The PayPal Mafia
This is the world’s most powerful mafia that you may have never heard of. Its power doesn’t come from guns or violence or its mountain of wealth, but rather from its ability to improve the world through disruptive technology. This is the story of the PayPal Mafia!
The Mafia was born in 1998 when a savvy 31-year-old hedge fund manager named Peter Thiel and a geeky 23-year-old computer genius named Max Levchin bonded over their itch to start a company. At first, they tried to sell cryptography software to enterprises. No one was interested. Then they tried to sell security software to consumers. Again, no one was interested. In fact, they had five business plan changes during their first year! By the end of 1999, they were running out of cash (the only investor was Peter), and they knew their next move would be their last.
Hanging by a thread, they decided to provide a service for transmitting money over PDAs. This idea suddenly clicked with the Palm-Pilot users, and Nokia Ventures decided to invest $4.5M to extend their lifeline. The story goes that the Nokia investors and Max met at a bar where the investors “beamed” the entire $4.5M to Max’s Palm Pilot. The Nokia investment not only provided Peter and Max with capital, but also the Silicon Valley “street cred” that helped them grab the attention of other investors as well as the press.
The newly earned attention helped them acquire almost 300 new users a day, but as the buzz dwindled so did their growth. Their user base stagnated around 10k, and this idea didn’t catch on with the mass public. In fact, it was voted one of ten worst business ideas of 1999.
Around this time, Peter and Max realized that their website business was growing much faster than their PDA business, which according to Levchin was “inexplicable because the handheld device one was cool and the website was just a demo.” Even more revealing was the fact that most of the website users were from a place called eBay. This observation led them to shift their focus to building their website business through eBay.
To acquire users to their web business, they launched banner ads, but it proved to be too expensive. Then they tried to build partnerships with large banks, but there was too much bureaucracy. Peter describes the turning point in their career:
“The turning point was when Luke Nosek (PayPal’s VP of Marketing) got a meeting with the chairman and top brass at HSBC in London. Several old school bankers crowded into a large wood paneled conference room. They had no idea what to make of these California startup guys talking about the Internet. They looked so dazed and confused that they very well could have been extras who knew nothing about payments and tech at all. The PayPal team reached an important conclusion: BD didn’t work. They needed organic, viral growth. They needed to give people money.”
So they paid people $20 to sign up and then paid them another $20 to refer their friends. Therefore, their average customer acquisition cost was essentially $40. This strategy paid off and resulted in 7% daily growth. In one month, they had 100,000 users.
While this strategy was effective, it was costly and not sustainable in the long run. So Max and his engineers created a bot that would automatically make many tiny purchases on eBay, but forced the transactions to be made through PayPal. This created an illusion among the Power Sellers that PayPal was in high demand among the buyers and thus forced the Power Sellers to sign up for a PayPal account. When the Power Sellers signed up, they were immediately hooked — PayPal was a great solution for their high transaction needs. In less than 4 months, they reached their first million users.
As their operations began to expand, Peter and Max started looking for new recruits. Stay tuned for Part II — Finding new Mafia members.
