Revolutionizing Online Payments: The Story of PayPal
PayPal is one of the largest online payment systems in the world today. Their story can be described with two words, the same ones they used to fashion their first name: confidence and eternity.
Throughout their history, PayPal has experienced more than a fair share of challenges and problems. From crashing at a friend’s place, not knowing what to do or where to start, to becoming an absolute winner of the online banking market.
Let's see what the company's been through since they took off under the name Confinity.
From Security to Money Storing Software
It's 1998, and grad student Max Levchin just spent his last dime to get to Silicon Valley from Chicago. He was there to sell his three startups, which were all he had. Microsoft was willing to purchase them for $100,000. It wasn’t much, but it was something.
Crashing at a friend’s place, with no money or a clear career path, the only thing going through Max’s mind was: 'what am I going to do with my life?!'
While waiting for the deal with Microsoft to close, he visited some Stanford University lectures. That brought him to a successful American businessman, political activist, and philanthropist Peter Thiel, and after hearing some of his lectures, he thought Thiel was a genius and decided to approach him with a business offer: creating a library for licensed scheme encryptions.
Peter loved it: it was a fresh and original idea, so he promised him some funding for the project. They named it Field link.
It took a few weeks before they realized that Field link had no potential on the market, but instead of dropping the idea and the business they started, Peter suggested changing the course: they would build a company for storing money!
That’s how Confinity came into existence: Max started working on a cryptographically secure project, but discovered it was unnecessary, and pivoted into a website with the same level of security, with software synced to email and the Web, where users would still be able to transfer money. That product was then renamed PayPal. Sounds catchy, right?
Expanding the Team and Getting First Customers
As they were developing PayPal, Peter and Max realized they needed some backup on the team. That’s where Luke Nosek, Max’s friend from college and previous startup co-founder, enters the story. He showed up with an amazing idea: financial inducement to boost PayPal’s virality.
What did this mean?
Each sign-up and each referral would get a $10 deposit on their account!
This plan was perfect for their first targeted niche: eBay sellers. Although at first they were trying to avoid eBay, it turned out to be the best option simply because it was an enormous market of sellers who were desperate for an improvement in the way transactions were handled. Some of them promptly agreed to embed PayPal ads to their online stores, linked to PayPal’s homepage. With their first customers ready, the first version of PayPal was up and running in 1999!
Symbolically, PayPal’s launch happened at the end of an era - the 20th century, the end of the second millennium, and the end of the dotcom era.
As we all know, what awaited behind the Y2K door was a whole new tech-driven way of life. And PayPal was one of the businesses that would pioneer this big leap!
However, they weren’t the only ones trying to expand in the online banking market. The competition was stiff, with Elon Musk’s X.com taking the lead. The team at X.com carefully observed everything PayPal did, and to outdo them, they even copied some of their strategies: gifting $20 to each new user.
As the competition was getting more and more fierce, Peter believed that the first company to file for an IPO would be the winner.
But, before they even had a chance to find out, the two companies joined forces: Confinity merged with X.com, Elon Musk became chairman, and Peter was appointed CFO.
Elon was convinced about the profitability of this step, although his then-CEO Bill Harris wasn’t, and opposed the merger. After a series of disputes, Peter decided to leave the company, which led to an emergency board meeting where Elon decided to replace Bill as CEO, and kicked him out of the company. Elon then renamed himself as CEO, and Peter returned as chairman. They completely dropped everything X.com was working on, and focused solely on PayPal.
However, the clash inside the merged company didn’t stop. Elon tried to phase out PayPal in favor of X.com, yet the company surveys clearly indicated that the public wasn’t interested in X.com.
Why? Their name was being too easily associated with the adult industry!
That’s where Max jumped in. He staged a coup against Elon Musk, which resulted in his removal from the executive team, and Peter becoming the next CEO.
During 2000, PayPal’s user base crossed the golden 1 million. This empowered them to rename Confinity to PayPal, and in 2002, the company went public under the PYPL code, at $13 a share.
That same year, Peter figured out that the company and the number of users was growing exponentially, and that it was time to find a buyer.
They pitched to Google and Yahoo! and set the minimum price at $600 million. However, both companies agreed that PayPal should make a deal with eBay, as that was its primary market. The founders weren’t very happy with this option, so they decided to go for an FPO.
After making a public announcement, eBay approached them with a threatening message that read something like this:
We are going to make this offer once and then crush you, you should really take this offer.
But they didn’t take it, standing firmly at $1 billion. Later on, the market valued PayPal at $1.5 billion: the prize eBay was forced to hand out when they bought the company in October 2002.
At this point, Luke left PayPal to travel the world and become an angel investor, and Reid Hoffman succeeded him. Luke started the Founders Fund in 2005, a venture capital firm that invests in various industry sectors, and in 2015 he created another venture capital firm - Gigafund, focused on investing in tech-development and space exploration. He reconnected with Elon and invested into his SpaceX project, where he is now a board member.
From the moment it was purchased, PayPal became eBay’s default payment method. It competed with eBay’s own subsidiary Billpoint, as well as with Citibank, c2it, Yahoo’s Pay Direct, and Google Checkout.
In 2005, PayPal was available in 55 markets worldwide. Over the next couple of years, they acquired several other companies like VeriSign, Bill Me Later, and FraudScience, and they announced a partnership with MasterCard which allowed them to roll out the PayPal Secure Card service: a solution for PayPal payments on websites that don’t even support it!
In 2008, while present at 190 marketplaces, they released an option for mobile payments for iOS devices. It was revolutionary, as a large number of users immediately switched to m-commerce!
In the meantime, PayPal’s founders abandoned the company. Max, Peter, and Reid, who each took $100 million from eBay’s purchase of the company, walked out and built careers elsewhere. Peter created his own fund, Clarium Capital Management LLC, and joined the Facebook board after investing $750,000. Meanwhile, Max created the photo slideshows tool Slide, and Reid co-founded LinkedIn.
Although its founders had abandoned it, PayPal never stopped growing. The idea of an easy-to-use and safe internet payment system simply doesn’t get old. In 2010, it had more than 100 million users in 190 countries, and operated in more than 25 currencies.
In 2011, the company started to move its business offline, so their customers could make payments through PayPal in physical shops. That’s why in 2012 they became partners with Discover Card, allowing their users to make PayPal payments in more than 7 million shops from the Discover Card network.
Over the next few years, they acquired a whole bunch of new companies, including the Palo Alto user engagement software and the Braintree payment gateway, trying to do everything it took to meet their users’ needs and ever-louder demands.
But who conducted all this?
The leadership mess was a caveat that followed PayPal from day one. Many people had a go at leading PayPal, including Scott Thompson, David Marcus, and Daniel Schulman, with the latter being the current CEO.
These people are not just anybody in the business industry. Before becoming PayPal’s CEO, Scott held the same position at ShopRunner. David was a successful businessman before PayPal, but he left to become the VP Messenger at Facebook, and to co-create Libra - the Facebook-supported cryptocurrency. Daniel used to be CEO at Virgin Mobile and Executive VP of American Express before he was named CEO at PayPal, keeping that position ever since.
Just like other successful companies, PayPal has had its fair share of controversies. In December 2010, it refused to continue processing WikiLeaks donations. As a reaction, it got attacked by Anonymous hacktivists, who disrupted all of PayPal’s operations by denying services to its users.
After two years of persecution and trials, 13 out of 14 hacktivists pleaded guilty.
Although this attack strained PayPal’s public image, it didn’t cause any major disruptions. People kept their trust in the company, and in 2012, PayPal processed more than $145 billion, with revenue amounting up to $137 billion only in the third quarter of the year!
In 2015, PayPal’s success was so great, that eBay spun it off into a separate publicly listed company. Since then, Daniel Schulman has held the role of PayPal’s CEO, and it looks like he’s there to stay.
PayPal rose to each occasion and stood the test of time, although they faced their fair share of challenges:
- Developing the first successful internet banking product
- Merging with other companies
- Constant turmoil at executive level
- Hacker attacks
- Re-succeeding as an independent company
More than 20 years after founding, they’re still on top of the online banking market food chain, with annual revenues crossing $17 billion.
Unlike many other startups that depend on venture capitalists, PayPal has its venture capital arm, called PayPal Ventures. They are the investors. Their success is not just about having the right idea and being persistent, but also about the timing, the perfect people, and most importantly, the right knowledge!