Episode 11: PayPal

[0] Yeah, in fact, there's Drake lyrics.

[1] I got enemies, got a lot of enemies, got a lot of people trying to keep me from, yeah, I don't know the rest, but it's great.

[2] Who got the truth?

[3] Is it you?

[4] Is it you?

[5] Is it you?

[6] Is it you?

[7] Welcome to episode 11 of Acquired, the show where we talk about technology acquisitions that actually went well.

[8] I'm Ben Gilbert.

[9] I'm David Rosenthal.

[10] And this is our show.

[11] today we are talking about eBay acquiring PayPal, an older acquisition, one that kind of set the tone for a lot of modern technology acquisitions, change the valley forever, birth the PayPal mafia, lots of great stuff to come.

[12] But first wanted to remind you if you have not yet and you like the show would really appreciate a review on iTunes.

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[17] We've heard rumors that audio, audio was a little quiet in the past, so working hard to make sure that we release that, you know, appropriate listening volume now.

[18] We're iterating.

[19] We are.

[20] We are a little start up ourselves.

[21] It's cute.

[22] Also, I apologize for the last like month of no episode.

[23] We got some people saying, And finally a new episode, I had ACL surgery, but I'm a real human now and I'm fully off the oxycodone.

[24] So we're back in action.

[25] I should know Ben has been a real trooper here.

[26] You were, we were recording last time you were what, like five days post -surgery?

[27] I remember right?

[28] Yeah, yeah.

[29] That was, I was barely post -oxycodone.

[30] But, yeah, stay away from the narcotics kids.

[31] That's my advice.

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[49] service now.

[50] All right.

[51] Should you do it?

[52] Yeah, Acquisition History and Facts.

[53] Man, I am excited for this episode.

[54] There is so much to dive into an unpack here.

[55] So I will get through the acquisition history and facts quickly.

[56] But first, a quick note, we're going to focus this show on the first act of PayPal, the founding, the acquisition by eBay, and then the, and then the, and then the the first period of history thereafter.

[57] We may do a future show on the spin -out that happened last year, where PayPal was spun back out from eBay, and we could also do another show on PayPal as an acquirer.

[58] It's true.

[59] They themselves have done a few interesting ones, especially recently.

[60] So much interesting stuff with this company.

[61] But there's definitely a whole episode for us to do just with the original.

[62] There's at least one more episode in the tank here.

[63] So with that, okay.

[64] So December 19.

[65] 1998, Peter Thiel, Max Levchen, and Luke Nozik found a company that they call Confinity, and they decide to make an applications, a payment and cryptography service for Palm Pilots.

[66] Amazing.

[67] Like, the PayPal that we used today started to beam money back and forth between Palm Pilots.

[68] Quickly, they realized that that's a small market.

[69] and they, in 1999, they decide to switch over and start working on a money transfer service that they've come up with, and they call the product PayPal.

[70] Also in 1999, a guy named Elon Musk, you might have heard of him, he, fresh off of of founding and selling Zip2, starts a company that he calls X .com as an online financial services and email payment company.

[71] Domains were cheap back then.

[72] Yeah, geez, X .com.

[73] March of 2000, a short while later, they decide to merge, apparently orchestrated by Michael Moritz at Sequoia, who was an investor in Confinity.

[74] Neither confirmed nor denied, but that's what the internet says.

[75] And Elon from X .com initially remains the CEO of the company that quickly changes, and Peter Thiel comes back as CEO of the combined company.

[76] in October of 2000, Elon was still the CEO, and he makes the call.

[77] The PayPal product is doing so well that they focus all the efforts of the combined company just on PayPal.

[78] And then in 2001, they renamed the company as PayPal.

[79] Yeah, there's a classic case of Elon being Elon and doing what he does best, and that's Focus.

[80] Yep, no more Palm Pilots.

[81] And then in February 2002, PayPal goes public.

[82] And it's actually, this is interesting to remember.

[83] This is February 2002.

[84] This is after the crash, after the dot -com crash.

[85] And this was the first consumer internet company to go public in 18 months.

[86] And it does pretty well.

[87] PayPal has, at close on the day of the IPO, has about a $1 .2 billion market cap.

[88] And then very quickly thereafter, only a few months later in July of 2002, eBay announces that they're acquiring PayPal.

[89] in an all -stock deal, depending on how you count, on how you account for the transaction somewhere between $1 .2, 1 .5 billion, which was about a 20 % premium to the stock's closing price the day before.

[90] So, interesting, and we're going to dive far more deeply into this, but pretty quickly the whole team leaves.

[91] Within, I believe the stat is within four years of the acquisition, over half of all PayPal employees have left.

[92] and including all of the founders of both confinity and X .com.

[93] And interestingly, they're actually the history of the PayPal, the president of PayPal within eBay has been a little bit of a, I don't want to say a hot seat, but some interesting figures have gone through there, including Scott Thompson.

[94] Do you remember him, Ben?

[95] And this is the guy who left being the president of PayPal to become the CEO of Yahoo. And then it was very quickly revealed that he had completely fabricated his resume.

[96] His pre -Pa PayPal resume?

[97] Yeah.

[98] I believe it was that he, I believe, I could be wrong on this, it was that he said he had a computer science degree.

[99] And it turns out he didn't have a college degree at all.

[100] Yeah, it was a whole big controversy.

[101] And then ended up in Marissa Mayer.

[102] afterwards coming to Yahoo. After him, David Marcus, who had actually come to PayPal from the acquisition of Zong, which was a payments company that he had founded, was the next president, and he is now running Facebook's Facebook Messenger.

[103] Hmm.

[104] So, yeah, and then PayPal remains part of eBay for 13 years, during which sees meteoric growth.

[105] And then in July of 2015, as mentioned, eBay, under shareholder pressure from Carl Iken, spins off PayPal into, once again, a separate standalone publicly traded company.

[106] And when they do, PayPal is worth at the time when it begins trading about one and a half times the value of eBay.

[107] eBay.

[108] So it is significantly more valuable than all of eBay.

[109] And today, PayPal has about a $46 billion market cap as a public company.

[110] And the question we're here to address today is, was it a good decision for eBay to pay that, call it $1 .3 billion to in -house PayPal, given where they are today?

[111] So much to unpack.

[112] Financially, no doubt.

[113] Yeah.

[114] I mean, should we take this from a shareholder of eBay's perspective where we assume that they end up with one PayPal share and one eBay share.

[115] Which is what happens at the spinoff, yeah, yeah.

[116] That feels reasonable.

[117] I think we can talk a little bit about the actual impact that it had on eBay's core marketplace business, but I think it'll be interesting to look at how did it feed the marketplace business and how did the PayPal business grow and would the PayPal of business have grown like we've seen it grow if eBay hadn't acquired it.

[118] Yep.

[119] Let's do it.

[120] Should we start it with acquisition category?

[121] Yeah.

[122] I think there's like a few questions that I sort of want to get to before we categorize.

[123] There's a few interesting nuggets in here.

[124] The biggest one that I think is interesting is eBay transactions generated two -thirds of PayPal's payment volume at the time of the transaction.

[125] So here's PayPal, where they finally have.

[126] found product market fit because people seem to be using it all the time for this eBay thing.

[127] And, you know, they're not really succeeding in peer -to -peer payments.

[128] They're getting embedded on some websites, but that business is largely fed by the fact that eBay sellers are using it on other websites that they operate.

[129] eBay's effectively their entire market segment and their distribution to get to new markets.

[130] And so...

[131] What was the...

[132] What was, Ben was mentioning to me a quote, was it a Peter Thiel quote that, that PayPal was essentially an app built on top of eBay?

[133] Or maybe I read that somewhere.

[134] Yeah, yeah.

[135] Anyway, that's essentially what it was.

[136] Yeah.

[137] You know, that's a precarious position for a company.

[138] eBay was in -house building a very similar solution, and they were partnering with Wells Fargo.

[139] I think it was called BillPoint.

[140] and, you know, in looking at kind of the way that eBay was facing decisions at this point was, okay, we love electronic payments in our platform.

[141] I think at the time of the PayPal acquisition, it was about a third, let's see, 40 % of eBay transactions, and Meg Whitman, who was the CEO at the time, said that she hopes that figure will increase dramatically.

[142] And so eBay is highly incentivized to make these really fast.

[143] electronic transactions occur.

[144] They've built Billpoint in house.

[145] It's an interesting sort of business on its own, clearly, as PayPal was demonstrating.

[146] And eBay faces this decision as, okay, one in four auctions on our platform are settled with eBay.

[147] They're pretty much entirely dependent on us.

[148] Settled with PayPal.

[149] Sorry, settled with PayPal.

[150] They're pretty much entirely dependent on us.

[151] We could buy them.

[152] We could build this thing in house, which they did called Billpoint.

[153] We could cut them off.

[154] but that exposes them to risk of regulatory pressure.

[155] So there's this interesting dynamic going on there where it's like a game of chicken.

[156] Not to mention that this product that PayPal, that the PayPal team had built, is really, really hard.

[157] Yeah.

[158] And among other things, like the way that they actually got classified as not a bank, but I think a money transfer service.

[159] There's a lot of regulatory things that they did that were really hard.

[160] But from a product perspective, making people feel safe, sending money over the internet when the internet is still this immature thing, and then actually backing it up with the fraud detection, I mean, there's bodies buried all over the place in these PayPal -like services at the time that didn't succeed because they couldn't keep a lid on their fraud detection.

[161] Yep, absolutely.

[162] And interestingly, which we'll get more into later, you know, the core of PayPal's fraud detection technology became the inspiration for Palantir.

[163] oh interesting i mean i knew is peter teal but it's uh is that is that like other people from yeah uh some of the uh some of the core engineers that worked on fraud detection at at paypal um helped start palenteer with peter teal and a lot of that technology came from um the fraud detection days at paypal hmm interesting i mean if you think about the if you think about the types of jobs that machine learning is like uniquely qualified for you know fraud detection is like right up at the top.

[164] Acquisition.

[165] Should we, let's move into Category and I think we can, I think we can discuss a lot of these things and unpack them as we go.

[166] Cool.

[167] So I'll go first with Category.

[168] You know, I'm going to say business line here, but it's an accidental business line.

[169] I would, you know, without knowing, without knowing exactly what the eBay executives were thinking at the time, I could imagine that they thought about this as a feature acquisition almost, you know, we, gosh, payments are a critical, you know, electronic payments are a critical part of our product and our marketplace.

[170] We've been trying to do this ourselves.

[171] These PayPal guys are doing it way better.

[172] We should just buy them and implement them as the feature on the site.

[173] And then over time, it turned out that that was actually in and of itself a way bigger and better business than eBay itself.

[174] Yeah, it's interesting.

[175] I don't I mean, I think, yeah, it was, it was a very Apple thing to do.

[176] It was a very, we want to create the best user experience by making sure that we control all the key components of our product.

[177] And, you know, I think.

[178] Which is crazy to back up for a minute.

[179] At the time of the acquisition, you said about 40 % of settlements on eBay were being done electronically.

[180] That's correct.

[181] So that means 60 % of eBay.

[182] transactions were not settled electronically.

[183] And I was trying to figure this out.

[184] Does that mean they're mailing checks around?

[185] I have no idea.

[186] That's crazy.

[187] Yeah.

[188] It's easy to forget.

[189] I mean, it was what, 14 years ago what the world was like?

[190] Where you couldn't just transfer my money.

[191] I was in high school.

[192] People were buying beanie babies.

[193] And I was selling beanie babies on eBay.

[194] I think I made about 550 bucks.

[195] I sold a Jerry Garcia bear for 350.

[196] Oh, man. I remember that one.

[197] Yeah, and like an inchworm or something for 100.

[198] Let's just, I think we should take a step back too and just do a little more stage setting here, which is, you know, it's hard for us to remember.

[199] I mean, we're, you know, I would argue fairly young.

[200] I like to think of myself as fairly young.

[201] But, you know, these were the days.

[202] I mean, I was like a. David, I haven't gotten a snap from you in a while.

[203] I love Snapchat, though.

[204] You're just not on my, you're not on top of it.

[205] That must be it.

[206] But I was in like, I was like a freshman sophomore in high school at this time.

[207] And these were the days like, you know, right before the bubble burst when I remember my classmates trading internet stocks during breaks between, between classes in high school my freshman year.

[208] I remember one of my buddies buying a whole bunch of Western digital stock, which was a hard drive manufacturer.

[209] best hard drives there are just you know not using a lot of hard drives right now my computers i think you nailed it i mean i think ultimately it was a control play where there was risk that was going on by PayPal you know having a large part of their business dependent on something they didn't control and they wanted to bring that in house um it was uh you know they saw it as an accelerant to their business to make it more reliable that you were going to get paid by on eBay.

[210] They were clearly building it themselves and an opportunity to bring this in house, you know, it was probably the right one and they took it.

[211] Now what it turned into, I think, was a behemoth that they had, you know, was not in the cards at the time.

[212] And it'd be super interesting to look at, you know, what was in Meg Whitman's head and if they really thought that this could be something that they grew independently because I think there's been a lot of discussions since then, kind of like, you know, hindsight is 2020 that that was the vision the whole time was to grow this, this, you know, new, new internet business where we can just transfer money anywhere all the time.

[213] And, you know, I think it was the original vision for PayPal, but they very quickly realized, like, wow, there's a very specific need for when people need to transfer money.

[214] And that very specific need is after auctions on eBay.

[215] So, you know, today it's going into something tremendously bigger, and I don't think it's what they saw.

[216] So I think they thought they were acquiring a feature.

[217] I think that's likely true.

[218] And it's interesting, too, you know, one of the sort of aphorisms in the in the tech world is you can't build a big company a really big company on the back of somebody else's platform and this is the example that both proves and breaks the rule you know like PayPal became a huge company obviously and did it on the back of the eBay platform but ended up having to sell to eBay because they were so captive to that platform, you know, what, I guess this gets a little bit into the, you know, what would have happened otherwise, but, you know, how could you imagine in those fragile early days?

[219] I mean, remember, this was 13, it was 13 years between the acquisition and the spinoff when all the vast majority of the now value in PayPal was created.

[220] Could that have happened if during those early years when it was so much dependent on eBay, it had been a separate company in eBay had had, you know, could have made changes to completely kneecap PayPal.

[221] Well, I think we're definitely in the, we've moved on to the what would have happened otherwise segment now.

[222] Absolutely.

[223] Officially.

[224] But it's interesting, too, to think about this.

[225] I'm thinking about this question of, you know, building a big company on the back of somebody else's platform.

[226] And I think perhaps you could make an argument that, um, you can do it if you can essentially raid the platform get all the users from it and then migrate them to you to your own platform so like i'm thinking about you know Pinterest grew really fast in the early days for a bunch of reasons but one of them being that um i don't know if folks remember you know they they really figured out viral facebook uh user acquisition you know we were, I was getting messages all the time, emails from Facebook of, you know, my friend Ben has just joined Pinterest, you know, do you want to join as well?

[227] And, and, and those user, Pinterest was successfully able to migrate those users over to their own ecosystem.

[228] And now I'm thinking about PayPal, back in those early days, when it really was just eBay, that was the primary use case, I don't think they were migrating anybody from using PayPal to settle their eBay transactions, to then doing, you know, peer -to -peer money exchange, which is the big business that PayPal's built over time.

[229] Yeah.

[230] But would they've been able to do that, you know, successfully had they not been part of eBay?

[231] I don't know.

[232] Yeah.

[233] The companies that have done that well have been really sneaky about it and have, like, succeeded and flown out of being crushed, like, just in the nick of time.

[234] I mean, you even see, like, a good example is actually LinkedIn, right?

[235] They grew on the back of stealing your entire address book and then emailing it.

[236] everyone.

[237] And it only cost them, like, what, $100 million or something a few years later when there was a gigantic class action suit for doing that.

[238] And, you know, they're a real and successful company because they piggybacked off that existing network.

[239] Or think about Airbnb.

[240] There are a bunch of articles out there, and Airbnb doesn't talk about it that much, but definitely in the early days, you know, they were auto posting to Craigslist and pulling a whole lot of both supply and demand out of Craigslist and onto their platform.

[241] Yep.

[242] But again, I think the key is you have to, you have to kind of exfiltrate the users and then, and then keep them captive within your own ecosystem.

[243] Right.

[244] And I, you know, I was young at the time, but I don't necessarily remember ever, like PayPal only existed to me when I was, again, selling Beanie Babies and then Boy Scout patches on eBay as my way of transacting on eBay.

[245] It never really seemed like the purpose of it was to.

[246] Anything else.

[247] Yeah.

[248] Yeah.

[249] Yeah.

[250] Interesting.

[251] So had eBay not acquired PayPal when it did, you know, PayPal was a public company, what would have happened to both companies?

[252] You know, we've just been talking about PayPal, perhaps would have been hard for the, you know, eBay could have made life really hard for them.

[253] What about, what about eBay?

[254] You were talking earlier about what's the value that PayPal?

[255] What's the value that PayPal brought?

[256] to the eBay marketplace.

[257] Well, similarly, could PayPal have made life hard for eBay?

[258] It could PayPal have done something where...

[259] Could they have started their own marketplace attached to PayPal?

[260] Oh, wow.

[261] Yeah, that, I mean, that seems like...

[262] It almost seems far -fetched.

[263] It's like, it's such a different and large business.

[264] Yeah.

[265] Yeah, I mean, I don't think PayPal...

[266] had a whole lot of power over eBay other than if they went away maybe people would have been kind of uncomfortable with the electronic platform that eBay was providing because it wasn't as secure yet but I bet eBay would have figured that out pretty quick.

[267] Yeah, I mean imagine you can I think this is a slim scenario but you can imagine a scenario where PayPal finds a different market besides eBay.

[268] The money transfer one that they've grown into today, which people eventually did become very comfortable with, but were uncomfortable at the time.

[269] So they probably would have had to ride out some tough times for a while if they had moved away from eBay.

[270] And eBay maybe doesn't figure it out and figure out the fraud detection.

[271] And then people are uncomfortable transacting on eBay, and they never get everyone onboarded to their own payment platform and people don't like using eBay because they still have to use an analog system and then someone comes along and builds it all feels far -fetched actually the more I talk about it it's like they would have figured it out actually before that PayPal just never would have moved away I mean that was like that was the the cash cow that was their their finally they had found product market fit in this in being effectively like a vendor or a supplier for yeah probably a vendor for for ebay so what would have happened to ebay i can't i can't imagine a scenario where ebay doesn't win here i think the only well not the only but one potentially negative picture you could paint for ebay here is you know if you think about over the subsequent 13 years between the acquisition and the spinoff paypal grows so much that it is you know call it 60 65 percent of the entire value of the company, maybe even 70 percent, and certainly all of the growth engine of the company, would eBay have been able to recruit and attract and retain top quality talent if it didn't have this really sexy growth business attached to it?

[272] Would eBay have stagnated a lot earlier?

[273] That's a great point.

[274] Yeah.

[275] I mean, I think that's predicated on the idea that, like, it was, it could actually, that status or that state could actually persist for many years, the state of them being separate businesses and both of them needing each other, that symbiotic relationship.

[276] It seems hard.

[277] I mean, we're biased by history and what actually happened here, but it does seem hard to imagine these two companies existing separately.

[278] Yeah.

[279] Until you get to the point where you are now, where PayPal is really a large and viable business with eBay only being a minority of it.

[280] Yeah, I mean, in my opinion, if it's like, here's what happens.

[281] If eBay doesn't acquire PayPal in, you know, July to October of 2002, eBay acquires PayPal for a different price at a different time.

[282] Yeah.

[283] I don't think that it's an inevitability.

[284] It's interesting to think whether that would be higher or lower.

[285] Yeah, yeah.

[286] He could go either way.

[287] That's true.

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[307] All right.

[308] So we move on to tech themes.

[309] Yeah.

[310] Yeah, I think that's interesting.

[311] yeah i've got well i really want to dive in here and this is um somewhat related to the acquisition but i think we would just be remiss if we didn't really talk about i mean for me this is the PayPal mafia you know i mean i think you could make a very uh valid argument it might even be hard to argue against a thesis that this single event this acquisition of PayPal by eBay was the catalyst to create everything that we now know of as Silicon Valley and the technology startup ecosystem.

[312] We'll unpack this, but just the chain of events set in motion by this acquisition is really incredible.

[313] when you think about the people that were at PayPal and there's there's a great um there's a great article on the tech republic we'll link to it in the show notes um about it's titled uh i believe how the PayPal mafia redefined success in Silicon Valley and um many of the many of the founders of PayPal talk about how you know they were all these incredibly young ambitious people and they've They'd just been through this, you know, super difficult but exhilarating experience at PayPal where they had to figure out a whole bunch of stuff that had never been done before, like we were saying, it was really hard.

[314] And then they made a bunch of money.

[315] And then they showed up at eBay, and it was like complete culture clash.

[316] And they hated it there, and they all left quickly.

[317] But they were all still really young and ambitious and wanted to prove themselves.

[318] And so, like, you just go down the list of companies.

[319] So I'm going to talk about just, I'm going to talk about two sets of companies here.

[320] The first are companies founded by PayPal alums, LinkedIn, Yammer, Yelp, YouTube, Palantir, SpaceX, Tesla.

[321] And then Reddit was not founded by YouTube alums, but was the CEO of Reddit for a while.

[322] Yishan Wong was a YouTube alum or a PayPal alum.

[323] And then, so that's companies actually founded by this group of people.

[324] And then companies, other companies in Silicon Valley and related environment.

[325] where PayPal Mafia alumni were very early investors or advisors or instrumental in starting the company.

[326] Facebook, Uber, Airbnb, Square, Pinterest, Stripe, and it just goes on and on and on.

[327] I mean, you're talking practically, practically every company, every major company that Silicon Valley has produced since that acquisition can trace its history either directly or indirectly to the PayPal Mafia.

[328] Yeah, I mean, I made a joke to David before this show.

[329] I was reading up and I was like, huh, we could get a guest for this, but all of people that were there are so insanely rich that why would they ever bother to go on a podcast?

[330] And the funny thing is, like, it's not from the money they made from PayPal.

[331] No. I mean, people got rich.

[332] Like, people got 100 millionaire rich, but, or at least, like, high tens.

[333] Well, don't forget, there's been a lot of dilution at PayPal.

[334] I mean, they'd raised, I believe, $180 million.

[335] I think that includes the capital they'd raised in the IPO.

[336] They'd been a merger of companies.

[337] There were lots of founders.

[338] I mean, there's no way that individually any of those people became hugely filthy rich after that acquisition.

[339] Yeah, it was more about what a whole bunch of really smart people recognized and did after that and opportunities that they saw because of the way that they grew PayPal.

[340] I mean, PayPal, actually, this is a good segue into what I was thinking.

[341] thinking about.

[342] PayPal sort of invented a lot of the paradigms that we see in startups today.

[343] Absolutely.

[344] I mean, the first one, they were the first business to do the whole, if you invite a friend, you get free money thing.

[345] And it's like sort of free money now.

[346] Like, oh, cool, if I invite a friend to Uber, I get $15 in my Uber account.

[347] Like PayPal literally gave you a dollar.

[348] Dollar, $5.

[349] They literally gave you money.

[350] It was like, if you, they would email their friends and they'd like, congratulations, you have free dollars.

[351] They invented viral acquisition.

[352] Yeah.

[353] So, yeah, I mean, and we were talking, I was just talking, about the company founding and investing part.

[354] Let's talk now about the actual tactics that are just now commonplace.

[355] They basically invented growth hacking.

[356] So viral user acquisition embeds.

[357] You could embed PayPal was one of the first, if not the first app that you could embed in other web apps.

[358] And then think about a direct company outcome progeny of PayPal was YouTube.

[359] And how did YouTube succeed?

[360] You know, it was embed.

[361] is so funny i have a good story here i built a website um for my buddy nils nils if you're out there listening um good name you um where we were selling t -shirts and i was a super early web developer and i didn't know a lot of the best ways to do an online storefront and the way that we built out this t -shirt website was by generating a unique paypal button for every skew and i just literally embedded the little PayPal forum on every single t -shirt page that was a sub -directory on our site.

[362] And it worked.

[363] I mean, it just completely worked.

[364] And I didn't have a storefront.

[365] Like, we weren't using that for inventory management.

[366] It's fine because we didn't sell that many t -shirts.

[367] But at the end of the day, like, we had a working website by a bunch of PayPal button embeds.

[368] And that's how a lot of little storefronts worked for a long time.

[369] And I think, you know, they obviously succeeded primarily because they were in such a huge part of PayPal.

[370] But like, even after that, as they were growing their business, off PayPal for a long time.

[371] I think that's what a lot of people did.

[372] We accept PayPal.

[373] Or yeah, sorry, off eBay.

[374] They're so one and the same to me now.

[375] I know.

[376] It is hard to untangle them in your mind.

[377] I have one other thing too.

[378] Me too, but go ahead.

[379] All right, I'll take this one.

[380] The interesting thing about payments are something that we see in advertising today, a parallel I'm going to make between the two.

[381] We've been talking a lot over the past 10 episodes about the rise of Facebook and Google as ad platforms and stealing a lot of the advertising spend away from non -social ads, so display ads, and understanding that brand advertising in particular and online advertising as a whole is a winner -take -all type market where you really need scale before you can rival the big guys now because there's such excellent targeting that you have to be able to choose any bucket that could be incredibly narrow, you know, tap dancing, you know, 24 -year -olds in Washington named Ben, and not named Ben, but that, that, uh, but Facebook could find those people.

[382] Right, right, and have a deep enough well.

[383] And so, so those are businesses that have a relatively high fixed cost and require massive scale to make the business actually work.

[384] Payments are sort of the same thing.

[385] I mean, PayPal really needed massive volume before they could have wide adoption, and they have an incredible flywheel where every person that has a PayPal account, can be a sender or a receiver of money and becomes comfortable using the platform.

[386] So the first time they get someone to send or receive money once, they make everyone else's experience more valuable.

[387] So it's a scale platform where it has a razor -thin margins, right, on payments, and really large fixed costs, especially in those days where they were building data centers, and they need huge volumes to make it work.

[388] And that's something that they saw with eBay, and they did really well.

[389] And that belief, which may have been completely crazy, and as we were talking about, perhaps wouldn't have worked had PayPal remained an independent company, but that belief that you can get to that scale to make that vision a reality.

[390] Yeah, you'd have to be insane.

[391] You'd have to be completely insane.

[392] And you think about the startups, again, that we were just rattling off a bunch of names in sort of the generations that followed PayPal, the ones that became really, really big are ones that made that same bet, you know, and won.

[393] You know, Uber, right?

[394] Like, imagine before Uber, if you had painted a picture of a world where there are going to be enough drivers in cars that are members of your platform and enough users, consumers of transportation on your platform in any given geographical area, not just San Francisco, but like, you know, the middle of nowhere in, you know, some non -American, you know, a country not in the U .S., that you could push a button and that driver would be right around the block and show up, you know, a minute later, you would have gotten laughed out of the room.

[395] Yeah.

[396] Yeah.

[397] And it's the same thing.

[398] I mean, you could imagine pre -users pitching PayPal.

[399] And it's like, well, it's the way for anybody to send anybody money.

[400] And someone says, what do you mean?

[401] And you're like, well, when everyone has PayPal.

[402] Like everyone wants to be super comfortable.

[403] It's a recursive argument.

[404] Yeah.

[405] And, you know, it's the same recursive argument that lots of people, like, completely fail at, right?

[406] You hear this at every, like, first time startup event, right?

[407] Like, someone who goes and the only world they imagine is the one where their service is pervasive.

[408] And they talk about, like, why doesn't it just exist?

[409] You know, you could hear, I don't know if somebody ever pitched Uber, but like, you could hear someone pitching Uber, you know, 10 years ago at a startup weekend.

[410] And I say, well, yeah, it's like.

[411] why doesn't it exist where anybody can just pick you up at any given time because you just see every single person has this in their car and can give each other a ride?

[412] And you're like, how on earth are you going to get there?

[413] And the magic of PayPal is they figured out how to get there.

[414] Well, and I think this is a great segue into the other thing I wanted to talk about here about the PayPal Mafia that I think might, again, you can make an argument, might be the most impactful thing that they've contributed to the startup ecosystem, even over and above all the other things we've talked about.

[415] There's a really, really great video on YouTube, of course, of Jim Gets, who's a partner at Sequoia, great, great venture capitalists talking, speaking at the business school at Stanford, which has a fond place in my heart.

[416] And he's talking about what makes great companies that Sequoia would invest in.

[417] And he talks about the PayPal Mafia.

[418] And he says, you know, the one thing to him that really sets PayPal alumni apart from other people in the ecosystem is they learned at PayPal this ability, both willingness and ability to iterate really quickly with a product, to put a product out there that is very far from finished and iterate like mad on it based on true market feedback.

[419] And he says, you know, not BSing themselves.

[420] about like what the actual signals from the market are and that's how you can create a recursive you know a recursive you know a recursive thesis like that you know is you can't start with like the end state you got to start with a very very small idea and then work on a bit by bit by bit by bit based on market feedback yeah and god that market feedback thing is is so hard where every line of code that you write or every little piece of product thinking that you do that then get solidified in any form, be it physical or design or code, it's like a burden you carry from that point forward where the more you've created, the heavier it is and the less you feel agile to move away from it.

[421] And so I just have tremendous respect for people at companies like this that can write something and put it out there and understand market signals quickly and within days say that's actually not the thing and like rip half of it out and put a new piece in and say that's not the thing either and then like just keep repositioning because I think that you know we just get emotionally attached to what we make and people will get really emotionally attached to their vision and if you if you can just keep responding it's a really incredible and really valuable skill and I think that's the the skill is holding both of those thing to borrow a phrase from my wife she loves this phrase holding both of those things in your head at the same time.

[422] One is absolute dedication and commitment to a vision of the future that you see.

[423] You know, you're recursive, these vision about the future.

[424] And two, an utter lack of bias or, you know, predetermined thought on how you're going to get there.

[425] And be willing to take, you know, the random walk that, that you need to take of product and, you know, product market fit discovery to get there yeah that's a challenge it is time to grade it yeah i think we can grade it um so this is a really interesting one uh to grade because you know one of the themes that i think has been pretty pervasive throughout the show that we've done is that the best acquisitions uh that we've given the highest grades to have been ones where You know, the, the acquirer follows the mantra of, you know, leave the team alone.

[426] It's all about the people.

[427] Let them do their thing.

[428] You know, don't mess with the magic.

[429] You know, we heard that with Pixar, where it was the reverse.

[430] It was like Pixar coming in and leaving the Disney people alone, you know, are you getting, letting the Disney get back to feeling the creative magic, you know, with Instagram, with Bungy that Ed Freeze was talking about.

[431] this is a total opposite.

[432] eBay comes in and really mucks around and everybody leaves.

[433] And I wonder if that's just characteristic of the time period.

[434] I mean, other acquisitions that we've like ripped apart have that characteristic too from that time period where it's all about integration.

[435] It's all about great.

[436] We like your product.

[437] Now it's time to move to the beat of our drum.

[438] And I think it's really only recently that companies have figured out that leave it alone thing.

[439] Yeah, the quote unquote Facebook style acquisition.

[440] There's another great quote from David.

[441] Sacks in the Tech Republic article where he's talking about the first meeting that happened after the acquisition, the integration meeting, and eBay team, you know, gets all the key people from PayPal together in a room and they book a three -hour meeting and they show up with like 137 page PowerPoint deck.

[442] And the PayPal guys are like, A, we've never had a three -hour meeting in our lives, B, what is PowerPoint?

[443] And at the end of it, David Sacks says, man, we're going to have to, if we stay here, we're going to have to create a whole new department just to do PowerPoint just so that we can communicate with these guys.

[444] Oh, man. I talk about a product that they needed and a team that was just completely incompatible with their culture.

[445] And so what's interesting about grading this one is like breaks all the rules and yet creates huge, huge amount of value for eBay, eBay shareholders, for the entire Silicon Valley startup ecosystem as a whole.

[446] I think taking all of this into account, it's almost like, you know, I think I'm going to net out at like a B plus for eBay on the acquisition, you know, like pretty great.

[447] I mean, created a huge billions and billions of dollars where shareholder value but you know had they handled it differently could they have realized much more value yes but also if they'd done that we all would be so much poorer for it you know because of the the exodus that happened because of the PayPal mafia we have so much else in the ecosystem yeah i mean why i look at it this way like when we're talking about so i see you i appreciate those things I hear you.

[448] I feel very appreciated right now.

[449] Okay, let's look at this from the lens of eBay as a company, right?

[450] Like, was this good for eBay as a company to make this acquisition?

[451] Normally, I would try and frame this in terms of like, well, let's look at, you know, Apple acquiring Authentac and being able to do touch ID sensors in this way that is additive to their existing product in a way that is of a, much greater value than anything authentic could do on their own, right?

[452] Like something where it's integrating into the product and creating, you know, synergies between the two products such that they can take their core product and make it, you know, a multiple of the acquisition better.

[453] In this case, like, I don't know that it added tremendously to eBay's marketplace.

[454] And actually, there's a point that Keith Robois points out where they had visibility into eBay's growth and they predicted that eBay's growth was going to plateau and that they actually needed needed to make the sale because they were like, we don't have a different growth strategy yet and people are going to be concerned.

[455] We're a public company.

[456] People are going to be concerned about us if our...

[457] We're solely dependent on eBay and their growth is plateauing.

[458] What we've seen, you know, eBay is indeed a major, you know, a major company.

[459] From 2004, they were doing $3 .2 billion in net revenue today they're doing 17 .9.

[460] They've grown.

[461] They're doing great.

[462] But they aren't a mega behemoth, and I don't think that their growth can be attributed to PayPal.

[463] However, we're looking at this through the lens of a person who owned PayPal or eBay stock at the time of the acquisition.

[464] Like, was it good for eBay as a corporation to do this?

[465] holy crap absolutely eBay grew like a weed and grew to be larger than their existing business so you know as a company it was a killer bet because effectively they acquired a product that gave them an entire second business line when their initial business line wasn't going to be the thing this is an A plus like this is yeah it's interesting it's like you know if you were to if our projection let's assume it's correct that eBay executives at the time weren't thinking about this as a business line, we're thinking about it as a, you know, feature technology acquisition, then, yeah, maybe my, you know, B -plus rating would hold.

[466] But in terms of like, you know, this is the actual financial outcome, massive home run, not to mention all the ancillary benefits to the whole ecosystem as we've been talking about.

[467] Yeah, yeah.

[468] I mean, the eBay acquisition was generally good for the world, right?

[469] It's generally good for the United States in terms of GDP.

[470] What's good for General Motors is good for America.

[471] Ain't that the truth?

[472] Cruise acquisition coming in future episodes, perhaps.

[473] I hope so.

[474] Yeah, yeah, I mean, I'm trying to think of other examples where, yeah, it's almost like how we rated the Pixar.

[475] Well, no, because that actually did feed back into the Disney business to reinvigorate that and make it great again.

[476] What other examples can you think of of a company that was flying high at the time, made an acquisition, and then it turned out that company's core product was like, you know, not going to be the thing for that company.

[477] And then they acquired like a mega giant, or to be mega giant that they, yeah.

[478] And they certainly propelled it there.

[479] I don't think eBay would, or I don't think PayPal would have done this on their own.

[480] I think that at some point, like we talked about, they were going to get acquired.

[481] Yeah.

[482] Yeah.

[483] It's interesting.

[484] I mean, gosh, maybe Instagram.

[485] I mean, Jerry's still out on that.

[486] Yeah, although to check in on our previous numbers on that, they, I think yet another analyst report, I don't think we have hard numbers on this, but it's predicted to do $3 billion in, is it revenue this year?

[487] I just saw a thing, you know, on a billion dollar acquisition a couple years later.

[488] Man, too shabby.

[489] That was a great buy.

[490] Yeah.

[491] Not without its challenges, though.

[492] I mean, you know, it's interesting that we could do an episode at some point on Snapchat, on the failed acquisition of Snapchat.

[493] Yeah, we should do that.

[494] That would be a fun one.

[495] Yeah.

[496] And we could compare and contrast Instagram and Snapchat.

[497] We could.

[498] But until then, do you want to do the carve out?

[499] Oh, yeah, carve out.

[500] Let's do it.

[501] You want to go first?

[502] I do.

[503] I do.

[504] So since we know you guys like listening to a podcast, I felt like I should pick a podcast.

[505] and this week was an incredible episode of the Bill Simmons podcast to follow up my my recommendation to read The Ringer.

[506] He had Chris Saka on.

[507] Oh, nice.

[508] World's colliding.

[509] It was so great.

[510] Yeah, because Bill's just like killer journalist.

[511] I mean, like he has a written interview with Obama.

[512] I think he was in GQ.

[513] That's just awesome.

[514] Like Bill can talk about sports.

[515] He can talk about politics.

[516] He can talk about technology.

[517] And him interviewing Chris Saka is just spectacular.

[518] I think I was a few minutes in and I was just completely, completely roped in.

[519] They talked about everything from like Chris's meetings with Kobe Bryant where Kobe's investing in startups and like Chris put him through the ringer.

[520] Like, no pun intended.

[521] Like Chris really like, it was like, okay, cool, like celebrity athlete who wants to get into investing.

[522] And like there's so much interesting stuff revealed.

[523] Like I didn't, I have to go do more research on this, but like Kobe actually doesn't sleep.

[524] Like Kobe, they reveal is like a dude that I'm sure he maybe is.

[525] sleeps like a few hours or something but like the way they describe it is like the dude you know his day life and then all night he was staying up reading and and trying to like learn and go through the exercises that of everything that Chris gave him so there's this Kobe segment they talk about the founding of Uber and like the jam sessions when they're sitting around and how all that fell into place talk about early days at Twitter about bets that Chris made about when Chris was dirt poor and then started day trading and made four million dollars day trading stocks and then lost it all and then went into massive debt and then the whole it's just like it's an awesome episode so i'll link it in the show notes but um the the bill simmons podcast featuring chris saka it's excellent excellent i'm gonna have to give that a listen yeah um so my carve out for the week uh caveat that i'm only about a third of the way through it but um is a book that came out a couple years ago that had been on my reading list um and i finally got around to thanks to the magic of audio books.

[526] A book called Anti -Fragile by Nassim Taleb.

[527] I just finished The Black Swan.

[528] Oh, nice.

[529] So this is my first Nassim Taleb book, and I want to read the rest of them after this.

[530] It is excellent.

[531] What do you think of The Black Swan?

[532] It was good.

[533] Like a lot of books like that, I felt like the first half covered it.

[534] Yeah.

[535] But really interesting.

[536] I highly recommend it also.

[537] Well, what's interesting, not having read the Black Swan yet, but a couple things about anti -fragile.

[538] One, Nassim is like, he's like a baller.

[539] He's hilarious.

[540] I mean, he's incredibly smart, but he writes like, he's also got like a giant ego and writes like, this is a guy who just like does not give a crap about anything.

[541] His ego shows through quite a bit in Black Swan, too.

[542] Yeah.

[543] But what's interesting is he actually, so the whole thesis of anti -fragile is that, there's this you know it reminded me a lot of zero to one and a fittingly for this episode of peter teal idea about you know the idea of secrets um that there are these things about the world that are like fundamental laws that govern it that just like people don't understand or realize and so the same talks about this concept of anti -fragility that like we know about things that are fragile and for millennia people thought the opposite of fragile was robust um things that you know are durable and not don't break when exposed to stress but it turns out that's that's just like a neutral thing like the opposite of fragile is something that gets stronger when exposed to stress and and so like an example would be the human body to a certain extent you know you exercise and you get stronger example another example would be would be also within within biology you know the concept of vaccines, where being exposed to a small amount of a toxin or a poison or a virus will then make you stronger against the virus.

[544] Anyway, and if you start looking at the world this way, there are all these examples of this.

[545] And then yet another example, bringing back to Nassim's ego, he says, actually, information is anti -fragile if you think about it.

[546] And he's like, what's the best way to, um, to get your message heard by as many people as possible, you should tell everybody it's a secret.

[547] And then you should try and make it as controversial as possible, and you should try and get as many people as possible to hate on you because then people are going to hear about it, and it's going to be really interesting, and people are going to want to read about it.

[548] And that's how you get disseminated.

[549] And if you want to make sure your information does not get disseminated, you want to be, like, really agreeable and tell everybody it's really important, and then nobody will read you.

[550] Huh.

[551] And it's so interesting because it's probably, a very uncommon thing because we as humans, I think it's a defense mechanism and it's something that we used to stay alive, but we don't like it when people don't like us.

[552] And we don't like it when, you know, people want to lash out against us.

[553] So we're very disincentivized to make enemies.

[554] And think about even like your carve out, well, the PayPal guys and your carve out, all these people, you know, Chris Saka, Kobe Bryant, Bill Simmons, all the PayPal, Al -a -a -Mafia, they were, not only did they not care when people didn't like them, they embraced it.

[555] Our sponsor for this episode is a brand -new one for us.

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[557] Yeah, for those of you who haven't listened, Vijay's story is amazing.

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[584] All right, everyone, thanks for listening.

[585] If you get a chance, we'd love, love, love if you could rate us on iTunes.

[586] And have a great day.

[587] We'll see you next time.

[588] Huh.