PayPal: Max Levchin (Part 1 of 2) - Transcripts

June 13, 2022

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During its formative years in the late 1990's, Paypal attracted an extraordinary group of young entrepreneurs, who then went on to build some of the best known companies in tech. They became known as The PayPal Mafia—and Max Levchin was one of the leaders. A computer genius from Soviet Ukraine, Max joined Peter Thiel, Elon Musk, Reid Hoffman and others as they grew PayPal into a massively successful online payment service. Along the way, they encountered almost every start-up challenge imaginable, including the emotional ouster of Elon Musk as CEO. After PayPal was acquired by eBay in 2002, Max couldn't sit still, so he launched a startup lab that eventually led to another successful fintech company: Affirm. Guy will talk to Max about Affirm next week, in the second episode of this two-part series.  See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Transcript

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2000 and one for me was largely a year of trying to scale this thing as it was just blowing the doors off with its growth every week. The growth would just be so much more than the system could handle every monday. When Ebay auctions would settle, this would just go down for multiple hours And at some point our head of database scalability who was also a very accomplished blues singer and guitarist, brought his guitars to the office and would play the monday blues because we all knew the site would

crash. 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 took an idea, nobody cared about and transformed it into Paypal, a brand that embodied startup culture with its rapid rise hairpin turns and world famous founders. There are just a few companies in tech whose overall impact when a lot further than just the products they produced. Hewlett Packard is a classic example. It's not that computers or printers they made that matter. But the fact that David Packard and Bill Hewlett were pioneers who laid the foundation for what is now known as Silicon Valley. Atari is another one. Sure. Nolan Bushnell's video games and consoles were cool. But what matters more is how Atari ushered in the video game revolution, that's now a massive force and global entertainment and then there's a company called Paypal. Yes, it may be convenient to pay someone using Paypal, but Its products aren't nearly as important as the legacy that came out of it.

The group of people who helped launch paypal back in the late 1990s would go on to either found or fund companies including YouTube, Tesla, facebook, yelp flicker, linkedin, Mozilla palantir and many more you may have heard the phrase Paypal mafia, a term popularized by Fortune magazine in an article that came out in 2007, the Paypal story is full of public drama and private intrigue and not surprisingly has focused on its three best known founders, Peter thiel, Reid Hoffman and Elon musk. But the guy who actually had the earliest idea for Paypal is max. Levchin Max is a gifted computer scientist and coder who founded his first companies as a student at the University of Illinois in 1998. He launched a tiny cryptography company with Peter Thiel that would evolve into paypal max would eventually go on to help start several other companies, including a firm, a payment platform that lets you pay for things in installments. Max's story is so rich, so full of anecdotes of the now famous founders he once worked with and so full of lessons for anyone hoping to launch anything of value that as the two of us were talking, I kept wondering how we were going to keep it all to a single episode. So we decided not to try. Instead. We're going to tell Max's story in two parts in this episode, part one, you'll hear about his early years, the launch and growth of Paypal and its eventual sale to Ebay and next week part two everything max did after Paypal, including the company he's most involved with today. A firm Max. Levchin was born in the mid 1970s in Ukraine when it was still under Soviet rule as a Jewish family. The older generation of the Levchin Clan faced a lot of hardship. Both

my grandmother and grandfather come from fairly large jewish families. My grandfather came from a family that was largely incarcerated by the Soviet state during the 1930s, persecution of Jews and and other intellectuals all throughout the first half of the 20th century. My grandfather's family found its uh various members in the gulags. And so by the time I met my grandfather, he had already lost most of his brothers and sisters and the reason he and my grandmother survived, they were both physicists and they were both involved in some defense related work for the state. So as the Germans approached Kiev, they're both sent very far off into Siberia to help the war effort from far away from the front

lines and from what I understand when, when you were growing up. Uh your mom was also a physicist, right?

Yeah. She was employed at the food sciences research institute, which sounds very boring, but she had a really cool job. She was measuring foods for radioactive contamination. And before Chernobyl that was a very boring job. And then after Chernobyl became a very exciting job. Not in a good way.

Um so your mom worked for the state and was a scientist and your dad was a,

he was a writer, although he too had a a chemistry degree as a matter of fact, but his calling was fine arts.

And did you speak Russian at home or did you speak Ukrainian dialect?

We spoke Russian. And my grandparents who lived with us spoke Yiddish to uh have an encrypted channel from the, from the young ones

was your family at all religious. Did you have any jewish identity or did they sort of stay away from it because it was, you could be persecuted in the soviet union if if you practice religion or Judaism right.

I definitely identified as jewish but had zero understanding of the religious identity or really the historic event. So I knew nothing of jewish holidays. But amusingly enough, one of the things that happened. So first of all, I guess I was in the track program most of my life. So I would get into this math and science special track and inevitably because at least soviet jews were so obsessed with education, I would get to this new class and it would be like half jewish and one time a teacher made a joke and it was very much an anti Semitic slur. And all of us kind of were a little stunned because like normally it came from other kids, didn't come from teachers but it also just happened all around us. So it wasn't like that huge of a deal. And then after class some kind of a spontaneous movement began were like we shouldn't put up with this like this, this isn't okay. And so we somehow talked ourselves into submitting a formal complaint to the school about anti Semitism at the time we seem to just completely misguided because maybe we still get kicked out of school but I think both the school and the teacher was so shocked by all these preteen, early teen jewish kids getting worked up about being called the equivalent of unprintable word in class. They ultimately centered the teacher and we're like yeah you can't really teach this class anymore. Which in retrospect, I think my parents were like what are you doing? You're gonna get kicked out like this is going to jeopardize your chance of getting into a good university.

And in retrospect, like you hate me, That was cool

mm Okay. So I've read that as a kid in Ukraine, you were you were already getting into computers right, like you were already learning about, about programming, right?

Yeah, it looks a whole collection of really lucky coincidences. So as my mom joined this food science research institute, the state gave her in order to learn how to program. And she wrote me into it and basically said look you know, I'm not really sure I understand how this stuff works, help me out. And so that was my first kind of rabbit hole into programming. And within a few months I was a better programmer than my mom and then better programmer than her colleagues. And I was just gorging myself on all the knowledge that I could get from. Both like translations of various computer science books. And so by the time I got to the U. S. I was completely hooked on the idea of writing software and I knew that I wanted to be a software engineer. I knew I wanted to go somewhere to beg borrow and steal to get my way to a keyboard in the monitor.

Soviet Union collapses in 1991, officially in Ukraine would would become an independent state. Um and today we're seeing the the the long tail of that story. Your parents decide to emigrate to the United States first of all, what did they, I mean what were they going to do when they got to the what was their plan when they got to the U. S.

I'm pretty sure they had no plan,

but they just knew what they wanted to get out.

A couple of things led to it. So my grandfather in particular, but also my grandmother were generally speaking apparently quite dissident in their views and I wouldn't know it even though they lived with us. So my grandfather, he and my grandmother have been scheming to get out of the country since maybe the 70s, certainly all through the 80s and two things happened in 1986. My grandfather died quite suddenly and my grandmother retired and she completely disappeared from the spotlight. She was an internationally known astrophysicist. And actually one of the coolest things I found after I came to the U. S. Is my grandmother's research papers in the Harvard library which was like a wow I did not know that this was the thing

but your physics

royalty. I am, I'm a

physics royalty

adjacent but she was an amazing woman and it's completely appropriate that she has papers in the Harvard library. But uh my grandmother decided that she would get us out the entire family. And so she engineered this mass exodus of the left shin clan while basically dying. She she had breast cancer that was fairly aggressive all throughout this process. And she just sort of said you know what screw this, we're getting out. And so I don't think they had a plan. They just had an opening where they realized that soviet state was falling apart. She had to bribe a soviet official to give her a new birth certificate and suddenly we found ourselves on a plane to new

york. Well so you you were let out um and you land in Chicago Uh in 1991. So what did your parents do for a living when they got there?

My father, a man of arts, spend a bit of time painting signs for shops on Devon Street, which is kind of a main drag in north side of Chicago. And my mom babysat for the first I think 10 years of our life in the us.

And did they speak english?

My mom spoke decent english and my dad did not,

You were a 16 year old kid, did you speak English?

Yes, they started me on it at two I think there are tapes of me trying to speak English as a two year old,

wow, alright, so you could integrate into the school system and your brother, you're a junior high school basically. And was was it hard for you when you got to school?

So academically was not, I definitely had my fair share of you're not from around here type conversations. But I was fortunate in the sense that I went to a very normal inner city public high school in Chicago, It was something like 30% black, 30% Asian, 30%, everything else, 10% people you didn't know existed or was it just some sort of a very very very integrated mix of anyone and everyone and so this was not a wow, you're not from around here. It was more of a, oh you're one more of these people who speaks with a funny accent and does math really well in place clarinet. Okay. You know we have three of you over there in the corner.

I

every stereotype.

Um so I read a story that you you you you knew about M. I. T. And that was your dream to go to M. I. T. And you talk to your school counselor about it. But you you were steered in a different direction not to Emmett.

Yes, this is a one of these, you laugh, you cry, you end up in a university stories. So I don't remember actually whether this was the way it was formally translated or the way I translated it. But in my from english to Russian back to english translation of M. I. T. It became empty. I

so you so you talk to your counselor and said you want to go to MT I.

Yes I was very insistent. I really want to go to M. T. I. And said well I just don't think I know the school who

sort of M. T. I. The Montana Technical Institute.

I think my my counselor may not have heard that one either, but she said like you've never taken a C. T. Never taken an S. A. T. Your as fresh of the boat as they come. Just like you know get your bearings and then you'll you know, you'll you'll you'll get to the right university. And so I was quite discouraged. But fortunately I met this great guy named Eric who is still one of my very closest friends. And I said, all right, I really want to go through computer stuff. Where do I go? And he said, you know the brightest kids from the school get into university of Illinois at urbana champaign and that's where I'm going to try to get into, you know, if you want, I'll show you how to get the paperwork and that's how I ended up with you and I

All right, so you get to school and you are determined from the day you get there too to what to become a software engineer when you graduate or to start your own software company or both. I mean from what I've read, it sounds like you kinda knew what you want to do when you got there. Is that, is that true?

Uh, a little bit after I got there. So I got there, I was still very much under the spell of my grandmother who was with us. She she actually managed to survive long enough to see the family moved to Chicago. And so on my way to college, she was quite ill, like really, really ill by that point and she basically said, look, I think you should probably consider being a professor and that was my plan when I entered the UI. But midway through sophomore year, I ran into a couple of guys that were starting their first company and they sort of infected me with the entrepreneurial wanderlust. And that, that's when I knew I just needed to write code and build companies and products and businesses.

I mean, I mean this was kind of a heady time at the university of Illinois. Um, and I think Netscape was marc Andresen came out of there, right? And, and so, you know, it was, it wasn't M I. T, it wasn't stanford, but it was uh, not far behind in terms of like the, the innovators that would come out of there. Um, but it's it's still the mid 90s, right? It's still like early Internet days. Um, but you probably had access to to see or to be exposed to technology that maybe ordinary people weren't exposed to yet, even as is a computer science student.

Yeah, that's exactly what happened. And so, so all of us were kind of realizing that we're in the middle of this maelstrom of innovation and we couldn't, we couldn't know and didn't really know exactly what was happening, but suddenly there's lots of attention to this mosaic project that marking trees and started at the national Center for Supercomputing Applications and they're all these people visiting campus and looking and the graphical browser Mosaic, the one launched in 93 when when I entered campus. And so I was thrust into this, the future is being made right here. Nobody knows what it looks like, but it's definitely being created right in front of you.

Do you by the way, do you remember getting on that browser for the first time? And it's just because I remember it just seemed like something totally, what is this

pennsylvania Avenue residence hall computer lab downstairs to the left second computer from first

row. That's

where I was when I saw my first copy of mosaic. And uh, I actually remember thinking, well this isn't that big of a deal except the embedded images are crazy, cool. Like this is just like all these

other text

hyperlink navigating things that I've seen before. But the images right alongside the text is just like a complete different experiences like reading a book and that was pretty amazing.

While you were in college, you already started to connect with other students to, found to start businesses, right? So

I think a lot of the immediate reaction to two things that the launch of mosaic and kind of the like, oh my God, this is different and important and everything will change now. Plus wow mark and five other people just upped and left campus and went to Palo alto California, which seemed like, you know, going to the mars to start a company and that, that construct was so cool and so inexplicably desirable. I ran into these people who were kind of hanging around the same computer science circles and they're like, hey, we're gonna go start a company, you should join us because you're one of these guys who doesn't sleep, doesn't need writes code and was like, that sounds great. I don't really know what we're gonna do and we don't know either, but we're going to start a company doesn't matter what it's gonna do. And what we kept on trying to do is answer the question. Okay, so the world today looks like this now add web. So advertising exists on tv it exists when you drive highway 57 from Chicago to Champagne. What happens to advertising when everyone has a web browser? We should build a company around that.

And I know you started a number of companies around this period, um, which didn't quite work. But what were some of the ideas that you came up with?

So the first one was in fact a web advertising I think may have been the very first web advertising company failed miserably for lack of funding and lack of understanding of how advertising industry really worked. Next one was an attempt to reimagine classified. So I, I looked at the back of a newspaper like classified in a newspaper. How about classified plus the web that's actually kind of vaguely successful.

It's a great idea. I

thought so and

successful. In which way, like, like people are paying money for it.

Yeah. My friend I started that and he would literally call small regional newspapers like an Upper peninsula michigan newspaper with a circulation of 200 would say do you guys have a website? And they'd say, yeah, we just got on the web ourselves, we have a website. It's like great you need a classifieds package because right now you sell, you make money by selling classified space in the back of the newspaper. Surely you will want to sell some classified space on your website. And so we would actually charge them sas fees $1200 a year I think.

But none of these companies that you started really went anywhere though, right? Like you didn't walk out of college with a big chunk of cash in your wallet.

No, I walked out with student loans

right? Got it. Okay. But but you you walked out of college clearly like fired up to to start something.

Yeah, the very seminal moment sort of like this is what I'm gonna do with for the rest of my life was when the very first company failed, we drove up to Chicago the four of us to try to raise money and were rejected. It was the, the advertising, what business we actually went to. I think leo Burnett, one of the large advertising agencies at the time and there was like, yeah, you guys have no idea what you're talking about. It's not gonna hunt. And so then that this was our last ditch attempt to save the company. So we were driving back to champaign, completely silent. The four of us in one car and just kind of like this, this is it like the end of the road. We're dead. And all I could think about was what is the next company I'm gonna start. Like I could not even like I was trying to convince myself it's like this is the moment of grief, you need to feel bad about the death of your first company like but I but I'm not, I just can't wait to figure out what the next one is going to do. And so when I left college I was just sort of on this kick of like, well number one, number two, number three, number four, the goal failed but surely number five will succeed. And I just couldn't wait to get

started when we come back in just a moment, how max moves out to Silicon Valley meets an up and coming small time investor named Peter thiel and starts a brand new business that initially goes absolutely nowhere. Stay with us. I'm guy raz and you're listening to how I built this industry disruptors make the world go round there. The innovators that take outdated technology and transform it into a product that benefits everyone, which is why I want to tell you about borough. It's a new kind of furniture company that makes everything with comfort in mind from their modular sofas and sectionals that make assembly painless to their wall shelves that make mounting a breeze burrow is designed to make life easier. Burrow is proud to launch everything you need to build the bedroom of your dreams including solid hardwood bed frames and modular dressers. Everything you love about their living room furniture, simple assembly, premium materials and more are built into their bedroom designs. Every order no matter how small or large is delivered directly to your door for free, thanks again to burrow for supporting our show, listeners can get $75 off their first order at borough.com slash built. That's Borough B U R R O W dot com slash built for $75 off burrow dot com slash built. Today's podcast is brought to you by a whoop the world's most powerful, wearable health and fitness coach isn't like other fitness trackers, it measures your vital signs including heart rate, variability, resting heart rate, and a fully phased breakdown of your sleep. In fact, I recently tried and it really helped me figure out how to think about sleep and recovery. Now I've always known how important those things are, but the data takes it to another level.

So if I wake up fully recovered, I know I can, you know, go out and push myself whether it's in a workout or a full day of interviews and when I'm feeling a little rundown can also tell me and gives me coaching feedback to help me get 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 bunch more data sleep, better recover faster and work out smarter with the all new device is free. When you sign up for a membership, go to dot com, that's W H 00 P dot com and enter built at checkout to save 15% off today. Hey, welcome back to how I built this. I'm guy raz. So it's 1997 and Max Levchin has just graduated from the University of Illinois with a bachelor's degree in computer science. He's already walked away from a few businesses that he couldn't raise money for. And now his former co founders are telling him to go west.

My co founders number one and two Upton left for Palo Alto because they knew you had to go there because that's where the action was. We failed to raise money. Silicon Valley was chock full of venture capitalists that were interested in giving money to people like us. And so they said, you know what, this college thing is overrated, we can drop out and go. And because these two guys scott and luke moved to Palo Alto, I knew we will kept in touch and I had gotten nonstop stream of, oh my God, it's mecca for startups here and you're riding away in champaign urbana, Get out here as soon as you can.

This is luke Nosek and scott banister, Right,

yep, they come

Back into your life. Uh well, in 1998 because you you move out there to kind of hang out with them,

yep. Exactly. 4 69 grand Avenue apartment Q. I was crashing on scott's floor and luke was an apartment p across the hallway.

And when you got there, what did you do?

I sort of, because I was hanging out with scott, I promptly became his brainstorming partner. I knew programming and I thought myself a pretty great software engineer, but I knew that most of my failures as a startup, ceo cto whatever I thought I was, or because I would build things that I thought were good and easy to use and then I would show them to someone like the classified software people like this is really great, but I have no idea how to make it work. It's so complicated. So, I decided that my next sort of development phase in life would go hang out with people who are really good at product design and scott happens to be just a genius, product designer type thinker. And so I sort of attached myself to him and would just roam around wherever he would go and say, all right, I have a product idea, and he would tell me all right, you know, tell me a product idea and I'd tell him and he'd rip it apart and show me why it's a stupid idea and all the things that are wrong with it. And it was my crash course education product design.

So you were kind of trying to come up with different ideas and I guess in in August of 98 a faithful and certainly fortunate encounter um we went to a lecture at stanford by Peter thiel. We know Peter thiel is today, he was at the time presumably just a kid, you know he I think he was at stanford and law school and worked in finance and and left finance and at that point he had raised some money to start a hedge fund. I don't think it was a huge hedge hedge fund, it was relatively small

It was $10 million dollars

compared to what it would be today. Why did you go to that lecture? What was a lecture? And and you were not a student at stanford but I think it took place on the campus.

Uh It's a it's a funny story. So so scott's apartment had no air conditioning. As many apartments in Palo Alto. Do not but it had a heater which would turn on Based on some Magic incantations and rules that I couldn't understand but that it was mostly on somehow and 98 summer was unbelievably hot. And so as much as I could I would go find an air conditioned room to just like not be drenched in my own sweat and stanford has all these wonderful classes during the summer and they don't really check I. D. S. You just kind of Rome at least back in the 1998 time frame at the time I would just kind of wander into a room any room and sleep in the back. If the election was big enough nobody cared. I was sort of half conscious of this guy named Peter thiel because luke told me that this young hedge funder Peter thiel. He thought it was really brilliant because among other things he was this super crazy libertarian quote unquote. And so as I was wrong Mr stanford looking for a lecture to crash and sleep.

I saw Peter's name was like oh all right well if the lecture is boring I can sleep and if the lecture is interesting I could listen and see who this peter thiel person is. What

he talked about.

Uh He talked about currency trading which was fascinating because I never even knew that whole genre of business existed and more than anything I just thought he was really bright. He was obviously very very smart person.

Did you? I mean from from everything I read about you you were a little bit awkward. Um Maybe you still are today a little bit which is okay.

That hasn't changed.

No shame there. Um But you did have some in the courage to go talk to them by the way. What was it? A packed lecture hall was like hundreds of people.

No actually the reason I didn't sleep because it was literally six people in a tiny little room, it's about as big as a broom closet. And I was like my first reaction remember very like oh my God I can't walk out, I can't even sleep because the lecturer, this peter guy will see me in probably mock me or something. So I just got to sit there and listen, he had another person who came up to him afterwards and you could tell from the look on his face that he was not enjoying the conversation. He just looked absolutely miserable while he was being interrogated slash talked at by some random person.

And so I

sort of decided that my move would be to free him from the grasp of this uh this person who was interrogating him. So I sort of came up and said hi peter I'm max and luke's friend. And I think he probably didn't necessarily know which look I'm talking about but he was like oh max yes great, great, I'm so sorry I have to talk to this

person. So

he just kind of abandoned the guy who was torturing him and started talking to me

and what did you what did you talked about? Just remember you say I liked your lecture,

I became my awkward self and basically said well I'm max, I just moved here from champagne and so it was like a weird kind of a zero content conversation. And then he asked me what I'm up to and I said I'm definitely gonna start a company again. And he said oh that's cool, we should definitely talk about that, let's meet for breakfast. Okay. And how about tomorrow? Which is very indicative of how peter thiel generally does things that peter thiel does.

So next day you guys meet for breakfast, where where was it?

Was it ho bees on embarcadero? And um

yeah all right so you go for breakfast at hobbies, legendary Silicon Valley diner cafe. Um And uh and you're like 22 23 he's probably close to 30. So he's like the you know you probably you probably thinking now this guy's knows where it's at. Uh he says what are your ideas and what did you what did you tell him

I came prepared? I had two ideas. Um One was based on a consulting gig I did while I was in Champagne, there was this company in Chicago. They would gather everything from like short clips of commercials from tv and photographs or like ripped out pages from magazines advertising, typically consumer packaged goods. And they would gather this whole thing up into a database which I would code for them and then they would sell that database to major brands and this is sort of illegal way of gathering competitive intelligence and nothing like this existed on the web. There are all these companies now that we're marketing things on the web and I thought there should be a competitive intelligence company for the web. So that was my idea number one. And I pitched that to Peter and he was sort of like Okay. And I could tell he just was not impressed. I thought it was the coolest idea in the world. And then he asked me like, all right, so like what's your other idea? He said he had to and before I fully fully decided that I wasn't going to get a master's or doctorate.

I was very hard at work on cryptography. So the idea of secret codes and breaking and making codes and that that's that's what I wanted to do. If I were to go get a PhD. And I had this sort of half formed idea that the world eventually would have small devices. Everybody would have a small device in their pocket. This is long, long, long pre iphone but this is right around the time of the heyday of the palm pilot, the

palm pilot. And

then I looked at the security design of the Palm pilot and was flabbergasted to know that there was no way to encrypt anything. You could communicate with other Palm pilots but people could sniff the communication and just steal your secrets. And so I had the second idea called secure pilot which was going to be cryptographic software for Palm pilots. And I was very reluctant to share this because this is a niche within a niche, like crypto, you know, security? Like most people don't care about this stuff and Palm pilots are still in their infancy. There's maybe one million of them sold. So I kind of blurted that one out and Peter was super excited about it. Like this is the greatest thing ever. Like you should absolutely start this company and I would like to invest and I was like the exact opposite of what I expected in every dimension. But sure I'll take your

money. This was because with Palm pilots you could like exchange addresses in infrared, right? You point at each other and that basically if you want, if you knew how to or was it was relatively easy to just suck information from someone else's Palm pilot and you're like, this is a security flaw. We should develop the technology and all right, so he says, I like this idea. I think we can maybe fund invest in this.

Yeah, he literally offered to invest in the spot. It was actually like the amount of time it took him to go from the cool idea and I'd like to invest. It was like fewer than a sip of his

smoothie. It

was like nanoseconds. I was actually startled and was like, okay, well I guess I'm starting this company because I have an investor, which by the way that this was the very first investor interaction I've ever had in my life that wasn't get out, This isn't gonna work.

And what did you know about, like, did he, did he say like, I'm gonna give you $100,000? Like how much money was he, was he willing to give you?

Uh, he asked me how much money, I thought I needed to get this off the ground and I said, I think I need about a half a million dollars. It's a great, I'll invest 300,000.

Okay,

so

It's pretty great. And, and, and a fortuitous meeting for Peter Thiel as well, because he was, he had a $10 million dollar fund at that point. I mean, not bad, but not great. Not, not necessarily guaranteed to make money. What, what was it about? I don't know. Peter thiel only, you know, read a lot about him and obviously his reputation precedes him. And some of that may be a caricature and some might not, but um, but even as a student at stanford, he was, he was a bit of a lightning rod. What, why did you trust him? Because, you know, it could have gone really badly and he could have, you had no experience dealing with cap venture capital investments. Like you didn't probably know how to structure the terms or your equity. What was it about him that connected with you?

I think the sort of, the pragmatic answer, Absolutely nothing to lose. There was nothing to take from me. And so in terms of risk for word, it was sort of like the worst that can possibly happen is I'll go from nothing to nothing. There's there's just very little downside. The thing about Peter that I think most people who don't know him just can't fully relate to, he has this amazing ability to see what you are great at. And he gets so excited on your behalf to be your best self, as the kids will call it these days, that you can't just not get infected, you become this ball of energy because this guy, peter thiel you barely met is just so excited about how talented you are in this one area and you will change the world and, and and he wants to be a part of it, he wants to be an investor, and he wants to be a partner and your friend and he's clearly genuine and kind of like, I didn't even know I am that good. And this guy is telling me he can see it and he's doing it with his entire body, He's that excited. And I was still knee deep in my various imposter complex at the time, I was this immigrant kid. I wasn't quite sure if I dropped my accent fully and it was supposed to be a PhD in computer science, but I just got a bachelor's and ran away and and he was just so genuinely excited to build this thing and to help me build it and I think that it's the, his superpower is that he enables you to be your very best self Well,

so

what, what

was the next step, I mean with a $300,000 investment

did he

say go and raise the other 200? Did he say go start working on this? What what, what did he say? Go hire somebody? What did he, what did you do?

I think he originally thought that I kind of had a plan and he would just sort of write me a $300,000 check and then off you go. And he did say like look, you need to go line up the rest of the money because this isn't gonna be enough, you just told me you need at least a half a million dollars. And so I sort of immediately went up to the fact that this is my first and only successful fundraise, so I probably could use some advice on how to do it said, okay, well maybe I'll help you out. And he had this guy that worked for him in teal capital management and his second in command named Kenny, Kenny, Howry, uh, Kenny will help you, Kenny is very good at fundraising. He helped me. And so Kenny got to work and made me a pitch deck and then I went in to pitch some randomly selected venture capitalists and they were all one by one telling me how this will never work. It's a stupid idea and it was just like rejection upon rejection. So at some point I went back to Peter and said, alright, something's not working like you bought this and can you help me with the deck? But it's just not landing with anyone, what do I do? And so I said fine, I'll help you. And so he started coming with me on these venture capital pitch is

so, so basically it wasn't the content of the pitch. It was you, you just sucked it it

I think it may have been me.

Yeah. And he was charismatic and more confident than you.

Yeah, I was very awkward and this totally did not work in venture capital where I would show up like with a disheveled hair and a T shirt that said Microsoft sucks or something like that and people like, alright, this is not a serious person

at that time at that time, that would change of course. But at that time it was like, right, because you probably venture capitalists were used to people with MBS pitching them.

Yes, I think they very much wanted to hear from someone who went to a talk to your school and could speak financial language and definitely had shoes on instead of flip flops,

right? But even with, even if your pitch skills weren't great, I'm still skeptical, I'm also skeptical about this idea, I don't, I would not invest in that idea. It doesn't seem that promising to me. I'm so, I guess, I mean if Peter thiel was behind you and he probably he already had some connections maybe that gave other investors confidence. But what were they investing in?

I am not sure.

I

think that's the honest

answer. I think

more than anything, first of all, just to give you a sense for the success rate of these pitches, we ran out of venture capital, kind of the Sandhill Road, classic blue chip venture capitalist community very quickly. I think we were roundly rejected by 100% of those pitches. We drove up and down Sand Hill Road and got absolutely nothing. And then we started pitching people kind of in the outskirts of the broadest remember driving to place called, I think it's called Red roof Ventures or something. Something Red Brother and it was a very long drive. And Peter first drove me around because I didn't have a car and This was a particularly memorable meeting because these people basically threw us out there like this is a stupid idea. We don't understand anything about it. We know we have another 15 minutes on the clock, but you're wasting your time in our stew. So please leave. And so we were not successful even with Peter's cash. And so we, we pretty quickly shifted into these like friends and family, wealthy people Peter knew and maybe raised money for his hedge fund. So that this was definitely not a professionally sourced seed capital, nothing like today.

All right. And, and this company that you launched was, was, was this the company called Field Link?

The very original name was Field Link because the idea was, you would have all these salespeople in the field and they would have secrets on their palm pilots and you would have to encrypt those secrets. That was the encrypted field link. And then it was kind of an awful name, even by my unsophisticated measure. And so I decided I wanted to give it a new name. I spent a lot of time thinking about it and came up with confident e, which was confidence and infinity combined and I was very proud of this. And then I pitched peter and he was like, sure, whatever we have bigger problems, we need to raise money. And then I told someone else and they were like, oh, like a long con like, okay, you're gonna sell the securities offered by company with Wird konnen it that's terrible. And so we kind of knew from day zero of the confetti wasn't gonna last, but that was the placeholder name for a while,

but I think in any case and you at this time do get some funding from, from friends and family and I think you, you managed to hire your friend from university of Illinois luke Nosek right, like to, to come out and help you. And did you get office space, did you like get rent a place and you know put computers in and get a fast T one line and

start you

know clamoring at the keys on your computer

basically we got our first office for this newly renamed conformity on University Avenue which Peter actually placed at the time. A lot of significance on like having a cool address. Like you don't wanna be in some random crappy off the grid office, you wanna be on University Avenue because that signals that you're important, you're in the mix. So we got that 3 94 University sweet too. And we had a bunch of IKEA furniture that we self assembled and we started typing.

And at some point I think pretty soon after peter thiel uh he he became the ceo of this company that you started. Did you ask him to be the ceo or or did he sort of say you know I should probably the face of this thing because I'm a little bit better at presenting.

It was very much my my effort. I remember talking to him Towards the end of 98 I think I was paying off a parking ticket. He made me get a car because he was tired of driving me around so I had to buy a car and luke had to be my co signer because I had no credit. And so I promptly got in my first parking ticket and I had to go to the courthouse in Palo alto I think or city hall or something that to pay off my ticket was standing on the steps of city hall basically telling him about yet another failed attempt at fundraising and the fact that I really should just be writing code. And he was telling me like, no, no, no, you're, you really should be recruiting your friends from college. Like this will not work out if it's just you writing code all the time, you must know some smart engineers, go get some as we talked. I was sort of like, you clearly know what we should be doing as a company and I just want to build this thing like maybe you should be the Ceo. And I sort of said it out loud and he was like, uh, no, that's a terrible idea. Like I don't wanna do this. I have this fund is doing really well and I was like, no, no, no, that's exactly what you need to start wanting to do. And so I went into this mode of must persuade Peter thiel to be the ceo of this company.

So Peter is a Ceo and you are presumably the head of technology and you're, you're trying to develop this, this crypto um, software that will encrypt data between palm pilots. But at some point, clearly this shifted to a completely different business. So tell me about how you came to the realization that maybe that wasn't the right thing to focus on.

So this was the backdrop, Peter and I and Kenny and luke are all kind of roaming around Silicon Valley trying to see if there's demand for the software that we're building, right. And it's becoming clearer and clearer that there really isn't and there's no nicer way to put it that no one really cares. I remember talking to uh Jeff Hawkins who created a palm pilot and his executive team and they're like, uh huh yeah, you know, security, like we totally thought about it, it'll, it'll get on a road map one day, but it's a consumer product right now. It's like address books and like nobody's clever enough to steal things through these Ir beams, but I can show you a demo where I can do that like yeah, but you're like a weird kid who wants to steal things from Ir beams and so it just wasn't really a value to the market and uh we basically shifted kind of back to the brainstorm mode where scott banister and luke and Peter and Reid Hoffman who was Peter's friend from stanford and a handful of others would just stay up really late at night and brainstorm, you know, what else can we do with this tech before we call it a day and Reid was one of the more oppression brains who was sort of like, hey you can secure other things, Maybe you can like secure invoices or secure I O. U. S. Or you know, secure something that kind of is valuable in and of itself and that kind of pushed us close enough to this idea of an electronic wallet and then there was a very short throw from that too. Well what if we just secured money and that, that's kind of the starting point of Paypal,

Reid Hoffman who has been on the show was on the show a few years ago and um and if you want to hear a story, you should go back and and check out that episode. He went on to found linkedin, um was he kind kind of just hanging out as a friend or was he did peter like bring him on as an employee of this company,

he was a board member of ours and he was running this company called um Social Net, I think it was called, it was failing actually remember visiting read at his company and it was like one of these stark kind of visuals, like I already failed four times, so I was perfectly comfortable with failing companies, but I've never seen a large scale failing company and I walked into this office and it was dark in the middle of the day and it was just like no people there at all, lots of desks and I was like, wow, this is so depressing and that's when Peter sort of said, look, you should join our board and maybe you should join our company and so eventually read of course join paypal as a full time employee, but at the time he was a board member and so he was mostly hanging out with us and brainstorming.

And so you begin to kind of pivot into, into this idea that maybe you should focus on and encrypting money transfers. Is it, is it a year before you make that pivot or is it faster? Faster?

I think by kind of mid spring, late spring 99 we were full steam ahead and we're gonna encrypt money

and you and you changed the name to Paypal at that point,

yep. Well, we started the name change process. It took a couple of months to get there.

All right at that time. And this is 1999, your paypal, it's not yet paypal that we would know of as paypal. It's still, the concept is still like, if I were just, I don't know if I was just meeting you at, at a, at a party somewhere and I was not a tech person, I would say, well, what are you working on, explain this thing? How's, how's it gonna work? Well like that from the consumer perspective, what would you have said in 1999

First of all, he would have walked away thinking, wow, that guy's a nerd, he cannot explain what he works on and Boise awkward. Um, so I'll try to do a better job. I'm not going to channel my 23 year old self. Otherwise it'll it'll just be long and boring and awkward. But the story I would use is like hey so imagine you and your best friend are going out to dinner and who anyway carries cash these days. Cash sucks. Nobody has cash, nobody wants to have. And yes I frequently would get called out like what you talking about? I have cash in my pocket. Do you not have cash in your pocket? I said well what if you don't have, what if you forgot what if you need to split the bill? But what if it's a business dinner?

It's like three people. It's complicated. So

what you need is

an IOU but I use our super awkward. You're not gonna write them down. But if you have a palm pilot and they have a palm pilot you can just beam them essentially a promissory note that compels you to pay them back if they cover dinner.

And and the promissory note would be tied to your bank account.

It would be a cryptographically secure message that you could later on connect your palm pilot to a computer. The message would automatically get processed and then it would go against your bank account or credit.

Oh wow okay. I like that. That's cool. No I like it. I like it because you know what you know I like it because I know that there are still people out there probably owe me at least 100 bucks. Like I'll pay you back next week. You know, you'd pay for somebody's movies and I'll hit you up later. But I don't remember and I'm sure I owe people like 100 200 bucks too. So that would have been great. And presumably the business model would be around taking a fee every time the money got transferred. Okay. But at that time there were other products out there was something called digicash I think.

Right. So there were companies that were focused on, you know, ways to transact and and send money back and forth in an encrypted way. So didn't they already solve the problem that you were trying to solve?

I think they thought they did. But actually funny enough, one of my more memorable Silicon Valley inaugural moments, I went to the digicash shutdown party,

They

started this company was really well funded. It was supposed to be the digital currency and it just completely died and it didn't succeed in the market. So I actually went to the party where they wound it down, it was on stanford campus of all places kind of outdoors around this picnic table. And they asked me like who are you and what you're doing here? And it's like, oh yeah, this idea of like moving money through ether with digital signature sounds so cool and it's a terrible idea, we just failed at a company doing this. But the reason all the prior experiments failed is really easy to summarize, they were just entirely user unfriendly. They were awfully difficult to use as a consumer. And if it's not easy it's just not going to work with money. Money works pretty well when it's in paper form and it works really well when it's a card form. So if you're trying to push it into an application or into a mobile device, it better be easier and quicker than the existing systems. So

how are you guys going to solve that problem? How are you going to make this? You were going to basically make it so easy that you could just beam a digital promissory note to someone else at the dinner table and then that would be it. They connected to the computer and then it would connect to their bank account and then they would get the money deposited in their account.

Yeah I remember uh literally drawing buttons like special on screen buttons for the Palm pilot app that we built to be more bubbly like like buttons that look like they had three D. To them to make them friendlier to make them look like it's easy and inviting to tap the amount of dollars you get a beam to your friend because I wanted it to be friendly and easy to trust and consume.

But what I'm trying to figure out is it doesn't mean it's still, there's still friction there. Like you got to beam the thing then dock your device and then probably connect to the like it doesn't sound like it was a scene, it was going to be a seamless process.

This is maybe why you have not most likely used the paypal on your palm pilot. The simplest user interface always wins.

So November 99 Paypal begins operations. What as a consumer at that time, what did that mean? Was it a website or was it still focused on doing it through Palm pilots?

So it was primarily focused on upon pilots would go to the Paypal website and you would see that you can download this application compiled for your palm pilot and because not everybody had a palm pilot just yet. You could do cool things like, hey, I will promise you to pay for my palm pilot, but you don't actually have to have a palm pilot, it'll just reach you via email and then you would sign up, create an account. So we kind of made a cross compatible palm to web, palm to palm. And as a footnote, we had a web to web very much a demo quality product that I threw together to just show how this works. If you just don't happen to have any palm pilots around and it's that demo that took off like crazy.

So initially the idea was it was peer to peer. Like I send you money, you send me money promised right now. And by the way I imagine that we don't e commerce really took a long time for e commerce to take off for people to trust it, you know, seven or eight years. So it's still when you launched it, it must have been a tiny number of people who were like, yeah, I mean it must have been really like early adopters who were confident and and felt secure with this.

Yeah. One of our very first engineers Russ made a screensaver that was just floating this number on the screen. That showed how many users we had in total who had ever signed up and it was like 17, 17. I could go home, come back the next morning. Still 17. It was growing about that fast

when we come back how in the space of a year Paypal goes from 17 users to hundreds of thousands. And how in the space of three years it goes through a merger, a management shakeup, an acquisition and an I. P. O. Stay with us. I'm guy raz and you're listening to how I built this one major factor that can make or break your business idea, Who knows about it. You need collaborators and supporters, both intellectual and financial. You need people who champion your idea, bring your vision to life alongside other high achieving entrepreneurs at F. W. Olin Graduate School of Business at babson College, the graduate school offers access to the opportunities, community and critical resources entrepreneurs need through the Arthur m blank Center for entrepreneurship. The center ignites the exchange of innovative ideas and has supported 400 plus entrepreneurs and 385 plus businesses while awarding more than $600,000 in funding and in kind services, Batson's annual competitions including e pitch rocket pitch and beta challenge award generous prize money and provide the opportunity to pitch your business to faculty investors and expert advisors and to receive real time feedback. They give you the opportunity to find your champions learn more about their full and part time graduate level programs at the school ranked number one for entrepreneurship for 29 years by U.

S. News and World Report, visit babson dot e. D. U slash grad. Now today everyone ages at different speeds and the date on your I. D. May not truly represent your biological age. If you're looking for ways to extend your health span and slow the aging process. The keys run in your blood, which is why Inside Tracker provides you with a personalized plan to improve your metabolism, reduce stress, improve sleep and optimize your health for the long haul created by leading scientists and aging genetics and biometrics. Inside Tracker analyzes your blood D. N. A.

And fitness tracking data to identify where you're optimized and where you're not. In fact, my wife has used Inside Tracker and she really appreciates the guidance that's given her on the right exercise and nutrition and supplementation for her body. Plus you can add inner age 2.0 to any plan. For a calculation of your true biological age for a limited time. Get 20% off the entire inside tracker store. Just go to inside tracker dot com forward slash built, that's inside tracker dot com forward slash built. Hey, welcome back to how I built this. I'm guy raz. So it's 1999 and max and his partners have built a new peer to peer payment system soon to be called Paypal. And almost right away the service starts to attract one very important user group people who use Ebay

back in 99. There really isn't a way to take a credit card payment online. If you're trying to sell things for a business, there are a couple of companies that kind of provided that service. But if you were a like a normal person just trying to sell something on Ebay, it was not a thing like you could not sign up for a business account and process credit cards and Paypal was this peer to peer system that had a web only interface which we made as a demo and you could just tell somebody type in your credit card number and I will charge your card as many dollars as we agreed. And it was like had an effect of a minor explosion in the Bay community

and I think we should be clear here, which is you you'd mostly created this thing to be used on palm pilots. Right? I mean but but where the explosion was happening was on the web. Right? So I mean the web version that you originally launched almost as an afterthought, I mean I think that ended up being like adopted by like 100,000 users in january of 2000 and I think by March of that year something like a million people were using Paypal. So how did it grow so quickly? I mean this is not, this is not a time with a social media marketing right? Like were you, were you advertising or was it just people discovering it

two things happened. So the ebay seller community was unbelievably self observing. So anyone able to sell things on Ebay would constantly optimized for selling things more and faster people are starting to make careers out of it. And so the second a seller would see it on someone else's site was like what is this Paypal button? Oh you click on this and it asked for a credit card number Like amazing. And so that was a very important growth vector. And then luke came up with the original viral marketing idea where he had said, Hey what if we gave every new user who signed up 20 bucks But not just $20 for signing up but $20 to the person who invited them And so college students in particular, I think going on these absolute benders of inviting their friends and getting us to give them $20. But the ebay growth was entirely natural and was really based on just sellers spotting other sellers using it.

I know you were focused on on the technical side but you know you were probably clued in to all parts of the business. How did you guys convince the credit card companies and the banks to cooperate

some combination of asking forgiveness versus permission and just the overall naivete and heaviness of the time where we showed up and said, hey we're going to do this and we promise nothing really bad will happen. We'll do just enough K. Y. C. To make sure there's no money laundering and people doing things and they've sort of said, okay well I guess commerce is good. Credit card processing is good, we like it. But keep in mind this is pre 9 11 and the world is very, very innocent relative to today. Back then this is a this is before patriot act before. Extreme focus on things like money laundering and terrorist financing etcetera.

But one of the biggest challenges you guys faced at the beginning, once you launched was fraud right? I mean there was the company was like losing millions of dollars a month from fraudsters who were who were trying to figure out how to outwit the system.

We started noticing kind of all these may be illegitimate transactions, maybe people kind of buying things from themselves and then taking the money out of the system and then we realize that the credit card they used is actually not theirs, it was stolen and then it just hit very, very hard sometime in april of 2000 we saw just this enormous attacks primarily from my former homeland or the general region. All those are the eastern bloc countries basically realizing that this is a very loosely secured financial system and at the time the sort of idea of securing private information, things like payment credentials and what's now called P I I personally identifiable information was really in its infancy. And so by mid june and I think I was starting to sort of become aware of the fact that we're probably losing tens of millions of dollars to these fraudulent activities per quarter.

Alright, so as as you start to see more and more people adopt this thing and I don't quite understand this part of the story and what, what was going on. But there was a another, I guess competing company that was founded around the same time called X dot com by Elon musk, we all know who he is and um he was trying to do, I guess a similar kind of thing. And and I know this because because jeremy Stoppelman who went on to found yelp and we'll get to that later, Jeremy has been on the show in the past, he was working with Ellen and and to, to him Paypal, you guys were like the enemy. It was, it was a battle to the death. But the, the two companies merge in March of 2000. How did that marriage happen? Who, what do you remember about that?

It's definitely a long and winding story. So the very short version is not only is X.com extremely concurrent to paypal, it's also literally in the same exact building. We were 394 university Sweet to their Suite one, which we did not know about. And well we realized that our number one competitor was literally our next door neighbor and that had the super charismatic Elon musk running it had already sold zip two and so he was both successful and wealthy and he had succeeded in pitching Sequoia capital and they came at payment little bit after we did, but they had some really good ideas that we didn't have. So very quickly we start just looking at each other and going, oh that's a good idea, we'll copy that and and vice versa. And we were in the market just beating each other up as hard as we could, primarily by way of offering more aggressive incentives to Ebay sellers and buyers to join. That's when the intensity really goes up in like late april early May 2000 And as this happens, Elon hires this guy Bill Harris to run X and he was one of these guys who could sort of see one plus one equals three, obviously these companies need to merge instead of beating the crap out of each other in the market. And so he was kind of the primary force behind that merger.

You guys are mortal enemies and all of a sudden you become, you know, X dot com and Paypal are the same company. Um, did you remember just thinking, wait a minute. This is crazy. Do you remember how you felt about

that? Um, it was definitely a little bit of a adjustment if you will in terms of, by then we knew some of the main characters and I'm sure they knew us and so we sort of appropriately demonize them and made ourselves to to hate

them. So

we have to get to know these people that we merged with and adjust our thinking from one of us will die too. Actually, we need to make it work now. It wasn't without attention were definitely some interesting, very loud debates between engineering teams on religious matters between Windows and UNIX. But it actually, I remember it kind of feeling initially very awkward and then not feeling very awkward very quickly.

Was was there kind of relief about that in a sense? Instead of competing against people like Elon and his team that you were now all kind of, you know, harnessing your collective power?

I think so, my main concern at the time, I think Peter's as well was this notion that it was just so completely irrational for these two companies to try to kill each other while the opportunity was so vast. And there were plenty of other competitors, including huge banks that were saying, hey, you know what, we're going to get into payments online too and just the ability to tell capital markets, hey, there's the only one that you need to make, there's only one company you need to consider funding etcetera. That was extremely productive

when, when the two companies merged, how do you, This is around sort of mid 2000. Do you remember how many employees total now this merged company had?

I would say on the order of a couple of 100 in aggregate, maybe less than 200, but not a lot. You could definitely know everyone.

Okay. So you knew everyone. And then pretty soon after the merger, Ellen, Ellen becomes Ceo and you're in the number two position as C. T. O. So how did you find working with him at the time?

Combination of amazing and infuriating. He is very smart. He can be extremely charming and loves debate. He has an engineer's mindset. So for an engineer which I certainly am, it's a great person to agree or disagree with because it's always rational. It is never well, you know what? I have a, I've made a decision and now we're going to go left, which I think a lot of engineers find extremely difficult to work with. He and I disagreed on about a million different things, but the debate was always intellectual and civilized.

Did I mean you were younger, You're younger than Nealon and Peter and, and did you, were you comfortable with with sort of him, you know, kind of running the show and from what everything I've read about. And there's a new book of course about Paypal and all the people who came out of out of it. Um, was that he really kind of saw this as X dot com was the sort of the senior partner in this relationship and he was the boss,

if I'm entirely honest. Uh, it was never entirely the perfect arrangement for me. Up until that point, I'd never actually worked for anyone in my life that said, you know, I had never felt a moment of disrespect or resentment towards Ellen in a sense that I'd always found him to be incredibly impressive and intellectually honest. And so I didn't enjoy the now do what I say, but I did not question the capabilities of the person saying it.

I mean, clearly there were tensions growing within Paypal. I mean, Peter, Peter was out of the picture kind of um, you were still there. Um, and october of 2000 Elon musk becomes the ceo, by the end of that calendar year, The board ousted him. They fired him. What do you remember about that? I mean, it was this was not a personal thing, maybe it was, but it was from what I understand, it was really just a fundamental difference in how to operate the company.

Yeah. Um, I remember plenty since I was very intimately involved. Uh, it's fairly hard to unpack, I think, to the sort of uninitiated, I guess On the one hand, there's all these raging emotions and you hate each other and then you merge and it's a 5050 merger, which means no one knows who won. And that's by the way, the root of all complexity at Paypal dot com story, is that because we sort of settled on this. Well, there's not really a senior partner equities just split evenly. There was no sense of who gets to pack up and go home basically. And so as the sort of thing unfolded and unfolded and unfolded, the emotions ran very high and people were meeting clandestinely in coffee shops. But it was certainly not personal. In fact, one of the most telling things about Ellen is that after the board coup essentially left him without the ceo job, He wanted to meet one on 1. And I met at the parking lot of Paypal. And he sort of said on the curb, I didn't doubt the validity of what just transpired, but I I felt incredibly sad for him and all he said like why did you do this? So, you know, it just seemed like the correct thing to do for the company and I'm really sorry the way it all went down.

I understand but I don't understand that and then we didn't speak for a few years except for for formal interactions on the board. He stayed on the board and it was extremely awkward to be in board meetings with Ellen where he would sort of sometimes glare at me as I would say

things all peter.

But and then people went public and he took me out to this extremely nice dinner and I sort of like where's the grudge man? It's like what's the point of holding grudges? Yeah, it ended well for all of us, it's all good. And so that that's that's basically Ellen in a nutshell, he's both a big man and and a big man.

Hm Well I'm curious max what what was your lifestyle like during that time? It seems like it was such an intense period. Like I've read about like how you would you would sleep in your office like under your desk or like in a sleeping bag. Did you did you do that often or was that was it sort of like off and on again?

I did it quite a bit. I will have to admit to this, I had a very strange lifestyle, which in retrospect probably took a few years off my expected life span but uh certainly slept in the office. There was a restaurant downstairs from our second office and I knew that it would close at 10 p.m. and so the 9 58.5 minutes, I would sprint down the steps to just get under the door of this restaurant and get my first meal of the day and so on. This was definitely extremely unhealthy lifestyle, but I needed the time to work.

Tell me a little bit about the, I mean, I think one of the benefits of early success, but also downsides is you get quoted when you're young and I, you know, I have some of that myself, but um, so, so, you know, I've read quotes or articles about this time at, you know, Paypal and it sounds, I don't want to caricature, but it sounds like a little bit of a frat culture, you know, and I know that you didn't. One of the things that you did not want, I think specifically were quote unquote frat boys, but there was a kind of a confrontational style and and this expectation to just fully like live this thing all the time or is that, is that not accurate?

I think there's some truth to it in some misunderstanding. So you're totally right. One of the interesting accusations that sometimes is leveled against the early Paypal crew is that it was this idea of a frat culture,

it's actually

quite the opposite. You know, if anything we were screening against this idea of sort of self righteous, privileged person who would come in and assume they're right. We wanted to have extremely honest intellectual debate over everything. Like one of the things that was really telling about the papal culture, we would sometimes slow down a release or a feature or even a decision because we wanted more

debate

that said it did lead to some extremely intense personalities and blow out arguments and people shouting at each other. The thing that's really important to understand is there were on my memory at least basically zero personalization of these debates. Somehow we all respected one another enough to never say. And and therefore you're stupid.

How did how did people survive the.com crash of 2000 2001

that squarely goes to the brilliance of Peter thiel and his nose

who became the ceo, I should say after Ellen was ousted.

That's right. So Peter has this unbelievable ability to sniff market crashes in the air as the approach. And I remember him telling me it's all going to get very ugly for startups. Like we're going to have to raise money, We're going to have to be prepared financially. And he went on this sort of quest of fundraising. But it was very rough. One of the more stark visuals I have from those days, the cafe where Peter and I would hang out and like some of the more important recruiting pitches took place there and some important negotiations took place. There was suddenly closed, it was boarded up and then all these other shops in Palo alto were closing up because the startup ecosystem wasn't really around anymore to support them.

So you, you guys had cash on hand because Peter had raised that money which enabled you to survive it. Um, Alright, so now Ellen is out, it's 2001. Peter thiel is ceo again and um, and paypal is, is growing. I mean you're doing fine despite the sort of the collapsing tech world around you. It felt okay within Paypal, there was no kind of nervousness or panic.

You know, I think we were too busy to be scared. I would love to tell stories of existential dread. But I think my primary concerns were, can we keep the site up in 2001 for me was largely a year of trying to scale this thing as it was just blowing the doors off with its growth every week. The growth would just be so much more than the systems could handle every monday when Ebay auctions would settle. This would just go down for multiple hours. And at some point our head of database scalability, who was also a very accomplished blues singer and guitarist, brought his guitars to the office and would play the monday blues because we all knew the cycle crash and it was a surreal thing And and then it would come back up and we would Senate apology and CNN would write a story about how paypal goes down again and it was just this thing that would repeat itself and so as the world was burning in terms of startup, you know, in 2001, I was just trying to keep the thing going.

The company went public in February of 2002 and I think on like day one that shares were up like 55% is amazing debut on the NASDAQ when it went public, you were Cto, Peter was a Ceo I believe. Did you, did you envision your future? I mean you were still 26 2027. I mean, you know, you were very young, did you think that this was the beginning of the end for you? Like you were now mentally moving on to something else or did you still see paypal as your career?

I was definitely not thinking any of those thoughts. I was still very much in the execution mode. I remember sitting down and thinking, okay, so now I'm at least on paper, very wealthy, but I'm still working just as hard. Like I fell asleep in my

car

right before driving home and then woke up four hours later trying to figure out where I was. So like nothing's changed except we're now publicly traded. How weird is that? I knew that something was gonna change, but I also just was so busy and the war with all the various competitors and Ebay was trying to shut us down while also trying to sort of cooperate with us because their seller ecosystem dependent on us so much. But the thing that I started registering is that the team was very tired and kind of the, the reason ultimately Ebay was able to acquire us is because the team was so overloaded over the four years of, of previous life.

All right. We know that Ebay would acquire you just a few months after you went public, but, but what you just said is, is also just unlevel right? Which is Ebay was trying to shut you down, explain that why.

So in the, I don't remember who came up with this metaphor, but it's a good line. So someone I think from Ebay said Paypal is throwing a party in Ebay's backyard and charging attendance and I think that's pretty accurate in a sense that we're providing a service to a million plus Ebay sellers, helping them collect credit cards online and charging them what we thought was a fair price for it. Ebay did not have a revenue share arrangement or just a service available to Ebay sellers and buyers except they had their own service that they had fully acquired or acquired and then built up called Bill Point right around the same time as Paypal was founded, They had tried and tried and tried, they did all sorts of really kind of obvious things like hey, if you use bill point, it's free for six months and then you have to turn off Paypal and read, read would send a note to the general counsel saying, Hey, I just received this disturbing email in my inbox. This seems to be prime for antitrust investigation just saying. And so it was kind of a race, which they should have absolutely won because they had a product that was supposed to do what we did, that they owned that built in, that, you know, could be promoted much, much, much better than we could.

So they could have, they could have completely crushed your bottle. They could have said, we can only use bill point on Ebay.

That's right. And they tried at various times and Paypal fans in the cellar base basically protested. Ebay was always very, very careful not to step on their cellars toast too much because that's where all the revenue came from. And I think at the time they were very concerned that if people were to get turned off commerce would slow down and he would make a lot less money.

So even after you went public, you kind of depended on Ebay, you needed Ebay, you need to keep them happy. But she also knew they didn't like you. And presumably you had to start thinking about diversifying your revenue streams because you were so dependent on Ebay and, and you're a public company and your share price would have tanked if Ebay kicked you off. So what did you mean? What were you guys doing to prepare for that possibility?

That was the great unspoken or maybe spoken in in the papal halls concern. So we're diversifying very rapidly. We were going international. We were trying to figure out what Paypal offline looks like. So maybe you go into a best buy and you use Paypal to buy things from the shelves instead of from the virtual ones and signing up all these partners outside of Ebay and yet Ebay itself was growing so quickly. All of our attempts to diversify away from the dependency on Ebay volume Or kind of futile imagine you have a company that's just growing 100% year on year and you're providing payments, you better find something grows even faster and there wasn't a whole lot like that going

on.

I think one of the things that sort of prepared me for life as an entrepreneur after was this multi year period where on any given day we expected Ebay to call us and say, okay, you're done, Get off. We don't mind losing all the volume because we're ready and we had all these double secret and triple secret plans of what we do then. But in reality we all knew that this would be pretty catastrophic and so brace for impact proactively.

I mean what an incredible opportunity that you had at such a young age to experience that kind of uncertainty and volatility because that was going to serve that obviously would serve you well as you, as you advanced in your life and career. But I mean it's almost like a, you know, business school class except the consequences are a little different. You're not gonna get a bad grade, you're gonna lose all your money. Yeah.

I think the backdrop of coming to the US with nothing just trying to survive as a multi time startup failure, once you get some barnacles of good life on you, that's when you start getting scared until you have something to lose. It's not that scary to to be in this permanent concern state. Like I, I certainly remember being really scared but not so scared that I would go hide or something like that.

Hmm. Um, in 2002, right, when Ebay announced that it was acquiring paypal, uh, and clearly you were included on this because you were part of the leadership team at Paypal was that surprising when they came when they said, hey, you know, uh, maybe we should, maybe we should just acquire, You

know, actually, it was kind of the opposite of a surprise. In fact, it was becoming very, very clear that they were completely dependent on us at this point and every move they would make. It was just another point of proof that we were succeeding in their own internal systems was not and sure enough, this is well before the I. P. O. They came to us and said, hey how about we just by you guys And of course initially we just said no we're doing fine thank you very much. Then they came back again and the surf dance began and right as we filed to go public they came in and said hey um will will buy you don't go public. And we said no and Peter said, I think this is the last time. I really don't think that they're gonna come back after we go public. By the way people had an amazing betting culture. We would bet each other all sorts of things all the time. But I bet Peter a dollar that they would come back in less than six months and I think twice the amount or something like that.

And I won one half of that bet. It took longer than six months but the evaluation was in fact dictated by the market. So it was better than better than two x.

Yeah. They paid $1.5 billion to acquire paypal. They acquired paypal in October of 2002. You're 27 You walk away with on paper Something reportedly about $30 million dollars you're set. Yeah.

And I left a few months after the acquisition.

Um, but I read that um, there's an article that was written in the times about you in 2007. Um and you have been quoted in that article saying that the year after Ebay purchased Paypal was the worst year of your life, which, which sounds nuts, right, because you're, you got all this money and you're young and you can do whatever you want. Um I think you had a girlfriend at the time who's not your wife what? And I don't, I'm not asking this like with a sense of judgment, I'm just curious,

can you

explain how that became the worst year of your life?

I think it was the first time when I had no clear purpose, which quickly became no clear sense of direction and I would literally wake up in the morning and sit in the PJs that I slept on my newly acquired couch, flip up in a laptop and stare at it and think I'm gonna start a company that, that's the only thing I know, that's the thing I want to do and then I would just sort of sit there and my girlfriend would go to work and then she would come back and she would find me in the same place and, and it went on for a long time and it was sort of a,

you

know, I'm not sure that qualifies for depression and I have a lot of empathy for people who actually do suffer real mental health issues, but that's about as close as I came to just spinning out entirely mentally out of control and that was a long year,

Why didn't you? um go, I mean, a lot of, a lot of the folks that you worked with went into investing, I mean, obviously Peter thiel famously, most famously, um did you try that at all?

I did this is this part of the story, I don't know if I ever told

anybody,

so Roll off, Who is now, of course, a he's the mist mr capital at this point, he's kind of the front man of the band. They're invited me to spend some number of months, maybe more at Sequoia Capital

was your he was your head of finance, right?

He was our CFO. And so I started going to school every day and it was great, I started sitting in on pitches, so I would meet entrepreneurs that were kind of like me, but you know, four years prior, and then I started noticing that I was really good at ripping into people's ideas, they would bring in this really cool concept. And of course it was half baked. It was just, you know, some bright eyed kid, freshly out of college, thinking about, here's what they're gonna build, and I would immediately explain to them why would fail. And I've gotten so good at stabbing them in the heart that one day I went home and told nellie my wife, I don't think I can do this, like I've become so cynical, I am now taking out my anger about not being in a startup on other startup founders.

You were quoted at the time and I'm sorry to read this quote because again, if I was quoted when I was 27 I was probably said some things I would be embarrassed, but you said the times I took this perverse pleasure in seeing if I could make someone cry, which does sound a little bit mean.

Yeah, I am not sure I was very nice at all at that time.

And you think that came from this, this place of like I need to be doing this, why am I not doing this

in retrospect? It was probably just envy. I wanted to be defending my idea against all enemies, foreign and

domestic. I

wanted to be

them and that is where we're going to leave max Levchin story for now. Next week we'll be back with part two of our conversation where we'll hear about all the things that max built since Paypal,

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 all the interest that you finally figure yourself

out, just

give yourself permission to go build something that's like another Paypal, but better

hey, thanks so much for listening to the show this week. If you want to hear every episode one week early, check out amazon music. If you want to listen one week early and ad free subscribe to wondering plus in apple podcasts or on the wondering app, please do follow us on your podcast app. So you always have the latest episode downloaded. And another way to support our show is by filling out a survey at one dory dot com slash survey. If you want to contact the team, our email address is H I B T at I D 0.1 dot com. If you want to follow us on twitter, our account is at how I built this. 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 chris mancini and carla estevez. I'm Guy raz and you've been listening to how I built this. Hey everyone, so I wanna 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. Please do follow us on your podcast app. So you always have the latest episode downloaded in another way to support the show is by filling out a survey at one dory dot com slash survey and thanks.

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