Affirm: Max Levchin (Part 2 of 2) - Transcripts

June 20, 2022

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After PayPal sold to eBay in 2002, Max Levchin could have relaxed on a beach for the rest of his life. But that’s not the kind of person he is. He isn’t happy unless he’s coming up with new ideas and building companies – so much so that he actually fell into a dark place after leaving PayPal. He didn’t fully find himself until years later, when he rediscovered his passion for the “hard, valuable, fun” problems of fintech. Now, Max runs another billion-dollar company: Affirm, a “buy now, pay later” service that’s transforming how we purchase things on credit. This is the second part of a two-part conversation with Max; to hear the story of PayPal, be sure to listen to part 1!   See Privacy Policy at and California Privacy Notice at


I'm Gregory Warner, host of the podcast, rough translation on our new season were telling stories about the cultures of work the 9-5. It's a myth and rest around the world I came into this totally prepared to defend my American productivity at work. The new season of the NPR podcast rough translation


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as we were brainstorming ideas. The first field trial would apply is what is sort of gut wrenchingly difficult that just people are willing to go to the ends of earth to, to figure out. And I said, credit scoring is such a gnarly problem. I still brace for impact every time I had my credit card over because who knows, they might cut it up and bring it to me in two pieces because my credit is so bad and it was sort of this like, uh, that's really hard. There's a lot of people like me who screwed up in college and probably would like to buy things using credit but have these horrendous triple digit rates they have to deal with. So that was the jump off point and we went to work feverishly

welcome to how I built this a show about innovators, entrepreneurs, idealists and the stories behind the movements they built. I'm guy raz and on the show today, how max Levchin regained his sense of purpose after losing himself in the long shadow of Paypal and eventually built a firm, another multibillion dollar fintech company. That's changing how we buy things on credit. I love every conversation I have with founders for this show. I learned so many things from each interview and as a team, we spend a lot of time trying to find founders who have built brands that have had some kind of wider cultural impact. But most importantly, we look for founders who are willing to be open because really what I'm asking, each founder is to share his or her story in the hope that you, you, the person listening will benefit from it. And in some ways max Levchin could be the poster child for this mission in part because max is obsessed with solving hard problems so much. So he named his tech incubator, H V F, which stands for hard, valuable and fun. Not only was he a key founder and developer at Paypal, but he went on to have a hand in the founding of Yelp glow, which is a suite of apps around fertility and pregnancy and now a firm, it's a platform that allows you to buy millions of products by splitting up the payments in two equal installments. This is one of those rare, how I built this episodes where the interview went on for such a long time and the interviewee was filled with so many great stories and insights that we broke it up into two episodes and if you missed last week's episode, please go back and start there before continuing with this one. Last week we heard about the origin story of Paypal and all the characters who helped build it, including Reid Hoffman, Peter thiel and Elon musk. Paypal eventually sold to Ebay for $1.5 billion but after walking away with a significant chunk of money, max was bored, he wasn't going to sit on a beach for the rest of his life?

He needed a new, hard problem to solve and so he started to explore, He first went down the social media rabbit hole with a product he built called slide before he landed on a new idea, an idea to make it easier for people to buy products on credit without punishing interest rates and late fees. Over the past 10 years, a firm has grown to become one of the country's most highly rated brands in what's known as the buy now pay later sector, but for now let's pick up the story where we left off last week, it's around 2000 to 2003 and max has walked away from Paypal with a reported $34 million but he's having what he describes as the worst year of his life, He feels rudderless, he's just sitting around his apartment in his pajamas and waiting for something to happen and to make matters worse, his then girlfriend nellie has just broken up with him.

She basically said, you're insufferable, go figure out what you want to be.


pretty sure we're gonna get back together, but you're impossible to be with, go away and be on your own for a little while.

Did you, did you ever want to kind of be a 27 year old with some money and you know, get a, an awesome car and get a great place to live and just kind of blow some cash. Did you, did you ever do any of that?

I attempted a poor excuse for that right after she broke up with me, I always wanted to live in a loft somehow. I was obsessed with this idea of extremely high ceilings and


I got this loft south of market in san Francisco and I decided to learn how to DJ, I think I was trying to call myself DJ


I'll leave it


the, to the reader to understand what that


But I took a bunch of lessons, got some equipment and then started inviting my nerdy paypal friends to come to my loft and have dance parties and I had like two or three and then the neighbors complained and I was like, wow, this is, this is quite a different level of misery. Um probably shouldn't be doing this. And then I decided this whole thing was kind of silly and I stopped.

No shame. We've all done things in our youth that um you know, are important you want to do, you need to do those things. You need to live those experiences to be able to reflect on them. Um but it sounds like one of the things that you actually did do at that time was to use some of your money to create like um like an incubator right? Called M. R. L. Ventures, you did this with, I guess you got some backing from Peter thiel.

Yeah, exactly right around the D. D. J. Phase I realized that basically the only way out of the pit of despair was to work like I wasn't going to be happy with just more money or cars or anything really and I was missing my girlfriend desperately so I was like, well I need to, I need to return to some kind of notion of what I was when she thought I was okay and I basically said, well kind of what's the essence of work for me, Like I can write code but I don't seem to be motivated and I can brainstorm product ideas but just nothing is on the whiteboard, what's going on. And I sort of went back in my mind to the earliest days of Paypal and sort of the happiest moments was luke and Kenny bought all these really cheap whiteboards and we would just fill it with ideas and some of the ideas were completely insane but that was like intellectual fountain of just craziness and creativity and cool and so basically I decided what I need is to rent an office that I could mount lots of white board on the walls and just start brainstorming and bring in some people that I love brainstorming with and something good will come out of it. And so it was less a a formal incubator and more of a, I need to pack a room with brilliant minds and something will happen. And as we started doing this, it actually very, very quick that cool ideas started to appear and it's like, wow, what I really need is a structure and maybe some engineers to start prototyping things, so it evolved as opposed to was created. So

you, you got some office space in Soma and we heard about this when, when we did our episode on Yelp with Jeremy Stoppelman, who, who you had met through the merger, he became like one of the people that you brought in to come up with an idea and he had this idea for like a review website when you heard that idea was immediately in your mind, you're like, yeah, let's do it, this sounds great, I'm, you know, let's go for it.

Yes, actually, this may be the only time in my life that I had sort of a jumped off a cliff without checking if there's water. So I had already gotten back together with that girlfriend now wife who had graciously took me back after a, I think we stayed apart for maybe six weeks by the way, so this was not like a true long separation or anything, but my spirits were suddenly very much up because the love of my life was, was willing to have me again and uh I was coming to work and I was brainstorming and my white board was filled with ideas and Russ, who was my chief architect at Paypal and Jeremy who was my VP of engineering at Paypal were hanging out in the space and brainstorming kind of all the time. They're kind of in this corner together talking about all these various ideas around local search and they pitched me on what became yelp And entirely on a whim I basically said I will buy as much of this company as you'll sell me for $1 million dollars and I don't think I've ever done that before or after.

Yeah it was a great great fortunate decision because I think you got about 11% of the company

by the time of the I. P. O. Yes, but in the moment it was much more since there was really nothing.

Um meantime this incubator was also a place where you could come up with your own new idea. Um and and the idea that you eventually land on was a company called slide for people don't remember what it was. Can you just briefly describe what slide did

uh It did a lot of things and there in lies the problem, the very original idea was this realization that I had that content online will start to become more like tv where you do nothing and just content washes over you And this is before youtube. So this idea of video on demand on your desktop just wasn't a thing yet and and video by the way was very very expensive to stream into post and to encode. And so I said, alright, so video isn't a thing yet And maybe it won't be a thing for a while. But what's the closest thing to a video that people could interact with? It the same way they interact with tv where you get news and you get content and you get beautiful images and maybe ultimately get advertising and that's how you monetize it. And so I come up with this idea of a kind of an application that sits on your desktop in a corner, like sort of tape that just scrolls images of things and goods and advertisements and stories and news and you get to configure it. And it was inspired in a way by a much earlier company that died in the dot com crash called the Pointcast, I remember obsessing over what Pointcast was and what it did wrong, what they did right and eventually decided they did nothing wrong. They were just too

early. So your idea was basically to create a way to share photos and videos that that was going to be easier and nicer and sort of more user friendly. Yes,

it was primarily about personal photo sharing. So it was very clear that regular people, people that kind of don't really care about cryptography and complex problems are going to start flooding onto the internet. And I said, well if the world of the internet becomes suddenly very social. There are these humans that are emotional, what will they do, what will they need? They're all gonna just follow the seven deadly sins because that's what humans do. We're all wired to transgress in sinful ways. And so I wrote down the seven deadly sins and so that my model will be one start up for every deadly sin. I remember reading or hearing the quote, vanity is the devil's favorite sin. So I thought well what does vanity look like online? It has to be media sharing, It has to be photo sharing, has to be video sharing. And so slide was very much invented through this sort of intellectual rigorous attempt to figure out what will people do once vanity becomes the dominant behavioral force online.

Yeah, I mean remarkably prescient because that of course did happen but probably were just a little bit too early. Right? Because I was thinking about this just the other day, looking at instagram and so many instagram accounts are just people taking photos of themselves. Right? It's social media is really, I mean something we would have called vanity a few years ago. It's just normal now right to call it Vanity is almost weird. People would be like what you mean? It's vain for me to put photos of myself on my account. That's what everybody does. But you were a little bit early on that.

Yeah, probably.

What what was it about this idea that appealed to you? I mean this is very different from, from what you had been doing, not, not just a paypal, but just like it was different from your interest and like cryptography and, and just like really intense like mathematical problems and this is like consumer photos like what, what was it about it that appealed to you? I

think you just answered the question yourself.

Part of

My existential crisis was I was super successful building a payment system at 27 and all I knew was how to secure things which mostly secure money and I knew about payments and I knew about banking now and I knew how to fight fraud and all kinds of really intense things. How could I top that, you know in my 30s, how was I going to build a better paypal?

And really from what I've read, it sounds like you were motivated by this idea of like you wanted to make something that was bigger than paypal because paypal was, you could measure by a number 1.5 billion and in your mind it wasn't about the money, it was about surpassing that number. So you could feel like you created something on your own paypal wasn't your like the peak of your career.

Yeah, that that was certainly a significant motivation. I'm not sure I was explicitly comparing it in terms of the sort of exit number, but I definitely thought of how many people will use this thing and how valuable would it be for some definition of value. And so absolutely, it was a, how can I one up my younger self,

I read that around this time you were again, you were quoted as saying, I don't know what I would do if I couldn't start companies, I'd probably think about slitting my wrist. Oh my gosh max. But, but but really, I mean that was, and to some extent is as we will continue to talk about your story, is your motivating force. There's a restlessness, right? Like you do have this restlessness.

Starting companies is clearly the thing that gets me going,

alright, so slide becomes your, your idea. And and did you go out and raise money for it right away. Pretty

much. I think the original idea was that Peter and I funded it and then fairly soon thereafter I sort of went out and raised they proper financing. Around this time I had a brand name to bring to Sand Hill Road. So lots of Sand Hill Road firms were excited to to participate and we were off to the races,

slide was a, can you tell me what it was like as a consumer, how what would my experience be with it? What would I do with it?

So by the time facebook started really growing explosively and Myspace was still a thing, We'd really kind of nailed this one. Use case that's exactly as you mentioned, you know, most photos people post online are of

themselves. And

so we had basically evolved the product to be just a really beautiful way of showcasing your own photos and instead of sharing them to a specific individual, you just broadcast them to anybody who would come to your Myspace page or your facebook page or anywhere. So it was basically a little scrolling self advert showing off your photos and eventually we added things like Photo effects and stickers and all the things that you see today in photo sharing software just 10 years earlier

by the ed speak. How many employees did you have that slide? 100 and

28 if I remember

correctly. Um, and I mean, I think at one point it was hitting like 150 million users a month.

That's right. I remember noticing that we were something like the seventh largest property on the

web. I'm curious having gone from running Paypal, which was about, you know, financial transactions to a really much more consumer facing site. That was a bit more about fun. Right. Did you enjoy it? Did you, you know, did you find your passion for it?

The honest answer is I loved the team that I built, but we had some pretty serious challenges throughout their multiple sort of realizations on my part that the culture wasn't going the way I wanted to, one point I had to ask a couple of people to leave because I thought they were just creating what is now called texas city and the team blowing the company up from within and throughout the whole thing, I felt like a fraud. Like I never played video games growing up. I was not really into photography, it was not a photo sharer. And so this idea of building entertainment products was this sort of mask I took on. And in some ways I was using my own product in real life. I was putting sort of a happy face sticker on max Levchin.

Um, I mean, it's, it's interesting because I would imagine that you, you were able to attract really great engineers and a great team because of your reputation. But what was, what were the problems that had begun to unfold? Probably

the most important learning from, from the problems is that this is great Michael later Paypal. But Paypal was this unbelievably combative truth seeking by any means necessary, almost culture. And when I left, I thought to myself, you know, next time around, I wonder if we have to fight so much. Like maybe it's better if we had a little bit more love all around. So as I was building, slide over indexed on this idea of hate, we really have to have just a lot more collegiality and that works really well if you are doing great as a company. But inevitably every company goes through ups and downs and sometimes downs take a long time and you know, go through the pit of despair for a while and in that moment is when all the veneer is stripped, you know, sort of all the superficial, you know, such a nice guy and you know, gosh, I just really enjoy spending my time with you goes away because you start to ask yourself whose fault is it and why are we not doing well? And the professional emotion if you will, you need at that time is respect for your partner's abilities. You don't actually need to feel like that person is an amazingly nice guy. The key thing is, I know you will be in your foxhole holding your position sort of almost like a military level intensity and as slides started unraveling a little bit here and there. I noticed that there are these people who were extremely loving towards one another that would, I would find out they didn't respect each other at


And I sort of had to start asking the question All right, well if you don't respect this person professionally, one of you cannot be here.

But obviously things are going well enough at slide that, I mean, google decides to buy it in 2010, I think for around 100 and $80 million and you become a google employee. But I'm assuming when you got there, you did not think you would be at google for the rest of your career.

I knew that I would leave and start another company at some point, but I certainly didn't enter the uh campus thinking, hey, this is a very temporary thing. I was actually quite genuine and I've never worked for anyone for more than a couple of months and that was one time at Ebay and so I sort of thought, you know what, like all the stress of being a founder, maybe I don't want it. It turned out I did,

you became a vice president engineering at google, pretty important job. How did you, how did you find the, the environment there? Did you, did you find it liberating not to have to, you know, be awake at three am stressing out or did you find it, you know, actually stifling?

I think for a little while I was suddenly worry free, but I found myself bumping into some of the corporate walls reasonably quickly and by the way it is, so you know, I don't mean to sound like an advert, but there's lots of good things to say about google and none of it is in any way disingenuous, but for an entrepreneur, you get reminded you're an entrepreneur when you're not trying to run a company the most you start realizing that sort of rules are written and you kind of have to follow them because you're in someone else's backyard And eventually I sort of said, Look, I think I'm probably better off on the outside stressing at 3:00 AM.

I think you lasted at Google for about almost exactly a year from on August two and August

that's right. Um I actually knew a little bit earlier Sundar who is now, of course the ceo of the whole thing. I was singularly the kindest person I met at google when I was sort of lost in the corporate wilderness there for a little while. He took me on walks and talked to me and let me sort of pour my confused heart out. And so as he was counseling me through what's really going on in your head, man, I pretty quickly, maybe six months and figured out like this probably isn't gonna work. And then I chatted to his larian surrogate and they sort of said, look before you hang up, your cleats poke around at google X. Look at all the really amazing stuff we're doing. Like surely there's something intellectually interesting that you can try to find and I did that for six months and I honestly look for something cool and maybe more autonomous and independent. I could do.

Were they disappointed when when you I'm sure they were when you when you said you were going to step down.

Yeah, I don't think they were they were pleased.

Was that a hard conversation?

Yeah, it was honest. I sort of said, look, I have a road, I have to go find again

meantime you you leave google in 2011, but there's other things going on in in your life, I mean for one thing you're still very involved with, yelp, I think you'd become the chairman in 2012, but you still have that the incubator, right?

Yes, I kept my fingers involved in a fair number of pies and It was certainly a very important one.

Alright, so, so 2011, you are now, once again out in the world trying to figure out what you're gonna do and from what I understand, because the first time this happened you really, it was it was a rough period. I mean personally because you were lost, you didn't really know what to do. Um did you go back into a slump? I mean this time it was different, you're married, your kid, I think you had at least one kid at that point,

we had the second one just as I was leaving google. So this is the same wonderful Nelly and now plus two kids and a puppy. And my primary thought at the time was the last time I ended up almost losing everything. So I am definitely gonna go start some company or do something to keep my brain occupied. Otherwise I run the risk of being told to a move out again. And so I was actually very, very keen on finding something interesting and in fact, I was like literally talking to people to start brainstorming maybe the day after I walked out of mountain view for the last time, but I I also decided I would take longer figuring out what I want to do because throughout slide for sure and even throughout google nelly would tell me, I know you're gonna start a company next time around. Just sit back and ask yourself what would make you happy, What is the thing that you're really meant to do?

And what was the, what was the kind of thing that made you happy that that you thought I need to do?

I didn't know and most of 2012 I spent kind of brainstorming completely random ideas but the probably most important output of that time I wrote this essay for myself titled Hard, valuable Fun where I try to sort of explain what is it that drives me like why do I do the things that I do in sort of this rigorous self reflection process and the very shorthand is it has to be difficult. I'm an engineer at heart, I like solving puzzles and if it's not hard, I've just done really value it enough and going all the way back to Paypal. One time I was working very late at night, I was working on some project outside of Paypal at the papal office, I was still kind of had enough time to tinker. Peter walked in and he asked me what are you working on and I sort of describe whatever program I was trying to hack together. So that sounds really difficult. So yeah, it's really hard. But but is it valuable? That's valuable? I don't know, it's just really fun said, well hard is not always valuable. Valuable is typically hard, but the inference doesn't work the other direction all the time. And it sort of really stuck with me like that is such an easy way of explaining why a lot of puzzles are kind of worthless. And so it's still important for me to build these really solve really hard problems.

But they have to be valuable sort of, you know, not to peter thiel. And then I said a whole paragraph on what is fun for max. And I don't really think it's photo sharing and I don't think it's social games. That was sort of this moment of truth. I was like, oh, I know the class of companies I'm going to start. And then I showed it to me and she said, you finally figured yourself out. And that was a liberating moment because I then said, well, it sure sounds like something in financial services again, but I'm definitely not going to do that. And she said, just give yourself permission to go build something that's like another paypal, but better

when we come back in just a moment how max starts to build a business that makes it easier to buy things on credit a need, he identifies after discovering that his own credit rating is pretty terrible. Stay with us. I'm guy raz and you're listening to how I built this. This podcast is brought to you by whoop a wearable health and fitness coach isn't just another fitness tracker. It measures your heart rate, variability, resting heart rate and a fully phased breakdown of your sleep, whoops algorithms. Then process all of that data to provide you with a daily personalized recovery score that can help you know how you should approach your day. Really changed how I think about sleep and recovery. I've always known how important those two are, but the data takes it to another level. If I wake up fully recovered, I know I can go out and push myself whether it's in a workout or a full day of interviews and when I'm feeling a bit low can tell and provides me with coaching feedback to help get me back on track. I wore their all new four dot oh, it's designed with new biometric tracking including skin temperature, blood oxygen and a lot more sleep, better recover faster and work out smarter with the all new devices free when you sign up for a membership, go to dot com W H 00 P dot com and enter built at checkout to save 15% off today. I'm pretty much always on the go. So I don't have a tough time to do the things I want to do.

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I L. T. To 505 100 to try audible free for 30 days audible dot com slash built. Hey, welcome back to how I built this. I'm guy raz. So it's around 2,012 and Max Levchin is hammering out an idea for a new fintech company and he starts to formulate a plan around this very embarrassing thing that had happened just after he left paypal. He was a multimillionaire at that point and he decided to buy a new car.

So I fly down to L. A. And try to buy this beautiful one of the very first hard top, fully retractable convertibles which was probably my most coveted possession in my late twenties and the dealership said, oh you know cool your your the papal guy like I saw you guys in public, you're still gonna have to pay cash because your credit that I just checked is terrible. I don't know what you did but my God


I'm standing there next to Nellie and next to Luke one of our paypal co founders and sort of my slowly shrinking and my face is probably purple with embarrassment and it was not the only in fact was one of many, many experiences where my credit would get checked and it would be this moment of like oh God please please don't say out loud that I came to the house as a 16 year old until my first credit card on campus which I promptly went delinquent on. I had no record at all. You know, I I had no idea how many payments work in college and my Fico score went through the floor and it's been a decade and I took a company public and still doesn't matter. I still look like a deadbeat to the rest of the world because of my credit

record. So I guess you start to think about how to solve that kind of problem. Like somehow sort of how to make it easier to presumably to buy things on credit or to build up a like a good credit record.

Yes as we were brainstorming ideas. The fir first filter I would apply is what is sort of gut wrenchingly difficult, you know, a real problem in the world that people are willing to go to the ends of earth to, to figure out. And I was chatting with Nathan, one of my closest friends from college days who was my head of risk at Paypal, he went on to co found volunteers with

Peter thiel. Yeah.

And I said I credit scoring is such a gnarly problem. I still sort of brace for impact every time I and my credit card over because who knows, they might cut it up and bring it to me in two pieces because my credit is so bad and Nathan said, you know what's really stupid is that a Paypal? We had access to all this amazing purchasing data. We never once tried to use it for credit scoring. We did so well with anti fraud and oldest data driven risk decision ng credit is kind of the granddaddy of them all and it's actually the consumer facing part of his decision. Ng can you and will you pay your bill if I gave you money up front and ask for it back later. And it was sort of just like, uh, that's really hard. There's a lot of people like me who screwed up in college and probably would like to buy things using credit but are either priced out or have these horrendous triple digit rates they have to deal with And it seems to be kind of stuck in 1970s. And so that was the, that was the jump off point. And we went to work feverishly.

So you you started to ask yourself can I solve this problem? Right? Maybe there's a way to create some kind of mechanism to evaluate consumers in a different way.

That's right. And this idea that there must be other forms of figuring out What you really are like as a financial actor, beyond your 10 year old college record or lack there off. And then fairly quickly we realized that fundamentally what people really want is not some abstract better credit score. They want to buy things. They don't want to be confused and don't be scared by the cost if they're paying overtime.

All right. So you you start to ask yourself, how do we solve this and how do you solve it? I mean, I mean banks, um you know, and and lenders have a system, they they evaluate your credit score based on a variety of factors whether you've paid your bills late. You know, if you if you've missed a rental payment or a mortgage payment or um and that's basically how they figure out whether you are going to predictably pay them back and and and that has more or less worked for banks, not not great for consumers,


there's a reason why that works because it's risky to lend money, presumably. So how are you going to solve that?

The short answer is there's no short answer. Um,


most important thing we realized very early on was the problem isn't so much with the credit score, although there's plenty to improve their on, but with the tools available to consumers to borrow money, this will sound harsh, but I generally believe that I'm about to say.

So payday

lending is a well understood, awful thing where you have very high rate compounding of interest into principle and ability to extend your payment period essentially. Arbitrarily, so long as you're here to kind of feed chunks of money to the lender, you know that that's the anathema that, that, that's the worst thing in the world. That's the payday lending. Now reduce the rate by let's say 10 and you're, you're describing a credit card, the two products are basically identical. You can revolve more or less in perpetuity, the rates lower, so it looks a little bit nicer, but it's still an exponential curve and the most common way to borrow money in America is a credit card. So one of the key insights for a firm was gen, z and millennial generations, which are now make up more than half of americans spenders are starting to actively ask the question is this the best way and the fairly loud answer is no, it's not, it's a lot nicer to say, hey, I'm going to borrow X dollars, it will cost me additional white dollars or maybe it'll cost me nothing because the merchant that really wants me to buy whatever the thing that I'm trying to buy is prepared to pay my interest for me. So maybe there's really no up charge, no no interest And that's it. And then I know that after six payments or 12 payments or 18 payments, whatever the good number is for me, I am done. And if I'm late there's not gonna be got here like late fees. So we said let's not do late fees and let's not compound interesting to principal and sort of just stripped out all the payday lending like yuck from payments.

So alright. Just to explain what what you're describing is is known as B. N. P. L. Which is buy now pay later. Right. And and and the company you launched a firm is one of several companies in this space right now.

That's right. All

right. But, but anyway, in the case of a firm, I guess, I guess the way it works is you make these short term loans to consumers. Uh, and there's no compounded interest and and no late fees and I guess when you launched you were trying to be like an alternative to normal credit cards right.

Yeah. A big part of credit cards is that there's some gargantuan limit and you know, you're encouraged to fill up your bucket of debt and never really fully empty it. The product we built was all about, hey borrow $100 paid back in six weeks be done if you need to borrow another 100 let's have that conversation separately and it might unfortunately result in us telling you, we don't think you can take on another 100

dollars. And as I, as I understand it right from, from looking at it, um, the loans can work in different ways, right? Like you guys do some loans where the customer does pay some interest and then there are other loans where the customer doesn't pay any interest at all. Like, like basically if you bought $100 pair of sneakers, You would just pay it in four installments of $25. But what I wonder is, how do you assess risk right? Because like when I go for a home loan, they look at my, my records and my scores. And, but when you're just looking at a random new customer, how do you assess whether they're going to pay a loan back?

You know, it's not that different from getting a rate for a mortgage except we do it in a matter of seconds

and you use different data points. So

we don't look at additional credit scores since we founded the company with a belief that we can do much better. But we do look at the data that goes into that score in some ways. We can think of us almost like computing a different score using much of the same data plus a bunch of other


at the limit. We literally say, hey, we can't figure out how to reason about your financial situation, like maybe you are, you know, what's called a thin file where your information is there, but it's just not enough of it. Would you please log into your bank account right now? We'll look at your cash flow and we'll actually decide whether we think you can carry this amount as a monthly obligation and will honestly tell you, obviously has to happen fully automatically. No human can look at the data and calculated quickly

enough. Okay, so essentially you're, you're basically using artificial intelligence to underwrite pretty much every alone you do. But like when you were pitching this model to investors, did did they believe that that approach was good enough to mitigate the risk that you know, that you'd make


smart lending decisions that you wouldn't need to charge late fees or things like that.

You're absolutely right. Every investor I talked to and for a while I sort of funded it myself because I've been fortunate and people didn't really believe that this is possible. But every time someone would ask me like how in the world are going to do this without lay these without deferred interest without all the sort of natural quote unquote, natural, I said, look, I think we're going to lose a lot less money because vast majority of people are going to pay us back.

But if there's no late fees and you don't it's just a straight, you know, for payments, what's the disincentive to to just not pay on time?

Well, for one, if you're delinquent, you can't transact again if you are what's in the industry is evocatively called a sloppy payer, which is someone who generally pays their bills but are almost never on time. The normal financial behavior say, great, you're a fantastic revenue opportunity. You have the money. You just don't don't care about being on time and will charge you a fee for that. And so instead of doing that, we basically said, look, we will go out of our way to remind you and remind you and remind you, we'll send you multiple notifications through multiple channels, through our app, through a text, through an email. And we'll also give you an opportunity to set up a fully automatic kind of a time withdrawal from your bank just so you're not late. And for a vast majority of people, this is more than enough and that they are on time. But if something happens and you're unable to make the next payment, that's fine. But that prevents you generally speaking from transacting again until your current or at least until we understand what's really going on.

Mhm. All right. I want to I want to dig into this from the merchant's perspective because from what I understand when a consumer makes a transaction with a firm, The merchant pays a fee, right? Like I mean whether it's a 0% loan or even a loan with interest, the merchant is assuming some of that cost, right? So, so why would they even go for that? Like what, what's in it for the merchant?

The reason the merchant finds that compelling is because without a firm this transaction most likely would not have happened

because the consumer might not have a credit card

or or chose not to do it. About half of the United States, adults are revolving on their credit card right now and the revolving is expensive and it gives you extreme anxiety if you're revolving for a long time on a lot of money and so putting more onto your credit card for those people is very, very stressful event. And the choice they have is, well, I'll buy it anyway, you know, damn the interest rate or you know what, I'm not gonna buy it. A firm being the third choice was a really powerful enabler. People said, okay, so I can buy this thing, I will pay no interest or some number of dollars on top of the retail price. But then I'm entirely out of debt for this thing in six months or six weeks, that seems like a pretty clear value proposition.

So, Alright, so in 2012, once you set out to launch this thing, how did you find customers too to, who would be comfortable using it?

We were looking for a hack basically a trick too. Get consumers who are interested in borrowing money to pay for things over time without having to spend marketing dollars. And so we had a couple of friends that were in e commerce and literally called around and said hey would you consider putting up hay with a firm right next to your pay with Visa and pay with Mastercard. We think there's a whole world out there that doesn't have access to Visa. Mastercard that probably would use us or nothing. And then the sort of the wow moment was when one of them called me back and said Alright we just saw a 30% spike in volume as soon as we added your button

when we come back in just a moment how max gets merchants to use his brand new payment platform and why he's spent way longer working at a firm than at any other job he's ever had. Stay with us. I'm Guy raz and you're listening to how I built this. Mhm. There's power in getting together with the people you love and today your family isn't just about people with shared D. N. A. It's also about the chosen family you've found who like what you like and know what you've been through. Maybe getting together with your people means reconnecting with your childhood friends or watching the game with your college teammates or seeing your new baby meet your best friend's baby for the first time or maybe it's about reuniting with the whole crew or laughing until you can't breathe or big sister real talk or just sitting in silence with someone who truly understands you. One thing is clear. Today's families don't often live in the same city, let alone have a single place to come home to. Vor bono's the best places with your people with millions of vacation homes.

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Just a tap. All of those annoying projects will just disappear. Maybe it is a little magic download thumbtack and start your next project today. Mm hmm. Right. Hey, welcome back to how I built this. I'm guy rise. So it's 2012, and Max has launched this new company, a firm buy now pay later service that simplifies the experience of buying on credit. And at this point he's looking for some merchants who will sign on to the plan.

The very first one you would have heard of is 1 800 flowers. Uh, it was actually a fascinating conversation where I talked to uh, to founder Ceo there and 100 flowers have been around for quite some time obviously. And uh, I thought this would be a what in the world are you talking about? And he actually said, Oh my God, like this is, you know, very similar to what we used to do in the 70s where people would call us on the phone and order and they say, you know, I don't have the money right now. I'd like to pay later and say, oh no problem. You know, just write down the phone number of course and then come back later. Yeah, well layaway, but you get the flowers today. And so kind of a layaway with instant delivery, but he graphed the idea instantaneously like, yeah, that's great. Let's give it a test. And so it was probably the easiest sale I've ever closed. And having a brand name merchant was a huge enabler. It literally allowed us to say, hey, you know what, it worked for them and their reference able customer.

That's when I sort of started knocking on much sort of a larger doors of people.

And then who was, who are the next ones? What were the next domino to fall, so to speak?

So the next set that we were unbelievably lucky to get where a lot of the online, the new director consumer sellers of homewares and home workout equipment like peloton revolutionized home workouts and Casper just completely rewrote the rules on mattress replacement cycle and how you sell it, how you deliver it. And so all of these brands were kind of being born in the Early teens, you know, the last decade. And uh, we were able to sign up an incredible number of them very, very quickly during 2014, 15.

So I wonder when you, when you got this together and launched in 2014? I mean, did you have to bring in a lot of money, Did you have to have a lot of cash on hand or was all of these sort of the interest payments essentially paid by the retailers. And then in some cases the actual consumer, you guys never affirm never had to pay any of those fees,

We certainly, we certainly did. So when we launched the product, just the very, very first lunch with 1 800. So the way the product was just from a capital perspective, as long as you're growing, it's a negative cash flow product. You approve, a consumer, they get their flowers, you send money Minour fees to 100 flowers. The consumer pays you back first payment is due, let's say 34 days from the transaction. So for those 34 days you've already paid your retail partners and you're waiting for consumers to come back and pay you. So at any given time you are waiting for money to come back and you need to continuously get more capital to grow the company.

So essentially, you had to have the money and have to have the money to pay the, you know, the full amount to the, the retailer minus your fee that they're going to pay you. And then you get the money directly from the consumer.

So the day we launched, I sort of said, well, we have no way of financing these loans and it's gonna be a negative cash flow business. And so I will put up $100,000 of my own money to, to front these payments. And if there's any uptake at all, we're gonna have to figure out how to scale some sort of capital program. And I went through sort of a sleepless night thinking, Oh my God, this thing launches and everybody wants it and my $100,000 will run out and what I do then. So I, I actually had this moment of like, you know, asking nelly like how much more should the election family be willing to put up? And uh, of course it launched a nobody cared, true true revelation from the world of startup very, very rarely as a product launch immediately had this sort of effect of a, an explosion. Just typically things don't work.

It was crickets, nobody, nobody,

Nobody showed up. So we had to learn how to promote it a little bit how to work with 100 flowers to tell consumers as they're considering their, their choices and bouquets that there is in fact a way to pay overtime is available later. But as we started seeing transactions very quickly, we had to figure out how to fund the actual loan flow and the way that works first you borrow money so you can lend it, you go to bank partners, non bank partners and say, hey, here's my financial profile of my product. I would like to borrow from you. And obviously I want to pay a lower interest rate that I think is fair to charge the consumer or the merchant on the other side. And the spread will be my feet. And you can imagine scaling that program to larger and larger and larger and eventually you effectively issue bonds and those become tradable.

So, um, how, how fast did it, did it, I mean, did did you feel like a firm once, you know, You got through that initial period with 1 800 flowers? How, how quickly before you, you convinced other big retailers? Because now it's, you know, it's, it's pretty much everywhere. I think it's on amazon now, right?

It is on amazon, the first major kind of break retailer for us with walmart. And it took a long time and I got to know some of the folks in senior management team there. And the thing that was pretty amazing is how similar their thought process was about the good and the not so good of the financial products. I was struck by just how aware they are of their customer and how these financial products can be really harmful. And so we had a meeting of minds long before we were official financial partners.

One of the things that's been really interesting about a firm is, and it sounds like you very sort of intentionally thought of gen z millennials as your consumer base. Right? Is it, is it fair to say

there's a fair amount of gen x as well, but it definitely skews very young.

I was looking at some just kind of broad data around a firm and it has a very high use rate among people of color. Um, and I mean this is obviously always sensitive to talk about, but from from what I understand it's been particularly among black consumers has been very welcome. I mean it's it's a, it's a fact that that credit ratings can, can disproportionately negatively affect people of color in the United States and you know, payday lenders and in particular have been particularly predatory, you know, in underserved communities. So yeah, I mean this is an option for lots of people who, who didn't have another option before. That's right. It

is a natural consequence that we don't look at traditional credit scores and traditional credit data as much. There's plenty of great people across many, many underrepresented groups and by great, I'm not passing character judgment of care of course, but financially solid footing enough to borrow money and pay back successfully without the needs for the nasty alternatives. And if you treat them right, they tell their friends, which is true for any of us and therefore these products take off because of their honesty and transparency that we bring to bear. And so I, you know, I would, like I said, it doesn't make me happy,

you know, max. It's, it's interesting. Um, I mean a firm is, it's a, it's a math problem right that you're solving here because I'm assuming that you're looking at the math and a firm is a public company. And so it's, you know, all your financials are open and, and it's not yet profitable, but you know, looking at the math where it's headed. Is that, is that true?

Yes. The probably most important thing about a firm is exactly what he just said. It is a really, really, really cool big math problem that we're solving. If you look at the unit economics, which is, you know, what happens to every transaction. If you divided the overall dollars in by the total number of dollars transacted, you'll see that that number is very positive and so over time, so long as we don't spend the excess transactional economics will sort of inherently become profitable. And it is something that we can model and can see in in our future because the public company will stop short of prognosticating when that immediate future and the future is. But it is uh, it is exactly that,

which I guess leads me to my next question which is running a public company is very different because you are now quarterly earnings reports and you know, you've got to answer your questions from the media and from shareholders. But you know, over the last year, your stock price has gone from 176 down to, you know, in the low thirties. Um, does that, does that keep you up at night or are you confident enough in the math? That you're not worried.

I'm not worried. I am very confident in the math. That's probably the thing that I'm most confident in in most most worlds. The stock price matters for two. Really important reasons They're there to constituents. So there are people who bought the stock one. It was higher than it is right now and it is my job to try the absolute hardest. I have to make sure that they don't feel that they made a mistake. I think the company is in exceptional shape and so my duty to my shareholders is not lost on me. But the way to do it of course, is to build a great company over a long period of time. And so the fluctuations of the stock today or tomorrow, something that I don't really look at. To be completely honest.

The second group that I really care about is the employees and for them the mission is truly important. But they have choices in their employment and I need them to believe and I need them to be here and continue building things, you know, all of us together. And so the stock price matters as a indicator of value that we have created for the personal finances of our employees. So that, that's really important, which is why I care about the stock price. But I care more about building something that five years from now is 10 times more successful financially than we are today. You know, there's a great, I think Graham quote in a short term, the market is a voting machine in the long term it's a weighing machine and I like that thinking process

Max you've been working on a firm now for 10 years. Um This is the longest you've been at one job right in your in your entire career. 10 years

by a wide margin to. Yeah.

Yeah. I mean if I if I'm looking at you, I'm thinking based on his record, he's he's restless, he's he's he's got to find some new challenge. He's gonna he's gotta just to live to survive to thrive, to be happy, he's going to have to come up with something new. Is that true?

A little bit in the following sense. So I mean this this sounds weird to some people presumably extremely prosaic, but financial products is like a play land for me, feel embarrassing that out loud I guess. But uh the ideas that are sloshing around in my head, the things that need to get built needs to get built tomorrow. Most of them these days are really in financial services because every where I look over the sort of rock, we turn over as we run the firm was like, oh my God that clearly needs to get reinvented and done better. And so the opportunities that I see these days are just predominantly in my own industry. So how do I stay fully engaged and fresh at a firm if I really am going to sell shares to the public and commit to them, which I certainly have that I'll be here a long time. So we've organized in some ways sort of the incubator 3.0 inside a firm and there's a team called C. T. S. 0 to 60 fortunately not just me but a bunch of other pretty smart people who are constantly coming up with ideas that were incubating inside a firm and launching in the sort of the way I describe it to my investors. If you look at any successful startup you know not just a firm, it's always a S shaped curve where you start with nothing and for a while it's just nothing and nothing and nothing and then something clicks and then it goes vertical and you just keep going up and up and up and then eventually it has to slow down as you saturate the market as the market becomes more and more competitive as consumer preferences change businesses don't go away but the growth curve slows and we're lucky to have hit on a giant opportunity in a giant market. So a firm as it exists today is very far from assim toting and turning into an S.

Shaped curve. But if I'm going to be here 10 years from now I'm gonna be here 20 years from now, I better have another S curve type product in my pocket. And so a lot of what I work on these days. So what gives me the greatest happiness really is experimenting within the C. T. S. Team building new ideas and most of them are going to go exactly the way of the dodo as any other startups? But even if one of them becomes another s curve that propels a firm to the next big thing that this purpose will be fulfilled. So I'm pretty sure I'm exactly where I need to be or quite sure exactly where I need to be. So I'm not in fact restless. The restlessness comes from, gosh I have to do another really really important management meeting and I'd rather Tinker was E. T.


I've been thinking a lot about the story you told of when he met Peter thiel. He went to this lecture that he gave in front of four or five people. And um and I think that was a very lucky moment for him and I think it was a very lucky moment for you too. And I think both of you, had you not met would have figured something out and been successful. You you were motivated. You came out there and you were clearly a talented computer programmer and mathematician. So there's no doubt that you would have figured it out. But you did have those moments like going to that lecture at stanford and You know eventually you know being part of paypal which is the kind of the history of of Web 2.0 I mean all those people who came out of paypal are hugely influential, hugely powerful for better or worse? How much of of your journey and what happened to you, do you attribute to those lucky moments and how much do you think have to do with just how hard you work and, and the grind and, and in your intelligence? Mhm That's

a great question. I've heard you ask this before and I thought what is my answer

and came

up with very little canned anything. You know, I think the role of luck is vastly underappreciated. I think the action you take when an opportunity appears is yours and it's the choice and willingness to take the risk and decision to just go for it and damage torpedoes moment. But if you are unwilling to move or unable to recognize or don't encounter these moments of opportunity, you know, it's probably not available to and I feel a certain degree of guilt that some brilliant people I know may not have had some of these moments and they could have been much more successful than they are yet. I do think that probably moments of luck appear in front of most of us at some point or another in our lives. And what do you do after once you see one of those have one of those, it does come down to work ethic and just willingness to grind and you know, sleep less and compromise things like work life balance which have their own consequences. It's, it's not free and it can be very damaging, but luck is the kick

start, that's max Levchin founder and ceo of a firm and co founder of Paypal by the way, whenever you're asked to verify, you're not a robot online. By trying to figure out what those wiggly letters spell, you could be taking the go spec legend test Only a human has the ability to discern those letters max created that test after paypal was getting hammered by hackers that was back in 2002 and the test in modified form is still widely used across the Internet. Hey, thanks so much for listening to the show this week. If you want to contact the team, our email address is H I B T at I D 0.1 dory dot com. If you want to follow us on twitter, our account is at how I built this and mine is at Guy raz and on instagram, I'm at Guy dot raz. This episode was produced by Alex chung with music composed by Rammstein, Arab louis. It was edited by neva Grant with research help from Claremore Oshima. Our production staff also includes J. C. Howard Casey Herman, josh Lash Liz, Metzger, Carrie Thompson sam Paulson, Catherine, cipher Elaine coats, john Isabella christmasy, me and carla estevez, I'm Guy raz and even listening to how I built this hey everyone. So I want to make sure you know all of the different ways you can listen to how I built this as you probably know, you can follow the show on amazon music, apple podcasts or wherever you're listening right now, but I wanna let you know that you can actually listen to the next episode of how I built this today, one week early on amazon music. You can also listen to it early and ad free by subscribing to one theory plus an apple podcasts or on the wondering app.

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