The Chronicles of PayPal Mafia

We have many payment app or digital wallets like PhonePe, PayTM, Google Pay and so on....

But do you know that the idea of a digital wallets erupted even before Apple released the first Iphone in 2007.

THE START

This story begins with a device termed as 'Palm Pilots'. A Palm Pilot was a specific kind of device called personal digital assisitant or PDA.

Before the mobile phone era PDAs were cutting edge hand held PCs with the ability to connect to the internet. They were launched in 1996 and started gaining popularity in 1997 and 1998. Palm Pilots were termed as the new revolution back in the day. 

That is not we are gonna cover in this blog. So just remember that it was a device, sort of a mini computer. 

It was in the year 1998 when two young minds Peter Thiel and Max Levchin decided to develop technology to allow person-to-person payments via the use of PDAs like Palm Pilots.

Back in those days sending money to someone was somewhat inconvenient compared to today. People were limited to cash or writing cheque only. If one had to send money to a far off place, it had to be through the mail. Over the years credit and debit card infrastructure expanded but was only limited to big merchants.

So, Thiel and Levchin got this idea of creating a system through which people could transfer money among one another, essentially creating the first model of digital wallet.

Lets first look into who were Peter Thiel and Max Levchin.

Thiel graduated from Stanford and was a former derivatives trader. He worked as a lawyer in New York before he decided to moved back to San Fransisco and open a hedge fund. Upon his return Thiel delivered a guest lecture at his alma mater Stanford and that's where he met Max Levchin.

Levchin migrated from Soviet Union to Chicago when he was 16 in 1991. He pursued computer science in the University of Illinois, after which he founded an automated marketing software company called 'NETMERIDIAN'. He ended up selling the company to Microsoft.

PUTTING IDEA INTO ACTION

A few weeks after they met at Stanford, Thiel and Levchin came up with the Palm Pilot person-to-person payment idea, which led to the foundation of a company named 'FIELDLINK' which was changed to 'CONFINITY'.

At the same time, another entrepreneur in the name of Elon Musk had a similar plan. His approach though was a little different. His vision was to create an entire online bank.

ELON MUSK'S HISTORY

Musk was a South African child prodigy. He taught himself how to program computers when he was around the age of 10 to 12. In fact, he developed a video game named 'Blastar' at the age of 12 and he sold the code to that game for around $500 back then.

By February 1999, at the age of 27 he sold his first start up called 'Zip2' to CompaQ for $307 million and he received $22 million from that deal. 

BACK TO THE  MAIN STORY

A month later he and his friend-cum-business partner Greg Curry founded 'X.com', the first online bank. Another person who decided to contribute in Musk's new start up was Harris Fricker who had a lot of experience working in the banking sector.

Things were never good between the two as there were conflicts between two and both had different approaches and ideologies to run the company. Harris Fricker also tried taking over the control of the company from Musk by mischief. But as we all know, Musk is pretty smart. So Fricker could never have the better of him and he left the company taking with him most of the top engineers of X.com.

After Fricker's exit Musk started hiring aggressively to fill the void of technicians. The X.com engineers worked tirelessly for the next three months and the bank went online a day before 'Thanks giving'. It is famously known that before the launch date Musk worked 40 hours straight because he did not want any last moment hiccups. I wish we could have such dedication!

X.COM'S STRATEGY TO HAVE AN INSTANT IMPACT

X.com was can actual licensed bank. It had a partnership with 'Barclays', the multinational investment bank. To get started X.com gave people $20 just for enrolling and an additional $10 for referrals. So, X.com was providing all banking facilities and on top of that person-to-person payment system which was more than what rival 'Confinity' was aiming to provide. In just the first month of its launch, X.com had made around 2,00,000 customers.

Back at Confinity, employees were working hard to make their person-to-person payment service. They were initially targeting to make it suitable for Palm Pilot but then created an complete online web service and named it PayPal. Using the service people could transfer money irresepective of them having Palm Pilot or not. The service was free and just like X.com, Confinity also decided to incentivise customers with $10 on signing up and $10 for referring to another person.

Somewhere around early 2000, Thiel got to know about X.com entering the payment services segment. Of course, this made him upset because now they had a competitor to deal with. Though services offered by Confinity were less compared to X.com, they remained a punch above among the user base due to their marketing efforts. PayPal, Confinity's payment service was the more opted for service for transactions on the famous platform E-Bay.

E-Bay at this point of time were already 5 years into their business and were growing tremendously. By the year 2000, E-Bay had nearly 10 million users, a huge jump from the 2 million user base a year before.

With an aim to attract the huge traffic on E-Bay, both Cofinity and X.com started focusing their marketing strategies on E-Bay users. 

But still this query might crop up into your mind, why was E-Bay considered the best place in order to grow their respective businesses?

Let's find out!

At that time the credit cards and debit cards had started but only big merchants could avail the facility of receiving money from credit and debit cards. Most E-Bay sellers did not sell enough items to be in that bracket of merchants and thus, could not avail the license. They were just regular people selling some stuff here and there. In place of cash or cheque they could accept money orders which would add another week to the waiting period before the seller can receive the money and buyer can receive the item bought.

E-BAY'S ENTRY

The battle became even more intense as E-Bay, seeing the huge surge in online payment system entered the game and acquired a credit card processing company called 'Bill Point' to establish their own person-to-person payment service. 

It was coming I guess. After all its their own land on which the battle is taking place.

Now the situation is pretty clear there are two companies trying to capture the market on the E-Bay platform and E-Bay's entry is looming on the horizon with its own product. Till this time Confinity had a larger following on E-Bay but now they were running out of money. They were spending around $100,000 per day on rewards for customers, while X.com was not as popular but they had significant amount of cash available. Finally, E-Bay entered the market with its acquired Bill Point. To tackle them on March 2000, a sensible business decision was made and Confinity and X.com decided to merge into one company under the name of 'X.com'.

The new executive team of X.com stood as:

Peter Thiel - Senior Vice President of Finance

Max Levchin - Chief Technical Officer

Bill Harris - CEO

Elon Musk - Chairman (and also the largest shareholder of the company)

Bill Harris was newly brought in with an expectation to provide the leadership qualities that the company needed. He was already a big name in the tech industry by that time.

The company was continued in the the name of X.com, but they decided to retain the brand name of the service, PayPal. Another sensible step as there were more PayPal users in the market meaning users had a trust connection with the brand now. It was important for X.com to keep a grip of that customer trust.

But they were not in a fairy land so soon they had to deal with lot of conflicts. Thiel opposed many of the ideas and tactics of the CEO Mr. Harris. To nail his point, after managing to get the company to some stability financially, Thiel resigned from his post. Many other executives also started complaining about Harris's management of the company.

Determined to take control from there on, Musk decided to hold a board meeting in which Harris was ousted. The board members put faith in Musk and thus, assigned him as the new CEO of the company. In turn, Elon Musk gave his previous post of chairman to Peter Thiel.

E-Bay was also now establishing itself as a formidable rival to X.com. They started making their own moves by partnering with the bank Wells Fargo by giving them 35% of Bill Point in exchange for their payment credibility and expertise.

E-Bay started using some malicious tactics against PayPal:

• They made it easy for sellers on E-Bay to add Bill Point logo on the auction pages and harder for the sellers to add their competitor's logo.
• Another rule was created that reduced the image size of third party payment logos. EBay, while taking out this rule would have probably thought, less visibility would lead people to opt for the more visible Bill Point logo.

But, but, but......despite E-Bay's best efforts, X.com's PayPal continued to grow. Though they were amid a difficult period. The company was losing a lot of money. By June, 2000 they had an unsustainable burn rate of $10 million per month.

With growing user base, X.com had to upgrade its website. The initial website made by Levchin and Confinity engineers could host only up to 2 million users but now the mark had been crossed. For the upgrade, Musk and X.com engineers decided to build the website on Microsoft Windows NT platform. This did not go down well with Levchin and his men as they had previously used Oracle platform and preferred that.

Another issue that PayPal had to face was the threat of tech savy criminals, who used to gain cash from stolen credit card details. According to the terms and conditions, victims could hold the merchant liable for their loss. This led PayPal to lose around $5.4 million dollars in a period of 4 months.

Then came the time when Musk decided to phase out PayPal's name and replace it with X.com. Many employees and staff were upset with this decision. Soon he gave the instructions to do so and left for a vacation to attend Sydney Olympics. Behind his back employees refused to change the branding and instead threatened to resign if Elon Musk was not removed from his position. A board meeting was called and Elon was no more the CEO of the company. All this took place when he was enjoying his vacation! Musk tried to speak to the board members but the decision was not reversed. 

Impressively, Musk did not even care too much about his control on the company and was rather concerned about its performance and growth. He decided to continue as the largest shareholder of the company after successful discussion with the other two top officials Max Levchin and Peter Thiel.

In the following years PayPal had to face many difficulties which they overcame and transformed from a money losing company to a highly profitable one. In June, 2001 the company changed its name to PayPal completely and raised around $63 million from the proceedings of a successful IPO. By that time 70% of auctions on E-Bay were accepting PayPal and 1/4th of the transactions were taking place through their platform.

Since E-bay could no longer compete, they followed the rule which is followed quite a lot in today's industry: "When you cannot compete, aquire." They offered to acquire PayPal at a price of $1.5 billion, which Musk and the board could not refuse. 

This deal was the launchpad that led to the rise of 6 billionaires in today's times and creation of many revolutionary companies.

PRESENT DAY

Elon Musk being the largest shareholder of the company (11.7%) received the most amount of money out of that deal getting around $170-175 million after taxes. Today, he is worth $70.5 billion surpassing Warren Buffett as of July 10. He is associated with a number of companies such as Tesla, SpaceX and the Boring Company. A few years ago, he founded Neuralink.

Peter Thiel received $55 million from the deal which he used to open a hedge fund by the name of Clarium Capital. He was also one of the first angel investors in today's social media giant Facebook. Another company Thiel has founded is Palantir Technology which specialises in Big Data and Data Analytics.

Reid Hoffman was the Executive Vice President at the time when E-Bay purchased the company. After leaving PayPal, Hoffman went on to co-found LinkedIn a networking, site we are all aware of.

Luke Nosek was the Vice President of Marketing and Strategy at PayPal. He and Peter Thiel opened a venture capital firm, The Founders' Fund. Apparently, he is also the first institutional investor in Musk's SpaceX.

There is Ken Howry who was PayPal's Chief Financial Officer (CFO). He co-founded Founders' Fund with Nosek and Thiel.

Jeremy Stoppelman, Vice President of engineering at PayPal. He went on to create a popular review site 'Yelp!' with his PayPal colleagues Russell Simmons and Max Levchin.

These are the six billionaires who after PayPal went on to create some amazing companies famous worldwide today.

And let's come on to one of the most underrated and underappreciated fact.

These three former employees of PayPal, Jawed Karim, Chad Hurley and Steve Chen are the people who got together to build a video sharing site, famously known as 'YOUTUBE'!! 

What? Seriously.... YOUTUBE, the world's second most popular site after Google. 

I jumped out of my couch on reading this and fell. Oops.

Now take a deep breath, and visualise as you read this. How incredible is this story that nobody talks about. This is where so many wonderful entrepreneurial journeys started and are standing tall today.

Next time whenever you see live or read a news about flight of a SpaceX rocket, see a Tesla on the road (not in India currently) so in pictures, sign into your LinkedIn account, read a review of a nearby restaurant on Yelp!, or watch another YouTube video, remember that they all originated from this incredible journey of the people from the PayPal gang and appreciate it.

Written by: Aastik Pasricha