Shopify, the new template company
Every market cycle elevates companies that must be imitated and the pandemic economy has found its mark.
Hello and welcome to I’m Late to This, a newsletter from Myles Udland about stuff I haven’t stopped thinking about.
If you’re new here, thanks for signing up!
If someone sent this your way or you found this post through Twitter or other channels, make sure to sign up below. We publish every Sunday.
If you like what you see here, please share this post far and wide.
Today’s post marks the 37th edition of this newsletter since launching last November.
And now, an extended metaphor.
The more time I spend in business media, the less surprised I am by how many liberal arts majors find themselves climbing the ranks of the financial industry.
It is an industry that depends — above nearly all else — on a strong grasp of metaphor, of storytelling.
As an investor, an analyst, or a salesperson you must be able to explain why and how some new company, fund, opportunity, etc. will work. And the easiest way to make this case is to explain why a new concept is a version of an older thing you know and love.
And so we end up with an industry that loves what I call the “template companies.”
These are the businesses that are the crux of the formula — “This [new company] is the [template company] of [a different industry].”
We all know the names of the biggest template businesses well: Uber, Netflix, Amazon, Airbnb.
Being a template company is good. It is an acknowledgement that you’re a market leader. A template company has had so much success that being a derivative play on this business model will excite investors and employees. Template businesses can also force competitors into copying their strategies. Vanguard is an example of this in financial services. Domino’s is a great example in pizza delivery.
The entire fintech industry is basically one big template bet. The [different industry] part of the equation is often a generational time-value — “for millennials” or “for college students” — with these upstarts trying to upend whatever bank happened to be in someone’s town when they got their first summer job.[1] But the fintech industry also acknowledges that banking is a good business. A great business. All it takes issue with is how banks do that banking now and asks why they’re not doing it with different tools.
For years, being the “Uber of [an industry]” was the easiest way to pitch a consumer business doing just about anything. Writing for Entrepreneur back in 2014, Laura Entis chronicled the many, many companies pitching themselves as the Uber of just about anything — flowers, laundry, grocery delivery, and lawn care among other areas. Entis’ piece begins with a link back to Business Insider — where I worked at the time and, knowing essentially nothing about anything, got my first exposure to this kind of analogous framing — writing about GlamSquad as Uber for women’s haircuts. All of which affirms Uber’s primary conceit: there is extant demand in an industry that we think can be aggregated.
Google “Netflix of” and you’ll get results about services that want to be the Netflix of gaming, takes on why there won’t be a Netflix of gaming, and SEC investigations into the Netflix of China.
In a byegone era, some businesses might have tried to become the “Facebook of [an industry]” before it became clear Facebook would just eat up whichever competitor came along unless that competitor is run by Evan Spiegel.
And with this template playing such an important role in framing what investors and the media see as the best ways to communicate some new business idea, it is always important to take note when new examples enter the canon.
Enter Shopify.
This week on Yahoo Finance, we talked with Rosenblatt analyst Bernie McTernan about a note he’d written on Peloton. And amid a conversation that broadened out to discuss the future of fitness, Bernie mentioned JetSweat as a company that wants to be the “Shopify of fitness.”
Maybe I just haven’t been paying close enough attention, but this was the first time that I’d ever heard a business described as the “Shopify of [an industry].”
And, of course, it makes complete sense.
This is the stock market’s sexiest eCommerce play: at the beginning of 2019, Shopify was a $140 stock; on Friday it closed at $987. It follows that with this kind of investor enthusiasm a new template would arise to which companies will be compared favorably in pursuit of additional venture dollars or public market investors.
Shopify is officially a template business.
A key factor for template companies is that they can only enter this category if the business model can be simply explained.
The Uber pitch, for example, is straightforward — we pick people up and drop them off. The level two explanation of Uber is that it aggregates demand in previously fragmented networks. And the level two vision on Uber is where its template formula is really derived from. We can see, for instance, how easily how lawn care fits this idea.
So, what does Shopify do?
Shopify enables companies to easily set up online storefronts. (In the annual report, it is somewhat more detailed.)
In a world where eCommerce sales as a percent of total retail sales rose from 10% in 2014 to 20% in April — and 17% in July after the initial pandemic boom wore off — every business needs to have an online presence. If every industry needed to have demand aggregated to operate more efficiently in the 2010s, then every business needs to be getting a slice of the growing eCommerce pie in the 2020s. Shopify is a template business because it allows companies to solve a formerly difficult problem to meet an obvious opportunity.
Writing this week at Not Boring, Packy McCormick explored Shopify’s role in the DTC stack through the lens of Shopify’s famous guiding principle — arming the rebels — and what happens when every idea can be acted on immediately with the toolkit Shopify offers founders.
In Packy’s outline, Shopify is part of the suite of services that has allowed companies to flourish with lower costs and be rewarded for simply doing good work and shipping the best product, not just having the most venture funding. There is, in this world, a huge opportunity for a smart curator to elevate the best rebels. As readers of last week’s letter will recall, I have my concerns about the durability of this trend for solopreneurship. Though removing “lots of fundraising” as a prerequisite for launching an internet-based business is definitely a good thing.
And while Packy doesn’t reach this conclusion, I think his work suggests Shopify might allow entrepreneurs to be mini-Zucks. By which I mean: copycats. Shopify’s ease of use makes copying successful companies and CACing your way to success with a Shopify storefront and Instagram ads simple. Is this a good or likely outcome? Who could say.
But in a world where investors, founders, creators, and consumers have all been raised on the idea of disintermediation as an inevitable market force that benefits consumers, that the most exciting new template business isn’t offering a specific product but merely offering a platform on which to sell a product is a logical conclusion.
Because if everything we know as true today in the “traditional” business world —however we want to define this — is inevitably going to be undercut by some internet-powered facsimile that connects with future consumers on the basis of it being digital first, then the platform is the place to play as an investor.
To torture an analogy a bit, if every horse in some future race is sired by the same past champion, Shopify allows you to bet on all of that stallion’s colts and fillys instead of having to back individual horses. (Yes, I know what you’re thinking.)
So, after you’ve become a template company, what’s next?
If we look at the list of previously mentioned template businesses, the answer tends to be: more success. Amazon, Domino’s, Netflix? They’ve all been good for investors and consumers.
More recent template vintages are a bit more mixed. Uber is a ~$50 billion business today. But a few years back, investors and bankers thought it might be worth more than 2x this. Airbnb is set to hit public markets soon. Airbnb’s most recent fundraise valued the company around $26 billion; it too was seen as worth almost 2x this not long ago.
But Shopify is really not that similar to either company. It is not consumer facing, at least not primarily. Shopify is not a regulatory arbitrage, it does not employ workers it claims are not actually employees. Shopify is not threatening to shutdown in California later this month. Shopify will also never see its market value drop 50%. Those are just the rules.
So it is broadly fair to say that becoming a template company is good, a coronation of sorts. It is a branding opportunity for the template business itself as much as it is for founders or investors that want to ride the template wave. Becoming a template business will also allow others to tell your story.
And after seeing the Winklevoss explain the bull case for bitcoin over gold last week, having outside narrators tell a story is often good for you. As a founder or executive, the case for your company is always maximally complicated because you know everything. But a really great business is almost always a simple story. Otherwise it’s just not a good business.
So for the team at Shopify, becoming a template probably changes nothing.
For the roving commentators writing Substack newsletters and equity research, Shopify’s template status makes it an accessible point of reference for outlining a new idea.
And for everyone else who hasn’t really thought about Shopify, it’s about to become a much larger part of any business news diet.
[1]: The financial industry is, in this way, sort of similar to the newspaper business in that its dominance was geographic. And while consolidation has made digital customer acquisition and retention easier, there are still a lot of people banking with companies they don’t like because there’s a branch nearby. The fintech bet is that a growing number of consumers won’t care about having physical access to the company they bank with. But this will take time.
Is it possible that Bernie intended to say 'Spotify of fitness'?