Payments = Growth

Many in the mainstream media think Pay is the biggest threat to PayPal’s business. What they don’t see is the exponentially growing startup lying in the weeds.

Over the past few weeks I’ve been watching and reading Y Combinator’s Stanford course CS 183B: How to Start a Startup. It has been great to learn from some of the best YC company founders and mentors so far, such as Sam Altman, Paul Graham, Peter Thiel, Dustin Moskovitz, Adora Cheung, and Alex Schultz.

The class is comprised of two lecture videos a week, readings to prepare you for upcoming lectures, and exercises to help train yourself to come up with and think through startup ideas. So far my best idea is basically a version of Craigslist, with local delivery so you don’t have to meet strangers to trade items. The idea came from less than ideal experiences I’ve had when meeting up interesting characters making transactions on Craigslist.

One of the recent assigned readings was to read PG’s Startup = Growth essay. I had read it before, but it’s always a good idea to re-read any of PG’s awesome essays. Startup = Growth is a great treatise on why startups are different than most businesses because they grow exponentially and thus become much, much more valuable.

In the section titled Deals, he says this about the value of rapidly growing companies:

It’s a good thing eBay bought PayPal, for example, because PayPal is now responsible for 43% of their sales and probably more of their growth.

PayPal is still growing like a weed two years after PG wrote this and eBay has become a smaller player in a crowded e-commerce market. PayPal is likely worth more than half of the value of eBay, the company who bought PayPal in the first place! With percent of sales numbers like that, it’s no surprise to read recent news of a planned split of PayPal and eBay.

It’s no wonder former PayPal founder Elon Musk said this about the split,

It doesn’t make sense that a global payment system is a subsidiary of an auction website — it’s as if Target owned Visa or something.

eBay was once PayPal’s strongest driver of growth, but that’s clearly not the case anymore. If anything eBay is holding PayPal back and the baby startup that eBay took under its wing has grown up to be bigger than its parent company. The board of eBay has come to realize that this incongruence is keeping PayPal from realizing its full potential for growth.

Even after the split, life won’t be easy for PayPal. PayPal’s growth is also threatened by Apple coming into the payments space with Pay and by the startup juggernaut Stripe, the startup that’s lying in the weeds.

Most developers love using Stripe and can’t stand using PayPal. The user experience as a purchaser is much better too. PayPal requires you to jump to a separate PayPal website to complete the transaction before throwing you back over to the original site you came from, while Stripe allows the entire transaction to occur on the same site.

Chart from Startup = Growth showing weekly growth rates vs yearly company growth.

Stripe is one of the most successful and fastest growing YC companies to date, even though Airbnb and Dropbox are probably the most well known. They’re growing at an incredible rate, fully embracing PG’s Startup = Growth framework. As it continues to grow and continues to win-over developers, it will keep chipping away at PayPal.

I think many in the mainstream media are over-indexing on the threat of Pay simply because Apple is another big, publicly traded company and they just announced Pay during their annual iPhone release keynote. While Apple does pose a real threat, the market Stripe is systematically attacking is what powers all e-commerce transactions on the web and mobile, which is PayPal’s bread and butter. Additionally, Pay seems to be mostly focused on in-person payments initially, which PayPal plays a much smaller role in at this point.

In my mind, PayPal is headed down the dangerous path of the Innovator’s Dilemma. While they’re dealing with the complexities of spinning one publicly traded company out of another publicly traded company, Stripe is consistently winning over the developers who are building the future of the internet, partnering with Facebook to power a buy button, and testing and supporting cryptocurrencies.

The whole point of PG’s post is that if startups focus on growing at exponential rates, they can accelerate extremely fast and dominate a market, seemingly coming from nowhere. Stripe is executing growth at a high level with a superior product and positioning themselves well in a huge market.

While the payments business might not be the sexiest, it is clearly still ripe for growth and wide open for disruption. For now, my long bet is on Stripe.