October 22, 2024 • 1hr 6min

Tobi Lütke - Building Islands of Innovation - [Invest Like the Best, EP.393]

Invest Like the Best with Patrick O'Shaughnessy

In this episode of Invest Like the Best, Patrick O'Shaughnessy interviews Tobi Lütke, co-founder and CEO of Shopify. This is their third conversation on the podcast, with previous episodes in 2020 and 2022. The discussion covers a wide range of topics, including the impact of AI on technology and business, Shopify's approach to product development and company culture, and broader ideas about innovation and entrepreneurship. Tobi Lütke is known for his unique perspectives on building and running a technology company. Shopify, under his leadership, has grown from a small startup to a major e-commerce platform used by millions of merchants worldwide. The conversation provides insights into Lütke's philosophy on technology, business, and leadership.

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Key Takeaways

AI is transforming the technology industry and will touch everything we do. It has incredible implications for how to build companies and products.
Innovation comes from "islands" - places that are separate and different from the mainstream, allowing for unique ideas to develop.
"Founder mode" refers to the intensity and passion that founders bring to their companies, which can be difficult to maintain as companies grow.
Companies have a "temperature" - founders and key employees inject "heat" and energy, while others try to maintain equilibrium. Protecting the "hot" people who drive innovation is crucial.
Shopify aims to be an "island" with its own culture and approach, rather than following mainstream business trends.
The "glory of entrepreneurship" is a key motivator for Tobi and Shopify - enabling and celebrating merchants who are building unique businesses.
Shopify's product philosophy is to "make the important stuff super easy and make everything else possible" for merchants of all sizes.
AI will transform how we interact with computers, likely moving towards more conversational and fluid interfaces.
Building trust in an organization requires working with trustworthy people, encouraging disagreement and first principles thinking, and having a low cost of failure.

Introduction

In this episode of Invest Like the Best, Patrick O'Shaughnessy interviews Tobi Lütke, co-founder and CEO of Shopify. This is their third conversation on the podcast, with previous episodes in 2020 and 2022. The discussion covers a wide range of topics, including the impact of AI on technology and business, Shopify's approach to product development and company culture, and broader ideas about innovation and entrepreneurship.

Tobi Lütke is known for his unique perspectives on building and running a technology company. Shopify, under his leadership, has grown from a small startup to a major e-commerce platform used by millions of merchants worldwide. The conversation provides insights into Lütke's philosophy on technology, business, and leadership.

Topics Discussed

The Impact of AI on Technology and Business (5:38)

Lütke begins by discussing the transformative impact of AI on the technology industry:

AI is the latest in a series of major technological shifts, following the internet, Web 2.0, and mobile.
It will touch everything in the technology industry and augment much of what happens in the world.
This creates a "foggy map" for builders, which Lütke sees as an exciting time for creativity and innovation.

Lütke describes his approach to experimenting with new AI technologies:

He typically gets early access to new AI models and spends significant time testing their capabilities.
He runs new models against previous scenarios that older models couldn't handle, to calibrate their improvements.
He emphasizes the importance of hands-on experimentation to truly understand new technologies.

AI-Generated Content and Collaborative AI Systems (9:55)

Lütke shares an experiment he conducted using AI to generate a presentation:

He created a system of AI "agents" with different roles (archivist, linearizer, slide designer, etc.) to collaborate on creating a presentation.
The AI-generated presentation was convincing enough that it could pass as one Lütke himself had created.
He found that running the AI agents in a simulated 3D environment led to even better results, due to the emergent properties of their interactions.

"I think people will have themselves put together a support structure and I think different people that get very different results out of the same systems, I don't think they will replace the white collar jobs. I think they will definitely replace the crappy parts, the toilsome tasks that we don't want to do anyway." - Tobi Lütke

Founder Mode and Company Culture (15:04)

The conversation shifts to the concept of "founder mode" and its impact on company culture:

Founder-run companies differ from managerially-run companies in their ability to quickly adapt to changes and make decisions based on first principles rather than established plans.
Companies have a "temperature" - founders and key employees inject "heat" and energy, while others try to maintain equilibrium.
Protecting "hot" people who drive innovation is crucial for maintaining a company's innovative edge.

"Founders are not room temperature people. By definition, the act of starting a company is you're trying to inject heat into planet Earth. You're trying to do something like fighting against entropy." - Tobi Lütke

Navigating Business Changes and Strategic Decisions (24:24)

Lütke discusses how being founder-led allows for more agile decision-making:

He uses the example of Shopify's decision to change direction on its fulfillment network strategy.
Founder-led companies can more easily "derive against new information" and make significant changes when needed.
He advocates for a "saturated sponge" approach to change management - implementing multiple changes at once rather than drawn-out incremental changes.

The Concept of Islands in Innovation (31:15)

Lütke introduces the idea of "islands" in innovation:

Innovation often comes from "islands" - places that are separate and different from the mainstream.
The internet has connected most of the world, making true "islands" of thought and innovation rarer.
Shopify aims to be an "island" with its own culture and approach, rather than following mainstream business trends.

"I think the memetic mainland has gotten so powerful. I don't think we have a lot of islands anymore... How do you become more like an archipelago of islands that all come up with part of merit and then trade ideas and give gifts to each other." - Tobi Lütke

The Essence of Open Source Marketplaces (36:38)

Lütke draws parallels between open source software communities and the concept of innovation islands:

Open source projects are often led by small groups with clear leaders, creating a marketplace of ideas based on merit rather than money.
This model teaches valuable lessons about effective human organizational structures.

Building Shopify: From Personal Project to Public Company (37:10)

Lütke reflects on Shopify's journey:

Shopify began as a personal project to solve problems Lütke saw in existing e-commerce software.
He built it for himself first, then invited others to use it if they found it valuable.
This approach allowed Shopify to develop as its own "island" with unique characteristics.

Philosophy of Product Development (38:42)

Lütke outlines Shopify's approach to product development:

"Make the important stuff super easy and make everything else possible" - this allows for both simplicity and deep customization.
The goal is to build software that works for people starting businesses in their lunch break, but can also scale to power billion-dollar companies.
This approach is challenging but allows Shopify to help businesses grow faster than they thought possible.

"My product principles is pull as much value out of what the smartest people in the world of computer science and logistics and computer networks have figured out to be helpful on our entrepreneurial journey so more millions of people can do it." - Tobi Lütke

Marketing and Mainstream vs. Island Approach (42:38)

Lütke discusses the challenges and benefits of marketing as an "island" company:

Mainstream marketing requires constantly adapting to changing trends and language.
Shopify focuses on telling its own story and explaining why it exists, rather than trying to convince everyone to use its product.
This approach attracts people who resonate with Shopify's mission and values.

The Glory of Entrepreneurship (46:52)

Lütke expresses his passion for enabling and celebrating entrepreneurship:

He finds the stories of Shopify merchants more inspiring than most entertainment content.
Entrepreneurship is seen as a "glorious pursuit" that requires courage and creates net value for the world.
Lütke hopes that AI will reduce friction and confusion, allowing more people to pursue entrepreneurship.

AI and the Future of Human-Computer Interaction (54:17)

Lütke shares his thoughts on how AI might change our interaction with computers:

He envisions a future where interactions are more fluid and conversational, potentially without distinct applications.
AI agents might work together to handle various tasks, creating a more seamless user experience.
He emphasizes the importance of builders actively engaging with these new technologies to shape their development.

Trust and Principles in Organizational Culture (1:00:30)

Lütke discusses building trust within a large organization:

Work with trustworthy people and give them opportunities to demonstrate their reliability.
Encourage disagreement and articulation of different viewpoints based on first principles.
Create a culture where correctness and truth are valued over consensus.
Maintain a low cost of failure to encourage risk-taking and innovation.

"I think when people are correct in a first principle sense and are willing to say so even if it's inconvenient, what happens next is the thing that really shape your culture. If that is appreciated, you're going to go places." - Tobi Lütke

Investor Insights and Long-Term Vision (1:04:31)

Lütke shares his perspective on how investors should think about Shopify:

He wants investors who understand and appreciate Shopify's unique approach and long-term vision.
The company's value lies in intangible assets like customer trust, ability to attract top talent, and willingness to make difficult but correct decisions.
Shopify aims to be a "highly alive, somewhat exothermic, sometimes wrong, but always willing to do something about it" company in a growing and valuable space.

Conclusion

This conversation with Tobi Lütke provides deep insights into his philosophy on technology, business, and leadership. Key themes include the transformative potential of AI, the importance of maintaining an innovative "island" mentality, and the value of entrepreneurship. Lütke's approach to building and running Shopify emphasizes first-principles thinking, a willingness to make difficult changes, and a focus on long-term value creation. As technology continues to evolve rapidly, Lütke's perspectives offer valuable guidance for entrepreneurs, business leaders, and investors navigating this changing landscape.