Last week's WIRED Business Conference "Disruptive by Design" highlighted several key innovators in business today, including Israel's Shai Agassi for Better Place, Elon Musk for Tesla Motors and SpaceX, Jeff Bezos of Amazon.com, and Scott Thompson of Paypal. The video of Scott Thompson's discussion is quite good, and available here.
Paypal provides users with a means of exchanging funds via the Internet, primarily via e-mail. If we turn back the clock to 1999, eBay was running auctions in which payment was done offline, primarily via personal check or money order (when was the last time you even saw one of those). The web payment space was at its infancy, with a few startup companies attempting to provide alternative currencies (beenz.com, Flooz.com) when Paypal came along.
The company was formed by two guys, Max Levchin, an online security specialist, and Peter Thiel, a hedge fund manager, who were seeking to create a payment medium between Palm Pilots. While that was not a very successful venture, it helped them figure out the 'secret sauce' to payments on the web - using e-mail and existing bank account/credit card information as authentication for transfer to other individuals/businesses with similar credentials. Credentials were never shared directly, which helped provide a secure feeling to early e-Customers.
Once the auctioneers at eBay realized how powerful this concept was (and how this helped severely mitigate risk, while increasing customer service) they quickly built up the brand and its reputation as a payment platform online.
Meanwhile, Elon Musk and his brother had developed X.com, an internet bank that had grown through enticing high savings interest rates and free money at sign up (I was in college at the time, and I recall getting an X.com account, only to use the $20 on pizza and beer - the dot com era was certainly fun). They had previously grown a business called Zip2, which was sold to Altavista for over $300M. When they came across the Paypal service, they sought it out and merged the two companies, rebranding their own business with the Paypal brand name.
The new Paypal began to aggressively expand its business in the online auction and e-payment space. Over the next few months, they created business accounts, which allowed customers unlimited acceptance of credit card payments, on auction or business sites. The service was so easy for businesses to use, that it spread like wildfire - customers could pay in a hassle free way, businesses just needed a paypal account to accept payment.
Competitors emerged in 2000, namely c2it from Citibank, Western Union's MoneyZap, and eBay's Billpoint. Despite similar business models, none could match the brand, simplicity and fee structure of Paypal.
Following rounds of Venture Capital infusion in early 2001 to the tune of $210M USD, the company filed for IPO status, just a few weeks following the 9/11 attacks.Problems with several states concerned about the status of Paypal as a non-bank taking deposits delayed the offering until February of 2002. Despite not having met profitability and having about $65M revenue in 2001 (Q1-Q3) on 12M users, the company filed and completed an IPO for $60M on February 16, 2002, valuing the company at $1.2Bn.
Following the IPO, Paypal ran into regulatory problems, around Anti-Money Laundering and its status as a "card not present merchant" (no card, signature or PIN authentication was conducted). As a result, Paypal refocused heavily on clearing possible security breaches and opportunities for money-laundering. They introduced the concept of hitting bank accounts with small transactions for verification purposes, as well as monitoring buy/sell activity for anomolies. This helped clean the business and make it more regulator-friendly.
Then, in the summer of 2002, Ebay purchased Paypal for $1.5Bn in stock and the rest is history.
What can we learn from the Paypal story? There are a few key elements that Israeli companies in the financial space (and elsewhere can apply):
- When it comes to web innovation - simple will always beat complex - yes, there are examples of this all over the web, but Paypal is particularly striking. It was not the first and not the best funded startup in the space - in fact they were considered naive when they began. That did not deter them from sticking to a simple model for their key customers - and those customers came and brought their friends.
- Use pre-existing infrastructure whenever possible - I never understood why businesses today will spend money and effort reinventing the wheel (which in web terminology, could be anything from CMS to open-source widgets, to more industry-specific protocols). Here in Israel, it is essential that we use our smarts to expand upon existing tools, like Paypal or useful existing banking infrastructure (like Visa/Mastercard/Amex/Discover networks) to enhance them and enhance the customer experience, not completely reinvent them.
- Assessing Web-based Financial Firms against Brick and Mortar Firms is a poor idea - The value that brick and mortar banks provided firms like Paypal was the infrastructure and the local relationships to connect potential customers to the grid. Once they were on the grid, the Paypal payment solution was substantially more valuable than archaic brick and mortar options, such as check or even early bill-pay services. The results are clear - Paypal was not a bank, but succeeded due to the banks. A comparison of Paypal and Citi would not be useful (or particularly effective), since they're very different entitites.
- It's all about Brand and Markets - One could argue that Paypal had a tailor-made market in e-Auctions, when it was founded in 1999. However, it was a combination of a brand promise of simple transactions, and the right kind of targeted marketing that pushed Paypal past its competitors. In the end, consumer product companies must be able to identify the right target markets, as well as the ideal brand promise to attract them to the business.
Needless to say, Paypal is a fantastic case study for all of us to observe and review in relation to our own businesses.