PayPal

Episode 11 covers eBay's acquisition of PayPal — an older deal that set the tone for many modern technology acquisitions and birthed the PayPal Mafia. Scope note: this episode focuses on act one — the founding, the eBay acquisition, and the first period after; a future episode could cover the 2015 spin-out or PayPal as acquirer. December 1998: Peter Thiel, Max Levchin, and Luke Nosek found Confinity, building a payments-and-cryptography service for Palm Pilots. The PayPal of today started as money moving between Palm Pilots. Realizing the market was small, in 1999 they pivoted to a money-transfer service and named the product PayPal.

Also in 1999, Elon Musk — fresh off founding and selling Zip2 — started X.com as an online financial services and email payments company ("domains were cheap back then"). March 2000: the two merged, reportedly orchestrated by Sequoia's Michael Moritz, an investor in Confinity. Elon initially remained CEO of the combined company; that quickly changed and Peter Thiel returned as CEO. In October 2000, with Elon still CEO, the call was made: PayPal was working so well that the whole company's effort would focus on it. In 2001 the company renamed itself PayPal.

February 2002: PayPal goes public — after the dot-com crash, the first consumer internet company to go public in 18 months — closing its IPO day around a $1.2 billion market cap. A few months later, July 2002, eBay announces an all-stock acquisition, somewhere between $1.2 billion and $1.5 billion depending on accounting, roughly a 20% premium to the prior close. And then, pretty quickly, the whole team leaves: within four years of the acquisition, over half of all PayPal employees had departed, including all the founders of both Confinity and X.com.

The PayPal presidency inside eBay became a curiously eventful seat: Scott Thompson left it to become Yahoo's CEO and was quickly revealed to have fabricated his resume — claiming a computer science degree he never earned; Marissa Mayer came to Yahoo after him. Next came David Marcus, who had arrived via the acquisition of his payments company Zong, and now runs Facebook Messenger. PayPal stayed inside eBay for 13 years of meteoric growth, until July 2015 when — under shareholder pressure from Carl Icahn — eBay spun PayPal back out as a standalone public company. At the spin, PayPal began trading worth about one and a half times all of eBay; today its market cap is around $46 billion.

The framing question: given where things stand today, was it good for eBay to pay ~$1.3 billion to in-house PayPal? The lens: an eBay shareholder at the acquisition who, at the spin-off, ends up with one PayPal share and one eBay share — which is what actually happens. The interesting angles: how the deal fed eBay's marketplace business, how the PayPal business grew, and whether PayPal would have grown as it did without the acquisition.

The biggest pre-category nugget: at the time of the transaction, eBay transactions generated two-thirds of PayPal's payment volume. PayPal had finally found product-market fit because people kept using it for this eBay thing; it wasn't really succeeding in pure payments, and its website embeds were largely fed by eBay sellers running other sites. eBay was, effectively, PayPal's entire market segment and its distribution to new markets — Peter Thiel's line (as Ben recalls it) being that PayPal was essentially an app built on top of eBay. A precarious position for a company.