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It’s too early to write the obituary for PayPal. But for a company so deeply etched into Silicon Valley folklore, it is a humbling moment to have become the subject of takeover talk on Wall Street in the wake of a share price collapse.
PayPal came to personify the brash, iconoclastic internet upstart of the late 1990s, and it is where some of the industry’s leading lights — among them Elon Musk and Peter Thiel — learned how to shake the business establishment. The arc the payments company has traced since then is an object lesson in the need for constant reinvention.
Before Mark Zuckerberg coined the term, PayPal’s founders brought a “move fast and break things” approach to payments. The idea that a regulated industry with powerful network effects might be vulnerable to that kind of disruption would have been unthinkable at any other time, but this was the height of dotcom chutzpah.
Jimmy Soni, author of an early history of the company called The Founders, caught the mood. When one employee suggested they hire more lawyers, the idea was nixed by the company’s leaders: lawyers would only point out all the things the company couldn’t do.
PayPal showed the value of a clear customer proposition (send payments by email!), maverick energy and better technology. That technology was often created in moments of desperate need, like the fraud detection systems that set PayPal apart from a gaggle of other online payments start-ups. According to Soni, one engineer credited with important breakthroughs in beating fraud was given a job interview by Musk that lasted until 4am — then told to come back in three hours to collect a job offer.
The tech luminaries who trace their careers back to PayPal’s early days include LinkedIn founder Reid Hoffman, Roelof Botha, former head of Sequoia Capital, and David Sacks, now President Trump’s AI and crypto tsar.
Viewed from the post-blockchain world, PayPal’s early ambitions look almost modest. Riding on top of existing payment rails, they were tied to what Musk called the “herky jerky frickin’ monstrosity” of the banking system’s entrenched technology. Working on the fringes of the system, the only way to survive and thrive was to keep inventing.
The surprising thing, given its inherent network effects, is that PayPal’s owners didn’t seem to foresee the scale their business could reach, selling out to eBay for $1.5bn after less than four years. With a heavy dependency on the auction site, they feared being squeezed out by eBay’s rival payment system.
There are clear echoes of other start-ups that sold to bigger competitors, like Google’s 2006 purchase of YouTube (itself founded by PayPal alumni) and Facebook’s 2012 acquisition of Instagram. Passing the $1bn barrier, those deals also seemed staggeringly big for the times, though the sticker prices look paltry for the giant networks they became.
The difference is that while YouTube and Instagram have thrived under new owners, eBay couldn’t unlock the potential in PayPal. The online auction company tried — and failed — to weld together a suite of services around commerce, payments and communications (it also bought Skype). The whole ended up being less than the parts. Subordinated to eBay’s main ecommerce business, PayPal failed to keep innovating and was blocked from one obvious route of expansion, partnering with other retailers. It took an attack by corporate raider Carl Icahn to force eBay to spin the company off again.
PayPal’s owners have always been acutely aware of the need to keep finding the next big thing. Even while still inside eBay, acquisitions included person-to-person payments app Venmo, cross-border remittance company Xoom and the “buy now pay later” company Bill Me Later. But PayPal didn’t find a new business to compare with its core, or turn its diversification effort into more than a collection of parts. It was a downturn in its original, highly profitable business that led to the forced departure of its CEO and the current crisis.
David Marcus, PayPal’s final CEO while under eBay control, recently pinned the blame for the decline on a loss of product vision and failure to think big enough. Chasing short-term financial returns, it didn’t invest in trying to build the payment industry’s next big platforms, he said.
Now, payments are facing another wave of disruption as AI threatens to remake online commerce. Even if he can steer the company past its current slump, Enrique Lores, the former HP executive who takes over as PayPal’s new CEO this weekend, will have his work cut out.
richard.waters@ft.com