I believe the future of commerce is currently lurking somewhere within Shopify’s partner ecosystem. In its pursuit to “arm the rebels” and present itself as a foil to Amazon, Shopify has taken a heavily partner-driven approach to building its e-commerce platform. There is a growing army of third-party app developers that are building on top of Shopify, and their collective effort is helping to accelerate the company’s mission to become the most comprehensive operating system for merchants the world over.
The proof is in the numbers. As reported earlier this year, $12.5 billion in revenue was generated by Shopify’s partner ecosystem in 2020. This number represents an 84% increase from the $6.8 billion generated in 2019. Shopify says that it’s proud of the fact that its partners collectively earned more than 4x the revenue it generated as a company in 2020.
Shopify’s enthusiasm for its partners has paved the way for many new high growth startups to be founded directly on the back of its platform. Unsurprisingly, the momentum has also attracted a flood of external investor activity. Today I have the pleasure of sharing my conversation with one of the leading investors in the space — Mike Duboe, who is a Partner at Greylock. I was keen to get his take on how he thinks about investing in and around Shopify’s ecosystem, considering the success that he has had so far.
But Shopify was just one topic out of many that we discussed during our chat. Mike is a man of many talents, after all. At Greylock, he works with entrepreneurs who are building the next generation of commerce, marketplaces, and network-oriented businesses. Given his unique background and expertise, I couldn’t pass on the opportunity to have a broader conversation about his professional journey, path to Greylock, and style of investing.
A bit more about Mike: He is extremely data-driven, having technical empathy from a BS/MS in engineering, and building organizations whose main objectives are experimentation and quantifying truth. Prior to Greylock Mike was leading growth at Stitch Fix, where he was responsible for all things user acquisition. He joined to build out the growth organization from the ground up, and left to join Greylock approximately one year after their IPO. And before joining Stitch Fix, Mike spent a few years at Tilt as the first growth hire during Tilt’s early days.
Now, on to the good stuff…
I loved your recent interview with Modern Retail about investing in Shopify‘s ecosystem. You’ve really established yourself as a leading investor in the commerce vertical. What originally drove you to specialize in this space?
My background was originally on the operating side. I was running growth at Stitch Fix, which I would call a more tech-enabled next-gen retailer, or even a personalization engine of sorts. So I had experience being in the industry and building for it — more so on the tech side as opposed to the brand side.
Coming to Greylock made sense, given our history as a firm that invests in software and network-based businesses — less so on the brand side. I think there are many good investments to be made into brands, but for a fund of our size, generally we’re looking to invest in networks or software plays that have the potential to become outsized companies with standout potential.
In joining Greylock, I started to really dig into and get involved with the Shopify ecosystem. Given my professional experiences, most of my network consists of e-commerce operators or DTC founders anyways. So yeah, I would say that over time as I started to get deep into the ecosystem, it became very evident to me just how much technology there was to build across the entire stack, and how supportive the whole ecosystem of Shopify partners were around that. It just so happened that there was a huge boom around that time where I started to look at this space too. The ecosystem was just kind of exploding.
So yeah, I would say in summary that it was a combination of my pre-existing set of experiences, Grelock’s style of investing, and a pursuit of outsized outcomes and returns over the next five to ten years.
I like how you map the e-commerce infrastructure stack by stage of funnel: acquisition, conversion, fulfillment, retention, returns, and re-commerce. Which of these areas are you actively looking to invest in now?
We have made investments across a number of these areas. The most recent one was in Postscript, which I would say touches on the retention theme — and expanding customer LTV — by making the experience of interacting with brands among customers better through this new channel of SMS. The thesis behind Postscript is that you as a merchant paid so much money to acquire and kind of build your list of customers, so you should use any channel at your disposal to really maintain and build that relationship with them. So retention is an area we’ve been really excited about.
There’s another one of our investments: Builder.io. I would put that one in the conversion bucket. And I’m very excited about what’s going on there. The single biggest bottleneck I had back at Stitch Fix while funneling 100 million+ of paid traffic through our website was actually the landing page. It was difficult to constantly spin up engineering dependencies to rework our e-commerce landing pages to drive conversions and get more out of our paid ad spend. So there’s an interesting thesis around a “no code page builder” such as Builder.io. The platform enables merchants to transport their content without the need to re-platform or rebuild, and makes everything more performant in general.
Analytics is perhaps the most foundational problem to solve as an e-commerce merchant. For most e-commerce merchants, analytics debt is the silent killer. I think the thesis underlying many investments in the Shopify ecosystem is that you can scale pretty far without any engineers, and certainly you’re not going to have data analysts in the mix — especially not in the early days. If you ask ten merchants who, let’s say, are generating less than $20 million in revenue, to produce some simple analysis or even describe their P&L, I think you’re going to get very different answers there. And so there’s kind of like this need for a baseline of just basic business hygiene or analytics. Underneath that there’s also the ability to benchmark your performance across other merchants and understand and shine a flashlight on your business in a way that you probably wouldn’t be able to, unless you have a deeper analytics team. So there’s definitely a thesis around investing in solutions that create this analytics baseline and consistency among merchants.
There are other interesting areas to invest in too which tangentially intersect with the funnel you mentioned, or fall outside of it altogether. For example there are so many alternative funding models for merchants to be able to invest in customer acquisition without taking on too much dilution. I think funding models from the likes of Clearco are interesting, as are all new modes of financing that are less dilutive, where you’re not actually raising venture capital to sustain your growth as a DTC brand. I actually think that’s going to continue to be a pretty interesting area, and will become more popular.
Another topic is around wholesale. The notion of omnichannel is becoming more real and more accessible for even smaller merchants. As the pendulum is shifted from offline retail back to DTC, I do think most successful merchants will be able to seamlessly sell across channels, and actually have a unified intelligence layer. We are excited about businesses that are helping merchants approach wholesale and sell omnichannel more and more seamlessly.
Finally I’d say yes, returns and reverse logistics remain interesting areas too. These challenges represent the biggest barriers to e-commerce penetration. And Amazon has certainly set the consumer’s expectations of how seamless returns can be. Long-tail merchants are being pressured to match this capability. I think there’s going to be more opportunity to build venture scale businesses here.
As you just mentioned, headless commerce is gaining momentum among higher growth merchants and (consequently) investors. You’ve also researched this space extensively and led an investment in Builder.io last year. Having previously questioned whether the startups in this space represent an existential threat to Shopify, I have to ask what you see as being the endgame for headless CMS companies and how Shopify fits into that story.
I think the thing to remember here is there’s just so much TAM out there that it’s possible to be very bullish on Shopify and also bullish on headless, which is the point of view that I take. As Tobi has stated publicly, Shopify is building for the 80% and making the best possible onramp to e-commerce entrepreneurship for merchants.
But the truth is that the vast majority of merchants out there should not be considering headless. If you are an SMB or kind of mid-market e-commerce merchant, Shopify as a whole ecosystem is probably going to be the best solution for your problem. It’s only when you start to grow that headless becomes more interesting. There’s a lot of content out there about headless, and if you really oversimplify it, the story there is about better site performance and better flexibility. It’s only when you’re at some significant scale where you’re going to see a big lift from that performance boost. I think that’s the way I would think about it.
Furthermore there are tradeoffs with headless and having the added flexibility. You need engineers to actually kind of architect it, whereas with Shopify the whole point is that it’s out of the box and no code. I think for merchants of a certain scale you’re going to see much better performance with headless, but it’s likely overkill for many others.
How do you think Shopify can continue to help its merchants compete and win against Amazon? Does the answer simply lie in cracking the code on fulfillment (i.e. democratizing Amazon Prime) and supporting efforts to drive more demand across DTC sales channels? And would you go as far as to say that Shopify is antithetical to Amazon?
It’s an interesting topic. I think merchants going on Amazon is basically a trade-off of perhaps accessing a larger pool of customers, even though the merchants don’t know anything about those customers. Conversely, if your goal is to build deeper and longer lasting relationships with customers, then it makes less sense to be on Amazon. So there are different ways of viewing Amazon.
At a certain scale Amazon becomes hard to ignore, especially if your product generates great margins on the first purchase. In that case it’s really hard to ignore Amazon as a distribution channel. But I do think merchants now are much smarter and always thinking about the opportunity cost of being on Amazon too.
In many ways this growing popularity of personalized commerce, and really building deeper and longer lasting relationships with consumers is perhaps antithetical to Amazon. What Amazon has done a great job of is becoming the leading destination for purchases where you just want to remove all friction — in other words you as a consumer just want to be confident that you’re getting the right price and easy returns and all that. When I think about the brands who have done the best job on Shopify, they are much smarter about building relationships, setting the mission, and telling a story. They’re fundamentally good at communicating the emotional side of the brand, and most consumers shopping from these brands actually care about that stuff. And unlike with Amazon, these merchants actually own their own customer data which is a huge benefit. So if you as a Shopify merchant can get at par with Amazon’s logistics capabilities, pricing, and generally just ease of purchasing, then I think you have a pretty competitive offering there.
But again, not every purchase needs a story. If I’m buying toilet paper online, I don’t need that deep connection with a brand. And maybe Amazon will actually always be a better experience for something like that.
Maybe there’s not a super direct answer here. But that’s kind of how I would think about this question currently.
In addition to making investments in software and consumer technology companies, you also look at marketplaces. What makes you interested in a particular marketplace as an investor? Is there a checklist you follow?
So there are a few pieces there. And in general, I don’t approach investments with a checklist. But I’ll talk about a few considerations that are implicit in what I’m looking for. I should say too that I spend a lot of my time looking at B2B marketplaces, which are a little bit different than B2C marketplaces. We’ve also looked at a number of labor marketplaces. So there are different flavors of marketplaces, but I’ll try to answer it more generally. But note that I’m a bit deeper on the B2B side.
I think market structure is one of the first big considerations. In general you want to see a market where there’s high enough fragmentation on both sides for the marketplace to really come in and increase value to both sides (demand and supply).
Another consideration would be liquidity. There are different ways of looking at that. For some it may be “time to fill” or utilization rate. In general the liquidity metrics are some of the first things that we’ll get into for diligence.
The third consideration would be frequency. This is not to say that you need to have a high frequency kind of experience to build a valuable marketplace — Airbnb is an example of that. But in general for marketplaces where the discovery of new suppliers happens on a regular cadence, that is going to help you avoid disintermediation and consequently drive up engagement. Disintermediation is a separate point altogether, but in general, frequency is a good thing.
This brings me to the fourth consideration, which is that with switching costs, ideally you have some high amount such that non-monogamy is kind of the experience in the marketplace. And so in general you want to be able to tell yourself that disintermediation will not be a serious risk for this marketplace. That could come in different forms, but one of them relates to the point about frequency, as I just mentioned. Others may argue that for some marketplaces there is actually increased value in having multiple matches or relationships between buyers and suppliers over time. In this case there may be more of an incentive for disintermediation.
The final consideration would be on the go-to-market side. The best marketplaces I see have some acquisition or growth loop at work, where supply begets demand acquisition or vice versa. So if you are on a B2B marketplace, if there’s a way for you as a supplier to streamline the experience to work with all of your buyers on the marketplace, then you’re actually incentivized to bring all of them on. And then maybe those buyers end up kind of bringing on other suppliers they work with as well. So these kinds of loops — where you don’t actually need to pay too much in marketing, or retain big sales teams to go and acquire supply and demand — are really powerful as well.
Those are a few of the things that I look for. Over time you just want to see marketplaces be able to expand the share of wallet on both sides pretty well. And that’s more relevant to the B2B side.
I guess that is a bit of a checklist after all. Hopefully it helps.
What led you to venture capital after a storied career as an operator and growth leader for companies such as Stitch Fix and Tilt?
Going back to the beginning of my career, I was always trying to optimize for learning. The thought of starting your way up the pace of learning at the base of a learning curve — and working your way up to then move on to the next curve — was always interesting. It always struck me as a pretty fulfilling way to spend time. That’s actually why I took my first job at Bain, because I got to work for a different company every few months. And I thought it would always be improving my surface area of learning.
Working in growth was actually a pretty good function for accelerating the pace of learning too. It’s a function that’s very experimental by nature. You’re running all these experiments and trying to learn faster than the organization. It’s fun to spread those insights across the organization.
I always had venture in mind but wasn’t sure about the right time. But realized Greylock’s DNA closely matched mine. And I did feel like I was at a point where what I had learned over the course of my career, and the depth that I had built, would actually be useful to a broader set of founders versus just one company at a time.
But honestly, the simple answer boils down to it being a privilege to just get to learn from some of the smartest people and different businesses over time. And the Northstar is optimizing for learning.
What do you look for in startup founders before deciding to invest?
I’ll be honest — I don’t think there’s a checklist here. I think we all have our own style as investors. We all resonate with different things.
We generally tend to really love founders who are product visionaries, have a deep sense of customer empathy, and are able to go and reflect that in the product. Oftentimes they are also infinite learners, just as we are.
In general, Greylock wants to help founders realize their potential and realize greatness, and I think that comes in different flavors. So I really don’t want to give a packaged answer here. With our style, and infrastructure of investing — we have a large fund — we make a very concentrated set of investments. And so we need to be able to see pretty massive, outlier potential to move the needle on our fund.
Even for founders that we see during the early days, although they may be narrowly focused on executing for the near term when we meet them, they are also usually thinking on a much longer term scale. They can articulate what the world looks like, in 5, 10, or 20 years. That foresight is something we really look for.
Being at Greylock, you have the chance to work directly with some of the most iconic founders and companies in the world. What’s it like to be in such close proximity to industry defining leaders such as Reid Hoffman?
It’s another flavor of that learning I alluded to earlier. I’ve learned much more about networks and network effects. I think a lot of VCs like to use that term. But Reid created one of the most powerful network effects in existence at LinkedIn. He’s a pleasure to talk to about this stuff.
Ultimately we’re all colleagues. We’re all partners. The way we prosecute opportunities is we pull in whoever is going to represent the relevant subgroup to actually be the most valuable partners on the deal. We will generally look at things together. If it’s a consumer social play, I’ll loop in David Sze who was involved with our Facebook investment. If it’s a marketplace or another network-oriented business in the healthcare space, Reid may help our HealthTech team on it. If it’s commerce infrastructure, Sarah Guo — who is one of the best SaaS investors I know — will help with that. We all learn a lot from each other. And we all learn together.
It’s nice to be at a firm that has some heritage. We’ve seen this business through multiple cycles before. And I think a lot of my partners have the maturity and the patience to share their experiences and learnings from the past, but also not be too wedded to it and recognize the future might look different. It’s good that there is always this delicate balance.
So in general there are a lot of special ways to learn here at Greylock and I’m not sure I’d necessarily get that at any partnership.
We’ve previously talked about your excitement for the Toronto startup community, which has a lot of fast-growing startups in the e-commerce space. What kinds of companies are you actively looking to connect with in our ecosystem and how can they reach you?
In general my focus is around everything related to commerce, marketplaces, and network-oriented businesses. This can include many things under the consumer vertical, for example.
Ours is a tight partnership and we cover a lot of surface area. Definitely keen to chat with founders who are working on that type of stuff I’m talking about today.
And e-mail and Twitter are the best ways to get in touch with me, which can both be found on our website.
As a parting gift, what’s one video, book or other resource that you’d like to leave our readers with that will make them smarter?
I should give a plug for my partner Reid’s podcast: Masters of Scale. It is genuinely a great pod.
I’ll do a plug for one of my former colleagues Kevin Kwok too, who I think is just an exceptionally smart person. He just enlisted a video series and started with Eugene Wei. I’m very excited that he’s moving over to YouTube. He’s definitely someone to keep an eye on. I think his content is going to be great.
At Greylock we’ve also been producing our own e-commerce content and podcasts with some regularity. This is an area that I’d be happy to hear ideas from founders on, and what they want to hear from us through that channel too.
This interview was edited for clarity.
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