The PayPal Wars - Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth is the exciting true tale of a startup that went from a blue-sky idea to a public valuation of over $1 billion in under three years. Written by the marketing manager for PayPal during its startup days, Eric Jackson, it is a consuming, fast read.
Jackson was a disillusioned staff consultant at Arthur Andersen who jumped ship to gain nonexistent stock options. He met PayPal’s CEO Peter Thiel at Stanford while earning an economics degree. Thiel had transformed a student newspaper, the “Stanford Review,” into a campus institution. He and a “Review” cohort wrote The Diversity Myth, a book that criticizes changes in Stanford’s curriculum. Eric had helped with some research for the book.
Thiel, an attorney who is today a venture capitalist, worked for a Wall St. law firm and Credit Suisse in Boston before returning to the San Francisco area in 1998 to set up his own hedge fund. After delivering a guest lecture at Stanford on the link between market globalization and political freedom, he was approached by Max Levchin, a young man whose prospects for opportunity and education had suffered until his family emigrated from the USSR to the US in 1991. During his brief time in the USA he had already developed automated marketing tools and sold them to Microsoft.
Peter, 32 years old, and Max, in his 20s, were idealists who wanted PayPal to become a way for ordinary people in the developing economies of the world to control their own money, depriving corrupt governments from stealing wealth from their people through currency devaluations and inflation. PayPal users could switch to dollars or Yen, dumping their local currency before it became worthless.
There would be a long yet brief journey to ramp up the offering.
A “digital wallet”
PayPal was the creature of Confinity, a startup that merged “confidence” and “infinity” to describe a company that would change the way all global citizens paid for– everything– and got paid. “In the 21st century, people need a form of money that’s more convenient and secure, something that can be accessed from anywhere with a PDA or an Internet connection,” stated Peter.
He also maintained that creating a successful payments service could only happen if something called a “network effect” was achieved. “An interactive, inter-connected system… could only exist if it conferred value on the people who voluntarily chose to join it. The more people participating in it, the more beneficial the network would become since all members could interact together. Hence a large, established network is very valuable to enter and very costly to leave… it locks in its members and prevents would-be competitors from getting off the ground.” Jackson notes on page 30. “A good example of a network is telephones. The benefits of having one increased exponentially as the number of people and companies that could be reached using it also grew. Similarly, the advantage of participating in a payments service increases as the number of other users goes up. Robert Metcalf, the inventor of Ethernet claimed that the value of a network equals the square of its users, or a network with twice as many users as a competitor is four times as valuable.”
Scaling up quickly was key. Jackson was given the task of spending $1M in short order to get more customers! Based on a hunch, he targeted eBay’s auction users. Referral bonuses were part of the plan as well. Soon, eBay auctioneers began to put PayPal logos on their sites to advertise this easy way to pay. They were advertising PayPal! A symbiotic relationship had been accomplished, but eBay’s owners were not in tow.
The network effect was at work, venture capital was flowing, and competitors were massing. Standing up to the assaults was accomplished in various ways. The new economy emphasis on shared goals, clear priorities and encouragement from management for the staff to suggest new ideas was a way of life. As well, new products and the immense talent of the software writers outpaced the competitors.
From mid-1999, PayPal went from several talented employees, a few board members, and $3M in venture funding to:
- Loads of employees, including 500+ at a call center in Omaha
- MANY, many millions in financing; the burn rate was $10M a month in mid 2000
- A focus on payments between friends to targeting online auction transactions by latching onto eBay’s online community.
Trench warfare
Combatting competitors from all quarters including an eBay acquisition, “Billpoint,” threw PayPal into trench warfare. Dealing with fraud was a major problem with one mafia costing the company $5.7M over a four month period in mid-2000. However, buying and selling patterns were noted and the Feds busted organized crime rings in Chicago, Houston and Nigeria, thanks to PayPal’s help.
PayPal decreased its dependency on eBay by linking with the gaming industry, merged with its major competitor, x.com, closed a finance round of $100M, and developed a working business model in short order.
THEN, regulators and other attackers such as attorneys for class action suits and even the American Banking Association nearly derailed the IPO, but fate smiled on the backers and PayPal became the first public offering after “9/11,” opening at $13 a share on February 15, 2002, and closing at $20.09, a 55% one-day increase.
The entire story is an unbelievable series of leaps from one stepping stone to the next as each morphed into an alligator until PayPal succeeded, only to be bought by eBay.
Jackson feels that PayPal could have developed further and perhaps realized its ultimate dream had there not been so many challengers––not the expected competitors, but the unexpected hits from so many major players. He is now CEO of World Ahead Media– the stock options paid off!
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