"crucible Moments" podcast episode delves into the gripping and foundational moments of PayPal's early history, narrated by Roloff Botha, managing partner of Sequoia Capital. The episode explores pivotal decisions, such as mergers, battles against fraud, and eBay's acquisition offers, that shaped the company's journey from a fledgling startup to a digital payments giant. It is a deeply personal recount of experiences from Botha, who was part of the team at PayPal, and features insights from key figures like Max Levchin and Michael Moritz.

The narrative begins with PayPal's infancy, detailing its formation from two competing entities, X.com founded by Elon Musk and Confinity led by Peter Thiel and Max Levchin. The podcast highlights the company's rollercoaster beginnings, marked by intense rivalry, crucial decisions amidst fierce competition, and the eventual merger that formed PayPal as it is known today. It also scrutinizes the leadership challenges involved in the merger and the relentless struggle to fight mounting fraud risks that threatened the company's survival.

Main takeaways from the podcast episode:

Please remember to turn on the CC button to view the subtitles.

Key Vocabularies and Common Phrases:

1. prolific [prəˈlɪfɪk] - (adjective) - Producing much fruit or many offspring, or producing many works. - Synonyms: (productive, creative, fertile)

One of the particularly prolific people who was creating these fraudulent accounts on PayPal somehow figured out my email address.

2. fraudulent [ˈfrɔdʒələnt] - (adjective) - Obtained, done by, or involving deception, especially criminal deception. - Synonyms: (deceitful, dishonest, corrupt)

One of the particularly prolific people who was creating these fraudulent accounts on PayPal somehow figured out my email address.

3. crucible [ˈkruːsɪbəl] - (noun) - A situation in which different elements interact to produce something new or to witness a change or transformation, often involving a severe test or trial. - Synonyms: (trial, ordeal, test)

Welcome to crucible Moments, a podcast about the critical crossroads and inflection points that shape some of the world's most remarkable companies.

4. rinky-dink [ˈrɪŋkiˌdɪŋk] - (adjective) - Of poor quality or small in size or importance. - Synonyms: (shabby, second-rate, inferior)

I walked into a rinky dink office next to the Palo Alto dump.

5. remit [rɪˈmɪt] - (noun) - The task or area of activity officially assigned to an individual or organization. - Synonyms: (scope, authority, responsibility)

Despite the fact that X.com had this broader remit and vision of financial products, it was really their person to person payments product that was exploding in use.

6. feud [fjuːd] - (noun) - A prolonged and bitter quarrel or dispute. - Synonyms: (conflict, rivalry, vendetta)

The actual company to company relationship was basically that of a mortal enemy, blood feud sort of thing.

7. perilous [ˈpɛrələs] - (adjective) - Full of danger or risk. - Synonyms: (dangerous, hazardous, risky)

It gradually became clear, as the financing market tightened, that each of these companies, as a separate entity, was treading its own road to perdition.

8. armistice [ˈɑrmɪstɪs] - (noun) - An agreement made by opposing sides in a war to stop fighting for a certain time; a truce. - Synonyms: (truce, ceasefire, peace)

A key person in this process and in the negotiation that followed and in the kind of armistice that these companies had was Peter Thiele.

9. in typo ['ɪn 'taɪpoʊ] - (noun) - A small mistake in a typed or printed text, often a typographical error. - Synonyms: (printing error, misprint, mistake)

There was a typo in the notification, making it seem more confusing.

10. orchestration [ˌɔr.kəˈstreɪ.ʃən] - (noun) - The planning or coordination of a situation or series of events. - Synonyms: (arrangement, organization, planning)

The orchestration of the merger required careful negotiation from both sides.

PayPal ft Max Levchin - A Merger of Enemies That Reshaped Silicon Valley

One of the particularly prolific people who was creating these fraudulent accounts on PayPal somehow figured out my email address. It would be like a bank executive talking to a bank robber as the robbery is happening. We went from this is a problem, let's address it to this is a survival moment. And if we don't figure out how to destroy what fraud is doing to us, it will destroy us instead.

Your life or your company will be disproportionately shaped by a few crucible moments. The decisions you make at these intersections will have an outsized bearing on your journey for years or decades to come. At Sequoia, we use this as a framework with our founders for navigating decisions, how to identify when you're facing a crucible moment, and what principles should guide you as you decide your path forward.

Today's episode is very personal to me. In the spring of 2000, on a student visa from South Africa and desperate to prove myself and earn a place in Silicon Valley, I joined a fledgling startup called PayPal. It turned out to be a life changing crucible moment, but it wasn't an obvious choice at the time. PayPal, as it's known today, a behemoth with a universal name and logo, one of the highest valued digital payments companies in the world, is nothing like the company I joined on my first day. I walked into a rinky dink office next to the Palo Alto dump. When I settled into my desk and switched on one of those thick 1990s style desktops, the smell of garbage wafted through the air.

PayPal is also famous for the people who came out of it. Max Lefgen, who you'll hear from today, Elon Musk, Reid Hoffman, Peter Thiel, Steve Chen, Chad Hurley. The list goes on and on. They're often referred to as the PayPal mafia because they went on to found some of the most significant companies of our time. But back then, we were just a group of unknown underdogs working day and night to keep our company alive.

PayPal start was a rollercoaster. It was scary. Again and again, we thought the company was going to die. Three defining crucible moments in PayPal's early history played out nearly simultaneously, just as we had wrestled one under control, another challenge rear its head. In this episode, we'll look at how a 50 50 merger nearly tore PayPal apart, how pressure to stabilize the business led to innovative fraud fighting measures still in use today, and how a series of acquisition offers tested our team's resilience and our resolve to fight and bet on ourselves.

When PayPal was in its infancy, it was two companies. One company was called X.com Dot, and it was founded by a then late 20 something named Elon Musk. The other component of what became what we know as PayPal was called Confinity, and it was co founded by Peter Thiel and Max Levchin.

The company was really started around this broad idea of cryptography coming to devices with small screens. Of course, it's mid nineties or late nineties, and so things like iPhone don't exist yet, but palm pilots do. And so you have this maybe possible interesting area of opportunity where things like documents and payments will have to be secured. My background was in cryptography, and so I thought of starting a company in the space. Met this guy, Peter Thiel. We hit it off and co founded a company that became known as Confinity.

As we sort of meandered through the desert of bad business ideas, we'd realized that nobody actually cared yet about encrypting documents on devices that could barely generate a random number. And so we sort of chiseled away at it and eventually turned to this idea of payments, initially on your mobile device, but then over time, through sort of a chance migration to the web, basically payments for everyone. They create an email money framework or a process that we all know as PayPal today.

Unfortunately for Max and Peter, they weren't the only ones working on digitizing payments over the Internet. Elon Musk's thesis was, if in a digital age, money really isn't real, why does it cost me anything to move money around? If I have an insurance policy and a mortgage and a bank and a brokerage, why can't that all just live in one place? And for him, that one place was X.com dot. We weren't aware of the presence of Confinity when we made the first investment in X.com dot.

Here's what leads to the rivalry between these two companies. Both of them have an email money mechanism, and both of them take off on this corner of the Internet called eBay. So eBay, it's recently gone public. It's an auction website. There's all these buyers and sellers. They could unite. Somebody that wants to sell a beanie baby with somebody that wants to buy a beanie baby. And so you have this flea market. But what the flea market hadn't figured out was how to do the payment part of the transaction. And eBay didn't have a good, integrated payment solution at that time.

And so despite the fact that X.com had this broader remit and vision of financial products, it was really their person to person payments product that was exploding in use. And similarly with PayPal, it was the email product, again used by eBay merchants, that was exploding in use. And the two companies really had neck and neck market share on eBay at the time. They both notice that, like eBay, buyers and sellers are totally gaga. They're obsessed because it's an instantaneous money transfer. They don't have to do things like mail checks or send cash in an envelope or send a money order through Western Union. They can just actually send email money.

The actual company to company relationship was basically that of a mortal enemy, blood feud sort of thing. I always think of the times when Confinity on one side of Universe, the avenue, and X.com on the other side were competing as if you've ever been to the little Tuscan hill town of San Gimignano, which is dotted in the center by very tall, thin towers where different families lived.

These families waged holy war on each other, and this competition drives both teams utterly, completely crazy, right? The world knows that Elon is no slouch, and he wants to win and he wants to be successful. What maybe fewer people understand, but certainly people in Silicon Valley know, is that Max Levchin has just as much endurance and intensity. There's a member of the Confinity team that is celebrating a birthday, and the birthday cake is brought out for the Confinity team to enjoy. And on the birthday cake in frosting is diex.com, comma, die. On the other side of the fence. On the X.com side of the fence, Elon, in a moment of heated competition, sends an email that to this day, 20 plus years later, rings in the minds of his teammates.

The subject is a friendly note about our competitors. And apparently the text was, kill our competitors. Die, die, die. Right? And so you have this sort of superheated competition. Max Levchin at one point warns his engineers who are working at Confinity, to be careful about what they say while walking around Palo Alto because there could be spies everywhere. The paranoia took deep hold, and in part because we were absolutely certain that they must have heard us through the walls or maybe dumpster dived for our ideas and etcetera, etcetera.

So it was definitely very, very tense. And of course, all of us being nerdy engineers, we'd never actually confronted each other in any sort of a physical domain. We just sort of duked it out online. Both X.com and Confinity had very high burn rates. For those folks who are unfamiliar with the terminology, in Silicon Valley, the burn rate of a company refers to the rate at which it is depleting its cash balance.

There were people who thought that if the competition continued, that it would be ruinous for both companies. A key person in this process and in the negotiation that followed and in the kind of armistice that these companies had was Peter Thiel.

And he realizes that they are in this fevered, competitive environment, but that it is actually costing both companies a huge amount of money and a huge amount of unnecessary stress and grief that at some point he realizes that Elon's X.com has far more capital than Confinity does, that it could basically just win by dint of size. It gradually became clear, as the financing market tightened, that each of these companies, as a separate entity, was treading its own road to perdition, and the sensible thing would be to combine forces.

The companies faced a crucible decision. If your business's life is on the line, do you merge with an enemy? And if you do merge, who's in charge? Look, there are always two issues that pop up in a merger, one of which is, how much of the cake will my company have? And the second one is, who's going to be in charge of the combined entity? It was certainly very controversial because the original proposal from X was significantly in their favor.

All the metrics suggested that we were in some form or another equal to them. And so my pride was insulted by the original suggestion of let's do a 90 ten merger in our favor. There's nothing complicated about a 90 ten combination. It means that one side has nine slices of the cake and the other side has one slice of the cake. And from Max and Peter's point of view, I'm sure that they felt that their progress at PayPal and the trajectory they were on should be worth a lot more than just one slice of the cake. And I can well imagine that they were affronted by that.

Peter, who's not a bad poker player himself, I think, countered with something like, absolutely not. But I left the negotiation of the actual merger terms to them, which ultimately led to a 50 50 merger, which is really something I do not recommend to anyone. In early 2000, X.com and Confinity merged. The combined company was renamed PayPal, adopting the name of Confinity's Payments product as the new overarching name of the company.

I joined PayPal on the heels of the merger, which, as Max said, was a 50 50 merger or a merger of equals. At the time, this was meant to signify that neither team was better than the other. But as Max hinted, the outcome of this crucible moment, a 50 50 split, came at a cost.

When these two companies, X.com and Confinity, unite into one company, it is profoundly awkward. I described the merger of X.com and Confinity as a shotgun wedding. And that's a pretty apt description, given that just days, just weeks before this merger, these two companies were truly trying to destroy one another.

Because it was a merger of equals. For example, my position was, well, I am the CTO of the combined company. I should be the one making technical decisions. Of course, Elon had his own technical decisions in mind, and there's well documented rivalry between us about what exactly we should have built and how. So Elon, for example, thought that we should move the infrastructure of the company over to Windows NT. And most of the engineering team that had come from the Confinity side were Unix developers. And Max also had a very strong point of view that Unix was a much more secure platform for the company than NT, which I think has proven accurate.

With the benefit of hindsight, that sort of narrative played out in a bunch of other places where you would say, well, this is obviously the better way it was our way. And the answer would be, well, sure, but we merged 50 50. It's not really clear to anyone here that this was your way or our way, and so just creates a set of tensions.

Here's a snapshot of the management roller coaster in those days. Peter was supposed to be the executive vice president of the newly combined company. He stepped down in May, just six weeks after the merger, but remained on the board. A few weeks later, there was a coup to remove then CEO Bill Harris. Shortly after that, there was another coup to remove Elon Musk, who'd replaced Harris, as CEO.

And that was in August. While Elon was away on his honeymoon. The management team drove over to the headquarters to plead our case to the board to remove Elon as CEO. We had Manila envelopes with signed resignation letters from the management team to show the board that we were serious. I was terrified about what was going to happen.

I had no idea how it would unfold. Insurrection, the rebellion, the coup, whatever name you want to associate with it meant that Peter became the CEO of the business. Elon, again, understandably, was immensely upset about this. I remember him calling me from Australia, obviously deeply upset, wounded, hurt, multiple time zones away, labeling it all a heinous crime.

This turnover was all in the span of six months. What was interesting was listening to employees. One of them actually jokingly said to me, sometimes you get to the office and you'd be like, oh, new CEO today. All right, no worries. I gotta get back to my work. Right? Because the change was happening that quickly. And that is actually one of the things that's remarkable about this story is just the amount, I would say the sort of toughness of some of the people to get through these rapid changes, to embrace the fact that immediately after this merger, they have a different title, they have a different role, they don't know where they're going to be. And I would say, in a lot of cases, the people who impressed me most were people who just said, you know, I'm just going to do what is needed.

In retrospect, I think a clear sense for owner versus not would have been. Would have made it easier for the teams to know who is the final source of authority. And so having a clear sense for who sets the direction and who leads the company in every part of its operation, in retrospect, is a really, really important thing for all m and a encounters.

For me, having clarity about the roles after the merger, having a really good sense of the comparative strengths of individuals in the different companies, and probably most importantly, and this is always absent, doesn't matter how hard you try coming up with a shared identity, not separate identities. And if there's any lesson to be taken away from this merger, it's to work very hard before you actually combine forces on the identity. That together you intend to build, that together you intend to own, and that together you intend to share.

As the two teams struggled to get along, the company's losses were out of control. We had another big problem brewing. Right after the merger, the management team started to realize that our fledgling payments businesses now combine into one, were really getting abused by what the term became known as the fraudsters.

This summer of 2000 was a very scary time at PayPal. We knew we had a massive fraud problem. It wasn't obvious that it was solvable. The primary source of fraud that risked our survival at PayPal was so called unauthorized fraud. What this meant was a user who didn't actually have authorization to use a given card would enter that card into PayPal system, charge $200 or $300, funnel that money into another account, and maybe consolidate it with a bunch of other accounts that they'd use with stolen credit card information, withdraw that money, and then they'd run off with it.

So this was just theft. And so that was the primary source. And the reason this is a very scary type of fraud is it's very scalable. You can go to the dark web, so to speak, and you can purchase stolen credit cards for probably less than a dollar today, and you can get a million of them. And if there's a way for you to write a computer program to automatically sign up for accounts on PayPal, add credit cards, charge them, funnel that money into a central account, withdraw to a bank account, and run off, you could make off with millions of dollars. And that's exactly what happened to us.

No one's ever encountered this kind of thing before. Which leaves the company PayPal, in a very precarious position. It is being defrauded to the tune of over $10 million a month at one point. And it's also not going to be able to raise more money because venture capital funding in Silicon Valley has all but dried up.

In the summer of 2000, the tone of the market changed dramatically. Cash became hard and then impossible to raise, and there was money flying out the door because of the cost of fraud. It became very clear to all of us that if we were to project fraud losses, we would be out of cash and out of business. Basically, in a few months, we went from, this is the problem. Let's address it to this is a survival moment. And if we don't figure out how to destroy what fraud is doing to us, it will destroy us. Instead.

How do you fight fraud and stem losses to stabilize the business? This was PayPal's next crucible moment, and solving it required all hands on deck. Every engineer was redeployed to fend off the fraudsters. There is a photo that an employee shared with me. And when you look at the photo, there's a kind of room. It's got a glass window on one side, and stacked next to this glass window are a whole bunch of cardboard boxes. And then you see something you wouldn't expect, which is you see a human being sleeping on top of the cardboard boxes. It's Max Levchin, and he is there catching precious hours of sleep, or minutes of sleep while he is mid all of these fights.

He's mid the fraud fight. He's amid the growth of the company, and he is sleeping on top of cardboard boxes in the office. Look, in the startup, everybody is always burning the midnight hours. And the work intensity at PayPal was immense. For the people involved with PayPal, that was what they lived and breathed 24 hours a day. As PayPal engineers became increasingly immersed in fighting fraud, something strange happened.

The team at PayPal is actually communicating with its fraudsters. One of the people who was creating these fraudulent accounts on PayPal somehow figured out my email address and would email me summaries of his takedowns of my latest idea. So before we got to the final version, I would get half a dozen of emails per week from this person somewhere in Eastern Europe saying, aha. You try to rename form names in HTML and confuse me. My scripts are not confused. I create 20,000 accounts today. Sort of menacing emails. It would be like a bank executive talking to a bank robber as the robbery is happening, or someone breaks into your house and you have a delightful conversation before they steal something from you.

It's born in part of the background of a group of fraudsters who are based in Russia and the background of the company CTO Max Levchin, who was born in Ukraine. And because Max is able to communicate in the fraudster's native tongue, he is sleuthing. He is visiting the forums where they spend time and share tips about tradecraft. He's in these little chat rooms and kind of like picking up intel about PayPal and what people are saying about this company. PayPal.

Finally, late one night, we had a breakthrough. My name is Dave Gauspec, and I'm one of the creators of the Gauspec Leggen test. When PayPal was being defrauded in droves, one of the kinds of fraud they faced were from computers, bots that were basically creating fake accounts by the hundreds so that they could fleece the company for its bonus payments. I remember this very, very vividly. I walked out onto the. I was in a cubicle right next to dozens of cubicles of our engineering team. David Gausbeck was sort of sitting down writing code. It was late on a Friday night, and I said, we have all these horrible human beings writing scripts to sign up for PayPal. I want to make them do a puzzle every time they go for signup.

But to make it too difficult, you will slow down the signups, and it would be bad for user conversion or user signups. If you make it too easy, you will automate it, or the bad guys will automate it, and they wouldn't work. Thinking back to computer vision classes from college, the idea that I had one night was, well, really, let's just go for any task not related to our site that is easy for humans and hard for computers. Reading text is one of the classic problems for that. And I thought, well, why don't we just stick that into our site? Gauzebeck looked up from his computer and said, optical character recognition. OCR, a squiggly name, is still very easy to read for a human. But computers struggle with OCR, and that was through a holy crap moment.

My next move, actually, was to sprint out to Fry's electronics, now sadly departed, where I bought every boxed version of OCR software available in the market to test my squiggly line introduction code to make sure that computers, in fact, could not OCR. We figured this will be a new arms race. It's not an impossible problem to solve, but it makes it a lot harder. If you've ever had to look at a series of squiggly letters and retype them to prove that you're a human, not a robot, you can thank the PayPal team.

That's the Gauss bic Lefgen test, now considered one of the earliest uses and first commercial application of CAPTCHA. I stayed up for three days writing code with no sleep, trying to bring it to the site as quickly as possible. There was a 48 hours coding crazy caffeine-fueled marathon in which David and Max build this technology to defeat these fraudsters. And it just sort of happens over a weekend, and it is intense, and at the very end of it, when the technology is deployed, a bedraggled Max levchin takes a big speaker and hooks it up to his computer, and he turns on ride of the Valkyries as a celebratory anthem.

For having developed this technology and defeated the bots, or at least some share of the bots, it had the exact desired effect. The real time account creation fell off by 50%, which we knew half of the accounts were being created were actually fraudulent. The easy, automated, high volume attacks just instantly shut off. And Igor, who had been taunting Max and sending these emails about how he would always win, and he was smarter than our development team and all of this, the moment of extreme triumph for me at the time was when I got an email from him basically saying, f you. And I knew it worked because he couldn't have broken it by then.

The PayPal team went on to build patent recognition tools to identify and stop laundering operations. We developed a system to verify a user's bank account to make sure the person who was transferring money in or out was really the owner. Another breakthrough invention, Sanjay Bhargava, who was recruited by Elon to Work@x.com comma, was on a walk with a colleague, Todd Pearson. They were noodling on this problem of how do you verify and authenticate bank accounts? And Sanjay said, well, what if we give people two deposits and then it's a code, it's a four digit code. So you would have two transfers into your bank account, let's say for twelve, and then you'd be asked to enter it back in at the PayPal site. You would basically have to type in 1235, kind of a similar to the four digit pin codes people get all the time now with SMS verification. The person standing next to him while they're on this walk for coffee, Todd looks at Sanjay and says, you are a genius.

And they get back to the office and they start building that technology right away. The way that David Sacks, who is the head of product, describes the launch of random deposit, he says, it's an idea that's like Velcro. It's so good, you wish you would have thought of it yourself. It's one of the or two of many that we had to come up with in a hurry and without mention, go literally hundreds and hundreds of ideas that we had come up with, implemented, only to find out that they didn't work.

With the implementation of these tools, gradually, we saw our efforts to curb fraud payoff each month. We lost less and less money to fraud towards the end of 2000. I thought, you know, we might just make it the bookends are the miracle measure of fraud at PayPal was we were probably over 1% of all transaction processed were fraudulent, which by any measure, in any stretch of imagination, is a horrific number. At the time we went public, I think we were, the gross margin on each transaction was probably 65 75 basis points, or 0.6%. When I was leaving PayPal, the fraud numbers were down to about 19 basis points, 0.19%. And at the time, I thought that was the theoretical minimum. You really could not do any better.

I think one of the more remarkable things about PayPal's fraud fighting techniques and tools is that a lot of those tools are still in wide use 20 years later, and almost nobody recognizes where they originated. And so you have things like random deposit, you have things like capture tests that we use at this point, unthinkingly, we don't even consider it. And those all came about in the effort of this one tiny Silicon Valley startup.

One of Peter's favorite expressions is, this is an experiment you can only run once. But it's very hard to tell whether we could have or should have done anything particularly differently relative to what eventually ended up happening. Maybe if we had prevented fraud really successfully from day zero, we wouldn't have been able to grow as quickly and as well as we did. And so maybe we're in fact better off having a, having gone through this sort of a moment of near death by a thousand paper cuts by these bad prostitutes.

Perhaps we could have done better by telling everyone, you know what, you need to fax us your driver's license and show up to our office and log in in person to prove that you are who you say you are. Really hard to tell.

I think the general pattern of lean in get bruised, but not killed by adversity, figure out how to get out of it, do it again is a pretty good formula for startups. I think it becomes harder and harder to do when you have a lot to lose. But we were, at the time, probably still very close to failure in just all kinds of other ways. And the fact that we grew very quickly and we had lots and lots of very happy, legitimate consumers pushed us on to invent a way to remove fraud. And invited at the time, we were celebrating first survival, and then ultimately success.

Throughout 2001, PayPal continued to gain momentum, and we gained confidence in the quality of our business. To give you a sense of our growth, we went from roughly 8 million in revenue in Q four of 2000 to nearly 50,000,001 year later, while shrinking our fraud loss rate. But with this growth came friction with eBay. Our presence on the site became a bigger and bigger issue.

Tension at the PayPal eBay intersection was that, on the one hand, PayPal was the most popular, fastest growing, most convenient way to pay for purchases on eBay. On the other hand, it was the only part of eBay experience that eBay didn't own. They did own a competing product called Billpoint, which they thought should have killed PayPal and made it, or at least made it irrelevant a very long time ago. And yet, somehow they failed to do so. And so, as told from their side or their point of view, PayPal was throwing a party in their backyard and charging attendance and not paying any rent for it. And so we were told by their execs time and time again, that, hey, this will not stand. Well, eventually, build something that competes with you and make you irrelevant.

Over the course of three years, eBay does everything in its power to gum up the works for PayPal, and PayPal does everything in its power to stay alive on eBay, because it's the place that's providing at that point, sometimes upwards of 90% of its transaction volume.

EBay would go out of their way to do changes to code on eBay's website that would make elements of PayPal stop working. And it would send the Paypal team into these kind of, like, paroxysms of, like, action and anger. We knew that eBay had pulled together a war room and that they were trying to figure out how to beat PayPal. They were desperately trying to figure out how to make their own payment system work. I mean, it's completely rational for them to do that. And at some point, they maybe would get it right. And if they did get it right, two thirds of our business was at risk.

They would send legal notices, they would send menacing emails, they would do code insertions, they would often just cut PayPal out of key product upgrades. There was this kind of sense of that. There was this big looming existential threat, which was the decision at any moment by eBay to shut PayPal down. David Sacks had this phrase, which is, we went to work every day feeling as though the sword of Damocles was hanging over our head. And it was a very, very stressful life for us.

Throughout the time of these sort of eBay wars, their management team would approach us and say, look, ultimately, you guys understand that we have to come together. You are an essential piece of our puzzle. You also just don't really exist without us. We are your largest payment platform source. So somewhere, somehow, we're gonna merge. We're gonna be one company.

We had multiple conversations with eBay, which were conducted with both a carrot and a stick. The carrot being some sort of acquisition offer, the stick being all sorts of threats about how difficult they were going to make it for PayPal as a standalone company. How Meg Whitman was going to ensure that the company, PayPal, was never ever going to be able to be a public company, because she'd be sure that eBay was writ large in the risk section of the prospectus, and she would ensure that we couldn't become a public company.

And, you know, this went on, and I like Meg and admire her, but, you know, it's the typical big company posturing, trying to bully and intimidate a small company. They would come in and say, look, we think we should buy you, here's a number. And the number would inevitably be something that we thought we were worth a year ago. And so he was always perceived as a kind of insultingly low offer.

We passed on eBay's offers, and meanwhile, despite Meg's threats, began to look towards an IPO. There were a few reasons for this. Going public would provide access to capital, it would legitimize the company, and it would offer us a clear, independent market valuation. In September 2001, we filed to go public. That Christmas, just weeks away from our IPO, eBay once again complicated things.

So eBay came in and said, hey, here's one final offer. We'll never do any better than this. You guys should not go public. You should sell to us. EBay's offer was close to a billion dollars. Their previous offers hadn't been anywhere close to this. Nothing high enough for us to even consider. But this one caught our attention. Its attractiveness put us at a crossroads, squarely in the middle of a crucible moment. Should we take the offer and end the battle with eBay? Or should we bet on the company's ability to stand solo and go public?

So every time eBay made an offer, one of my kind of standard operating procedures was to sit down with a senior management team and basically say, hey, these guys are here, there's a stack of money on the table. Are you prepared to continue fighting? Or would you like to sort of punch out and cash? In the four years of blood, sweat and tears, and every single time the team basically said, no, let's keep fighting, we can keep doing this. This is actually some sort of a painful fun that we're all going through here. Certainly wore the team down in a fairly meaningful way. There was a pretty vigorous back and forth a debate among team leadership about what the right thing was to do.

To some extent, we as a young team loved the prospect of being able to take a company public. How many times in your life do you get to be part of building a business from scratch and successfully seeing it through to an IPO? And so there was something alluring about that. But we also felt a sense of responsibility to our team, because you don't go public for vanity reasons, you want to do it because you're a steward of the business and you look after the financial interest of all your shareholders and all the employees.

Peter had this fantastic phrase, which was, just because somebody's shooting at you and they don't succeed in hitting you doesn't mean that you're bulletproof. It may just mean that they're poor shot. But if they can keep shooting, at some point even a stray bullet can do serious damage. Peter was very inclined to make the sale. I did not want to do that.

And I think, you know, if Sequoia can claim a contribution to PayPal, it's that we were able to put off and postpone the sale for as long as possible. PayPal bet on itself. We turned on eBay's acquisition offer and went public in February of 2002. There were some who took eBay at its word that its acquisition offer just before we decided to IPO, was its last, and that our battle with them would drag on.

Certainly, PayPal going public didn't stop eBay from continuing to make our lives miserable. But then, in the summer of 2002, over the July 4 weekend, eBay approached us yet again. I remember one weekend afternoon where Peter and I were invited down to Meg's home in Atherton. We sat in her kitchen and she was negotiating with us. This time, the offer was 1.5 billion.

Now, it's easy for these numbers to seem small, as we're surrounded by today's tech valuations, but take yourself back 20 years. In 2002, we didn't have broadband in America. The majority of people on the Internet were on dial-up. Smartphones didn't exist. The total number of people on the planet had access to the Internet was about 250 million, not the 4 billion we have today.

This was a tremendous outcome because the company, PayPal, was public. It was a lot easier for them to understand what the market perceived to be the value of the company. And so, as a result, there was no longer this tense and tenuous conversation about price. It was just a matter of while the public markets are valuing you at x, here's what we want to do. And you can decide whether it makes sense to you or not.

Again, we sat down to think things through. Part of this was taking stock of our team and our stamina and thinking long and hard about what we wanted our future to be. And so right after we went public, I had the same conversation with my team, and they basically said, look, we're very tired, but we'll keep fighting.

And then I once again sat down with the management team and said, hey, this is a moment to decide. What enters into the conversation is they feel as though they are simply fighting for their survival and they are not creating new things anymore. That it gets a little tiresome after a while to simply have to try to stay alive to work all night just so eBay doesn't shut you down. The team is simply exhausted. We've checked the checkbox of initial public offering. We're now a real grown-up company. We can keep doing this independently, or we can accept the fact that we are ultimately an important tool within eBay, and they are a huge percentage of our ecosystem.

I had disagreements all the way up to the eventual sale of the business. I thought we had a huge opportunity ahead of us. They were going to lose control of their destiny. They were going to be very frustrated. You can live until you're 120 and you will never see a business opportunity like PayPal. And I was right.

We formally announced the acquisition on Monday morning, right after the weekend, and the final acquisition offer was at a $1.5 billion acquisition price. And the acquisition finally closed in October 2002. It was bittersweet. It was a victory, but it was also being bought by the enemy. It was definitely a step away from being this cohesive team in a smaller office, and it felt like leaving part of PayPal's history behind.

It was very hard to suddenly switch legions to this new owner of the business. Peter left, Reid Hoffman left, David Sachs left. And so Max and I were probably two of the last senior management team members left at the company, and we'd sort of lost the cohesion that we had as a management team, and we're starting to wonder about what we might do next. And at that point, Michael Moritz from Sequoia called and asked whether I'd consider a role at Sequoia. I stayed on through the first earnings release for PayPal in early 2003, and at that point, I joined Sequoia.

I think ultimately, acquisitions are one of three things. They're either exits or maybe put more bluntly, rescues. And a lot of companies don't want to admit it to themselves. But they are in need of a rescue. I'm intimately familiar with the hard choice of saying I thought this was going to the moon, but it looks like it will probably tap out just here on earth.

The other, more happier side of M&A is kind of a one plus one equals five type situations where you really have something and someone else has another building block to what you're creating. One enables the other, and there's a very large component in between where you've lost your way and you don't know what happens next, and you don't need to die, but you can't quite figure out how to live, sort of a thing. If a company was a human, and I think those are the hardest ones, there's been a great deal written about what's known as the PayPal mafia, but maybe what's more appropriately referred to as the PayPal alumni group and a bridge list is almost hard to do. But if you were looking at the creation of YouTube, Yelp, Tesla, SpaceX, Palantir affirm, the first money into Facebook, some of the earliest money into every social network, you know, all of it traces back to this tiny startup that was created in late 1998 and is sold to eBay in 2002.

There's always a question of nature versus nurture. Was it just that this company attracted really, really remarkable people who would have went on to build YouTube anyway? Or did they take something from their experience at PayPal that helped them build YouTube or Yelp, or any of the yammer, Palantir, etcetera? And I think the honest answer is a bit of both.

They also went through a series of experiences building a startup during one of the hardest times, I think, in Silicon Valley history to ever build a startup. And you couldn't help but be imprinted by those lessons if you were working there at that time. When they started their respective companies, Yelp, YouTube, some of the others, LinkedIn, they understood they'd already had experience in a setting where they had lived firsthand with the challenges, complexities, opportunities, risks and excitement of building a very high growth, successful business.

One of the lessons from my PayPal experience is not underestimating what can happen in the long run. One of the things we talk about at Sequoia is what is possible, what is the imagination? And honestly, when I think about my biggest mistakes in my professional career, it's been a failure of imagination. And to see how PayPal flourished in the long run and how successful it's been.

As somebody who was young and didn't have that much experience I didn't fully appreciate the company's potential. There's a famous adage known as Amara's law, which states that we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run. Learning to look at new technologies, whether it's the Internet, cloud, mobile, aih, through the lens of Amara's law, is part of being a successful founder or investor.

In 2015, PayPal split from eBay, embarking on a brand new chapter for the company, once again betting on itself. So far, it's paid off, but the story continues. This has been crucible moments, a podcast from Sequoia Capital. Join us next time as we hear from Brian Chesky about how Airbnb built and then had to rebuild user trust, launched a ground war against a clone, and led its community through a global shutdown that brought travel to a halt. crucible Moments is produced by the epic stories and Vox podcast teams, along with Sequoia Capital. Special thanks go out to Max Lebchin, Jimmy Sony, Michael Moritz, and Dave Gausbach for telling their stories.

Entrepreneurship, Business, Technology, Paypal, Mergers, Fraud Prevention, Sequoia Capital