Posts Tagged ‘PayPal’

The book Founders at Work by Jessica Livingston provides an educational, behind-the-scenes look at companies that began life as start-ups and exploded into huge companies.  She interviews the founders of Hotmail, Apple, Yahoo, Trip Advisor, Firefox, and Adobe Systems, among many others, and lets them tell their stories: how they got started, the mistakes and smart decisions they made, what they wished they’d known, etc. 

In her introduction to the book, Jessica says all of the founders she interviewed shared one quality: perseverance.  That’s a trait most small business owners share, too. And because I like to learn from others (even while making plenty of mistakes on my own), I thought sharing insights from select founders each month on this blog might be fun.  So here goes:

What you can learn from Max Levchin, Cofounder and former CTO, PayPal, launch date December 1998:

Throw out business ideas that aren’t working.  Before PayPal became a web-based payment system, it offered a service for transmitting money via PDAs.  When Max and his co-founder, Peter Thiel, realized everyone was trying to use the website, which was just a demo, for transactions, a light went off.  Max and Peter made the decision to shut down the PDA service and focus on the web-based service.

If someone warns you about potential risks, listen to them.  Max was warned about fraud from people in the banking and credit card processing systems.  They did what they could to prevent fraud, but after 6 months, chargebacks started popping up.  (I had no idea what a chargeback was, so I looked it up on PayPal’s website: Chargebacks occur when buyers ask their credit card company to reverse a transaction that has already been approved.  Fraudsters game the system by requesting a refund on goods they purchased and received.) In no time at all, PayPal got swamped with chargebacks—to the tune of $10m in losses per month.  Because the problem was so severe, Max ended up refocusing his time and energy on the fraud issue.  PayPal had to hire investigators to help track down the sources of fraud, and he and an intern built an internal system called IGOR to finally bring chargebacks down to almost nothing. 

What Max wishes they’d known.  They had no idea that fraud would become such a huge issue and require so many resources—both time, money, and people—to combat it.  As Max says in the book, they are basically a security company pretending to be a financial services company.

Free is a powerful tool to fuel growth.  Because PayPal allowed non-members to receive money without being charged a transaction fee, growth went viral.  The catch: once the money was sent to you, you got an email saying you had to become a member to actually retrieve it.  Max said, “That’s the most powerful viral driver there is.  Free money available to you.”

 Endnote: Max has left PayPal and, like many serial entrepreneurs, he has moved on to found a new venture, Slide, which sells apps for Facebook.  He is also the Chairman of Yelp.