Paypal
Max Levchin co-founded PayPal in late 1998. It was acquired by eBay for $1.5B in 2002, only six months after going public in February.
At PayPal Max was a member of the board of directors and chief technology officer, responsible for the areas of technology development, network and information security, and the fight with transaction fraud and identity theft. Prior to PayPal, Max cofounded and ran NetMeridian Software and SponsorNet New Media, which built some of the early Internet marketing services and tools.
Since leaving PayPal late last year on the fourth anniversary of its founding, Max has been contemplating his next startups and re-acquainting himself with the world he has ignored for the last four years.
Max graduated from University of Illinois in Urbana-Champaign in 1997 with a degree in Computer Science, specializing in computer security and music. Sometime earlier, he was born in Kiev, Ukraine, when it was still part of the Soviet Union, and moved to Chicago in 1991. His interests include cryptography, math, music, modern art, online crime, and meeting smart people.
Related Links: www.paypal.com
Last Updated: Thu, Apr 20, 2006
Peter's advice to eBay for the future of Paypal is to keep scaling the business. At the beginning, it made sense to integrate Paypal's product closely with eBay, but now they are starting to develop applications outside of eBay and these should be vigorously promoted.
Though Paypal launched the Palm model and the internet model at roughly the same time with roughly the same number of customers, the internet model took off while the Palm side remained stagnant. Consequently, Paypal shifted its company focus toward the internet model.
The founders of Paypal are often asked if they are a bank. They are not a bank because they are not involved in fractional lending, nor are they backed by the Federal Reserve. Peter likens Paypal to a money market fund.
There is no set formula to make viral marketing successful. Rather, it depends on the situation. It worked with Paypal because customers were able to transfer money to non-customers, therefore growing the network quickly.
The world is headed in the direction of a global, inter-connected economy in which enormous amounts of money are transferred around the world. Currently, there are outrageous margins on currency exchanges so there is an opportunity in offering transfers at respectable margins.
Entrepreneurs generally describe themselves as either unlucky or brilliant, depending on whether or not they were successful. Since the company can never be founded again, Peter Thiel says it is hard to know whether they were in fact brilliant or merely lucky with Paypal. He does say that they were at the right place at the right time, but undoubtedly did many right things along the process as well.
The early merger with the competitor created a unified front that helped convince people that there was a large market with real growth. Though there is no way to tell, it is likely that both companies would have run out of money had they not merged.
Max met Peter at a free lecture on the currency market held in Terman. The lecture only had six attendees and Max approached Peter afterwards to tell him he was going to start a company. Peter had lots of friends that had been involved in startups, most of which had blown up catastrophically. Still, they were eager to try it themselves. Peter had experience in finance and Max had experience in crypto, and after a great deal of brainstorming, they decided to do something with encrypted money.
The negotiations with eBay were difficult because eBay did not originally recognize Paypal as an essential part of their business model. After a year-and-a-half long negotiation (and a few marketing ploys by Paypal), eBay recognized the Paypal's value and the two companies were able to agree upon the deal terms and valuation figures.
In the beginning, the company had three points of focus: recruiting people, selling investors, and selling the products to customers. Selling the company to investors was initially the most difficult of the three and Peter discusses how difficult it was to secure funding.
The concept of digital cash had been around long before Paypal. Paypal was unique in that it was successfully able to create a compromise between security, privacy and convenience that was acceptable to the customer.
The founders built the initial team of six by recruiting people they knew and trusted. Though it some took convincing, they got the other members to give up whatever they were doing and move out to California.
Technology companies face four major development hurdles along the path to success: basic concept, the product, getting it to customers, and making money. Focusing on the last, the two prevalent business models for making money in the high tech market are advertising or partnering. After thorough analysis comparing the costs of different advertising strategies, the Paypal founders decided that, however unintuitive, giving each customer $10 for opening a new account was the cheapest method to obtain customers.
PayPal Co-Founders Peter Thiel and Max Levchin discuss the connections between growth and burn rate during their company's early days. The co-founders also describe why this was a frantic and stressful period for the organization.
The founders soon realized that a major part of the high burn rate was due to fraud. They admit to being very naïve about fraud when they started the company. They had to either find a way to beat fraud or the fraudsters would beat them. They were able to successfully stay ahead of the fraudsters and reduce the fraud rate dramatically.
Paypal was the first company to file for IPO status after 9/11 and consequently faced much-stricter-than-normal scrutiny. Additionally, the night before a deadline the founders found out that they were being sued for patent infringement. After a sleepless night and rushed meeting with a lawyer, the suit was dropped. The process was so rushed and stressful that it remains just a blur in the memories of the founders.
To mark the first major funding round, the Paypal founders staged the famous Beaming at Bucks, where the Paypal money encryption technology was used to send the funding money from one PalmPilot to another across the room in a publicity demonstration. There was a mad rush before the demonstration to get the technology working and there was consideration of faking the event, but they decided to stick to the plan and miraculously pulled off the money transfer successfully.