Acquired - PayPal

0:00Yeah, in fact, there's Drake lyrics. I got enemies, got a lot of enemies. Got a lot of people trying to keep me from... Yeah, I don't know the rest, but it's great. Welcome to episode 11 of Acquired, the show where we talk about technology acquisitions that actually went well. I'm Ben Gilbert.

0:34I'm David Rosenthal. And this is our show. Today, we are talking about eBay acquiring PayPal, an older acquisition, one that kind of set the tone for a lot of modern technology acquisitions, change the valley forever, birth to PayPal, mafia, lots of great stuff to come. But first wanted to remind you, if you have not yet, and you like the show, would really appreciate a review on iTunes.

1:02Yeah, and as always, hit us up on Twitter, acquired at acquired FM or at Gilbert or at DJ Rosen. We love feedback. We do. We do. We promise we'll listen. We'll try and make it better. We've heard rumors that audio audio is a little quiet in the past. So working hard to make sure that we release that appropriate listening volume now. We're iterating. We are. We are. We're a little star up ourselves. It's cute.

1:29Also, I apologize for the last month of no episode. We got some people saying, finally, a new episode. I ate ACL surgery, but I'm a real human now, and I'm fully off the oxycodone, so we're back in action. Should no Ben has been a real trooper here. We were recording last time. You were what, like, five days post-surgery. Yeah, yeah. I was barely post-oxycodone.

1:57But yeah, stay away from the narcotics kids. That's my advice. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired. LaGora, the agentic operating system that is redefining how the world's best legal teams work.

2:14Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm.

2:41for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

3:10And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test.

4:02Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at legora.com slash acquired and just tell them that Ben and David sent you. All right. Yeah, acquisition. Let's do it. Acquisition. History in fact, man, I am excited for this episode. There is so much to dive into an unpack here. So I will get through the acquisition history in fact quickly but first a quick note we're going to focus this show on the first act of PayPal the the founding the acquisition by eBay and then

4:52and then the first period of history thereafter. We may do a future show on the spin-out that happened last year, where PayPal was spun back out from eBay. And we could also do another show on PayPal as an acquirer. They themselves had done a few interesting ones, especially recently. So much interesting stuff with this company. But there's definitely a whole episode for us to do. There's at least one more episode in the tank here. So with that, okay, so.

5:21December 1998, Peter Teal, Max Levchin, and Luke Nozick found a company that they call Confinity, and they decide to make an application's payment and cryptography service for Palm Pilots. Amazing. Like, the PayPal that we used today started to be money back and forth between Palm Pilots.

5:49Quickly, they realize that that's a small market. And they, in 1999, they decided to switch over and start working on a money transfer service that they've come up with, and they call the product PayPal. Also in 1999, a guy named Elon Musk, who might have heard of him, he fresh off of founding and selling Zip2, starts a company that he calls x.com as an online financial services and email payment company.

6:18domains were cheap back then. Yeah, she's x.com. March of 2000, short while later, they decided to merge. Apparently orchestrated by Michael Meretz at Sequoia, who was an investor in confinity, neither confirmed nor denied, but that's what the internet says. Elon from x.com initially remains the CEO of the company that quickly changes and Peter Tiel comes back.

6:46as CEO of the combined company. In October of 2000, Elon was still the CEO and he makes the call. The PayPal product is doing so well that they focus all the efforts of the combined company just on PayPal. And then in 2001, they renamed the company as PayPal. Yeah, there's a classic case of Elon being Elon and doing what he does best and that's focused. Yep, no more palm pilots.

7:13And then in February 2002, PayPal goes public, and it's actually, it's interesting to remember, this is February 2002, this is after the crash, after the comm crash, and this was the first consumer internet company to go public in 18 months. And it does pretty well. PayPal has at close on the day of the IPO, has about a $1.2 billion market cap.

7:40And then very quickly thereafter, only a few months later in July of 2002, eBay announces that they're acquiring PayPal in an all stock deal, depending on how you account for the transaction somewhere between $1.2, $1.5 billion, which was about a 20% premium to the stock's closing price the day before. So interesting and we're going to die of far more deeply into this, but pretty quickly the whole team leaves.

8:10within, I believe the status within four years of the acquisition over half of all PayPal employees have left. And including all of the founders of both ConfinityNX.com. And interestingly they're actually the history of the PayPal, the president of PayPal within eBay has been a A little bit of a, I don't want to say a hot seat, but some interesting figures have gone through there, including Scott Thompson. Do you remember him, Ben? This is the guy who left being the president of PayPal to become the CEO of Yahoo. And then it was very quickly revealed that he had completely fabricated his resume. His prepaypal resume? Yeah. I believe it was that he, I believe I could be wrong on this. It was that he said he had a computer science degree.

9:06And it turns out he didn't have a college degree at all. Yeah, it was a whole big controversy, and then ended up in Marissa Mayor afterwards coming to Yahoo. After him, David Marcus, who had actually come to PayPal from the acquisition of Zong, which was a payments company that he had founded, was the next president, and he is now running Facebook Messenger. Hmm. Interesting.

9:34So, yeah, and then PayPal remains part of eBay for 13 years during which she's meteoric growth. And then in July of 2015, as mentioned, eBay under shareholder pressure from Carl Eiken spins off PayPal into, once again, a separate standalone publicly traded company. And when they do, PayPal is worth at the time when it begins trading about one and a half times the value of eBay. So it is significantly more valuable than all of eBay. And today, PayPal has about a $46 billion market cap as a public company. And the question we're here to address today is, was it a good decision for eBay to pay that, call it $1.3 billion, to in-house PayPal, given where they are today?

10:30So much to unpack and financially no doubt Yeah, I mean should we should we take this from a shareholder of eBay's perspective where we assume that they end up with one PayPal share and one eBay share Which is what happens that it's been off yet Yeah, yeah, that that feels reasonable. I think We can talk a little bit about the actual impact that it had on eBay's core marketplace business, but it's I think it'll be interesting to look at how did it feed the marketplace business and how did the PayPal business grow, and would the PayPal business have grown like we've seen it grow if eBay hadn't acquired it? Yep. Let's do it. Should we start it with acquisition category? Yeah, I think there's like a few questions that I sort of want to get to before we categorize. There's a few interesting nuggets in here. The biggest one that I think is interesting is

11:24eBay transactions generated two-thirds of PayPal's payment volume at the time of the transaction. So here's PayPal where they finally have found product market fit because people seem to be using it all the time for this eBay thing, and you know, they're not really succeeding in peer-to-peer payments. They're getting embedded on some websites, but that business is largely fed by the fact that eBay sellers are using it on other websites that they operate. eBay is effectively their their entire market segment and their distribution to get to new markets. What was Ben was mentioning to me a quote, was it a Peter Teal quote that PayPal was essentially an app built on top of eBay? I thought maybe I read that somewhere. Yeah, that's essentially what it was. Yeah.

12:16That's a precarious position for a company. eBay was in house building a very similar solution, and they were partnering with Wells Fargo. I think it was called Bill Point. In looking at the way that eBay was facing decisions at this point, we love electronic payments in our platform. I think at the time of the PayPal acquisition, it was about a third.

12:44Let's see, 40% of eBay transactions, and Meg Whitman, who was the CEO at the time, said that she hopes that failure will increase dramatically. And so eBay is highly incentivized to make these really fast electronic transactions occur. They built Bill Point and House. It's an interesting sort of business on its own, clearly, as PayPal is demonstrating. And eBay faces this decision as, okay, one in four auctions on our platform are settled with eBay.

13:13they're pretty much entirely dependent on us. They're pretty much entirely dependent on us. We could buy them, we could build this thing in house, which they did called bill point, we could cut them off, but that exposes them to risk of regulatory pressure. So there's this interesting dynamic going on there where it's like a game of chicken. Not to mention that this product, that PayPal, that the PayPal team had built is really, really hard.

13:42Yeah, and among other things like the way that they actually got Classified as not a bank, but I think a money transfer service There's a lot of regulatory things that they did that were really hard but from a product perspective making people feel safe Sending money over the internet when the internet is still this immature thing and then actually backing it up with the fraud detection. I mean, there's bodies buried all over the place in these PayPal-like services at the time that didn't succeed because they couldn't keep a lid on their fraud detection. Yep, absolutely. And interestingly, which we'll get more into later, the core of PayPal's fraud detection technology became the inspiration for Palantir. Oh, interesting. I mean, I know it's Peter Teal, but is that like other people from...

14:30Yeah, some of the core engineers that worked on fraud detection at PayPal helped start Palantir with Peter Teal. And a lot of that technology came from the fraud detection days at PayPal. I mean, if you think about the types of jobs that machine learning is uniquely qualified for, fraud detection is right up at the top. Yeah.

14:57acquisition. Let's move into category and I think we can discuss a lot of these things and unpack them as we go. Cool. So I'll go first with category. I'm going to say business line here, but it's an accidental business line. I would, you know, without knowing exactly what the eBay executives were thinking at the time.

15:21I could imagine that they thought about this as a feature acquisition almost. You know, we, gosh, payments are a critical, you know, electronic payments are a critical part of our products and our marketplace. We've been trying to do this ourselves. These PayPal guys are doing it way better. We should just buy them and implement them as the feature on the site. And then over time, it turned out that that was actually in and of itself a way bigger and better business than eBay itself.

15:49Yeah, it's interesting. I don't think eBay had tried to get into the peer-to-peer payment space. I mean, I think, yeah, it was a very apple thing to do. It was a very, we want to create the best user experience by making sure that we control all the key components of our product. And, you know, I think... Which is crazy to back up for a minute. At the time of the acquisition, you said about 40% of...

16:16Settlements on eBay were being done electronically. That's correct. So that means that means 60% of eBay transactions were not settled electronically. Yeah, and you know, I was trying to figure this out. Does that mean they're mailing checks around? I have no idea. That's crazy. Yeah. It's easy to forget. I mean, isn't what 14 years ago what the world was like? Yeah, I mean, you couldn't just transfer money. I was in high school. People were buying beanie babies. And I was selling beanie babies on eBay. I think I made a about 550 bucks. I sold a Jerry Garcia bear for 350. Oh man, I remember that one. Yeah. And like an inch worm or something for 100. All right, listeners. Now is a great time to tell you about a long time friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI first world, that doesn't hold up anymore.

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18:44I think we should take a step back and just do a little more stage setting here, which is, you know, it's hard for us to remember. I mean, we're, you know, I would argue fairly young. I like to think of myself as fairly young, but, you know, these were the days. I mean, I was like a... David, I haven't gotten a snap from you in a while. I love snapchat though. You're just not on my, you know, on top of it. Oh yeah, that must be it.

19:11But I was in like I was like a freshman sophomore in high school at this time and These were the days like you know right before the bubble burst when I remember my classmates Trading internet stocks during breaks between Between classes in high school my freshman year. I remember them. I remember one of my buddies buying a whole bunch of Western digital stock which was a hard drive manufacturer Best hard drives are are just you know Not using a lot of hard drives right now, my computers. I think you nailed it. I think ultimately, it was a control play where there was risk that was going on by PayPal, having a large part of their business dependent on something they didn't control, and they wanted to bring that in-house. They saw it as an accelerant to their business to make it more reliable that you were going to get paid by transacting on eBay. They were clearly building it themselves.

20:08and an opportunity to bring this in-house. You know, it was probably the right one and they took it. Now what it turned into, I think, was a behemoth that they had, you know, was not in the cards at the time. It'd be super interesting to look at, you know, what was in Meg Whitman's head and if they really thought that this could be something that they grew independently because I think there's been a lot of discussions since then, kind of like...

20:31hindsight is 2020 that was the vision the whole time was to grow this new internet business where we can just transfer money anywhere all the time. I think it was the original vision for PayPal but they very quickly realized, wow, there's a very specific need for when people need to transfer money and that very specific need is after auctions on eBay. So today it's going into something tremendously bigger and I don't think it's what they saw. So I think they thought they were acquiring a feature. I think that's likely true.

21:01And it's interesting to, you know, one of the sort of aphorisms in the tech world is you can't build a big company, a really big company on the back of somebody else's platform. And this is the example that both proves and breaks the rule, you know, like PayPal became a huge company, obviously, and did it on the back of the eBay platform, but ended up having to sell to eBay because they were so captive.

21:31To that platform, you know what I guess it gets a little bit into the you know what what happened otherwise but You know how could you imagine in those those fragile early days? I mean remember this was 13 it was 13 years between the acquisition and the spin-off when All the vast majority of the of the now value and PayPal was created Could that have happened if during those early years when it was so much dependent on eBay it had been a separate company in eBay had had you know, could have made changes to completely kneecap PayPal. Well, I think we're definitely in the, we've moved on to what would have happened otherwise. Yes, absolutely. Officially. But it's interesting too to think about this. I'm thinking about this question of building a big company on the back of somebody else's platform. And I think perhaps you could make an argument that you can do it

22:31if you can essentially raid the platform, get all the users from it, and then migrate them to your own platform. So like I'm thinking about Pinterest grew really fast in the early days for a bunch of reasons, but one of them being that, I don't know if folks remember, they really figured out viral Facebook user acquisition. I was getting messages all the time, emails from Facebook of, you know, My friend Ben is just joined Pinterest. Do you want to join as well? And those user Pinterest was successfully able to migrate those users over to their own ecosystem. And now I'm thinking about PayPal back in those early days when it really was just eBay that was the primary use case. I don't think they were migrating anybody from using PayPal to settle their eBay transactions to then doing peer-to-peer money exchange.

23:28which is the big business that PayPal has built over time. But would they have been able to do that successfully? Had they not been part of eBay? I don't know. Yeah, the companies that have done that well have been really sneaky about it and have succeeded and flown out of being crushed just in the nick of time.

23:48You even see a good example is actually linked in. They grew on the back of stealing your entire address book and they're emailing everyone. It only cost them about $100 million or something a few years later when there was a gigantic class action suit for doing that. They're a real and successful company because they piggybacked off that existing network. Or think about Airbnb. There are a bunch of articles out there and Airbnb doesn't talk about it that much.

24:17definitely in the early days, you know, they were auto-posting the Craigslist and pulling a whole lot of both supply and demand out of Craigslist and onto their platform. But again, I think the key is you have to, you have to kind of exfiltrate the users and then keep them captive within your own ecosystem. Right, and I, you know, I was young at the time, but I don't necessarily remember Ever like PayPal only existed to me when I was again selling beanie babies and then Boy Scout patches on eBay as my way of transacting on eBay It never really seemed like the purpose of it was to anything else. Yeah, yeah, yeah Interesting so had eBay not acquired PayPal when it did you know PayPal was a public company What would have happened?

25:08to both companies. So maybe we've just been talking about PayPal. Perhaps it would have been hard for the, eBay could have made life really hard for them. What about eBay? You were talking earlier about what's the value that PayPal brought to the eBay marketplace? Well, similarly, PayPal have made life hard for eBay. It could PayPal have done something where... Could they have started their own marketplace attached to...

25:37to PayPal. Wow. Yeah, that, I mean, that seems like, it almost seems far-fetched. It's like, it's such a, such a different and large business. Yeah. Yeah, I mean, I don't think PayPal had a whole lot of power over eBay. Other than if they went away, maybe people would have been kind of uncomfortable with the electronic platform that eBay was providing because it wasn't as secure yet, but I bet eBay would have figured that out pretty quick. I think this is a slim scenario, but you can imagine a scenario where PayPal finds a different market besides eBay. The money transfer, they've grown into today, which people eventually did become very comfortable with but were uncomfortable at the time. They probably would have had to ride out some tough times for a while if they had moved away from eBay. eBay maybe doesn't figure it out.

26:39and figure out the fraud detection and then people are uncomfortable transacting on eBay and they never get everyone onboarded to their own payment platform and people don't like using eBay because they still have to use an analog system and then someone comes along and builds it all feels far-fetched actually the more I talk about it it's like they would have figured it out actually before that PayPal just never would have moved away I mean that was like that was the the cash cow. That was their finally they had found product market fit in this in being effectively like a vendor or a supplier for yeah probably a vendor for ebay. So what would have happened to ebay? I can't imagine a scenario where ebay doesn't win here. I think the only well not the only but one potentially negative picture you could paint for ebay here is you know if you think about

27:36Over the subsequent 13 years between the acquisition and the spin-off PayPal grows so much that it is you know call it 60 65% of the entire value of the company maybe even 70% and and certainly all of the growth engine of the company would eBay have been able to recruit and and attract and retain top-quality talent if it didn't have this It didn't have this really sexy growth business attached to it. You know, would eBay have stagnated a lot earlier? That's a great point. Yeah. I mean, I think that's predicated on the idea that like, it could actually, that status or that state could actually persist for many years. The state of them being separate businesses and both of them needing each other. That symbiotic relationship. It seems hard. I mean,

28:33We're biased by history and what actually happened here, but it does seem hard to imagine these two companies existing separately. Yeah. Until you get to the point where you are now where PayPal is really a large and viable business with eBay only being a minority of it. Yeah, I mean, in my opinion, if it's like, here's what happens, if eBay doesn't acquire PayPal in July to October of 2002, eBay acquires PayPal for a different price at a different time.

29:03I don't think that it's interesting to think whether that would be higher or lower. Yeah. Yeah. You could go either way. That's true. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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31:27Valid argument it might even be hard to argue against a thesis that this single event this acquisition of PayPal by eBay was the catalyst to create Everything that we now know of as Silicon Valley and the technology startup ecosystem We'll unpack this but just the the Chain of events set in motion by this acquisition is Really incredible When you think about the people that were at PayPal and there's there's a great There's a great article on the tech republic willing to it in the show notes About it's titled believe how the PayPal mafia redefine success in Silicon Valley and Many of the founders of PayPal talk about how they were all these incredibly young, ambitious people, and they've just been through this super difficult, but exhilarating experience at PayPal where they had to figure out a whole bunch of stuff that had never been done before, like we were saying, it was really hard. And then they made a bunch of money, and then they showed up at eBay, and it was like complete culture clash, and they hated it there, and they all left quickly.

32:48But they were all still really young and ambitious and wanted to prove themselves. And so you just go down the list of companies. So I'm going to talk about just, I'm going to talk about two sets of companies here. The first are companies founded by PayPal alums, LinkedIn, Yammer, Yelp, YouTube, Palantir, SpaceX, Tesla, and then Reddit was not founded by YouTube alums but was the CEO of...

33:15Reddit for a while, you shan long was a YouTube alum or a PayPal alum and then and then so that's companies actually founded by this group of people and then companies other companies in Silicon Valley and related environs where PayPal Mafia alumni were very early investors or advisors or instrumental in starting the company Facebook Uber Airbnb, Square, Pinterest, Stripe, and it just goes on and on and on. I mean, you're talking practically, practically every company, every major company that Silicon Valley has produced since that acquisition can trace its history either directly or indirectly to the PayPal Mafia. Yeah, I mean, I made a joke to do it before this show. I was reading up and I was like, huh, we could get a guest for this, but

34:07All the people that were there are so insanely rich that why would they ever bother to go on a podcast and I think the funny thing is like it's not from It's not from the money they made from PayPal. No, I mean people got rich like people got a hundred millionaire rich But or at least like high tens well, don't forget there been a lot of dilution in PayPal. I mean they'd raised I believe $180 million I think that includes the capital they'd raised in the IPO. They'd been a merger of companies. There are lots of founders. I mean, there's no way that individually any of those people became hugely filthy rich after that acquisition. Yeah. It was more about what a whole bunch of really smart people recognized and did after that and opportunities that they saw because of the way that they grew PayPal. I mean, PayPal actually, this is a good segue into what I was thinking about. PayPal sort of invented

35:00a lot of the paradigms that we see in startups today. Absolutely. The first one, they were the first business to do the whole, if you invite a friend, you get free money thing. And it's like sort of free money now, like, oh, cool, if I invite a friend to Uber, I get $15 in my Uber account. Like, PayPal literally gave you a dollar. $1.5, they literally gave you money. It was like, if you, they would email their friends and they're like, congratulations, you have free dollars. The invented viral acquisition. Yeah. So yeah, I mean, we were talking, I was just talking about the company founding and investing part.

35:30Let's talk now about the actual tactics that are just now commonplace. They basically invented growth hacking. So viral user acquisition embeds. You could embed PayPal as one of the first, if not the first app, that you could embed in other web apps. And then think about a direct company outcome, progeny of PayPal was YouTube. And how did YouTube succeed? It was embeds.

35:59So funny I have a good story here. I built a website for my buddy nils nils if you're out there listening Good name you where we were selling t-shirts and I was a super early web developer and Yeah, I didn't know a lot of the best ways to do an online store front and the way that we built out this t-shirt website was by generating a unique PayPal button for every skew and I just literally embedded the little PayPal form on every single t-shirt page that was a sub directory on our site and It worked. I mean it just completely worked and I didn't have a storefront like we weren't using that for inventory management It's fine. We didn't sell them any t-shirts But at the end of the day like we had a working website by a bunch of PayPal button embeds and that's how a lot of little storefronts worked for a long time and I think you know they obviously succeeded

36:52primarily because they were such a huge part of PayPal, but like even after that, as they were growing their business off PayPal for a long time, I think that's what a lot of people did. We accept PayPal. Or yeah, sorry, off eBay. They're so one and the same to me now. I know it is hard to untangle them in your mind. I have one other thing too. Me too, but go ahead. All right, I'll take this one. The interesting thing about payments are something that we see in advertising today.

37:22a parallel to make between the two. We've been talking a lot over the past 10 episodes about the rise of Facebook and Google as ad platforms and stealing a lot of the advertising spend away from non-social ads, so display ads, and understanding that brand advertising in particular and online advertising as a whole is a winner-take-all type market where you really need scale.

37:46Before you can rival the big guys now because there's such excellent targeting that you have to be able to choose any bucket that could be incredibly narrow, you know tap dancing You know 24 year olds in Washington named Ben and not named Ben, but that that That could find those people right right and have it deep enough well and so so Those are businesses that have a relatively high fixed cost and require massive scale to make the business actually work Payments are sort of the same thing. I mean PayPal really needed massive volume before they could have wide adoption and they have an incredible flywheel where every person that has a PayPal account can be a sender or a receiver of money and becomes comfortable using the platform. So the first time they get someone to send or receive money once, they make everyone else's experience more valuable. So it's a scale platform where it has like razor-thin margins on

38:46Payments and really large fixed costs especially in those days where they were building data centers and they'd need huge volumes to make it work and That's something that they saw with eBay and they they did really well and that That belief Which may have been completely crazy and as we were talking about perhaps wouldn't have worked head PayPal remained an independent company, but that belief that you can get to that scale to make that Vision a reality like to be insane you'd have to be completely insane and and you think about The startups again that we were just me rattling off a bunch of names in sort of the generations that followed PayPal the ones that became really really big are ones that made that same bet you know and and one and You know uber right like Imagine before uber if you had painted a picture of a world where

39:44There are going to be enough drivers in cars that are members of your platform and enough users, consumers of transportation on your platform in any given geographical area, not just San Francisco, but the middle and nowhere in some country, not in the US, that you could push a button and that driver would be right around the block and show up a minute later.

40:12You would have gotten laughed out of the room. Yeah. Yeah. And it's the same thing. I mean, you could imagine pre-users pitching PayPal. And it's like, well, it's the way for anybody to send anybody money. And someone says, what do you mean? Like, well, when everyone has PayPal, like everyone will have to be super comfortable. It's a recursive argument. Yeah. And you know, it's the same recursive argument that lots of people like completely fail at, right? You hear this at every, like, First time startup event, right? Like someone who goes and the only world they imagine is the one where their service is pervasive. And they talk about, like, why doesn't it just exist? You know, you could hear, I don't know if somebody ever pitched Uber, but like, you could hear someone pitching Uber, you know, at 10 years ago at a startup weekend and they say, well, yeah, it's like, why doesn't it exist? Where anybody can just pick you up at any given time because you just see every single person has this in their car and can give each other a ride. And you're like,

41:05How on earth are you gonna get there? And the magic of PayPal is they figured out how to get there. Well, and I think this is this is a great sig into the other thing I wanted to talk about here about the PayPal Mafia That I think might again you could make an argument might be the most impactful thing that they've contributed to the startup ecosystem Even over and above all the other things we've talked about there's a really really great video on YouTube of course of Jim Gatz, who's a partner at Sequoia, a great, great venture capitalist, speaking at the business school at Stanford, which has a fond place in my heart. And he's talking about what makes great companies that Sequoia would invest in. And he talks about the PayPal Mafia. And he says, you know, the one thing to him that really sets PayPal alumni apart from other people in the ecosystem is

42:02They learned at PayPal this ability, willing both willingness and ability to iterate really quickly with a product. To put a product out there that is very far from finished and iterate like mad on it based on true market feedback. And he says, you know, not beessing themselves about like what the actual signals from the market are. And that's how you can create A recursive platform, a recursive thesis like that is you can't start with the end state. You got to start with a very, very small idea and then work on a bit by bit based on market feedback. Yeah, and God, that market feedback thing is so hard where every line of code that you write or every little piece of product thinking that you do that then gets solidified in any form, be it physical or design or code.

42:57It's like a burden you carry from that point forward where the more you've created the heavier it is and the less you feel agile to move away from it and so I Just have tremendous respect for people accompanies like this that can write something and put it out there and understand market signals quickly and within days say that's actually not the thing and rip half of it out and put a new piece in and say that's not the thing either and then just keep repositioning because I think that we just get emotionally attached to what we make and people will get really emotionally attached to their vision and if you can just keep responding, it's a really incredible and really valuable skill. And I think that's the skill is holding both of those things to borrow a phrase from my wife she loves this phrase holding both of those things in your head at the same time.

43:50One is absolute dedication and commitment to a vision of the future that you see. You know, your recursive vision about the future. And two, an utter lack of bias or predetermined thought on how you're going to get there. I'd be willing to take the random walk that you need to take of product and Product's market fit discovery to get there. Yeah. That's a challenge. It is. All right listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the...

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45:16So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Time to grade it. Yeah, I think we can grade it. So this is a really interesting one to grade, because one of the themes that I think has been pretty pervasive throughout the show that we've done is that the best acquisitions that we've given the highest grades to have been ones where, you know, the choir follows the mantra of, you know, leave the team alone. It's all about the people. Let them do their thing. You know, don't mess with the magic. You know, we heard that with Pixar, where it was the reverse. It was like Pixar coming in and leaving the Disney people alone, you know, or getting letting the Disney get back to feeling the creative magic, you know, with Instagram.

46:16Bungie that at Freeze was talking about, this is a total opposite. eBay comes in and really mucks around in everybody leaves. And I wonder if that's just characteristic of the time period. Other acquisitions that we've ripped apart have that characteristic too from that time period, where it's all about integration, it's all about great, we like your product, now it's time to move to the beat of our drum. And I think it's really only recently that companies have figured out that leave it alone.

46:44the quote-unquote Facebook style acquisition. There's another great quote from David Sachs in the Tech Republic article, where he's talking about the first meeting that happened after the acquisition, the integration meeting, and eBay team gets all the key people from PayPal together in a room. They book a three-hour meeting, and they show up with like 137-page PowerPoint deck. And the PayPal guys are like, A, we've never had a three-hour meeting in our lives. B, what is PowerPoint? And at the end of it, David Sack says, man, we're going to have to, if we stay here, we're going to have to create a whole new department just to do PowerPoint just so that we can communicate with these guys. Oh, man. I talk about the product that they needed and a team that was just completely incompatible with our culture. And so what's interesting about grading this one is like, breaks all the rules and yet,

47:42Creates huge huge amount of value for eBay eBay shareholders for the entire you know Silicon Valley startup ecosystem as a whole You know, I I think Taking all of this into account It's almost like you know, I think I'm gonna net out at like a B plus for eBay on the acquisition, pretty great. I mean, created a huge billions and billions of dollars worth of shareholder value. But had they handled it differently, could they have realized much more value? Yes. But also if they've done that, we all would be so much poorer for it. Because of the Exodus that happened, because of the PayPal Mafia, we have so much else in the ecosystem. Yeah. I mean, while I look at it this way,

48:37When we're talking about, so I see you, I appreciate those things. I hear you. I feel very appreciated right now. Yeah. Okay, let's look at this from the lens of eBay as a company, right? Like, was this good for eBay as a company to make this acquisition? Normally, I would try and frame this in terms of like, well, let's look at...

49:02Apple acquiring authentic and being able to do touch ID sensors in this way that is additive to their existing product in a way that is a much greater value than anything authentic could do on their own. Something where it's integrating into the product and creating synergies between the two products such that they can take their core product and make it a multiple of the acquisition better. In this case, I don't know that it added tremendously to eBay's marketplace and actually there's a point that Keith Roblox points out where they had visibility into eBay's growth and they predicted that eBay's growth was going to plateau and that they actually needed needed to make the sale because they were like we don't have a different growth strategy yet and people are going to be concerned we're a public company people are going to be concerned about us if our

49:55It was solely dependent on eBay. And their growth is plateauing. What we've seen, eBay is indeed a major company. From 2004, they were doing $3.2 billion in net revenue today. They're doing $17.9. They've grown. They're doing great. But they aren't a mega behemoth. And I don't think that their growth can be attributed to PayPal.

50:26However, we're looking at this through the lens of a person who owned PayPal or a eBay stock at the time of the acquisition. Was it good for eBay as a corporation to do this? Holy crap, absolutely, absolutely. Like, eBay grew like a weed and I grew to be larger than their existing business. So, you know, as a company, it was a killer bet because effectively, they acquired a product that gave them an entire second business line when their initial business line wasn't going to be the thing.

50:54This is an A plus like this is yeah, it's just it's like you know if you were to If if our projection let's assume it's correct that eBay executives at the time weren't thinking about this as a business line were thinking about it as a you know feature technology acquisition Then yeah, maybe my my you know B plus rating would hold But in terms of like you know, this is the actual financial outcome right massive home run Not to mention all the antelope benefits to the whole ecosystem as we've been talking about. Yeah. Yeah. The eBay acquisition was generally good for the world. Right. It's generally good for the United States in terms of GDP. What's good for general motors is good for America. Ain't that the truth? Cruise acquisition coming in future episodes. Oh, man. Perhaps. I hope so. Yeah. Yeah. I mean, I'm trying to think of other examples where

51:55Yeah, it's almost like, like, how we rated the Pixar, well, no, because that actually did feed back into the Disney business to reinvigorate that and make it great again. What other examples can you think of of a company that was flying high at the time, made an acquisition, and then it turned out that company's core product was like, you know, not gonna be the thing for that company, and then they acquired like a mega giant. Or a 2B mega giant that they, yeah.

52:24And they certainly propelled it there. I don't think eBay would, or I don't think PayPal would have done this on their own. I think that at some point, like we talked about, they were gonna get acquired. Yeah. It's interesting. I mean, gosh, maybe Instagram. I mean, Jerry's still out on that. Yeah, although to check in on our previous numbers on that, they, I think, yet another analyst report. I don't think we have hard numbers on this, but it's predicted to do $3 billion in revenue this year.

52:52Just a thing you know on a billion dollar acquisition a couple of years later. Yeah, that was a great buy Yeah, not without its challenges though. I mean, you know It's interesting that we could do an episode at some point on snapchat on the failed acquisition of snapchat. Yeah, we should do that That would be a fun one. Yeah, and we could compare and contrast Instagram and snapchat you could We could but until then you want to do the carve out. Oh, yeah carve out. Let's do it You want to go first? I do I do so Since we know you guys like listening to podcasts I felt like I should pick a podcast and this week was an incredible episode of the Bill Simmons podcast to follow up my my recommendation to To read the ringer. He had Chris Saka on. Oh nice and

53:43Oh, it's good. It was so great. Yeah, because Bill's just like killer journalist. I mean, like he has a written interview with Obama. I think it was in GQ. That's just awesome. Like Bill can talk about sports. He can talk about politics. He can talk about technology. And him interviewing Chris Saka is just spectacular. I think I was a few minutes in and I was just completely, completely roped in. They'd talk about everything from like, Chris's meetings with Kobe Bryant where Kobe is investing in startups and like Chris put them through the ringer like no pun intended like Chris really like it was like okay cool like celebrity athlete who wants to get into investing and like there's so much interesting stuff revealed like I didn't I didn't have to go do more research on this but like Kobe actually doesn't sleep like Kobe their reveal is like a dude that I'm sure he maybe sleeps like a few hours or something but like the way they describe it is like

54:34The dude, you know,izes his day life and then all night he was staying up reading and trying to like learn and go through the exercises that everything that Chris gave him. So there's this Kobe segment. They talk about the founding of Uber and like the jam sessions when they're sitting around and how all that fell into place. Talk about early days at Twitter about bets that Chris made about when Chris was dirt poor and then started day trading and made four million dollars day trading stocks and then lost it all and then went into massive debt and then the whole it's just like It's an awesome episode. So I'll link it in the show notes, but the Bill Simmons podcast featuring Chris Saka, it's excellent. Excellent. I'm going to have to give that a listen. Yeah. So my carve out for the week, caveat that I'm only about a third of the way through it, but it came out a couple of years ago that had been on my reading list. And I finally got around to, thanks to the magic of audio books.

55:31book called Anti-Fragile by Nassim Talib. I just finished the Black Swan. Oh, nice. So this is my first Nassim Talib book and I want to read the rest of them after this. It is excellent. What do you think the Black Swan? It's good. Like a lot of books like that, I felt like the first half covered it. Yeah. But like really interesting, I highly recommend it also. Well, what's interesting, not having read the Black Swan yet, but a couple things about anti-fragile. One, Neseem is like, he's like a baller. He's hilarious. I mean, he's incredibly smart, but he writes like, he's also got like a giant ego and writes like, this is a guy who just like does not give a crap about anything. Yeah, his ego shows through quite a bit in black swan too. Yeah. But what's interesting is he actually, so the whole thesis of anti-fragile is that

56:26There's this, you know, it reminded me a lot of zero to one and fittingly for this episode of Peter Tiel idea about, you know, the idea of secrets that there are these things about the world that are like fundamental laws that govern it that just like people don't understand or realize. And so the seam talks about this concept of anti-fragility that like we know about things that are fragile. And for millennia, people thought the opposite of fragile was robust. Things that, you know, are durable and not don't break when exposed to stress. But it turns out that's just like a neutral thing. The opposite of fragile is something that gets stronger when exposed to stress. An example would be the human body to a certain extent. You exercise and you get stronger. Another example would be

57:19would be also within biology, you know, the concept of vaccines, where being exposed to a small amount of a toxin or a poison or a virus will then make you stronger against the virus. Anyway, and if you start looking at the world this way, there are all these examples of this. And then yet another example, bringing back to Naseem's ego, he says, actually, information is anti-fragile.

57:48if you think about it. He's like, what's the best way to get your message heard by as many people as possible? You should tell everybody it's a secret. And then you should try and make it as controversial as possible. And you should try and get as many people as possible to hate on you. Because then people are going to hear about it. And it's going to be really interesting. And people are going to want to read about it. And that's how you get disseminated. And if you want to make sure your information does not get disseminated, you want to be like really agreeable.

58:16And tell everybody it's really important, and then nobody will read you. And it's so interesting because it's probably a very uncommon thing because we as humans, I think it's a defense mechanism and it's something that we used to stay alive, but we don't like it when people don't like us. Exactly. We don't like it when people want to lash out against us, so we're very disincentivized to make enemies. And think about, even like your carve out.

58:42Well, the PayPal guys, and your car about all these people, you know, Chris Saka, Kobe Bryant, Phil Simmons, all the PayPal, you know, Mafia, they were not only did they not care when people didn't like them, they embraced. All right, everyone, thanks for listening. If you get a chance, we'd love, love, love if you could rate us on iTunes and have a great day. We'll see you next time.

59:10Is it you? Is it you? Is it you? Who got the truth now?