PayPal is famous for being one of the few dotcom successes that survived the 1999 bubble. It is also famous for the ‘PayPal Mafia’ — the founding group of individuals who left PayPal in the wake of their 2002 eBay acquisition and then spread out to start multiple successful companies in Silicon Valley over the subsequent decade.
It’s easy to look at PayPal today and think that it was destined for success. But this was absolutely not the case. The PayPal we are familiar with evolved out of a 1998 technology startup named Fieldlink. Its co-founders, Max Levchin, Peter Thiel, and Luke Nosek, were initially focused on providing security services for enterprise customers with handheld devices.
Levchin was desperate to promote Fieldlink and its security services. At the time, he was Palm’s 153rd registered developer, and regularly attended their conferences. During one particular conference, Levchin approached Palm CEO Jeff Hawkins to ask for “a ride home”. Hawkins agreed, thinking Levchin was an employee. After getting in the car, Levchin gave vague directions and pestered Hawkins that his PalmPilot PDAs would need operating system security. Irritated, Hawkins informed Levchin that they were already partnered with a Canadian company called Certicom for their security needs. Levchin was dropped off at a random place and thought to himself, “oh fuck, they have someone else working on this”.
There were other concerning signs that Fieldlink was fishing in lousy waters. Their previous experience selling mobile security to enterprise customers revealed to them that most people didn’t even think of it as a problem. Fieldlink was simply too early. Levchin later described themselves as the “early Christians in the first century… waiting for the second coming”.
Fieldlink decided to target consumers instead. Thiel and Levchin closed a $500,000 funding round in February 1999 and changed the company name to Confinity (which was a blend of the words confidence and infinity — a name that Levchin regretted soon after, as it sounded too much like it was a ‘con’). The day after they closed the round, they sent their investors an 18-page document detailing their pivot to launch mobile wallets for handheld devices. Confinity believed they could allow consumers to send money and conduct e-commerce straight from their PalmPilots.
But this pivot had a similar problem. People were reluctant to swap their physical wallet for a virtual one; worse, it wasn’t seen as exciting or as futuristic for customers. Confinity then brainstormed alternative use cases and came up with the idea of “beaming money” using the infrared ports found on the 1998 Palm IIIs. They envisioned a future where friends could go out for lunch and settle their bills via PalmPilot.
The idea sounds stupid today, but the early Confinity team really believed that it had a shot. More importantly, money beaming appeared exciting and futuristic, and seemed more likely to capture the imagination in a way that mobile wallets didn’t. Levchin remembered it as a “weird and innovative” idea. For Thiel, beaming represented a glitzy new story, one they could sell to investors.
Levchin went to the 1999 International Financial Cryptography Association conference with the goal of testing the waters for their new pitch (a cashless, all-digital, PalmPilot-based money system!) — and got a tepid response. It turned out that the team was pitching its concepts amid a string of spectacular digital currency failures. DigiCash, a ten year old attempt at a similar idea, had just declared bankruptcy a year before.
Bad timing notwithstanding, the Confinity team started pitching VCs over the course of 1999. They were rejected by pretty much everyone they talked to. Eventually, the team became so desperate they began reaching out to venture firms outside of Silicon Valley. Luke Nosek used his contacts to earn a meeting with Nokia Ventures, which — as the venture arm of European mobile company Nokia — was seen as near the bottom of the VC pecking order.
In the end, Nokia Ventures invested US$4.5 million, and did it at Confinity’s 1999 PayPal launch event. With several local television stations covering the launch, Levchin took out the two prepared PalmPilots, handed one to Nokia Ventures Pete Buhl and the other to Peter Thiel. Buhl took his device and entered Nokia’s payment — a grand total of US$4,500,000 — positioned his infrared port next to Thiel's and pressed “send”. Thiel’s PalmPilot beeped and successfully received the payment — a notable achievement, given the amount of pain Levchin and his team had to take on in order to deliver working software.
With a working prototype at hand, Confinity believed that if they built it, the beamers would come. Others at the company weren’t so sure. Board member Reid Hoffman questioned the practicality of beaming from the very beginning. From Jimmy Soni’s The Founders:
“We are living in the heaven of PalmPilots,” observed Reid Hoffman, a Stanford friend of Thiel’s and early Confinity board member, “and we could walk into every single restaurant and go to each table and ask how many people have PalmPilots.” He guessed the answer was between zero and one per restaurant. “And that means your use case can only be used between zero and one times, per restaurant, per meal cycle! You’re hosed! It’s over on this idea.”
Hoffman then raised another problem. What if one of these PayPal users forgot their PalmPilot and still needed to beam money? What then? In response, Levchin proposed a backup email service. Users who forgot their PalmPilot could go home, open up PayPal’s website, and send money via email. No infrared ports or physical proximity needed.
This was an eureka moment, but few recognized it at the time. Levchin designed it as a throwaway demo and put the feature in a corner of the PayPal.com website for the unlucky souls who forgot their PalmPilots. Over the next few weeks, however, Levchin found himself increasingly using the email service to test out PayPal’s transaction functionality, since he found it more convenient than setting up the hardware for the PalmPilot. He later described that as “a clue” that perhaps the email service would be more successful than the beaming. But he did not think so at the time.
Another teammate, David Sacks, would make a similar case for the email service. During his job interview, he dismissed the entire PalmPilot product and said he would only join if the email service was given primacy. Sacks later recalled that there were two problems with the initial PalmPilot idea:
“One is that there are only five million Palm users, so unless you’re with somebody who also had a PalmPilot, the app is useless. And then there’s the other problem, even if you’re with somebody who’s got a PalmPilot, what would you use it for? Nobody could really come up with anything better than splitting dinner tabs.”
Thiel assured Sacks that email would take precedence over beaming and Sacks joined, but Thiel didn’t notify the rest of the team. So the Confinity engineers got a surprise when Sacks came in and started deprioritizing the PalmPilot product. Thiel eventually brokered a compromise: both products would be built side by side.
By 2000 though, it was clear that the PayPal email service was the superior product. Email was everywhere, and PalmPilot wasn’t. The 1998 romantic comedy film “You’ve Got Mail” (which referenced AOL’s iconic email notification) highlighted the degree to which email had entered mainstream culture. The next year, Americans sent more email messages than the Postal Service delivered packages.
Sacks and Hoffman got what they wanted. The PalmPilot product, weeks after its 1999 launch, had about 13,000 users. A year later, the number of users was still about the same. Email payment, on the other hand, quickly became the key service offered by PayPal.
And it would remain the core product of the company, up to the point when eBay paid a cool US$1.5 billion to acquire PayPal in 2002.
Compare this case with a previous case you've read. What is similar? What is different?
Does this remind you of a similar case? If so, what is different there?
If you have any thoughts, feel free to comment in the member's forum.