(Illustration by Jasu Hu)
Last February, Shop.ca was in trouble. The e-commerce startup was bleeding cash, and the board of directors was seeking a way to keep the company afloat. A group of existing investors was willing to pony up new funds and reached out to co-founder Drew Green. Although he retired as CEO in 2014 at age 40, Green remained the majority shareholder and a board member. The investor group had one big stipulation before pouring in more money: the shareholder agreement would have to be rewritten. Green would effectively be giving up rights he enjoyed as a co-founder, limiting his control over the company. The prospect of additional funding, combined with a new plan from management, offered Shop.ca not just a chance to survive for a while longer, but a shot at turning an actual profit. Moving ahead, however, proved anything but straightforward.
Green had reason to maintain an interest in Shop.ca. He liked to say it was the largest online shopping site in Canada, and that it could one day become a billion-dollar company. Like many Canadians, Green was unimpressed with the state of e-commerce in this country. Duties, brokerage fees and shipping costs for products that were already priced higher here than in the U.S. made purchasing items online a miserable and expensive endeavour—assuming shoppers could even find what they were looking for in the first place.
Green proposed an alternative: a marketplace that carried items customers actually wanted, shipped from Canadian sellers to Canadian buyers, with no added fees. Shop.ca would function like a virtual department store and boast more than 25 product categories, including toys, electronics, baby goods, and apparel.
In the world of Canadian tech startups, which tend to build dull business-to-business products and services, Shop.ca stood out when it launched in 2012—boldly eschewing the enterprise crowd for everyday consumers. The concept was enough to attract more than $70 million in funding, along with a handful of notable names. Author and businessman Don Tapscott joined as advisor, and Bill Gregson, the former CEO of The Brick, signed on to the board.
Despite the funding and in-house retail expertise, Shop.ca led a rocky existence and ended up filing for bankruptcy protection earlier this year. The company serves as a case study of the challenges that face many fledgling businesses—namely costly growth tactics and differing opinions on strategy. But Shop.ca was particularly troubled, a picture gleaned through numerous on- and off-the-record interviews with former staff and investors. Tensions among the executives and at the board level weighed on the company, and the relationship between Green and his co-founder, Trevor Newell, was left severed. Without these clashes, Shop.ca would have had a more successful run, according to a former company insider: “No doubt in my mind whatsoever.”
Drew Green and Trevor Newell were, in fact, childhood friends. They were born in Toronto, in the same year, in the same month. The pair spent summers together at camp, and their families were close, too, even taking a trip to Disney World together.
As they grew older, their interests diverged. Green studied kinesiology, while Newell opted for a degree in business administration. Green was later swept up in the dot-com boom, bouncing from Toronto to New York to Chicago, and by 2005, he was a senior vice-president at an American online comparison-shopping website called Shop.com. (In many ways, it served as a model for Shop.ca.) Newell, meanwhile, worked in product management and strategy for clients in professional services.
In 2010, Green got in touch with his childhood friend. Each was interested in starting ventures of his own, and both happened to involve e-commerce. Green saw that Canada lacked a market leader like Amazon, while Newell was intrigued by loyalty and rewards programs. The pair sketched out the plans for Shop.ca and quit their jobs in 2011 to pursue it full-time. Green, as the majority shareholder, assumed the CEO role, while Newell was president.
Shop.ca raised $27.4 million ahead of its launch in July 2012, a round led by Torstar Corp. and including capital from Slaight Communications. The company made its office in a 1,600-square-foot loft downtown. There was beer in the fridge and a ladder in the kitchen, built by Newell’s dad, that led to a roof where early employees would sometimes gather for lunch.
“[The] office culture at Shop.ca was defined by extremely hard-working staff that came in early and would often leave after 8 or 10 p.m. at night,” Green wrote in an email to Canadian Business. In the year prior to launch, he says he drove eight to 10 hours between Toronto and Chicago to see his wife and children on weekends until the family moved back to Canada.
The site earned a lengthy write-up in the Globe and Mail around the time of its debut. Green was described as looking like “the host of a wild party, the morning after.” He stood at over six feet tall, with a scraggly beard and circles under his eyes; Newell, on the other hand, was clean-shaven and came across as the more buttoned-down of the two. (He also serves as a Cub Scout leader, and includes the organization’s motto on his LinkedIn page.) Green, the charismatic salesman, signed deals and built relationships with merchants and marketers, while Newell worked behind the scenes.
As a pure play marketplace, Shop.ca didn’t own any warehouses or ship products. Rather, it served as an intermediary, signing up retailers, brands, and distributors. Merchants handled inventory, shipping, and listing their products on the site, while Shop.ca assisted where necessary and looked after customer service, taking a cut of every sale. The company recruited more than 850 retailers, which allowed Shop.ca to boast a virtual inventory of more than 15 million items across 4,000 brands, including Samsung, Sony, Fila, and Miele, and retailers such as Sporting Life and Bad Boy. The hope was that Canadians who had grown accustomed to buying from myriad sites—or none at all—could get everything they needed in one place. “I think everyone had their own little personal story of trying to order something online and not being able to find it on a Canadian site,” says Scott LeBlanc, the company’s former director of product experience, and one its first employees.
The plan hinged on one thing: scale. Shop.ca’s model reduced operating costs, but margins were razor thin. Generating millions of dollars in revenue each month was the only way to turn a profit. That meant selling all things to all people, and building a massive number of loyal, repeat customers—at all costs.
In December 2013, Shop.ca gave discount codes to everyone who attended an NBA game between the Toronto Raptors and the Philadelphia 76ers, blanketing every seat in the Air Canada Centre with a sea of company-branded red flyers. It was a characteristically flashy advertising initiative. The company spent big on marketing, even sponsoring Toronto Maple Leafs left-winger Joffrey Lupul, and plastering its logo around the ACC during basketball games. To further entice shoppers, practically every item on the site shipped for free. Returns were free for up to a year. In 2013, the company spent $13 million on marketing and sales, equivalent to 60% of its annual revenue.
The aggressive approach to marketing and customer acquisition is not uncommon for startups, nor was the focus on vanity metrics to showcase the company’s success. (In November of that year, for example, Shop.ca issued a press release announcing the site had its first “million-dollar day,” meaning more than $1 million in revenue earned over 24 hours.)
But what neither could compensate for were bad customer reviews. “[The] prices were terrible,” complained one user on RedFlagDeals.com. “Literally nothing on that site you couldn’t get for cheaper elsewhere.” Others cited products that were frequently out of stock, faced shipping delays, or never shipped at all. Yet more complained of products that didn’t arrive as described, and difficulty reaching customer service. Even LeBlanc, an employee, encountered these problems. “If I didn’t work there I probably wouldn’t be shopping [there],” he says.
Many of Shop.ca’s merchants lacked online selling experience, especially in the company’s early days. “It was pretty much anybody who wanted to come on, because we wanted as many diverse products as possible across many different categories,” says Aven Santo Domingo, one of Shop.ca’s former marketplace managers. He estimates that during Shop.ca’s first two years, more than half of the site’s merchants had never sold online before. This meant dealing with merchants who weren’t familiar with the intricacies of shipping and the costs involved, or best practices for describing a product. A merchant selling furniture, for example, might have neglected to include dimensions in a product’s description—if there was one.
And while the site boasted of a large virtual inventory, it was hard to shake the feeling that much of it wasn’t very good. “When you have a directive of trying to get very big very fast, you will almost list everything and anything,” says Santo Domingo, who was responsible for onboarding merchants. The company later employed stricter merchant standards, but when customers encountered problems, there was only so much Shop.ca could do as an intermediary.
Spending on customer acquisition intensified into 2014, and in May the company raised $31 million from the venture capital arm of Shaw Communications, alongside Shop.ca’s existing investors, which around that time valued the company at $200 million. That same month, Green negotiated a loyalty program with Aeroplan to court higher-income customers, scrapping Shop.ca’s own plan.
Meanwhile, tensions were building inside the company. Concerns were brought to the board that Green was using company funds to pay for personal expenses, according to multiple sources familiar with the matter, and the directors established a committee to investigate. At the same time, a disagreement over strategy had been brewing. Some investors were pushing for Shop.ca to focus on profitability instead of scale, according to a former insider, who requested anonymity so as not to risk breaching a confidentiality agreement. “Whereas Drew felt that he was a mini-Amazon, and even if you lost money on every transaction, you can still grow the business and raise cash,” says the insider.
In October of that year, Green departed the company. There was no fanfare, and Green told staff he was retiring to spend more time with his family. “It was unexpected,” LeBlanc says. (The company lost more than $20 million that year, according to bankruptcy documents.)
“To be clear, my retirement did not stem from disagreements on the growth strategy of the company, nor was my retirement a result of my expense account,” Green wrote in an email to Canadian Business. “If at any time my corporate card was used instead of my personal card, it was paid back in full. These amounts were insignificant and only happened in the instance I did not have my personal card with me, or room on my personal card.”
With one co-founder gone, the other was about to assert himself.
Trevor Newell, Shop.ca’s president, was getting antsy. Change at the company was not happening fast enough under Green’s replacement, a longtime broadcast industry executive named Jamie Haggarty who assumed the CEO role in October 2014. (He’d served as Shop.ca’s chief operating officer since that April.) While the company was putting some emphasis on profitability—a second-quarter report to investors in 2015 obtained by Canadian Business highlights improvements to product margin and gross profit, for example—it continued spending heavily on marketing. Shop.ca raised another $15 million in May 2015 from existing investors, just to stay afloat.
In August, Haggarty started exploring strategic alternatives, which meant either a sale or more funding. (He also told the press the company was considering an IPO.) The following month, the company signed a deal with Toronto-Dominion Bank that gave Aeroplan cardholders $50 to spend on Shop.ca along with 3,000 Aeroplan points, worth another $50. That meant Shop.ca was effectively paying customers more than $100 to shop on the site. The deal ran until December, and there was no limit on how many cardholders could take advantage of it. Many of them did—to the point where Shop.ca pulled the plug early. According to multiple sources, in no small part due to the TD deal, Shop.ca was on track to run out of cash by the end of 2015, and there was no compelling plan to reduce costs.
By October, Newell had come up with his own plan. Supported by other members of the management team, Newell organized a call with the board’s strategic committee. “FYI, Jamie is not aware of this call,” he wrote in an email to the committee. “I am ready to lead; but I cannot do it without your support and action.” A change was necessary, given how the e-commerce landscape was evolving. Amazon had expanded its Canadian offerings, while retailers like Walmart and Canadian Tire were redoubling their online efforts as well.
Not everyone on the committee responded positively to Newell’s proposed pivot, as he called it. “I understand that some members of the Strategic Committee believe that today’s call was a ‘coup d’etat,’” he wrote in a subsequent email in October. “I am not attempting to overthrow, I am not forcing a seizure. I am trying to communicate to you that I care, I am passionate, and I am showing leadership,” Newell continued, expressing his intent to give Haggarty “the opportunity to re-align or disagree.” Haggarty stepped down later that month. (Haggarty and Newell declined interviews.)
He was replaced by Anthony Chvala, a former Amazon executive who had been on Shop.ca’s board for three months. First, he slashed marketing costs dramatically, which still accounted for $15.4 million by the end of 2015. “It was clear they wanted to grow top line as much as possible at whatever cost,” said Chvala. In addition to laying off 28 employees, about half of the company’s headcount, Chvala instructed staff to focus on curating the products and brands on Shop.ca’s platform, rather than try to sell everything to everyone. “We concentrated on some very core categories, based on some analytics that clearly showed those customers that were buying within those categories,” Chvala says. Home products, electronics, fashion and baby and children products carried higher margins and were more likely to attract repeat customers, according to bankruptcy filings.
Chvala also intensified the company’s reliance on analytics to better track and understand the site’s most valuable customers. Finally, he suggested licensing the company’s custom merchant-facing technology, which helped sellers more easily input product data to the site.
“There was optimism,” Santo Domingo recalls. “We were trying to be more data driven, which was something new, and something that gave us hope.”
By February of 2016, some of Shop.ca’s existing cash investors had grown confident enough in Chvala’s plan that they had warmed to the idea of pursuing further investment—provided the shareholders agreement was revised. The group felt the agreement gave Green a disproportionate amount of power considering he was no longer at the company. According to multiple sources familiar with the matter, Green was told both in person and in writing that the company needed the funds to survive. Green says that he “confirmed verbally that I was willing to make any necessary changes to the shareholder agreement to support funding.” But Green says he never received a formal proposal detailing the suggested changes. The investor group apparently became convinced that Green would not budge and thus never bothered with a formal proposal. The talks were effectively a statement, according to one insider. The prospect of new financing died, and in the months that followed, there was an exodus from the company’s board.
Chvala immediately set about trying to sell the company (Canadian Tire and Wal-Mart were among the potential suitors, according to the Globe and Mail) but despite receiving letters of intent from two large Canadian companies, both deals fell through. By the end of June, the company had just $1.5 million in cash, and executives expected to run out of money by August. With no potential suitors, and no one willing to invest, there was no choice but to file for bankruptcy protection to allow more time to find a buyer.
The company, which had 40 employees at the time of the filing, held a going-out-of-business sale of sorts at its headquarters over the summer. Members of Toronto’s tech community picked over the office’s contents, claiming pieces of furniture with Post-it notes. “The office had just stunning, beautiful furniture,” recalls one attendee. What stuck out the most, however, were the large red letters hanging from the ceiling, spelling out the name Shop.ca. “That alone must have cost huge amounts of money.”
The bankruptcy filing was not the end for Shop.ca. In July, a newly formed private equity firm called Transformational Capital acquired the company’s assets for an undisclosed sum.
Transformational’s approach is the opposite of Shop.ca’s initial model in many ways, with a focus on profit instead of revenue growth. “We believe the new era of e-commerce is one that is grounded on sustainability,” says Ghassan Halazon, Transformational’s CEO, and the co-founder of daily deals site TeamBuy. To that end, the company is aiming to acquire troubled e-commerce companies and keep operating costs low by sharing resources. Halazon says that since purchasing Shop.ca’s assets, Transformational has renegotiated with merchants to secure more favourable margins. And because the site now shares an office in Toronto, a management team, and back-office costs with two other e-commerce brands (Halazon says the company is not yet prepared to name them), Shop.ca is on track to turn a profit. He concedes revenue is down, but argues that profitability is the “strongest weapon in ensuring we deliver to customers and merchants long-term.”
As for Green, he wrote to Canadian Business that, “I am as disappointed as anyone in the outcome.” In a previous email sent during the course of reporting, Green wrote, “Drew Green was the heart and soul of this company. In less than two years without his leadership, Shop.ca filed [for] bankruptcy protection and [was] consequently sold.”
His retirement did not last long. Last December, he moved to Vancouver and became CEO of Indochino, the online men’s suit retailer. Newell is currently unemployed. Sources say the two no longer speak.
Green has ambitious plans for Indochino, aiming to open 150 retail locations in the next five years and generate roughly $500 million in revenue by 2020. At Indochino, he gives a copy of The Alchemist, his favourite book, to every new hire. It’s an allegorical tale written by Paulo Coelho about a young boy on a quest to fulfill his destiny. The Alchemist is chock full of inspirational quotes and life lessons, including a few any entrepreneur would do well to heed. “Everything that happens once can never happen again,” Coelho writes. “But everything that happens twice will surely happen a third time.”
MORE ABOUT DIGITAL RETAIL & E-COMMERCE:
- There’s no longer a difference between physical and digital retail
- Shopify CEO Tobias Lütke on how to maintain a startup culture at scale
- Shopify COO Harley Finkelstein on the future of digital retail
- Hybrid digital-physical stores will win the retail race in 2016
- Indigo CEO Heather Reisman on reimainging the 21st century bookstore
- How brick-and-mortar storefronts boost sales for online retailers
- Made-to-measure tailor Indochino focuses on scale with a new CEO
- After years in the slow lane, Canada’s e-commerce ecosystem is booming
- How Indochino is suiting up for a massive retail expansion
- How Klothed helps online shoppers try clothes with their smartphone
