which is a company which has been doing amazingly well again, in a way of thinking long term. And both of these companies and many other companies combined, say, “we actually exist not for cash but rather for delighting customers.” And I think you’ve heard us talk on a bunch of times on a various talks. It’s very important to emphasize this. Delighting customers is really what it’s all about and then a lot of good things follow from this.

And what do I mean by going and look into history, and please don’t take history lessons from a high school drop-out like me. You have to read up on this stuff for yourself (laugh). So this is, I was trying to find the picture of Henry Ford’s assembly lines but this is the closest thing I found. These things are really, really amazing. Like, about a 100 years ago, they were the newest thing that anyone knew existed in the world of business. They were invented. They made quite incredible effectiveness, incredible wealth and there were a lot of problems with them too. So, however, they were so good that everything of the entire, especially the American automotive industry really did build itself or model itself on what Henry Ford did. And, now 80 years later or so, Gm is now market leader and  all of a sudden have all these Japanese companies running cicles around them. No one really quite knew why. I bet then, information wasn’t flowing quite freely. So, this is really interesting case of, I guess it’s called Nummi. And that’s a car manufacturing plant somewhere in California, which is really rough place. You really did not want to go, want to work there. They had a massive problem of people getting drunk at work, that massive absenteeism. They actually have a problem with workers having sex at work (laugh). You know, things are pretty bad and that’s one of your number one problems. So, they shut it down, and um, so, they shut it down and then what happened next is that Toyota came and said, “hey GM, why don’t you put a joint venture here? And we would build this factory in sort of a Japanese style” and then the project was a huge success. And same people coming in to work building now Japanese cars and the differences were striking because Toyota invented a lot of innovations in the supply chain. But the biggest difference it made was they gave the workers an incredible amount of autonomy. So, every person had a red card to stop the supply chain. Everyone could go ahead and say, “there is a problem with this car, I’m going to stop this now” and they actually had ways of rewarding people who did that the most and actually solve problems. So, no one had really thought about these kinds of things. No one wanted to give a lot of autonomy to these dispensable people, however as soon as someone did, they completely outcompeted everything. So, the lesson of this is: success doesn’t make you right. And I think this allows us to say our responsibility is that we need to build companies that don’t embarrass us like that in 100 years.

So, there’s a lot of stuff wrong with companies right now. And this brainstorming is great, it’s a great exercise. Everyone can and should really think about this and try to improve things a slight bit in their own companies and then tell other people what they did and I think there were some really, really neat examples of this already in today’s talks. One really useful phrase in the office environment: the atmosphere of the average workplace is to productivity what flames painted at the side of the car at a speed. I love this, Paul Graham said that. And this, you know, this is, again, a (?). You can create in an environment which is much more creative, more like a left side rather than a right side. You can make your corporate retreats more like that rather than verboten and catering, I mean, we all want to have beers right now, don’t we? (laughs). So it’s funny to compete against guys where you can take their company pictures as negative examples, thanks Volusion.

I don’t know why I share them but there you go. But um, compensation is a really really interesting one. That’s a hard problem. Office environment – easy, this one – super hard. So, I mean, do people here pay bonuses? Kind of everyone does, so you kind of have to. So, it’s like this rat race where people really do think of bonuses as part of their base comp and then kind of no one, like this is clearly a North American thing and in Europe it wasn’t really around. I never quite figured it out. So, the problem I have with bonuses and I’ve heard that this is something to take a stand on. Let’s think about this, you know. What can we do here? It’s like, it looks like they’re never really distributed right. And, yet the other things also, the effectiveness of bonuses, it’s really quite disputed. You know, there is a famous experiment that takes two groups of people, three days in a row, each group solves puzzles every day, every day they get a certain amount of money and then both of groups on day two get twice the amount of money. Do I have that right? So, sorry, one of the groups only gets extra money on day two. On day three, that’s been taken away. So, and then, they measure up overall output. And, it turns out that this group that has gotten the straight pay, every day ended up out- performing the group even though on the second day, the group which cut the bonus was, ended up being more effective, and that’s because on day three the funding ran out for the extra money, they just didn’t perform nearly as far. So, it’s a good shot to measure but in the long term has proven to not be so effective. So, one interesting thing, when I was still in Germany, I was an apprentice programmer there, that means I was on an intermanship, which is something you can do in Germany, which is something North America absolutely needs because they are  sticking people for way too long into universities around here. I had this mentor. I was looking for Seimens, big German company. And this leader of mine, he ran the skunk works, like a really, really effective group. They are a group of doers within this large organization, so I asked him, you know, how did you go about selecting people for this group, you know, how do you know how is right, who is good? And then, he said that this was all in his mind, he didn’t really do this. He said the thing he would love to do is, or what he does in his head is a bucket of paint test and the way that goes is, you would put a bucket of paint in front of a front entrance of a house, of an office, and then at the end of the day, you will go back in and look around on the foot prints and find the desks of all the people that just surrounded the footsteps. The people that, everyone walked to that problems, everyone talking, like, these are the most important people and clearly somehow the corporation internally knows itself that these people are important people. But it’s a terribly hard problem to figure out from the top down view. Usually when you sit down with other managers, you know, and other people, people of this kind of things, so you usually know who the important people are but it’s really really tough to figure out certain aspects of this.

So, any way, this is a good thing to look at. Um, you don’t have to read this, this is an example, it’s very technical, it’s a top one in our system that I’m going to describe that came up. Julie thanking Jose for having made some kind of a data base for us on Friday night. So this is something that happened in the company and Judy truly really was thankful to Jose about it, so she then went ahead and thanked him for it. Now, what do I think? How good is that for the company? Is this a one unicorn good, two unicorn, three unicorns? I know this is completely arbitrary. I would say it’s probably a one. He obviously did something on Friday night when he didn’t need to and clearly Julie was delighted and so, I’m happy about it too.

What is this? So, this is our internal system. It’s what runs essentially all of Shopify, and really, really helped us get through this 30 to 70 employee death valley, which is very very hard to get through. It’s the time when your company realizes, okay we can’t all go to have lunch anymore and talk everything over. Communication suffers. You don’t know what the people in sales might have accomplished, especially if you are in development and so on. So, the way unicorn works, it’s essentially this place where people go and simply thank other people for things that they may have done. And, there are certain reports. Other people in the company can go through and get email once a day and so on. Just saying, here’s what happened in a company, what do you think about these things? How many unicorns do you think are deserving of this? Similarly, it does project managements and managers have one on one meetings as well but the point of it is, one percent of all our revenue goes into the system. This is for bonus points. It goes into that a big pot and even its evenly distributed among the people in the company and based on their votes, it then goes to the people who deserve it the most. It’s an incredible system because here’s what happened. We had, we are trying to run a corporation just like most of you hiring the best of the best. They are very good at attracting these people but you don’t always get it right. In some cases you hire someone who you thought would be absolutely fantastic but then, somehow, they don’t end up as effective as you’ve imagined.

We had one case where after the three months mark, the probation period, we looked at it, scheduled a one-on-one meeting, checked on his unicorns and then what became obvious was that an incredible amount of people thanking him for doing all these small things and it turns out that the reason why he wasn’t actually that effective was because he spent most of his time helping other people. This was his own way to integrate into the company and it was tremendously useful. In fact, he was the second large recipient of bonuses that particular month and if he would have carried this forward, that would be like a 30% increase of his base salary, so that is significant. So in a way like, a company already knows more than the managers, and there are ways to tease these out. I think this was something on the right side of history in terms of human relations and so on.

Next thing is – do not start a company to make money. I think that’s something we’ve discussed, we’ve discussed here. The right here is to start a company to delight customers. And, money is something that should follow. I know this,I know this very well, um, before I get into this, again everyone knows this here. There are two economies out there right now like this, normal place and this crazy technology place, which, which has 0.5% unemployment and I’ve been asking around today, some companies um here in the Boston area paying $20,000 for single referral of a single engineer like, that is crazy, that’s a car. So, they are clearly all trying to find amazing people, therefore, everything, like a lot of things don’t count. Everyone in this room her is by definition like a percentage of a percentage of a percentage. You know, you are all smarter and better looking and you know, everyone here can go and work for a larger company and, and you know in very little time can get medium six figure salary and you know, you can make, I mean, you put that into some kind of balnce, investment fund portfolio, I mean you’re going to be a millionaire before your kids go to school. Don’t take investment advice from a high school drop-out. (Laughs) There are so many better ways to start companies. Money is sort of a side effect of this critical success. A critical success you can’t get if your target is money. It just does not look like this. It’s not something you can seek, it’s something that follows. So, I even forget this myself so the first business I started, which is funny, given Jeff’s story, is, I started snowboard store. This was not breaking water. It was supposed to become breaking water but we started it online and this was in 2004, my first business in Canada. And it was a fun business like calling up all the suppliers and negotiating rates and tiny suppliers. You called up a guy and they say, “okay, ten snowboards” and they go in their garage and they ship them out to you. So, it’s really, really neat in a lot of ways. And, it was successful, we saw the profit and all these kinds of things but then in the Spring of 2005 I was kind of like, you know, I’m really, really proud of this but not actually of the businessy bit because I spent all my time tweaking the knots and bolts of the software that ran this business. I really put all my work into, into the sort of the underlying machinery of this and I didn’t really think that the actual store was that worthwhile, I actually thought the software was a bit amazing, so somehow my heart already knew what kind of company I wanted, so I said, “okay, maybe we close this down and then we would start a business that helps other people try to achieve critical success by allowing them in a more direct way to help them pursue what they want to do.”

And the last one, invest into internal tools. I think that’s generally like, there’s a, like absolutely hard, it’s hard to over state like of investment that is going on right now in general in companies like the amount of horrible software that you see in larger companies, it’s absolutely outstanding. In Shopify, from the early days, we’ve put our best programmers in building tools and it’s, you know, unicorn is a good example of that, of what kind of things we have. But we have really this kind of quality in just about everything that’s worth doing for the company.

AAPL is interesting. This is not perfect because this yellow line has machinery equipment and internal use software but you clearly see where AAPL is locating its money like this is a tremendous amount and this is about, um, I think it’s five times the next company in terms of these sizes of investment into anything software like this. So, internally we have things such as, like, the top left is our phone system, so have you ever, like I don’t know how AT&T is or Verizon but if I call Rogers in Canada, I call them on my cell phone which is on a Rogers cell phone, then I get connected, then the first thing they ask me is to put in my phone number. I’m like, I pay you for caller ID (laughs), I’m on your network, you know my phone number, this makes no sense whatsoever, and then the great thing is you are like “okay fine”, you talk to someone, they ask you for your name, and then the next thing is they ask you for your phone number (giggles) because there’s no connection between those two systems, you put your phone number in, and then they connect you and then they connect you to another department you type it in twice again. It’s crazy in a way, like, why is that? Like really, they can’t solve this? With Twilio you can do that in like two minutes, so its, so when you call Shopify the other system goes into the database, it figures out who you are, it’s “hi John”. Everyone who signs up to us always get someone called a guru assigned. What a Guru is: are the people who help you for the first couple of months because in as much as Shopify makes it easy, e-commerce itself is still pretty complicated. We route you directly to that person and that’s not a big investment, that’s a week of having a great person hack on some software. We have internal BI tools, which will hopefully release soon. We have a public happiness card, that’s been, if we talk to you, if the support talks to you, you can rate them at the end of the call. We try to get a feed back. We try to maintain a 90% happiness and we are very proud of having reached that and having be there for a while. And, of course unique couple of other things.

And then, the neat thing is what you can do later is that, in fact, you can turn internal tools to external tools for more leverage.  Anyone here use Active Merchant? Is there, is there anyone (rumbling) ok I see a couple of hands. So, Active Merchant is something that I wrote um, and I started it originally um on Shopify. It is essentially dealing with payment versus pain. They are all kind of the same yet specific kind of languages, so it is um, software system that allows us to just touch the file and we say okay you talk to Active Merchant and Active Merchant talks to all these other guys. And then, I integrated two gateway payments which I wanted and then called in my co-founder and saw, oh, he did another three and so we were supporting five payment gateways and then he flew on his Honey Moon to Venezuela and when he came back three weeks later. We’ve got four new payment gateways submitted in the mean time. Even if he would have stayed home and spent this entire time implementing this, he couldn’t have finished it. So, it’s a really cool success story and it’s something you can do once you get into the habit of building great tools internally. So that’s it. Thank you very much.

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Tobias Lutke

Tobias is CEO and co-founder of Shopify, the marquee shopping cart system of the e-commerce industry. As a programmer Tobias has served on the core team of the Ruby on Rails framework and has created many popular open source libraries such as the Typo weblog engine, Liquid and Active Merchant. He maintains a popular tech weblog at http://blog.leetsoft.com/

More From Tobias.