Anthology #2: PayPal Mafia
Anthology #2: PayPal Mafia
Max Levchin, David Sacks, Reid Hoffman, Keith Rabois, Yishan Wong, and Dave McClure
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Anthology #2: PayPal Mafia.
If you read this newsletter, you know about my compilations. In fact, you’ve probably even bookmarked a few. But you’ve probably (definitely) never actually read one cover-to-cover.
Unlike my compilations, which range from tens to thousands of pages, or my letters, which are typically a single letter that gives you insight into a single person, Anthologies will be my way of telling a story of some of the people and companies I find interesting through a series of letters, notes, quotes, and/or videos (important: not “the” story, but “a” story).
Today, the PayPal Mafia is legendary for the value they’ve created through the companies they’ve built and invested in. But they weren’t always so revered.
When PayPal was initially acquired by eBay in the early 2000s, they were running out of cash, they were facing mounting regulatory scrutiny for involvement in gaming/gambling, they weren’t confident about continuing to fend off competitors, and they believed their core market was stagnating and they had no alternative markets of sufficient scale. So while they weren’t happy about selling (and Peter Thiel compared PayPal post-acquisition to the Fall of Saigon), they didn’t have any other choice.
After the acquisition, many of PayPal’s founders and employees left to start, join, and invest in other startups. But because PayPal’s acquisition was not a historical event at the time, the PayPal alums did not get extensive media attention, nor did they seek it. For the most part, they were heads down building companies and investment firms.
One of the companies that several PayPal alums joined was Facebook. So when Facebook engineers Adam D’Angelo and Charlie Cheever left to found the social Q&A platform Quora in 2009, they were able to tap into the PayPal alum network for funding and early users.
While the PayPal alums were still not (yet) legendary, they had been building and investing outside of PayPal for nearly a decade, and had been far enough removed from the company and had new experiences applying their learnings to new companies to properly reflect on their time there. Some of the alums who answered questions on the platform were Max Levchin, David Sacks, Reid Hoffman, Keith Rabois, Yishan Wong, and Dave McClure. In their posts, they shared stories about what happened, how they made certain decisions, lessons they learned, and more. (Names are linked to their Quora profiles if you want to read everything they asked or answered on the platform.)
I’ve collected all of their PayPal-related stories and organized them into the following nine categories:
Culture
Management
Hiring
Strategy
Product
Internal Dynamics
Industry Dynamics
Lessons
Competition
Max Levchin - Max was the Cofounder and CTO of PayPal. After he left, he founded or cofounded Slide.com (acquired by Google for $182mn), HVF (incubator), and Affirm (~$10bn market cap). He was also an early investor in Yelp.
David Sacks - David served as the COO of PayPal. After leaving, he founded or cofounded Geni.com, Yammer, and Craft Ventures. He also served as CEO of Zenefits and was an early investor in Facebook, uber, SpaceX, Palantir, and Airbnb.
Reid Hoffman - Reid was an EVP and Founding Board Member of PayPal. He left to start LinkedIn (acquired by Microsoft for $26.2bn) and later joined Greylock as a Partner. He was also a founding investor in OpenAI.
Keith Rabois - Keith was the EVP, Business Development, Public Affairs, and Policy of PayPal. After leaving, he continued to collaborate with his fellow PayPal alum (on both sides of the table), as an operator with Max at Slide (COO) and Reid at LinkedIn (VP Business and CorpDev), and an investor with Jawed (Karim) at Youniversity Ventures and Peter Thiel at Founders Fund. Outside of the PayPal ecosystem, Keith has also served as COO for Square and founded Opendoor and Openstore. He is currently an investor at Khosla Ventures.
Yishan Wong - Yishan was a senior engineering manager at PayPal. After leaving, he joined Facebook as a director of engineering and then became CEO of Reddit. He later founded Terraformation to combat climate change through reforestation.
Dave McClure - Dave was a director of marketing for PayPal. After leaving, he launched Simply Hired, joined Peter Thiel at Founders Fund, served as acting investment director for Facebook’s fbFund (a joint venture incubator/accelerator with Founders Fund and Accel Partners), and founded 500 Startups and Practical Venture Capital.
Relevant Resources
PayPal
Compilations
Elon Musk (512 pages)
Peter Thiel (536 pages)
Letters
eBay
Pierre Omidyar Compilation (eBay shareholder letters)
Other
Vinod Khosla Compilation (1,190 pages)
Q&A
Culture
What key values led to early PayPal’s culture of entrepreneurship?
1/10/2010
Reid Hoffman
1) hiring: youthful, smart, driven people with a strong hunger to win
2) taking no answer at face value — e.g. “this is the way that it is always done”
3) intense need to survive: lots of immediate challenges to ongoing life
4) entrepreneurial execs/teams that create/reinforce culture
5) and, as always, luck, fortune, or whatever you call it…
What key values led to early PayPal’s culture of entrepreneurship?
1/10/2010
Keith Rabois
In addition to the elements that Reid has identified:
1) Confrontational culture: People needed to fight for their ideas against vigorous critiques.
2) Anti-meeting culture.
3) Internal promotions (nearly exclusively) for executive and managerial roles.
4) Anti-team/collective/committee bias.
Before Google, were there other Silicon Valley companies that provided their employees with free meals while at work?
5/29/2010
Keith Rabois
Yes, in we provided free breakfast at dinner at 8 pm during the week at PayPal during 2000 -2002. We also provided free lunch in the 1840 Embarcadero Office, but stopped serving lunch when we moved to Mountain View off of Castro Street.
Should a student finish college or go work for a startup if given the chance to work for a YC, TechStars alumni?
6/22/2010
Keith Rabois
Paul Graham’s advice is sound (Students Guide to Startups): http://paulgraham.com/mit.html
Nevertheless, at PayPal we often urged students to drop-out and some of the best entrepreneurs I have met subsequently dropped out of school too. Indeed, Caterina Fake just published an outstanding post advocating that entrepreneurs drop out of college:
Rob Kalin, Etsy’s founder, never finished college. Evan Williams, Biz Stone, Jack Dorsey — the founders of Twitter — are not college graduates. Mark Zuckerberg, Facebook founder, is another dropout. And of course Steve Jobs and Bill Gates. As an angel investor, I’ve invested in two college dropout founders this month. What gives?
What strong beliefs on culture for entrepreneurialism did Peter, Max and David have at PayPal?
2/21/2011
Keith Rabois
A few key elements that were unorthodox:
Extreme Focus(driven by Peter): Peter required that everyone be tasked with exactly one priority. He would refuse to discuss virtually anything else with you except what was currently assigned as your #1 initiative. Even our annual review forms in 2001 required each employee to identify their single most valuable contribution to the company. (Although I resisted some of this approach during the PayPal years, I am now a proponent of it and have even devised a theory of why it is crucial.)Dedication to individual accomplishment: Teams were almost considered socialist institutions. Most great innovations at PayPal were driven by one person who then conscripted others to support, adopt, implement the new idea. If you identified the 8-12 most critical innovations at PayPal (or perhaps even the most important 25), almost every one had a single person inspire it (and often it drive it to implementation). As a result, David enforced an anti-meeting culture where any meeting that included more than 3-4 people was deemed suspect and subject to immediate adjournment if he gauged it inefficient. Our annual review forms in 2002 included a direction to rate the employee on “avoids imposing on others’ time, e.g. scheduling unnecessary meetings.”
Refusal to accept constraints, external or internal: We were expected to pursue our #1 priority with extreme dispatch (NOW) and vigor. To borrow an apt phrase, employees were expected to “come to work every day willing to be fired, to circumvent any order aimed at stopping your dream.” Jeremy Stoppelman has relayed elsewhere the story about an email he sent around criticizing management that he expected to get him fired and instead got him promoted:
I was a 22-year-old whippersnapper, and I remember firing off this e-mail that disagreed with the entire executive staff,” says Yelp’s Stoppelman. “I didn’t get fired–I got a pat on the back.
Peter did not accept no for answer: If you couldn’t solve the problem, someone else would be soon assigned to do it.
Radical transparency on metrics: All employees were expected to be facile with the metrics driving the business. Otherwise, how could one expect each employee to make rational calculations and decisions on their own every day? To enforce this norm, almost every all-hands meeting consisted of distributing a printed Excel spreadsheet to the assembled masses and Peter conducting a line by line review of our performance (this is only a modest exaggeration). Even after we had our IPO, Peter impelled our legal counsel to allow us to continue 95% of this practice (basically stripping the explicit revenue line off of the printout).
Meritocratic opportunity & opposition to traditional general management: Just as responsibility for initiatives was frequently re-allocated based upon performance, so was “management.” Peter and Max crusaded to replace under-performing senior colleagues, which introduced some fear and less stability into the office, but, also forged new opportunities for new stars promoted from within to thrive. Peter and David also were opposed to general managers or hiring people whose core skill was “managing.” People were promoted based upon their technical proficiency at a given role–i.e. the best engineers would manage engineering, the best product people who be running product, etc. I still recall concluding my first week at PayPal by jogging around the Stanford campus on a Saturday afternoon with Peter when he explained this philosophy to me; any other approach he argued would breed resentment by talented employees. This approach was perceived as radical in 2000, by now it is much more “acceptable” in the consumer Internet realm, at least.We did not invest in many other traditional management techniques (which are poorly suited for managing talented employees anyway). As David summarized, one’s prestige at PayPal was measured by how few people could stop you from proceeding with a new idea.
Vigorous debate, often via email: Almost every important issue had champions and critics. These were normally resolved not by official edict but by a vigorous debate that could be very intense. Being able to articulate and defend a strategy or product in a succinct, compelling manner with empirical analysis and withstand a withering critique was a key attribute of almost every key contributor. I still recall the trepidation I confronted when I was informed that I needed to defend the feasibility of my favorite “baby” to Max for the first time.
What were some cultural faux pas when working at PayPal pre-acquisition?
8/29/2011
Keith Rabois
PowerPoint (for almost any reason).
Suggesting a BD deal, particularly Intuit or MSN.
Raising Bill Harris’s name.
Criticizing people who play chess.
Scheduling a meeting with more than 4-5 people, absent extraordinary circumstances.
Arriving late to a meeting.
Praising eBay (don’t think this happened at any point after eBay purchased Billpoint).
Speaking loudly on the phone (I violated this at 1840 and infuriated the design team).
Inquiring, “what happened to [insert name],” VP of Engineering.
Suggesting hiring someone who worked at Bank X, Y or Z.
“Teams.”
What was it like at PayPal just after the eBay acquisition?
12/5/2011
David Sacks
Peter compared it to the Fall of Saigon.
Why did so many successful entrepreneurs and startups come out of PayPal?
3/26/2012
Keith Rabois
1. Talent: Peter and Max assembled an unusual critical mass of entrepreneurial talent, primarily due to their ability to recognize young people with extraordinary ability (the median age of *execs* on the S1 filing was 30). But the poor economy allowed us to close an abnormal number of offers, as virtually nobody other than eBay and (in part) Google was hiring in 2000-02.
2. Culture & Ideology: Peter/Max/David (for the most part) had very strong beliefs in the type of culture that would fuel an entrepreneurial enterprise, many of these views were unorthodox, but history has proven them to be correct.
3. eBay: Virtually anyone with talent hated working at eBay, so we all left PayPal rapidly (days/weeks/months) after the acquisition which enabled us to start new things instead of treading water in a large company.
4. Macro views of the future of the Web: This may be difficult to believe, but in 2003 and even during part of 2004, virtually nobody believed that there was going to be a new wave of innovation online. Peter and Reid were virtually the only ones writing substantial checks to finance “crazy” new ventures (Sequoia was, but not really other VCs). This created a magnet to the PayPal crowd for new entrepreneurs.
5. Pressure: PayPal was a very difficult business with many major issues to solve. We were able to see our colleagues work under extreme pressure and hence we learned who we could rely on and trust.
How did Peter Thiel build such a great team at PayPal?
3/7/2014
Yishan Wong
It’s important to understand that PayPal didn’t assemble some sort of magical dream team. The early PayPal team has now achieved a sort of mythical status because of the things they did (I realize that some of my own answers on Quora have become part of this mythology), not because they started out great and therefore conquered the challenges they did. It was a talented team, but many startup teams are talented. My feeling is that the talent was combined with extraordinary willpower and adverse circumstances to forge a number of otherwise fairly ordinary individuals into unique personalities who would later come into their own.
My understanding is that people came in via multiple routes. Peter Thiel recruited many of the smart people he knew at Stanford (primarily on the business side), Max Levchin recruited many of the smart people he knew at University of Illinois and Chicago (technology side), and then various other talented people joined via random routes. There was an emphasis on hiring smart people regardless of experience, which is typically a good thing to do in Silicon Valley; it also tended to avoid the problem of hiring tenured people with good-looking resumes who aren’t actually very capable.
PayPal also merged early on with X.com, so a number of the staff were from that company as well. The PayPal name is the one that’s been remembered, because they chose to go with that brand after the merger because it had more name recognition (in addition to, in my opinion, being better). (Check out x.com today.)
PayPal was also willing to fire people. Many startups have trouble maintaining the will to do this after they grow to moderate size (some never do), but I remember several people being fired due to incompetence throughout the pre-acquisition time I was there (post-acquisition, eBay pretty much never fired people). This served the dual purpose of keeping the talent level high and reducing the morale hit that comes from having less-good people hanging around. For instance, I was hired alongside about 3 or 4 other new engineers. Six months later, all of them had been fired.
In general, as I begin to survey more startups, I find that the talent level at PayPal is not uncommon for a Silicon Valley startup, but the differentiating factor may have been the level of intensity from the top: both Peter and Max were extremely intense people—hyper-competitive, hard-working, and unwilling to accept defeat. I think this sort of leadership is what pushes the “standard” talented team to be able to do great things and, subsequently, contributes to producing a wellspring of later achievements.
How did Peter Thiel build such a great team at PayPal?
11/25/2012
Keith Rabois
To supplement Yishan Wong’s answer:
I identified a couple of other critical factors in Why did so many successful entrepreneurs and startups come out of PayPal?
Peter has an uncanny ability to assess the ability of people. Most people who hire their friends are not ruthless at evaluating their abilities. If you are going to recruit primarily friends and scale by recruiting friends of friends (see, e.g., How did Yishan Wong get recruited to PayPal?) you must possess exceptional discipline in this.
Peter also enforced the culture by insisting on interviewing all final candidates for a very long time in the companies history; either he or Max interviewed everyone who received offers at least until our IPO, I believe.
Peter and Max also avoided MBAs like the plague. Roelof was recruited because Peter figured we should hire the very best one in the US (in case there was something we might learn). Peter also refused to hire PhDs, which is a restriction he might revise today.
What are some of the best pranks you have pulled?
10/26/2011
Yishan Wong
Back when PayPal was headquartered in downtown Mountain View, we had an underground parking lot. Since the company was expanding rapidly, the lot very quickly became too small for all employees to park in, so oftentimes when you arrived there would be no spots available and you’d have to exit and park somewhere else on the street.
However, on the first level of the lot were two handicapped spots near the elevator. At the time, PayPal did not have any handicapped employees, so occasionally you’d see someone lazy parking in that spot instead of leaving and finding an spot elsewhere outside. After awhile of this, there was a sternly-worded email sent around admonishing people about it, and asking that people keep that spot free, because occasionally we had handicapped visitors. After that, we would get occasional emails asking people to move their cars from the handicapped spot, with a description of the car and its license plate number, and repeating the admonishment. These emails would come from one Natasha Gibson, who was in actuality quite a nice receptionist with very little power, but they were worded very officially, so people really treated it like a serious matter. For a while, that seemed to suffice, and there didn’t seem to be any repeat offenders.
PayPal had completed its IPO a few months earlier, and many of the early employees had made a fair chunk of money. Among these people was Jawed Karim, who bought a BMW 5-series; this was well-known among the engineering department—we generally knew who had bought a new car; for example, the outlandish and colorful Yu Pan had bought a BMW M-series which we all thought he was going to get himself killed in (Yu Pan is alive and well today) and later I also bought a minor sports car.
One day we noticed that Jawed was consistently parking his car in that spot and eventually, there came a day with multiple emails sent out to the office asking someone to move their car from the handicapped spot. Based on the description of the car we were all able to tell that it was Jawed’s, but he was apparently in a meeting or otherwise away and never responded (it got to a point where three notices had been sent out, so it pretty much caught everyone’s attention), so late in the day we decided to come up with a prank. We printed up an official-looking notice that said:
Mr. Karim:
You have been found to be in violation of company policy for parking in a handicapped zone, and attempts to contact you to ask you to move your car have been ignored. As a result, your parking privileges for the company lot have been suspended for a period of 1 week; in the intervening time, please find parking outside on the street. If you have any further questions, please contact Natasha Gibson for clarification.
– Facilities
We went down to the garage and put the notice on his car, and then back up to the receptionist’s desk to inform Natasha, hopefully to get her to collude with us on this prank. When we got there and began to describe the situation, she asked us, “Yeah, who’s car is that? They aren’t responding to the emails! Facilities is really mad!” When we told her it was Jawed, she said exasperatedly, “Jawed! He’s always parking there! This isn’t the first time it was his car!” We told her about the prank, and she agreed that she would definitely back us up and if he tried to appeal, she’d say that he should take it up with Facilities, who was already gone for the day. Our hope was that we could fool him for at least a day and get him to park out on the street (where it was actually impossible to find nearby parking).
Nothing happened later that night, as Jawed apparently returned to his car after Natasha had gone home.
The next day, we saw his car on the street. No one said anything to him.
The day after that, we saw his car on the street. No one said anything to him. There was a bit of sniggering behind his back.
The day after that, someone (I think Mike Solomon) decided to take a poke at him, and said something along the lines of, “Hey Jawed, I saw your car out on the street. That’s a pretty nice car to just park out there on the street; wouldn’t it be safer to park it indoors?” According to Mike, Jawed gave a sort of non-committal answer.
At the end of the week, we decided to reveal the prank, and managed to get Natasha Gibson to send out the following email:
Everyone:
Please continue to be advised that the handicapped spots in the garage should be left open for employees or visitors who have a handicapped badge on their car. Thank you to everyone who has continued to help keep those spots clear.
The following employees who have been parking out on the street due to a prank sign on their car now have their parking privileges reinstated:
1. Karim, Jawed
That is all.
– Facilities
It took about 30 minutes for Jawed to see the email. In fact, some nearby engineers had to say to him, “Hey Jawed, there’s some sort of email about parking that mentions you, what’s up with that?” to prompt him to check his email (at which point he burst out laughing). He was a pretty good sport about it and thought it was a great prank.
Also, the handicapped spot remained open after that.
Management
What are the most important things that David Sacks did while running product for PayPal? How did this contrast with how product was run before David Sacks ran product?
3/10/2013
Yishan Wong
Interesting note: when this question was posed, someone asked David Sacks himself to answer it. A few days later, I get a notification saying that David Sacks is asking me to answer it. Well, all right, you asked for it. 🙂
I never actually worked directly with David Sacks. During the times when we both worked for the company, he was COO and I was just a new grad engineer working on various obscure projects. To me, he was a distant imperious fellow who would make big decisions and influence the course of various projects, sometimes to the great frustration and consternation of my colleagues, especially the other product managers and some of the designers. My primary impression at the time is just that he drove people really hard and got results.
In talking to other people around and since then, I’ve gathered the following information: basically, the most important thing that David Sacks did while running product for PayPal is that he ran product.
That is, prior to David Sacks, the company did not have a product organization. He was put into the position (I don’t know what his exact original title was; shortly after I joined, I recall an email being sent out praising his work and promoting him to COO) and created a product organization and split its work along the different verticals (e.g. customer service, anti-fraud, merchant services, auctions, etc), each with a couple product managers working on it. His greatest contribution was bringing a regular and systematic drive to prioritizing and cranking out new product features and improvements: my impression is that it did not exist before that time – prior to that, things were described to me as “The Mercenary Age,” where engineers just sort of picked features off a big list and implemented them. In the latter part of Sacks’s time running the product organization while I was there, we had to continually crank and out-execute eBay, which was constantly trying to do nefarious things to bump us off their platform.
There were plenty of product innovations that PayPal came up with (I think one of the most prominent ones was “Web Accept,” which is the snippets of code you could cut and paste into your website so that people could pay using PayPal by just clicking on a button), but those were primarily originated by individual product managers or engineers, and David Sacks’s greatest contribution is in providing the force to drive things hard and getting those innovations or feature improvements shipped consistently week over week, month over month.
To many people, this is not the “cool” part of running a company – usually that has to do with brilliant ideas or elegant engineering or “strategy” – but since my own primary strength is that of someone who wins simply by being able to execute better than other people, it seems like a pretty valuable (crucial) contribution to me. PayPal didn’t have the resources or the structural market advantages of eBay’s platform, but we cranked harder and faster than eBay and our other competitors.
What are the most important things that David Sacks did while running product for PayPal? How did this contrast with how product was run before David Sacks ran product?
4/15/2010
Keith Rabois
I joined PayPal while David was still EVP, Product and before he was promoted to COO, when I moved to report to him. I generally agree with Yishan’s answer, but will try to break it down into more concrete, specific changes that David instituted:
a) Replacing “product managers” with producers: David converted all PMs into “producers” as an official title. As he would state, he wanted people delivering results, not “managing” things. Small cultural signals matter. I believe more start-ups should replicate this idea.
b) “Accept/Deny”: David figured out the key to converting a popular product that lacked material revenue into a product that 89% of users would pay for virtually overnight. As a result, PayPal ended an era of bleeding millions of dollars per month (-$6 m the month that I joined) into one that one would break-even in less than 5-6 months and start generating substantial profit. He transposed the idea from a feature that yahoo email had deployed–basically when a user received a payment (assume $20), he could “accept” the money and agree to pay our new fees on this payment and every future payment he received or reject the money and send it back. Shock–most people claimed the money.
c) Killing BD initiatives: Before David assumed the role of COO, PayPal consummated several major BD deals (e.g. Intuit) and was pursuing a few others (Microsoft). David consistently believed these were a folly. He insisted that we concentrate on enhancing the product as the only acceptable strategy.
d) Culture: As other questions have discussed, PayPal had a unique culture. At a minimum, David was one of four key drivers of the culture, but it would be reasonable to ascribe David the most credit for the culture. He used subtle techniques (re-writing the annual review form) as well as overt tactics to enforce it (banning meetings with more than 5 people, etc).
e) Error correction: David would insist that specs, UI and products be simple and elegant, no feature bloat, no extraneous language, no choices for the user that were not absolutely necessary. He would hand-correct most of the plans until they (mostly) met this standard. Of course, today the PayPal product is so bloated and complicated that it is impossible to imagine that it was once as elegant as Quora.
Why did David Sacks crack down on meetings at PayPal?
7/2/2010
David Sacks
I want to add some color to Keith Rabois’s point (“David enforced an anti-meeting culture where any meeting that included more than 3-4 people was deemed suspect and subject to immediate adjournment if he gauged it inefficient.”).
Hopefully it’s obvious that an email culture is vastly superior to a meeting culture. A group of people can make progress on dozens of issues simultaneously by email in the time it would take to organize their schedules for a single meeting. Also, the quality of decisions made by email is frequently better because there’s no arbitrary need to make a decision by the end of the meeting; people can respond when they are ready, and easily pull in additional participants and information as needed.
What may be less obvious is that PayPal at one point suffered from a meeting culture. In the wake of the merger with X.com bank, PayPal had twice as many VPs as it needed (half were former banking executives) and was led by the former CEO of a big finance company, who set the example by holding excruciating hours-long meetings of the aforementioned execs. These management issues were eventually resolved, but the culture had to change as well. The crack-down on meetings was a deliberate attempt to restore the “true” startup culture of the company. It did not prevent impromptu collaboration or brainstorming sessions, out of which many of PayPal’s best ideas came.
The other reason to keep tabs on large meetings was that they could be symptomatic of an underlying organizational problem. For example, if a dozen people from product, marketing, sales, etc, are meeting to hash out international issues on a frequent basis, perhaps it’s time to create an International team dedicated to solving these issues. Or perhaps people are meeting excessively because it’s not clear who owns an area. By “popping in” on meetings occasionally, I got a feel for refinements that we should make to the org chart, such as adding new teams to cover unmet needs or re-defining roles to avoid overlap in job responsibilities.
How did David Sacks go about “cracking down” on the meeting culture introduced by the merger with x.com?
7/4/2010
David Sacks
I can see from your follow-up question that “crack down” was perhaps the wrong choice of words in the original question because it implies a much more severe and formal policy than what was actually implemented. A better description might be cultural course correction. We did not seek to end meetings at PayPal (that would just be silly) but rather speed up decision making by eliminating the need for excessive meetings. The most important enabler of this was clarifying areas of responsibility to heighten individual ownership and accountability and eliminate overlaps, so that individuals could make decisions within their spheres without the need to consult with or persuade lots of other people.
What did Keith Rabois do at PayPal?
8/21/2013
Keith Rabois
This is copied from my LinkedIn profile so it has not been edited in 5-10 years:
Promoted to manage BD, financial services, competitive strategy, government affairs, and public relations teams
Charged with assessing and resolving risks posed to the viability of the business, including regulatory risks, as well as devising competitive strategy vis a vis eBay and VISA/MasterCard
Supervised relations with external partners, including Providian, Intuit, Wells Fargo, UPS, DirecTV, Microsoft, and eBay enterprise sellers
Orchestrated multiple substantial public affairs campaigns to complement business strategy, including building a multiparty PAC, lobbying more than 70 Members of Congress and 20 U.S. Senators, as well as presenting PayPal’s interests to the DOJ, FTC, Treasury and several state AGs
Impelled product initiatives to meet key strategic objectives, including devising the most profitable product feature for the company in ’02.
Hiring
What was the interview process like during the early days of PayPal?
3/19/2011
Yishan Wong
This answer is limited to my experience when I interviewed and (later) when I was performing interviews. Most of my interviewing experience at PayPal was done during what I’d call a “middle” period, and only a small amount of it during an “early” period.
Short answer: It wasn’t really as hard as you might think. These days early PayPal has a bit of a mythic status about it but it doesn’t mean it was some sort of techno-Camelot or anything.
When I interviewed, I met with five people, and was asked the following questions:
Erik Klein, now CTO of Thread.com:
– if you have two ropes that burn at an uneven rate, and each takes 30 minutes to burn through, how do you measure 45 minutes? I got this one instantly, but sat there “thinking” for about 5 seconds so it wouldn’t seem too absurd.
– a question about linked lists where the insight was to re-write the data in a pointer in order to do an insert in O(1) time. I got this one instantly.David Gausebeck, working on some game company (?):
– implement atoi(). I wrote this one out immediately but forgot to implement the negative case. Gausebeck seemed impressed enough by my speed that he was nice enough not to dock me for it.
– some questions about array syntax in C, like what a[0], a[1], *a, a, etc referred to, on a whiteboard diagram. I got one of these wrong, probably “a”, but I’m not sure.Doug Ihde, later chief architect and now at Facebook:
– a question where I was to write the class methods for a class that represented rectangles (as in 2D graphics program) and a method that calculated whether two rectangles intersected.
– write a class method definition using as many “consts” as possible. I got this one very quickly.Max Levchin, now CEO of Slide and generally famous:
– Asked me if I knew anything about C++ exceptions. I said I didn’t, so he skipped to another one.
– Asked me if I knew anything about some other obscure technical topic. I said I didn’t, so he skipped to another one.
– Again, third topic, same result.
– Generously, this fearsome CTO then flabbergasted me by saying, “Well, I have no idea how to evaluate your skills, so I’ll just have to rely on the opinion of the other interviewers.”(then-VP of engineering)
– told me apparently I’d done well and they were going to make me an offer.Nowadays, I would consider an interview like that too easy (especially compared to how hard we would eventually make them, and how hard Facebook’s are today), but at the time I was just glad to have passed, which enabled me to avoid working at Lockheed Martin, my only other Bay Area offer.
Interestingly, the interviews I got may have been during a temporary lull in difficulty due to (this is hearsay) the VP of Engineering who didn’t feel that the bar needed to be as high as it had been before. I was hired right after PayPal raised their last round of funding, and they used [part of] it to hire four more engineers, one of them being me. Six months later, all of those engineers except me had been fired; I received a raise three months in (this was very motivating for a young engineer like me, and impressed upon me the benefits of working really hard). So, that period may have been an odd anomaly, since many of the existing engineers seemed much better than their relatively easy interview questions indicated: later when I worked with Doug Ihde and got to know him, I was surprised that the interview question he’d given me had been so simple. Also, subsequent rounds of hiring gradually increased the difficulty of interviews, gradually peaking in around late 2002.
For reference (for the Facebookers who are reading), Facebook’s interview difficulty at around the same time (I joined Facebook at around 20 engineers, which is roughly also when I joined PayPal) in late 2005 was much, much easier – I was actually a little put off by how easy my interviewers at Facebook were on me, while Facebook’s interviewing difficulty from ~2007 onwards was much much higher than any PayPal ever ended up achieving.
What was the interview process like during the early days of PayPal?
1/31/2010
Dave McClure
i was a bit of an oddball, since i was being hired for a position that really didn’t exist. to be accurate: i came in as a consultant for the first 3 months, and was only hired after it seemed like i was doing something useful, or at least not too [stupid]. the position i was taking was to start & then run the PayPal Developer Network, which didn’t exist when i got there. i was recommended by Kevin Hartz, an early PayPal investor and friend of David Sacks & some other PayPalers. i also had a recommendation from an acquaintance of Peter Thiel, so perhaps that helped.
most of my interview questions weren’t technical, since i was being hired for a (seemingly) marketing role. everyone was trying to figure out whether i was a technology person or a marketing person (answer: neither at that point, really 😉 i probably had enough tech background that most folks weren’t 2nd-guessing my qualifications. since they didn’t know exactly what they were hiring, i guess they figured they’d give me a test drive and see how it worked.
during the interview, i seem to remember meeting with ~5-6 people including:
– David Sacks (my initial boss, altho only for a few months)
– Bill Onderdonk (my subsequent boss, still at eBay)
– Amy Rowe (now Amy Klement, and VP Product)
– Luke Nosek (now a partner at Founders Fund)
– Eric Jackson (author of The PayPal Wars)
– Peter Thiel (founder/CEO)i don’t remember too much about the interviews, altho somewhat memorable in the final meeting with Peter, i think we mostly just talked about economics & capitalism, and only briefly about PayPal. i don’t know if that helped, but he seemed to enjoy the conversation (as did I).
in any case, i think i sort of got away with something — they probably should never have hired anyone as unqualified as me. guess i fooled them. the rest of course is history. possibly 3 of the most amazing years of my life followed.
What was the interview process like during the early days of PayPal?
1/28/2010
Keith Rabois
Interviews?
I am not sure there were too many of them as Peter hired the smartest friends of his from college for the business/product roles and Max recruited his friends/classmates from the University of Illinois crowd (and some high school colleagues too).
For an amusing depiction of the “process,” read Chapter 1 of Eric Jackson’s book PayPal Wars. (I am not attesting to the remainder of the book, but he captures this part well.)
How did Yishan Wong get recruited to PayPal?
6/16/2014
Yishan Wong
I was referred by Jawed Karim, now famous for co-founding YouTube.
Our parents knew each other – our dads worked at 3M, and when his father was relocated here from Germany, the company (I think) asked my dad to help him and his family get settled in and we became family friends. Jawed ended up at the same middle school as me, with our parents carpooling. Jawed once remarked to me that the “carpool” was really my parents just picking him up and driving him to school; his parents for some reason never drove my sister and me to school. We were on the math team together, and I did pretty well on it.
Later we went to different high schools and colleges, but as I was graduating from college (in 2001, the depths of the first dot-com crash), Jawed found out and referred me to PayPal – he was already working there, having been recruited from UIUC and convinced to drop out a year earlier by Max Levchin and the other guys there (Gausebeck, Klein, Chu, Kang, etc). In college he was already kind of well-known for having written a few interesting programs, like Jaw3d (a rendering lib – apparently you can still find this at
http://www.jawed.com
) and mp3voyeur (a sort of primitive version of Napster for finding songs on a school network), so he was known as a good programmer. Later I asked him about why he referred me, citing the fact that he had never seen any of my programming output, and he replied that he figured I was smart, owing to my performance on the math team back in middle school (in high school I was also on math team, but did much better – in junior year we were all overshadowed by the venerable Michael Korn (http://dspace.mit.edu/handle/1721.1/16628) but then in my senior year after he graduated I got to be the top-ranked scorer on the team).
At the time, I had two other offers (one from Harris in “Melboring,” Florida and another from SEI/CERT in Pittsburgh), neither of which I was enthusiastic about. I wanted to return to the Bay Area, where I had interned two summers ago for Echelon, because the weather and civilization was so much nicer. Because there weren’t many (any) jobs, I relaxed my “never work for the military-industrial complex” standards and got an interview at Lockheed Martin [the Sunnyvale offices]. The day before I was scheduled to fly out, PayPal’s recruiter called me and asked me if I’d be willing to come out to interview and, finding out that I was scheduled to be out there for Lockheed, asked if they could piggy-back on my trip. Yes, they managed to get the whole trip for free – perhaps an example of classic PayPal scrappiness.
I actually had my Lockheed interview in the morning (it was kind of a joke – I was asked, I think, zero real technical questions) and then went to PayPal that same afternoon. Lockheed had given me an offer on the spot, so I was bursting with confidence (or relief, or maybe just caffeine) when I got to PayPal, so I wasn’t nervous at all – either way, at least I had a ticket out to California (for both Kimberly and me) instead of having to stay in rainy, drizzly, slushy, backwards Pittsburgh.
The interview itself is described in What was the interview process like during the early days of PayPal?
I pretty much took the offer right away; I took two months off after graduation and went to work at PayPal on July 5th of 2001, reporting to Karen Seto and later Brendon Foster.
What prompted David Sacks to quit McKinsey and join PayPal?
1/6/2011
David Sacks
The background to this was that I was friends with Peter Thiel from undergrad at Stanford. We had both been editors of the Stanford Review, and we had written a book together about political correctness.
In 1999, Peter and I had an ongoing conversation over the course of several months about what he was trying to do at PayPal. The company was actually called Confinity then, and it was focused on a mobile application to “beam money” from one Palm Pilot to another.
In not so many words, I told Peter that it was a dumb idea — there were only 5 million Palm users and beaming money didn’t seem like a compelling need. At some point the conversation shifted to “what if you could email money?” I told Peter this was a killer idea and I would quit my job at McKinsey if that’s what the company was going to do. Peter agreed, and after a quick trip to California to interview (nobody wanted to hire me but Peter overruled them), I joined.
I don’t want it to sound like the pivot to emailing money only occurred because of these conversations. Peter was having other conversations at the same time (such as notably with Max) that were reaching similar conclusions. But the pivot was the impetus for my joining and the first thing I focused on afterwards.
Are friend-referrals the best way of hiring great engineers?
1/11/2010
Keith Rabois
Yes, regardless of your favorite interview process and technique, interviewing is a poor proxy for a previous professional relationship in predicting success. At PayPal, it was virtually impossible to get an engineering offer without a relationship to a current engineer.
Strategy
What do most people not realize about PayPal?
5/10/2016
Max Levchin
Its cost-of-funds arbitrage business model: when you pay with your bank account, PayPal’s cost of funds is very low; when you pay with your credit card, it’s comparatively high. To the consumer, this costs nothing; to the merchant the fee is always the same: depending on which path the consumer took, PayPal either makes money or doesn’t on the transaction.
What was PayPal’s most important strategic decision early on in achieving widespread customer adoption?
4/11/2010
Keith Rabois
Most important:
A) To pay a $10 bonus for signing up plus another $10 per referral….Second:
B) Merging with X.com in conjunction with a $100 M financing round that closed 3-4 days before the market collapsed.Third most important:
C) Empowering David Sacks to run product.
What was PayPal’s most important strategic decision early on in achieving widespread customer adoption?
4/11/2010
Yishan Wong
To launch on the eBay platform:
This immediately brought to bear two enormous advantages:
eBay was a closely-knit community, within which viral adoption could spread considerably faster than on the internet at large.
The value proposition of PayPal was much greater for eBay users. Whereas for an average person who might use it to pay back a friend for lunch it would be barely more useful than handing over some cash or owing a small debt, it was much more useful for eBay users whose previous best solution was to send checks in the mail and wait for up to a week for them to clear before being able to send the product.
What’s the best pivot in business you’ve ever heard?
10/2/2010
David Sacks
PayPal shifted from beaming money over Palm Pilots to emailing money.
Which startups deferred profitability for a long time in order to build a large user base and then successfully monetized?
9/6/2010
Keith Rabois
PayPal–even adopted the tagline “always free” and motivated users to sign up with $10 bonuses. Did not effectively monetize until September 2000.
At PayPal whose decision was it to shutdown X.com internet bank business?
7/4/2010
David Sacks
CEO Peter Thiel, ratified by the board.
What is the technology history of PayPal?
8/20/2013
Keith Rabois
I don’t believe any vendors were employed and all technology was developed internally.
How can I get the referral email copy used by PayPal for its hugely successful referral program (inviter gets $10, invitee gets $10)?
4/30/2014
Yishan Wong
I don’t think the email copy was the critical part here. It’s the “you get $10” bit. Focus on that part.
Why hasn’t PayPal done more with offline payments?
5/27/2010
Keith Rabois
Because it would be a bad idea:
a) PayPal has no expertise in these areas and the core asset of PayPal (fraud modeling) is wholly irrelevant in this offline transactions (merchant does not bear the fraud loss);
b) Margins are compressed to a commodity;
c) Offline payments are very efficient in the US and Europe with exceptions in subprime markets, which could tarnish the eBay/PayPal brand;
d) Neither the merchant nor consumer has a major pain that these technologies solve.
Product
What were the early achievements that drove PayPal’s awesome fraud detection systems?
12/4/2009
Yishan Wong
Some features include:
1) Development of the “Gausebeck-Levchin Test,” the first commercially-deployed CAPTCHA to prevent automated signups and other site activity.
2) A GUI system for visualizing sequences of transactions between networks individuals, allowing a human operator to quickly identify fraudulent account activity.
3) Fraud models developed in batch-time were implemented directly into code for runtime execution in order to make real-time determinations of which transactions or accounts might be potentially fraudulent as they were happening.
4) Advances in rapid-response for customer resolution of restricted accounts -automated fraud detection had a high false-positive rate, so methods needed to be developed to allow legitimate customers to quickly and painlessly prove that they were legitimate.
How was PayPal able to structure the $10 sign-up bonus?
8/11/2010
David Sacks
Initially users just had to sign up, confirm their email address, and add a (unique, authorized) credit card.* The money was simply added to their account.
This was real money. Users could send it to someone else or withdraw it. So it was a real cost to PayPal. We must have spent tens of millions in signup and referral bonuses the first year. (PayPal acquired 1 million users by March 2000 and 5 million by summer 2000.)
The bonuses were gradually phased out, first by reducing them to $5, then by adding more verification hoops (like bank account verification) so they became more difficult to get. Then they were eliminated altogether.
* I can’t remember if we went out the door with the credit card requirement or whether it was added shortly thereafter. If I get confirmation on this point, I will update this answer.
What are the most successful startups that had a major change in idea/product direction?
3/7/2010
Yishan Wong
PayPal was famously started as Confinity, which originally meant to build crypto for handhelds, which evolved into beaming money between handhelds (what the kids today called “mobile devices”).
Keith Rabois: What was your “baby” at PayPal?
12/18/2010
Keith Rabois
A “wallet” that would auto-complete any payment form on the web with a virtual debit card linked to your PayPal account. (If you are old enough, you may recall the old Gator wallet before browsers stored any of this information).
Internal Dynamics
Which individuals deserve credit for PayPal’s success, and why?
12/4/2009
Yishan Wong
The following people are known to have played key roles in PayPal’s success, not necessarily in any order:
Peter Thiel, later executive leadership, founder of PayPal
Max Levchin, technological and realtime anti-fraud leadership
Elon Musk, earlier executive leadership, founder of X.com (merged with PayPal)
David Sacks, operational and product leadership
Roelof Botha, financial leadership and key later fundraising
How well did the founders of PayPal – the “PayPal Mafia” – actually get along? With so many really smart, driven type A’s as founders/co-founders, were there frequent personality clashes?
4/19/2012
Yishan Wong
All of the people in what is today called “The PayPal Mafia” were not equal co-founders or anything, so yes, there was an obvious and established pecking order where (at the time of the IPO), Peter Thiel was the CEO and everyone reported to him, Max Levchin was the CTO and everyone technical reported to him, etc.
Non-technical people whose names you may recognize included David Sacks, Roelof Botha, Reid Hoffman, Keith Rabois, Luke Nosek, Eric Jackson, Premal Shah, and Dave McClure. Technical people whose names you may recognize include Chad Hurley, Steve Chen, Jeremy Stoppelman, Russ Simmons, and Jawed Karim.
Yes, there was a clash between Elon Musk and the PayPal gang (“led” by Peter Thiel), and so Elon was CEO for awhile and then left, and then Peter became CEO. I think they are all friends (at least friendly) nowadays. At least they are certainly co-investing in each others’ ventures and such.
The culture was very conducive to aggressive Type-A personalities, in that you were expected to argue vigorously and that was okay. As a young new grad, I liked that culture, it was a probably a great way to be introduced to the working world.
Was Elon Musk, and not Max Levchin or Peter Thiel, the real reason behind PayPal’s success?
2/4/2014
Yishan Wong
Wow, I’m being offered 3000+ credits to answer this question!
This is awesome, because I have no idea. I joined PayPal after Elon left, so I served entirely during the Peter Thiel regime. So I don’t have any special insights.
I suppose I’ll say this: sometimes people appear successful just because they hit the luck of the draw. You can usually tell people like this apart from the real contributors if they fail to follow up with any significant accomplishments or activity afterwards (i.e. “once you’re lucky, twice you’re good”). In both Elon and Thiel-and-company’s cases, they have all gone on to significant, world-class achievements. One of them is a key early investor in Facebook and a number of other significant startups and is influential and active in other ways, and the other is building electric cars, rockets, and solar energy systems. I consider it pretty reasonable to assume that they were all exceptionally talented people who made key contributions at different times. It’s also very reasonable (and common) that when you put people like that together, sometimes the stresses of the work can force them into conflict and split them apart.
I mean, it all turned out okay, except for the part where eBay is kind of mismanaging PayPal now. So you can tell who the real “lucky” one is in the story.
Industry Dynamics
Why did PayPal merge with X.com?
7/2/2010
David Sacks
To consolidate the fledgeling market for email-based payments.
In the months before the merger, Confinity/PayPal and X.com were locked in a heated competition to gain share on eBay. Confinity initially offered a $10 signup bonus and a $10 referral bonus for each new user (the referral bonus went to the inviter). X.com then upped their bonuses to $20. Both companies probably would have run out of money competing with each other. Immediately after the merger, we raised $100 million at a $500 million (pre-money) valuation because the combined company was the undisputed market leader.
Why did PayPal sell to eBay?
9/5/2010
Keith Rabois
There were two key reasons we decided to sell to eBay:
a) Peter and Roelof studied eBay’s core marketplace and came to the conclusion that it was stagnating. This was our core market, and we had no alternative markets of sufficient scale that were likely to succeed in a sufficiently short time horizon. (The rest of the world was still enamored with eBay, but we had unusual data insight into their performance and while eBay still had another year or two of international growth, PayPal was less baked into those markets.) As with most public companies, our market cap was primarily driven by prospects for growth over the next decade, so our stock would have been punished severely if we had decelerated in revenue as a result of eBay’s decline.
b) eBay was on a relentless campaign to artificially conscript buyers into using eBay Payments instead of paying with PayPal. Although we had defeated these initiatives over the past 12 months, we were not confident that we could succeed forever or that the government would intervene. (Reid had a pithy means of describing the challenge: Just because someone shoots five bullets at you and misses… does not preclude the sixth one from killing you.)
Why did PayPal sell to eBay?
7/22/2012
David Sacks
1. eBay risk.
PayPal had a huge platform dependency on eBay, a site with its own competing payment solution.
eBay transactions generated two-thirds of PayPal’s payment volume at the time of the acquisition. The off-eBay volume was growing faster, but would still require many years to overtake the on-eBay volume. Also, much of the off-eBay volume was acquired through the activities of eBay merchants on their own websites, so losing eBay as a customer acquisition channel might have ruined the off-eBay business as well.
It’s important to realize that losing even half the eBay volume might have destroyed PayPal as a business (in 2002). Payment businesses are all about achieving scale. Most have razor-thin margins and large fixed costs so you need huge volumes to make the model work. (This is the problem with most payment startup ideas; people don’t realize how big they have to get before they work at all.)
One thought experiment we engaged in was this: if we were running eBay Payments, could we think of ways to beat PayPal? We were arrogant enough to believe that we could, but not so arrogant to believe that eBay would never figure any of these things out.
After all, eBay owned the platform and the checkout line. In hindsight, it’s a miracle they didn’t thrash PayPal.
2. Visa and MasterCard risk.
The card associations had a dim view of PayPal, which they saw as a potential future rival that was operating in a grey area of their rules.
This risk was magnified by the eBay risk, because eBay was ginning up the card associations (through its relationship with Wells Fargo) to clamp down on PayPal for supposed infractions. If either Visa or MasterCard shut down PayPal, it would destroy the product’s value proposition because merchants want to offer a super-set of payment options.
A subtle way for Visa and MasterCard to squash PayPal would have been to categorize all PayPal payments as “quasi-cash” (a form of currency), which has huge fees associated with it. Avoiding this categorization was a constant battle. To this day, you can see the result of our negotiations with the card associations in the “Send Money” flow on PayPal, which asks the user to categorize what the money is being sent for. Quasi-cash is one of the options; not surprisingly, users never check it. From a UI perspective, this was an ideal outcome; we were always concerned that it was subject to change.
3. Legal risk.
PayPal had begun to be used by a substantial number of online gambling sites. Although this was perfectly legal at the time, a number of state attorneys general (including Eliot Spitzer) were looking to make a name for themselves by investigating whether PayPal was “aiding and abetting” online gambling.
In conjunction with the eBay acquisition, PayPal announced that it was prohibiting these transactions. This was inevitable even without the acquisition, but as a stand-alone company PayPal would have been an easier target for politically-minded prosecutions.
We already had some experience with this: the State of Louisiana had previously shut down PayPal for a week due to the arbitrary decision of some bureaucrat (I forget why). This was reversed, but the legal issues seemed never ending.
4. Psychological factors.
The team had been run down by years of fighting the “PayPal Wars”. Today PayPal is a massive company that faces none of the risks above, but at the time the outcome was far from assured. The alternative to an acquisition was continued fighting on all of these fronts with a somewhat exhausted team. Today, because of PayPal’s success, it’s easy to look back and say that we should have gone for it, but at the time it certainly seemed like a tough slog.
Who was the cover bidder on eBay’s acquisition of PayPal?
1/8/2010
Keith Rabois
There was no other bidder. PayPal was a publicly traded stock at the time.
Lessons
What is the greatest lesson from PayPal that’s helping you build Affirm?
5/10/2016
Max Levchin
People underestimate the complexity of legacy payment infrastructure. Solid knowledge of that helps a bunch. More broadly, the greatest lesson is always the same: people is what makes or breaks every company.
What were some of Keith Rabois’s key takeaways from his time at PayPal?
12/18/2015
Keith Rabois
The importance of assembling a critical density of talent.
The importance of focus.
The importance of learning how to evaluate people w limited “data” on their resume.
Competition
Can Facebook Credits replace PayPal one day, why or why not?
6/9/2010
David Sacks
I don’t think so. Here’s why:
PayPal is the low-cost provider in the industry. The main reason is that roughly half of its payments are funded from a PayPal balance or bank account instead of a credit card, virtually eliminating funding costs for those transactions. Funding costs (because of credit card interchange fees) are by far the biggest portion of the expense of processing a payment.
This funding mix was extremely difficult to achieve. It required us to drive a huge percentage of users to (1) add and verify their bank account so it could be used as a funding source, and (2) keep money in their PayPal account so it could be recycled within the system. A bank account was only verified by transferring to it two small payments (less than $1) that together constituted a 4-digit PIN. Waiting for the PIN took several days so this was a multi-step/multi-day process. It still amazes me that so many users completed it; however, we systematically created benefits for becoming “PayPal Verified”.
PayPal also incentivized balances through money-market interest rates and a PayPal debit card that made the PayPal account liquid at any ATM. Finally, anyone could receive payments through PayPal, which meant that ordinary buyers could accumulate a balance; although P2P payments seem easy, they are actually extremely risky and require special fraud detection systems. All of these features would be extremely difficult for Facebook to replicate; even if they did, it’s not clear users would have the same incentive to verify their accounts.
As a result, Facebook will have higher funding costs than PayPal, which will prevent it from challenging PayPal on the basis of price. For many companies, like social gaming sites and apps on Facebook’s platform, this won’t matter. They will gladly pay more for the additional conversion that Facebook payments will generate. This is because their margin on each incremental transaction is 100%. On the other hand, price-sensitive e-commerce sites with thin margins will want to use the cheapest payment provider. If your margin is only 10%, for example, then saving a couple of points on payment processing increases your profits by 20%.
Here’s how I see the market breaking down: Facebook will charge a premium fee for delivering additional convenience, distribution, and conversion to merchants. This will win over the virtual goods market. But merchants with thin margins (e.g. sellers of physical goods) will prefer to stick with the low-cost leader for the majority of their payments.
Keith Rabois: Do you think Square will be the future PayPal, or even bigger?
12/18/2010
Keith Rabois
At Square, we aspire to build a substantially greater independent company. Jack articulates a powerful and exciting vision for the company every week at our company meeting. (We are actively recruiting, so send me a message if you want to join the team.) PayPal is today worth at least $15 Billion, approximately 11 years after the product was launched, and was valued at about $1.4 Billion as a publicly traded company (while the NASDAQ was performing miserably) when we agreed to sell to eBay in 2002.
PayPal was an excellent product for allowing micro-merchants and aspiring entrepreneurs to accept credit cards for the first time. It also allowed buyers to fund transactions with balances and via their checking account (ACH), while providing immediate settlement to the seller. However, PayPal transactions are nearly exclusively devoted to online purchases, which represent only 5-6% of commerce in the US. Square empowers the other 95% of commerce.
From a valuation perspective, PayPal was massively discounted because of our dependency on the eBay market. Depending on the method used to measure, 70-90% of PayPal transactions were sourced via eBay. At Square, we are acquiring users from a wide variety of (fragmented) channels.
At Square, we are more committed to delivering a magical experience and developing a Apple-quality brand in financial services . At PayPal, we were probably more utilitarian, although still obsessive about how our brand compared to eBay’s in the hearts and minds of power sellers. If we succeed at Square, we intend to be iconic.
Think The Golden Gate Bridge vs. The Kosciasko Bridge (http://upload.wikimedia.org/wikipedia/en/5/51/Twinbridges.jpg).
Why has no payment startup emerged as a meaningful challenger to PayPal?
2/16/2011
Yishan Wong
The nominal answer is that PayPal’s business has network effects, creating a moat that makes it difficult for a new entrants to gain critical mass. Additionally, PayPal’s brand is (nowadays) quite strong and associated with financial reliability and trust, and because people are reluctant to trust a newer, smaller company with something as serious as money, the field is tilted significantly in favor of the incumbent.
The more complex reason is that PayPal’s own business climate is actually extremely hostile. This was apparent when PayPal was small and struggling with it, but not as apparent now because PayPal makes it look easy. The core challenge surrounding any payment system is the need to simultaneously make the system easy to use (low-friction) for users while preventing fraudulent transactions. A payment system has to do both of those extremely well, because (1) if the system is not easy to use, no one will adopt it and (2) if it is too easy to defraud, criminals will rapidly bleed you into bankruptcy. Optimizing those two things often come at the expense of another – one way of preventing fraud is to ask for more verification of identity from the user, but that increases the friction of use; conversely, making it easy to use also makes it easier to commit fraudulent transactions – and therefore requires extremely clever solutions. Surmounting these challenges takes a blend of skilled product design, technical acumen, and exceptional will and daring (most startups do not have to contend directly with criminals stealing from them), and PayPal managed to do this through developing a variety of methods and technologies and solidified a strong lead in it. In doing so, it has had to engage in an ongoing arms race with the fraudsters, so that now the business climate is even more hostile. This makes it more difficult for a new entrant to overcome the ambient fraudulent activity and reach sustainability than PayPal itself originally had to – and PayPal burned through a lot of money.
Secondary reasons include:
Almost everyone with the necessary industry experience in overcoming these challenges is a PayPal pre-IPO alum, and (so far as I can tell) all of them were so scarred by the experience that none of them want to work on a new payments system again, thus depriving any potential new startup of people with operational experience in beating these challenges.
A challenger to PayPal would likely be just an incremental improvement to the service, whereas PayPal itself was a massive improvement in user value delivered over existing methods (i.e. mailing someone a check). This affects how enthusiastically users would embrace a challenger.
PayPal drove a large portion of its early growth on eBay, a closely-knit ecology of people engaging in high volumes of transactions. Now that eBay owns PayPal, it has made it the only supported payments system on the auctions platform, and no other commercial ecologies of comparable size exist for a new entrant to piggyback its growth on.
Therefore, the challenges are now greater: a new entrant would need to start from square one without the benefit of experienced veterans, overcome a more difficult fraud environment than PayPal itself had to, convince users to adopt a product whose market value delta is incremental rather than substantial, it would need to fight against an incumbent market leader, and no comparable “giant” exists on whose back a new entrant could ride to gain market share.
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Wrap-up
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Absolutely loved it. The way full convo is presented and articulated is no less than an art.
love it