Shopify Inc. has taken a significant stake in Stripe Inc., the payments giant it helped turn into Silicon Valley’s most valuable private company.
The Ottawa-based commerce software giant on Monday confirmed it has invested more than US$350-million in Stripe – its exclusive provider of payments processing services – over a series of investments. The investment was first reported Monday by the Wall Street Journal, citing unnamed sources.
Payments has been a key driver of Shopify’s success as it has grown into Canada’s most valuable company, providing a platform for more than 1.7 million merchants globally to run their digital stores and manage their operations.
The partnership has been a lucrative one for both companies, and expanded this year as Shopify introduced bank accounts and debit cards for merchants as part of a program with Stripe. “This is obviously a very deep partnership,” said former Shopify interim chief financial officer and adviser Mark MacLeod. “Stripe became the backbone of Shopify Pay from the inception. They’ve grown up together … Stripe probably powers half of Shopify’s revenue right now.”
Despite the mutual benefits, Shopify did miss out on the chance to invest in Stripe early on and book a significant return on investment as the U.S. company reached a valuation of US$95-billion during a fundraising round in March.
“It only makes sense this investment would happen; both Stripe and Shopify are once-in-a-generation companies,” Mr. MacLeod said. “No question, from a pure investment standpoint, it would have been great if [Shopify] invested earlier, but Stripe still has so much upside.”
Shopify for years has taken pride in the value created by partners that provide services to its merchant customers, noting last year for example that they generated US$12.5-billion in combined revenue, compared with the US$2.9-billion it booked itself. Several companies in Shopify’s merchant app store have achieved US$1-billion valuations and/or raised hundreds of millions of dollars in growth capital, such as online marketing services providers Klaviyo Inc. and Yotpo Inc. and antifraud software seller Signifyd Inc.
But as part of a strategic shift over the past year as Shopify emerged as the key rival to giant Amazon.com Inc., the Canadian company has started using its clout in the global ecommerce business to take a bigger bite of out of the huge spinoff value it has generated.
Chief financial officer Amy Shapero made passing mention of the strategy during Shopify’s first-quarter earnings call in April, saying: “To further future-proof our offerings and capitalize on our position ... we are also stepping up our strategic partnerships. This includes investments in companies and technologies in our ecosystem that align with our mission and whose success at scale could positively impact our merchants.”
For example, in April Shopify signed a services and partnership agreement with Israel’s Global-E Online Ltd., which helps online merchants conduct cross-border sales in the native languages and currencies of their buyers. Shopify agreed to make Global-E its exclusive outside provider to its merchants for at least three years in exchange for warrants costing Shopify less than US$200,000 – and which converted into equity valued at nearly US$500-million the day Global-E went public one month later.
Shopify struck a similar deal last July with Affirm Holdings Inc., giving the San Francisco company the right to exclusively provide “buy now, pay later” consumer financing services to Shopify merchants. In exchange, Shopify got warrants costing just more than US$200,000, exchangeable for equity worth almost US$2-billion the day Affirm went public early this year. Shopify’s gain on its Affirm stake accounted for its entire US$1.26-billion profit in the first quarter – by far its largest profit in its 17 year existence – and the Global-E stake will have a significant impact on the second quarter’s bottom line as well.
“Shopify recognizes the captive audience it has and therefore can strike self-interested partnerships,” Mr. MacLeod said. “I think they’ll be able to strike more deals like that.”
Shopify has also become one of Canada’s most active corporate venture capital investors in the past year, backing fundings by Toronto same-day delivery software provider Swyft Technologies Inc., online merchant financing marketplace Pipe Technologies Inc. of Miami, and Vancouver’s Bench Accounting Inc. this year.
In the past, Shopify made modest investments, buying app providers to merchants, such as Handshake and Return Magic. It has made one big acquisition, paying US$450-million for warehouse robotics company 6 River Systems Inc. in 2019. But Shopify CEO Tobi Lutke has indicated a reluctance to make large mergers and acquisitions, recently telling The Globe and Mail, “I honestly haven’t cracked the code on M&A yet.”
Instead, Shopify appears to favour minority investments in companies it sees as the strongest providers of particular offerings to its merchants. The impact of the new strategy has been material. In the past three quarters, it has started breaking out “equity and other investments” as a separate line item on its balance sheet. The total value was US$2.5-billion at the end of 2019. On March 31, it stood at US$1.63-billion – mostly made up of its Affirm stake – or 15 per cent of all assets.
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