A Shopify Partner’s thoughts on the IPO filing
Way back before I started Disco and went full-time as a Shopify developer and consultant, I had a brief flirtation with the world of corporate law. Something in me must have missed the hours spent trawling through long and boring legal documents, because I just had a quick read through of Shopify’s IPO filing.
I don’t have a finance background, so I won’t venture any thoughts on the money side of things or get to use terms like “GAAP-adjusted trailing revenue net of cost of goods sold”.
What I did think I’d do is highlight a couple of things that I thought were interesting to Shopify Partners like myself who make a significant percentage of their revenue from the platform.
US or bust - for now
The biggest surprise for me in the filing was the geographical distribution of revenue on the platform:
- US: 68.7%
- UK: 7.5%
- Canada: 7.4%
- Australia: 6.1%
- Rest of World: 10.3%
Even when I run my eye over my own client list and note that yes, around two thirds are US-based, the fact that nearly 70% of Shopify’s revenues come from their southern neighbour surprised me. On gut feel alone (what a reliable source), I would have expected the UK, Canadian and Australian markets to provide more than 21% between them.
It is important to note that these numbers are based on revenue, not total number of stores. I imagine the distribution of merchants is a little more spread out, with the US-based businesses tending to be a bit larger in scale and spending more on the platform.
For Partners, this means that targeting apps, themes and services to the US market is still the number one priority, as that’s where the money is - but it does hint to some major opportunities as Shopify starts to grow and expand into international markets.
The platform’s recent improvements in their internationalisation features and increased international marketing spend (see below) suggests that there’ll be an increasingly international market for third-party Shopify development.
Taking advantage of this expanded reach could mean:
- Locale-specific landing pages for apps and services;
- Locale-specific apps like local Shipping Carrier service support or integration with regionally-focused social networks;
- Improved multi-lingual support for themes (RTL, dynamic translation / currency support).
If the recent announcement of Shopify’s “Multi Channel” functionality wasn’t enough of a clue, the F-1 makes it clear that Shopify’s goal is to become the only platform you need to build your empire. I know this because Tobi says in the F-1:
“Shopify is exactly this: the only platform you need to build your empire.”
It’ll be interesting to see how Shopify’s going to proceed with this. I’m imagining that the end game is to have Shopify as the single place to manage all sales channels for a business — whether that’s physical or online.
Building the Shopify platform itself out to that level would be a massive undertaking, but by making the integration of large existing services simpler and more feature-rich, a lot of opportunity opens up.
As an app developer, I’m licking my lips thinking of the API improvements that will probably accompany this transition (and the explosion of demand for Shopify API-savvy developers).
A truly multi-channel Shopify is a good thing for all third-party developers as well, as it will provide more entry points for new merchants and make the platform stickier for existing merchants. More merchants equals more work for Partners!
As a Partner, the more Shopify spends on marketing and growth efforts the happier I am, as they’re essentially working to expand the market for my apps, themes and services for me.
The F-1 shows some major growth in Shopify’s marketing spend, with a 100% increase in budget for marketing and growth between 2013 and 2014.
Anecdotally, I feel that we’ve seen the result of that effort in a more aggressive content marketing strategy, and paid Adwords / retargeting campaigns.
One thing that’s a bit opaque in the filing are the dollar amounts being paid out directly to third-party developers for app and theme sales (it’s all lumped under a “subscription revenue” heading, which includes the monthly subscription fees merchants are paying to Shopify). Making things more complicated (for my limited analytical skills at least) is the fact that Shopify reports app revenue net of payouts to developers but theme revenue gross of fees.
Fortunately, Shopify’s own 2014 Year in Review gives better insight into these numbers — around $4MM paid out to app and theme developers in 2014. These numbers are perhaps a little lower than one might think looking at the number of apps on the Shopify App Store and the known size of comparable app stores.
Despite this, knowing that there are a number of businesses succeeding on the app store, plus seeing the potential for significant market growth over the next couple of year keeps me bullish on my plans to get my own range of apps released in to the App Store in 2015.
Sidenote: I found it interesting that 40% of Shopify’s total revenue was coming through “merchant solutions” (essentially payment processing fees and transaction fees). Introducing Shopify Payments to get a slice of the credit card fee pie has obviously been a successful strategy.
Culture and relationships
One of the things that has stood out for me in the past when dealing with Shopify is that they’ve managed to maintain a very open and friendly feeling (especially towards the developer community), even while growing headcount at a crazy rate. I value this not only as it makes working with Shopify more enjoyable, it means I can deliver a better experience to my clients through the relationships I’ve fostered.
Whether they’ll manage to maintain this culture post-IPO in the world of “maximising shareholder return” remains to be seen. Positive signs:
- Tobi (the founder) has retained a large chunk of equity in the business and generally seems like a stand-up guy keen to steer the ship for the long haul;
- The voting structure is set up to keep the folks that have grown the company in control post-float;
- They list “Get shit done” as a core value, and that’s nice to see in a SEC document;
- They’re still mostly Canadians, meaning they’re culturally incapable of being dicks.
So far, most of what I’ve mentioned I’ve seen as a positive for Shopify Partners. I guess the biggest risk that’s dangling over the head of anyone who bases their business on someone else’s platform is that platform shifting underneath them. One only has to look at Twitter’s history with third party developers to see the risks involved there.
Given a large war chest of IPO cash, Shopify could look to expand their in-house development and support capacities, ultimately competing with the apps, products and services of Shopify Partners (obviously with a massive advantage to be had).
Right now, I’m not overly concerned with that scenario — the financial incentives for that sort of aggressive behaviour don’t really match up with a Twitter-esque scenario. That said, there’ll always be a degree of risk and churn when it comes to building apps on a platform though, so staying alert and not being overly reliant on a single feature or app is probably a good idea.
Buy or sell?
No idea. Looking forward to seeing how it prices and pans out (I’m not much of an investor).