This video is sponsored by Storyblocks. PayPal is one of the world’s
largest online payment companies — valued at over $300 billion. Its service is available in more
than 200 countries and has over 400 million consumer and merchant accounts. And it all started with a struggling student
who was ditched by his girlfriend, and thrown out of his own place, before meeting two
strangers who would turn his life around. Before we get into the next part of
the story, we would like to quickly thank our sponsor, Storyblocks. Storyblocks offers unlimited downloads
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or larger organization, their enterprise license has your back with comprehensive
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how we bring our stories to life while saving on time, budget and resources. To check them out, simply
go to storyblocks.com/hook." In 1997, 23-year-old Soviet refugee, Max
Levchin, graduated from the University of Illinois with a bachelor’s degree in computer
science — and a reputation for struggling to build one startup after another. [1997] He and a group of students had tried but
failed to run a banner ad network, SponsorNet New Media, a white-label classifieds for
newspaper sites, NetMomentum Software, an internet app developer, NetMeridian
Software, and an email list service, ListBot. While ListBot was acquired for an
unknown amount by LinkExchange, Max found himself at a low point in his life. Max’s once perfect Ph.D.-track GPA was
damaged, he was thousands of dollars in debt, his credit cards were maxed
out, and his girlfriend dumped him and then kicked him out of their apartment. Unsure of what to do next, Max
drove from Champaign, Illinois, to Palo Alto, California, and crashed
on an apartment floor, belonging to one of his SponserNet New Media co-founders, Scott Banister. [1998] Max didn’t mind the discomfort until
he realized the apartment didn’t have air conditioning, making Palo
Alto’s summer heat unbearable. So Max decided to hang around Stanford
University’s campus and sneak into lectures to sleep at the back since they had AC. When Max’s other SponserNet New Media
co-founder, Luke Nosek, found out, he mentioned that a hedge fund manager who
invested in his online calendar startup, SmartCal, was giving lectures at Stanford,
and that Max should try and meet him since he was investing in more startups. One day, Max was hanging around Stanford’s
campus and noticed a flyer pinned to a board about a lecture by the hedge fund
manager Luke had mentioned: Peter Thiel. Max decided to head in but had no intention
of introducing himself like Luke suggested. He just wanted to find a place to
sleep at the back of the room as usual, assuming that it would be full like
the other lectures he snuck into. Unfortunately, only a handful of
people attended, so it would be too obvious if Max fell asleep. He had no choice but to stay awake
and listen to Peter’s lecture. To Max’s surprise, he found Peter’s
lecture interesting and decided to chat with him when it ended. After 20 minutes, Peter asked Max
what he was doing in Silicon Valley. Max shared he had just arrived two weeks
ago and would probably start a company. Peter was curious to hear his ideas
and suggested they meet for breakfast. The next morning, Max met
Peter at Hobee’s in Palo Alto. Max shared a few startup ideas
that he had been mulling over. Peter listened to each one and then suggested
that he seriously consider pursuing only one of them: encryption software for PalmPilots,
the first popular handheld computer that had just launched the year before, and
allowed users to access their contact list, calendar, notes, email, and the web. Believing that they would one day be used
in the workplace and require security, Peter offered to invest $300,000 but noted that
Max would likely need to raise more money. Max accepted his offer and
began to build a pitch deck. However, he didn’t actually know
how to even pitch his idea, which quickly became obvious to Peter. “You have no idea what
you're doing with this stuff. Why don't I help you while
you build the software?" Peter suggested. Max didn’t hesitate to take Peter up on
his offer, and eventually, the two became partners and called their company, Fieldlink. Soon after, Max and Peter began to recruit
some of the brightest people they knew. Peter brought on one of his hedge
fund employees, Ken Howery, as VP of business development, and
then Luke, who had introduced them indirectly, as VP of operations. Max brought on two University of
Illinois’ classmates, Russel Simmons and Yu Pan, as senior engineers. Only a few months later,
Fieldlink launched — and failed. Peter and Max were told that PalmPilots
would never be used in the workplace and would remain a personal device
given its limited capabilities. Peter and Max then decided to rename their
company, Confinity, and use their technology to allow PalmPilot users to securely
beam money to other PalmPilot owners. They called their product PayPal. At the time, the only way a person could
send money to another person was by writing a cheque, making a trip to the
bank to send it, and then waiting for several days before the check cleared. The need for sending money was
universal so Peter and Max were confident that PayPal would succeed. But after discussions with their new
board members, Scott and Peter’s former classmate, Reid Hoffman, they quickly
realized there was more to consider. Reid pointed out that not everyone
has a PalmPilot — not even in Silicon Valley — and that the web was a
bigger, more accessible platform. Max then suggested allowing people to
send money to others through email. The rest of the team thought it
was a good idea but decided to do both PalmPilot and email payments. Enjoying the video so far? Be sure to subscribe to Hook and ring the
bell to stay up to date with new stories about today’s most successful companies! One year later, PayPal launched and
was made available in two versions: a PalmPilot app and a web version. Both versions used strong encryption and
required users to create an account on PayPal’s site, which involved providing their
email address and linking a credit card. The app version allowed PalmPilot
users to beam money to each other, while the web version allowed users
to email money to other users. Both PalmPilot and web users could then
transfer the received money to their bank account or send it to others. PayPal was free to use since its
business model banked on the hope that over time, users would send money
using funds they preloaded into their accounts — by check or ACH transfer — as
opposed to a linked credit card. nThe funds would then be deposited into a
corporate bank account, which would allow PayPal to make money from the interest earned
until a user requested to use or withdraw it. To create media buzz, Confinity
hosted a PayPal launch party at Buck’s Restaurant in Woodside, California. There, Nokia Ventures used the
app to send a $3 million dollar investment in Confinity to Peter. According to Max, it was one of
the first times in history that money was sent electronically. The Confinity team then ramped up
its marketing efforts by giving every new user $10, and another $10
for each new user they referred. While the promotion encouraged thousands
of people to try PayPal, it nearly burned all of the company’s cash. A couple of months after PayPal’s
launch, the Confinity team discovered a strange phenomenon. PayPal’s email payment service was
being used by people who needed it for a site they had never heard of: eBay. When Max found out, he looked
up the site and was taken aback. “This is like a den of illicit commerce,”
he exclaimed, not realizing it was merely a site to auction any kind of item, including
collectibles, antiques, and furniture. “I need to block them from using PayPal.” After several failed attempts, Peter
asked Max what he was working on. Max told him about the eBay users and
complained, “They're like cockroaches. You try to block them off, and they keep
on coming in through a different entrance." "That’s what’s called a
market pull,” Peter responded. “All these people trying to pay online
don't have anything better to use.” A market pull refers to a market
demanding a particular product. And in eBay’s case, buyers wanted an
easier way to send payments to sellers since they had to mail checks before
receiving their item in the mail. When Max and Peter shared this realization
with Scott and Reid, they all agreed to only focus on PayPal’s email payments since
PalmPilot payments weren’t growing at all. Soon after, the Confinity team
realized PayPal’s pivot came too late. eBay purchased an online credit card
payment service, Billpoint, to integrate into their site and compete with PayPal. And while there was no news of Billpoint
expanding into online payments, a direct rival entered the market: dotBank. Like PayPal, dotBank allowed users
to transfer money through email. However, the company also offered features
that were on PayPal’s to-do list for quite some time: a feature for generating an
electronic invoice to request payment, and another feature to request money from
several people at once, for things like splitting dinner bills with large groups. “Get the dotBank features live on PayPal
before Christmas!” Peter instructed. Even though the holidays were less
than a week away, PayPal’s engineers willingly stepped up to the challenge. They were committed to
PayPal for many reasons. Most personally knew Max, Peter, or the
launch team and some dropped out of college to start working for PayPal immediately. They also believed that PayPal would one
day change the world and were willing to risk everything to make it happen. PayPal placed a high value on
people who were not only talented but had that kind of tenacity. Meanwhile, other tech companies like
Google cared more about people with Ph.D.s. “We wanted kids who had nothing to lose,
who were going to go big or go home every time, and basically think this is their
final training ground,” Max later revealed. “Their next company is
going to be their own.” Two days after the challenge
was set, the Confinity team discovered even more crushing news. X, an online financial services company,
pivoted into email payments and was giving every new user $20 and another
$10 for every user they referred. The company also made it easy for users to
refer others by providing a customized URL. The Confinity team were taken aback. They had once worked in the same
building as X, which was just down the street from its current office. After Confintiy moved out, X
actually took over their old office. It was likely hard for many to
believe that X’s pivot coincided with Confinity’s, but the decision was made
before the two knew about each other. Nearly a year before PayPal pivoted to
email payments, 28-year-old Stanford dropout, Elon Musk, founded X as an
online financial services firm that would offer bank accounts, email payments,
insurance, and investment options. However, soon after launching, Elon
decided to focus on only email payments. The dot-com bubble, a period where investors
raced to invest in online startups thinking they’d certainly become millionaires,
started collapsing after insiders and more informed investors realized many startups
were overvalued and not turning a profit. As a result, Elon was forced to scale back
his ambitions for X and chose to keep email payments since investors and customers
were more interested in that service. Confinity had many reasons to
fear X’s coincidental pivot. The company already had 100,000
users while PayPal only had 10,000. Plus, Elon had already successfully
built and sold a company called Zip2, an online business directory, to Compaq for
over $300 million — marking the largest internet company acquisition of its time. X was also being backed by Sequoia, one
of the top venture capital firms in the world, and managed to convince the former
head of Intuit, Bill Harris, to be its CEO. In spite of the new competition,
Confinity managed to raise $23 million from idealab Capital and Goldman Sachs. The Confinity team then ram ped up its
marketing efforts by creating a tool called AutoLink, which allowed eBay
users to automatically place PayPal referral logos in all their auctions. Only one month later, PayPal’s
total number of users grew from 10,000 users to over 150,000. However, Confinity ended up paying
over $100,000 per day in bonuses to users and was unable to recover from
the losses from its business model. [February 2000] The business model, which aimed to make
money through interest earned from funds that users kept in their PayPal accounts,
backfired due to users withdrawing their funds upon receiving them or using credit
cards to fund their payments — costing Confinity a 2% fee per transaction. Each time a user signed up for and
used PayPal, Confinity lost money. At the same time, X was catching up to
PayPal when it came to being used for eBay. Fearful of what might happen next,
Max and Peter decided to meet with Elon and propose joining forces. Elon agreed. All three of them were well aware that
the market was becoming increasingly competitive and that a third-party would
likely shove both PayPal and X out. X acquired and then merged with Confinity. The joint company went by X but
was later renamed to PayPal. Max remained the CTO while
Peter demoted himself to VP of finance and Bill became the CEO. Only two months later, Elon replaced
Bill as CEO after Bill resigned over doubts about PayPal’s future success. Bill insisted that PayPal would have
to become an online financial services firm, while Elon believed PayPal could
remain an online payment service. After Bill’s departure, a
corporate reorganization became the least of PayPal’s worries. After Bill’s resignation, PayPal
had much more to deal with than a potential PR nightmare. Crooks were opening PayPal accounts with
stolen credit cards, sending themselves or accomplices money, and withdrawing
it as cash — costing PayPal between $5 million to $15 million each month
to reimburse users for their losses. When PayPal tried to stay ahead of
them by flagging large transactions, the fraudsters came up with ways to
create multiple accounts and move small, negligible amounts of money around. Tackling these problems was allegedly delayed
due to Elon focusing on switching PayPal’s operating system from Unix to Microsoft. At the same time, Elon was
trying to raise money and flew to Australia to meet with investors. However, Elon also decided to use
the opportunity to go on a honeymoon with his then-wife, Justine Wilson. PayPal’s management team were taken
aback that Elon would travel during such a stressful time and deemed
him unfit to lead the company. They even went as far as convincing
the board to fire Elon while he was away and make Peter the CEO. However, Elon remained a member of the board. “I could have fought it really hard. But I decided, rather than fight it at
this critical time, it’s best to concede.” As PayPal’s new CEO, Peter focused on growing
profits and expanding to other countries while Max worked on preventing fraud. Despite Max and his team’s best efforts,
they had to pull many all-nighters to hunt down brazen hackers — which they later
discovered were part of the Russian mafia. In one case, they discovered a
hacker who went by the name, Greg Stivenson, created programs to open
hundreds of fake PayPal accounts and move small amounts of money around. When ex-Marine-turned-PayPal investigator,
John Kothanek, shut down several of Greg’s accounts, Greg sent PayPal an email. “You think you got me? Look at this,” Greg wrote, showing
that he was able to quickly open thousands more fake PayPal accounts. Each time Max and his team found
a way to stop Greg, it would take him less time to find a solution. Max and PayPal engineer, David Gausebeck,
then developed a mechanism to identify whether a machine or a person was opening a
PayPal account by presenting wiggly letters that only a person could read and retype. The mechanism was one of the earliest
uses of CAPTCHA, a test developed by Carnegie Mellon University engineers
to identify if an action was made by a human or automated by a computer. While it helped to bring PayPal’s fraud
rates down, the company had already lost even more millions of dollars. Peter and Max decided that it was time to
take the company public in hopes of raising $80 million to keep the company running. One year later, PayPal rolled out
changes to both lower transaction fees and earn more revenue. First, the company authenticated users’
bank accounts by depositing several cents and then asking them to report the exact
amount to activate their PayPal account. Afterward, their bank account
would become the default payment method as opposed to a credit card. Bank account transactions cost
PayPal pennies, while credit card transaction fees continued to cost 2%. Later, the company limited how much users
with personal accounts could receive from credit card payments: $500 every six months. If they received credit card payments
that exceeded the limit, they would have to upgrade their personal
accounts to fee-based business ones. When PayPal announced the news,
they received mixed reactions. “PayPal gave it away free until
they got us hooked and then started charging," one user claimed. “Paying customers are necessary for a service
to stay in business,” another user explained. In spite of the backlash, PayPal
found that many users slowly upgraded their personal accounts to fee-based
business ones within a month. Elon later revealed that he, X’s
original executive team, and Confinity’s original COO, David Sacks, developed
both changes prior to his departure. While PayPal succeeded in fending
off fraud and building a sustainable business model, it continued to face many
challenges leading up to going public — some of which were quite questionable. “All kinds of crazy stuff started
happening,” Max explained. “We would get sued by patent trolls. Every other day, you would find ‘We filed
a lawsuit against you; you're infringing on this patent’ in our fax machine.” Once, PayPal received a lawsuit
for allegedly infringing on a patent for a rotary dial telephone. And eventually, there were so many lawsuits
being faxed into PayPal’s office that Max had to sleep on the office floor by the printer. One morning, he was awakened by a lawyer who
kicked him in the ribs with his boot before informing that PayPal was getting sued again. Soon after, PayPal’s underwriter’s
counsel told Max they couldn’t take the company public, for reasons
that didn’t make any sense to him. Peter and Max were convinced that
competitors were conspiring to keep PayPal from going public but decided
to forge ahead with their plans. When PayPal finally went public,
it was marked as one of the most successful offerings from
a tech company in nearly a year. And soon after, 75% of eBay auctions
were accepting payments by PayPal, while only 27% were accepting eBay’s
own payment service, Billpoint. Even worse for Billpoint, it was losing $10
million to $15 million per year, largely due to losing customers from being difficult
to use and having high transaction fees. Realizing it was hopeless to compete,
eBay decided to end the war with PayPal and offered to buy them out. PayPal rejected their
offer but eBay kept trying. Eventually, Peter and Max decided to
accept their offer for $1.5 billion after realizing how run down their
employees were from working seven days a week, four years straight. "The team was very tired. Probably the right call, but On the emotional front, it was very difficult. On the business front, it was probably the right thing." Immediately after the sale, it was
clear to Max and Peter that eBay wanted to make PayPal their own — prompting
them to leave just weeks later. And while it was a devastating time for
many, Max, Peter, Elon, and several former PayPal employees moved on to start and fund
other companies, including Slide, Palantir, Tesla, SpaceX, YouTube, Airbnb, Uber,
Lyft, Yelp, LinkedIn, Eventbrite, and more. These companies became so successful that
the former PayPal employees behind them are now known as being part of the PayPal mafia:
the richest group of men in Silicon Valley. As for the company PayPal, it’s now one
of the world’s largest online payment services that brings in billions in revenue. It continues to offer personal and
business accounts, processes over 35,000 transactions per minute, and
can be used in more than 200 countries. “The success didn’t come too
easily,” Peter often reminds others. “People learned not to be too
pessimistic and they learned that you have to do a lot of things right.” This is the story of how three
strangers-turned-allies made it easier for people to send and receive money
online and built a billion-dollar company.
