The Story of PayPal

Bharath Kumar J
May 21, 2017 · 4 min read

[Preamble] PayPal was founded by Max Levchin, Peter Thiel, Luke Nosek and Ken Howrey in 1998 and it was established as Confinity ( a combination of confidence and infinity), a money transfer service. The company operates as a payment processor for online vendors, auction site and other commercial users, for which it charges a fee.

[Genesis of PayPal] Max Levchin, a Ukrainian-born computer scientist from Chicago, had launched three start-ups including NetMeridian which he sold to Microsoft for $100,000 just prior to his graduation. While waiting for the deal to close, he was practically broke and had journeyed halfway across the country to silicon valley and crashed at a friend’s place, wondering what to do with the rest of his life. During this period, he attended a lecture at Stanford University by Peter Thiel , an American businessman, philanthropist, political activist and an author and was by all accounts a genius. Levchin proposed a company to Thiel that would create a library to encrypt schemes which they could license. Thiel found the idea intriguing and promised that his hedge fund would invest a couple of hundred thousand dollars as seed money. They named their fledgling enterprise as Field link. After starting work on the crypto library, he learned there was no intrinsic demand for this level security. That’s when Thiel suggested the idea of storing money. This sent Levchin on a mission to create cryptographically secure IOU ( “I owe you”, an informal document acknowledging debt) notes that could be beamed from user to user via Palms built-in infrared ports (Palm is the trade name for a popular personal digital assistant (PDA), a form of handheld device that is also known as a palmtop computer). They named their new venture as Confinity. Later when Levchin remarked that a user wouldn’t necessary need a palm. Since he could sync the software with Email and the Web, so with or without a palm the user could transfer money. They named this product as PayPal.

[Viral Spread] Luke Nosek came up with the idea of a financial inducement to juice PayPal virality. Each sign-up would receive a $10 deposit in their PayPal account and a bounty of $10 for every new user they referred. The sellers of eBay, an online auction and shopping website needed a better way to complete the transaction online. This referral conception made the sellers in eBay embed PayPal advertisement for payment service, which they linked to PayPal homepage. This tailed the growth of PayPal.

[Ingress of Elon Musk] PayPal wasn’t alone chasing this online gold. Competitors like Dotbank, PayMe and X.com touted similar service. X.com , headed by Elon Musk , broke the bank by gifting $20 per new user, often copying services and strategies of PayPal. PayPal raced headlong and X.com followed. Negative cash flow reached epic proposition for both PayPal and X.com. Thiel believed that, one to win would be the first to file for an IPO(Initial Public Offering). PayPal and X.com merged in March 2000, with Bill Harris leading the combined company, Musk becoming the chairman and Thiel was the chief financial officer. The two companies clashed, with X.com button-down culture running headlong into PayPals freewheeling environment. There was a heated argument between Thiel and Harris, eventually leading Thiel to quit the company. The combined company continued to bleed red, Musk arranged an emergency board meeting to replace Harris as CEO. Musk was named the new CEO and Thiel returned as chairman, with the board commanding the new management team to solve its cash flow problems. It’s didn’t just end there. Musk took steps to phase out the PayPal brand in favour of X.com, company surveys showed that the public had little appetite for X.com, since it reminiscent of the porn industry. Levchin gathered his former executive team together and led a PayPal revolt and took up a petition to the board to remove Musk or they would quit. The coup was successful, with board removing Musk as CEO — “That’s the problem with vacations” he later remarked appointing Thiel as interim CEO. Musk, later went on to bring forth Tesla Motors and SpaceX.

[PayPal IPO] When PayPal was on its way to 200 million user accounts worldwide, Thiel and Hoffman agreed it was time to seek a buyer, they set the minimum price at $600 million, and approached Google and Yahoo, they both denied claiming that PayPal reliance’s on eBay. Then Thiel and Hoffman agreed it was time to prepare for an IPO. After announcement became public, eBay approached PayPal with a deal of $400 million quoting that “ We are going to make this offer once and then crush you, you should really take this offer”, but Hoffman stood past $1 billion. After several weeks eBay claimed $850 million was its final offer. But PayPal proceeded with IPO and the market valued PayPal at $1.2 billion. After some hemming and hawing, eBay agreed to $1.5 billion and PayPal was sold to eBay in 2002. Thiel, Levchin and Hoffman, who collectively took in more than $100 million, walked away from the company they had started. Thiel then founded his own hedge fund, Clarium Capital Management LLC, invested $750,000 in Facebook and joined the board. Levchin created Slide, a widget maker that counts hundreds of millions of installs of its photo slideshows. Hoffman went on to Cofound LinkedIn.

As per PayPal reports the revenue in 2016 is $10.84 billion with 197 million active customers accounts, 6.4 billion payment transactions and its worth nearly $50 billion.