4 ms·

PayPal Never Could Have Been Built Lean

53 points by tsondermann 17y ago

davi 17y ago
At PayPal we spent tens of millions in marketing through our referral program (get a friend to join we'll give you $5-10) Assuming a good business case (which PayPal had: bootstrap network effect with pure money), could a web startup ever get funded to do something like that today?
- jeff18 17y ago
  Assuming you will get a measurable ROI for each referral, you probably could just go to the bank and negotiate a traditional loan to pay for it.
  - _delirium 17y ago
    A lot of the ROI is speculative and aggregate, though, isn't it? You're not mainly buying the potential profitability of the specific new customer, but attempting to buy a network with enough critical mass to get off the ground as a viable payment mechanism. I'm not sure how you measure the ROI on that, since it's got huge uncertainty.
    - jeff18 17y ago
      If you are going to spend tens of millions of dollars on a referral bonus promotion, it better not be speculative!
      - _delirium 17y ago
        Well, it's the nature of markets dominated by network effects that outcomes tend to be fairly binary: either you build your critical-mass network and win huge, or you don't, and go bankrupt. I'm not sure there was a plausible middle-of-the-road outcome where PayPal becomes a small but profitable niche company.
        failquicker 17y ago
        I'm not sure that I agree with that. Niches have popped up and thrived middle of the road in markets that paypal vacated. Adult content and gambling come immediately to mind. So if they weren't getting the wide net traction they were after, they probably could have focused the beam into a successful niche. Who knows, If things went differently paypal could be working the neteller circuit of transactions.
- ramit 17y ago
  Doesn't Gilt do this?
  - andrewvc 17y ago
    They give you $25, since most stuff on Gilt is pretty pricey (most items are $80+, with a lot that extend into the hundreds) my guess is it all works out for them. Plus, they have a rather steep $12 shipping+handling fee.
emanuer 17y ago
Why it couldn't have been build lean: 1. It needed a critical mass of both buyers and sellers 2. Customer service in financial industry is expensive 3. The 2 main competitors (Billpoint & C2it) had bottomless pockets. (4.) Web 1.0 technology was expensive.
- rjurney 17y ago
  If you actually look at what Steve Blank has written, it says that you need lots of funding to enter a new market. Paypal did just that. Therefore 'Lean' in this case means 'Tons of Money.' Its a theory that means more than its title. Maybe its wrong, but this article fails to even discuss it.
manderson2080 17y ago
In 2001, when the money was flowing, everyone's solution for any startup's problem was to throw money at it. Today, there many other outlets for growing an intelligent idea: blogs, press, alternative incentives programs. And minimal hardware/software costs to build such a product. While PayPal, in 2001, could maybe not have been built lean. It is very possible for the next PayPal-like startup to disrupt the market now on a micro-budget.
- steveklabnik 17y ago
  Yep. I don't think Venmo has gotten an insane amount of funding, for instance, and I think it's just as disruptive as PayPal was.
  - klenwell 17y ago
    "When people trust you, you can pull money from their accounts at will." Hadn't heard of Venmo before this. But yeah, that sounds like it could be pretty disruptive.
    - steveklabnik 17y ago
      I've had an account with them for a while, and I met them at SXSW. I'm not sure what they're publicly saying or not, but they've got some really cool stuff in the works with that feature... They're a company that I'm excited about, because I've found them useful a ton of times since I've heard of the idea. One of those "you never knew how useful it was until you had it" kind of things.
    - adw 17y ago
      They're not doing much that's dramatically new - check out the M-PESA system, which is massive in North Africa...
jdietrich 17y ago
I think that it is easy to be led astray by anecdote. I think that PayPal is such an outlier as to be irrelevant to almost all of us. There's the fact that this all happened a decade ago. PayPal launched at a time when the internet was effectively undergoing a Western Expansion and many claims were being staked to build essential infrastructure. Very few ecompanies really understood the internet, there were very few incumbents in the online space and huge opportunities for first movers. I can't imagine any VC today allowing a startup to spend in the way PayPal did. As we all know, back then it just wasn't realistically possible to be properly lean because building stuff was so much more expensive. I'm sure the idea of YCombinator would seem as nonsensical to the founders of the nineties as multimillion first rounds seem to us today. The article alluded to the fact that payment transfer is exceptional in structure. I struggle to think of other startups that required such enormous network effects to become sustainable and had such extraordinary cashflow issues. I think that there's a strong case that a PayPal-like business could be built lean today, but I'm not sure it's relevant - I don't think any of us are trying to build those businesses and I don't think any of us would succeed in doing so. Looking at the likes of Facebook, I think it's clear that the biggest, most network-dependent businesses really can be built out of dorm rooms these days.
- ojbyrne 17y ago
  Isn't youtube also an outlier?
  - jdietrich 17y ago
    Absolutely - I don't think many of us have much to learn from a vast, unprofitable company that sold for $1.65bn. As far as I'm concerned, Chad, Steve and Jawen won the lottery - their intelligence, insight and connections bought them a lot of tickets, but they still won the lottery. They're very interesting companies, but I think it's dangerous to think that we mortals can learn anything from them. Usain Bolt is the fastest man in history. We understand that he's a genetic freak who happened to try out for the best track team in the world. Exactly the right man in exactly the right place at exactly the right time. We understand that he's so far outside the norm that he can eat 40 chicken nuggets and run 100m in 9.69 seconds on the same day. We understand that what he does teaches us nothing about what we should do if we want to run faster. YouTube was founded by three guys working for PayPal who were likewise exactly the right men in exactly the right place at exactly the right time. What they did is very informative if you happen to be well-connected guys in the valley who chance upon perfect timing. For the rest of us, "sell out to Google" is not a business plan. It seems to me that the whole point of what we're doing here at HN is to upend the old notions about what it means to start up. The discourse has long been dominated by VCs who are only interested in billion-dollar companies, but I for one am far more interested in the idea of ten thousand people becoming millionaires than ten people becoming billionaires. Patrick of BCC is for me the prime example of the new startup logic. Absolutely any of us could realistically aspire to do what he has done. He's not making 'fuck you money', but he's making a good living from a couple of evenings a week. How much happier would he be if he were a billionaire? In utilitarian terms, what is the net benefit of a million Patio11s vs one Chad Hurley? These sorts of articles really bug me, because they seem to me to be part of this age-old cultural notion about what geeks ought to be doing with their lives. For the rest of the human race, it's perfectly acceptable to pursue your own happiness, but if you're really smart you're expected to change the world. I'm sure there are plenty of people who really do want to change the world, but I'm also fairly confident that most of us just want to do cool things and have enough money to be comfortable. It seems to me that the dialogue about startups is warped by a particular kind of charming, eloquent VC. I think there are a number of very influential people out there who are using our sense of public service, our avarice and our ego to manipulate our expectations of success. I think we as smart people are pressured enough without our own community distorting our sense of what constitutes a good day's work. I think that talking about mega-companies is just as harmful as our cultural fixation on size zero models, or the sense amongst some young men that the only good jobs are playing ball or rapping. I think paying much attention to outliers is inherently harmful as it warps our sense of what is normal and reasonable and realistic. I think that startup culture has a sickness - a disease that we caught in High School and that we have incubated since. I think we expect far too much from ourselves and have an unrealistic sense of the threshold for success. DHH is considered a radical, in no small part because he has a very specific scope to his ambition. He is noteworthy in the startup community for saying that there are such things as 'enough revenue' and 'enough customers. We forget that to most ordinary people, DHH has wealth and freedom beyond their imagination. I think the schoolroom sense of "I expected better of you, you're a bright boy" has evolved into this sense that we are in it to serve shareholders and VCs, that we are in it to do something superhuman. Why is there a sense of shame to say in our community that we just want to pay the bills and have fun doing it? Why do so many people seem to sneer at the likes of Tim Ferriss? Why can't we be happy to do things just for ourselves and our customers?
richcollins 17y ago
It's unfortunate that Eric chose to label his philosophy "Lean" because it's become synonymous with "bootstrapped". Lean doesn't mean cheap it means efficient through validation of a business model before scaling.
- jaytee_clone 17y ago
  I was thinking the same thing. From my knowledge, PayPal followed some what of a lean approach. Their initial product was about sending money between palm devices. When they tested it and figured out that no one would use it, they just pivoted to online money transaction, which more people found useful. That's when they started to scale. Now that sounds pretty lean to me.
rjurney 17y ago
It would be great if we could actually debate this topic instead of debating different interpretations of the title. Lean doesn't mean cheap. It can mean more expensive. It simply means recognizing the cost of entering different markets and not spending too early, to optimize funding around finding a business model instead of the product development cycle.
inboulder 17y ago
Never mind the cost of the network effects, PayPal only stayed in business because it figured out effective fraud loss minimization, which its completion did not (billpoint etc). Preventing fraud is mostly orthogonal to the lean/cash intensive issue.

53 points by tsondermann 17y ago

davi 17y ago

At PayPal we spent tens of millions in marketing through our referral program (get a friend to join we'll give you $5-10) Assuming a good business case (which PayPal had: bootstrap network effect with pure money), could a web startup ever get funded to do something like that today?

jeff18 17y ago
Assuming you will get a measurable ROI for each referral, you probably could just go to the bank and negotiate a traditional loan to pay for it.
- _delirium 17y ago
  A lot of the ROI is speculative and aggregate, though, isn't it? You're not mainly buying the potential profitability of the specific new customer, but attempting to buy a network with enough critical mass to get off the ground as a viable payment mechanism. I'm not sure how you measure the ROI on that, since it's got huge uncertainty.
  - jeff18 17y ago
    If you are going to spend tens of millions of dollars on a referral bonus promotion, it better not be speculative!
    - _delirium 17y ago
      Well, it's the nature of markets dominated by network effects that outcomes tend to be fairly binary: either you build your critical-mass network and win huge, or you don't, and go bankrupt. I'm not sure there was a plausible middle-of-the-road outcome where PayPal becomes a small but profitable niche company.
      - failquicker 17y ago
        I'm not sure that I agree with that. Niches have popped up and thrived middle of the road in markets that paypal vacated. Adult content and gambling come immediately to mind. So if they weren't getting the wide net traction they were after, they probably could have focused the beam into a successful niche. Who knows, If things went differently paypal could be working the neteller circuit of transactions.
ramit 17y ago
Doesn't Gilt do this?
- andrewvc 17y ago
  They give you $25, since most stuff on Gilt is pretty pricey (most items are $80+, with a lot that extend into the hundreds) my guess is it all works out for them. Plus, they have a rather steep $12 shipping+handling fee.

emanuer 17y ago

Why it couldn't have been build lean: 1. It needed a critical mass of both buyers and sellers 2. Customer service in financial industry is expensive 3. The 2 main competitors (Billpoint & C2it) had bottomless pockets. (4.) Web 1.0 technology was expensive.

rjurney 17y ago
If you actually look at what Steve Blank has written, it says that you need lots of funding to enter a new market. Paypal did just that. Therefore 'Lean' in this case means 'Tons of Money.' Its a theory that means more than its title. Maybe its wrong, but this article fails to even discuss it.

manderson2080 17y ago

In 2001, when the money was flowing, everyone's solution for any startup's problem was to throw money at it. Today, there many other outlets for growing an intelligent idea: blogs, press, alternative incentives programs. And minimal hardware/software costs to build such a product. While PayPal, in 2001, could maybe not have been built lean. It is very possible for the next PayPal-like startup to disrupt the market now on a micro-budget.

steveklabnik 17y ago
Yep. I don't think Venmo has gotten an insane amount of funding, for instance, and I think it's just as disruptive as PayPal was.
- klenwell 17y ago
  "When people trust you, you can pull money from their accounts at will." Hadn't heard of Venmo before this. But yeah, that sounds like it could be pretty disruptive.
  - steveklabnik 17y ago
    I've had an account with them for a while, and I met them at SXSW. I'm not sure what they're publicly saying or not, but they've got some really cool stuff in the works with that feature... They're a company that I'm excited about, because I've found them useful a ton of times since I've heard of the idea. One of those "you never knew how useful it was until you had it" kind of things.
  - adw 17y ago
    They're not doing much that's dramatically new - check out the M-PESA system, which is massive in North Africa...

jdietrich 17y ago

I think that it is easy to be led astray by anecdote. I think that PayPal is such an outlier as to be irrelevant to almost all of us. There's the fact that this all happened a decade ago. PayPal launched at a time when the internet was effectively undergoing a Western Expansion and many claims were being staked to build essential infrastructure. Very few ecompanies really understood the internet, there were very few incumbents in the online space and huge opportunities for first movers. I can't imagine any VC today allowing a startup to spend in the way PayPal did. As we all know, back then it just wasn't realistically possible to be properly lean because building stuff was so much more expensive. I'm sure the idea of YCombinator would seem as nonsensical to the founders of the nineties as multimillion first rounds seem to us today. The article alluded to the fact that payment transfer is exceptional in structure. I struggle to think of other startups that required such enormous network effects to become sustainable and had such extraordinary cashflow issues. I think that there's a strong case that a PayPal-like business could be built lean today, but I'm not sure it's relevant - I don't think any of us are trying to build those businesses and I don't think any of us would succeed in doing so. Looking at the likes of Facebook, I think it's clear that the biggest, most network-dependent businesses really can be built out of dorm rooms these days.

ojbyrne 17y ago
Isn't youtube also an outlier?
- jdietrich 17y ago
  Absolutely - I don't think many of us have much to learn from a vast, unprofitable company that sold for $1.65bn. As far as I'm concerned, Chad, Steve and Jawen won the lottery - their intelligence, insight and connections bought them a lot of tickets, but they still won the lottery. They're very interesting companies, but I think it's dangerous to think that we mortals can learn anything from them. Usain Bolt is the fastest man in history. We understand that he's a genetic freak who happened to try out for the best track team in the world. Exactly the right man in exactly the right place at exactly the right time. We understand that he's so far outside the norm that he can eat 40 chicken nuggets and run 100m in 9.69 seconds on the same day. We understand that what he does teaches us nothing about what we should do if we want to run faster. YouTube was founded by three guys working for PayPal who were likewise exactly the right men in exactly the right place at exactly the right time. What they did is very informative if you happen to be well-connected guys in the valley who chance upon perfect timing. For the rest of us, "sell out to Google" is not a business plan. It seems to me that the whole point of what we're doing here at HN is to upend the old notions about what it means to start up. The discourse has long been dominated by VCs who are only interested in billion-dollar companies, but I for one am far more interested in the idea of ten thousand people becoming millionaires than ten people becoming billionaires. Patrick of BCC is for me the prime example of the new startup logic. Absolutely any of us could realistically aspire to do what he has done. He's not making 'fuck you money', but he's making a good living from a couple of evenings a week. How much happier would he be if he were a billionaire? In utilitarian terms, what is the net benefit of a million Patio11s vs one Chad Hurley? These sorts of articles really bug me, because they seem to me to be part of this age-old cultural notion about what geeks ought to be doing with their lives. For the rest of the human race, it's perfectly acceptable to pursue your own happiness, but if you're really smart you're expected to change the world. I'm sure there are plenty of people who really do want to change the world, but I'm also fairly confident that most of us just want to do cool things and have enough money to be comfortable. It seems to me that the dialogue about startups is warped by a particular kind of charming, eloquent VC. I think there are a number of very influential people out there who are using our sense of public service, our avarice and our ego to manipulate our expectations of success. I think we as smart people are pressured enough without our own community distorting our sense of what constitutes a good day's work. I think that talking about mega-companies is just as harmful as our cultural fixation on size zero models, or the sense amongst some young men that the only good jobs are playing ball or rapping. I think paying much attention to outliers is inherently harmful as it warps our sense of what is normal and reasonable and realistic. I think that startup culture has a sickness - a disease that we caught in High School and that we have incubated since. I think we expect far too much from ourselves and have an unrealistic sense of the threshold for success. DHH is considered a radical, in no small part because he has a very specific scope to his ambition. He is noteworthy in the startup community for saying that there are such things as 'enough revenue' and 'enough customers. We forget that to most ordinary people, DHH has wealth and freedom beyond their imagination. I think the schoolroom sense of "I expected better of you, you're a bright boy" has evolved into this sense that we are in it to serve shareholders and VCs, that we are in it to do something superhuman. Why is there a sense of shame to say in our community that we just want to pay the bills and have fun doing it? Why do so many people seem to sneer at the likes of Tim Ferriss? Why can't we be happy to do things just for ourselves and our customers?

richcollins 17y ago

It's unfortunate that Eric chose to label his philosophy "Lean" because it's become synonymous with "bootstrapped". Lean doesn't mean cheap it means efficient through validation of a business model before scaling.

jaytee_clone 17y ago
I was thinking the same thing. From my knowledge, PayPal followed some what of a lean approach. Their initial product was about sending money between palm devices. When they tested it and figured out that no one would use it, they just pivoted to online money transaction, which more people found useful. That's when they started to scale. Now that sounds pretty lean to me.

rjurney 17y ago

It would be great if we could actually debate this topic instead of debating different interpretations of the title. Lean doesn't mean cheap. It can mean more expensive. It simply means recognizing the cost of entering different markets and not spending too early, to optimize funding around finding a business model instead of the product development cycle.

inboulder 17y ago

Never mind the cost of the network effects, PayPal only stayed in business because it figured out effective fraud loss minimization, which its completion did not (billpoint etc). Preventing fraud is mostly orthogonal to the lean/cash intensive issue.