Episode 11 PayPal

Summary Notes


In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal, along with their guests, delve into eBay's acquisition of PayPal, a pivotal deal that not only reshaped Silicon Valley but also established a blueprint for modern technology mergers. They explore the origins of PayPal, its merger with X.com, and the subsequent buyout by eBay, which led to the birth of the influential "PayPal Mafia" and set the stage for PayPal's growth into a financial giant. Despite cultural clashes post-acquisition, the union proved to be a strategic move for eBay, fostering a new business line that eventually outgrew the original platform. The discussion also touches on the acquisition's broader impact, including the innovative practices that PayPal introduced, such as viral user acquisition and rapid product iteration, which have become standard in the tech industry.

Summary Notes

Introduction to Acquired Episode Eleven

  • Ben Gilbert and David Rosenthal introduce the topic of eBay acquiring PayPal.
  • They discuss the significance of the acquisition and its impact on the technology industry.
  • The acquisition is credited with setting the tone for future technology acquisitions and leading to the emergence of the PayPal Mafia.

"We are talking about eBay acquiring PayPal, an older acquisition, one that kind of set the tone for a lot of modern technology acquisitions, changed the valley forever, birthed the PayPal mafia."

The quote outlines the main topic of the episode and highlights the importance of the eBay-PayPal acquisition in shaping the tech industry and Silicon Valley.

Engagement with Listeners

  • Ben and David encourage listeners to leave reviews on iTunes if they enjoy the show.
  • They invite listeners to engage with them on Twitter for feedback and to improve the show.
  • They mention past audio issues and assure listeners that they are working to release episodes at appropriate listening volumes.

"Would really appreciate review on iTunes... hit us up on Twitter... working hard to make sure that we release that at appropriate listening volume."

The quote emphasizes the hosts' desire for listener engagement and their commitment to improving the podcast's quality based on feedback.

Personal Updates from Hosts

  • Ben Gilbert shares his recent experience with ACL surgery and his recovery process.
  • He advises listeners to stay away from narcotics, reflecting on his own post-surgery medication use.

"I had ACL surgery, but I'm a real human now and I'm fully off the oxycodone."

The quote provides a personal update from Ben Gilbert, connecting with the audience on a human level and providing context for the podcast's release schedule.

  • Pilot is introduced as a sponsor and accounting service provider for startups and growth companies.
  • The service is praised for allowing startups to focus on their core business by outsourcing accounting tasks.
  • Pilot's growth and endorsement by prominent investors such as Sequoia and Jeff Bezos are mentioned.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs... now is the largest startup focused accounting firm in the US."

The quote highlights Pilot's role as a comprehensive accounting service provider for startups and its significant growth in the industry.

Acquisition History and Facts: eBay and PayPal

  • The history of PayPal's founding and its merger with X.com, led by Elon Musk, is recounted.
  • The decision to focus solely on the PayPal product and the company's subsequent IPO and market performance are discussed.
  • eBay's acquisition of PayPal shortly after the IPO is detailed, along with the premium paid over PayPal's stock price.

"In July of 2002, eBay announces that they're acquiring PayPal in an all-stock deal... between one point two, one point five billion dollars."

The quote summarizes the key event of eBay's acquisition of PayPal and the financial terms of the deal.

Employee Turnover Post-Acquisition

  • Following eBay's acquisition of PayPal, there was significant turnover, with many employees, including founders, leaving the company.
  • The position of PayPal president within eBay saw notable figures, including Scott Thompson and David Marcus, who later moved on to other high-profile roles.

"Within four years of the acquisition, over half of all PayPal employees have left, including all of the founders of both Confinity and X.com."

The quote indicates the high level of employee turnover at PayPal following the acquisition by eBay, which is a significant point in understanding the acquisition's impact on company culture.

PayPal's Growth and Spin-Off

  • PayPal experienced substantial growth while part of eBay and was eventually spun off as a separate publicly traded company.
  • The value of PayPal upon its spin-off was significantly higher than eBay's, reflecting its success and growth.

"In July of 2015, eBay, under shareholder pressure from Carl Icahn, spins off PayPal into, once again, a separate, publicly traded company."

The quote provides information on PayPal's spin-off from eBay and the circumstances that led to it, including shareholder pressure.

Evaluation of eBay's Acquisition Decision

  • The hosts discuss whether eBay's decision to acquire PayPal was financially sound based on PayPal's performance and growth.
  • They consider the impact of the acquisition on eBay's marketplace business and whether PayPal would have grown as it did without being acquired by eBay.

"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?"

The quote sets up the central question of the episode, which is to evaluate the success and implications of eBay's decision to acquire PayPal.

Acquisition as a Strategic Business Move

  • Acquisitions can be seen as a method to integrate critical features into a company's product line.
  • eBay's acquisition of PayPal was initially thought to be for a feature integration, but PayPal turned out to be a more significant business.
  • eBay had attempted to create a similar electronic payment system but recognized that PayPal was doing it better.

"Acquisitions are a critical part of our product 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."

This quote illustrates the strategic thinking behind eBay's acquisition of PayPal, highlighting the importance of integrating a superior electronic payment system into their marketplace.

The State of Electronic Payments at the Time of Acquisition

  • At the time of the acquisition, 40% of eBay settlements were electronic, implying 60% were not.
  • The prevalence of non-electronic transactions, such as mailing checks, is noted as surprising given today's digital transaction norms.
  • The conversation reflects on the changes in the way money is transferred over the years.

"At the time of the acquisition, you said about 40% of settlements on eBay were being done electronically."

This quote provides a statistic that sets the stage for understanding the payment landscape on eBay at the time of the PayPal acquisition.

The Evolution of PayPal and eBay's Relationship

  • eBay's acquisition of PayPal was seen as a feature but evolved into a behemoth business.
  • The discussion addresses whether eBay executives anticipated PayPal's growth as an independent internet money transfer business.
  • PayPal's specific need to facilitate payments post-auction on eBay is highlighted as its initial product-market fit.

"Now, what it turned into, I think, was a behemoth that they was not in the cards at the time."

This quote suggests that the scale of PayPal's eventual success was not fully anticipated by eBay at the time of the acquisition.

The Dependency of Companies on Platforms

  • The tech aphorism that building a big company on another's platform is challenging is discussed.
  • PayPal's growth on eBay's platform is seen as both a proof and a break of this aphorism.
  • The necessity for companies like PayPal to separate from their parent platforms to continue growing is debated.

"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."

This quote introduces the idea that a company's significant growth is often limited when it's dependent on another company's platform.

User Acquisition and Platform Migration Strategies

  • Companies like Pinterest and LinkedIn grew by leveraging other platforms' user bases and then migrating them to their own ecosystems.
  • Airbnb is mentioned for its strategy of pulling users from Craigslist.
  • The conversation suggests that PayPal did not initially migrate users from eBay for peer-to-peer transactions but eventually built a large business around it.

"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."

This quote exemplifies how platforms can grow rapidly by utilizing the user base of another platform before migrating them to their own service.

Speculation on the Separate Futures of eBay and PayPal

  • The discussion speculates on what would have happened had eBay not acquired PayPal.
  • Potential scenarios include eBay and PayPal making life difficult for each other and the impact on their respective businesses.
  • The possibility of PayPal finding a different market or eBay struggling without a secure payment system is considered.

"What would have happened to eBay? I can't imagine a scenario where eBay doesn't win here."

This quote reflects the belief that eBay would have likely remained successful regardless of the acquisition outcome with PayPal.

The Symbiotic Relationship and Talent Attraction

  • The acquisition's impact on eBay's ability to attract and retain top talent is discussed.
  • The growth of PayPal is seen as a potential factor in making eBay an attractive employer.
  • The conversation acknowledges the difficulty in imagining eBay and PayPal existing separately for an extended period.

"Would eBay have been able to recruit and attract and retain top quality talent if it didn't have this really sexy growth business attached to know? Would ebay have stagnated a lot earlier."

This quote raises the question of how the presence of a high-growth business like PayPal within eBay might have influenced eBay's attractiveness to top talent and its own growth trajectory.

Sponsorship from Statsig

  • Statsig is introduced as a new sponsor for the episode.
  • The platform is described as a feature management and experimentation platform that helps product teams make data-driven decisions.
  • Statsig's capabilities in managing and testing AI product features are highlighted.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate a b testing and see the impact every feature is having on the core business metrics."

This quote describes the functionality and benefits of using Statsig for product development and experimentation, emphasizing the platform's role in facilitating data-driven decisions.

Feature Flagging Integration

  • Discusses the ease of integrating with existing feature flagging setups.
  • Emphasizes no need for migration from current solutions.

"No matter how your feature flagging is set up today, you don't even have to migrate from any current solution you might have."

  • This quote highlights the flexibility and convenience of integrating new feature flagging tools without the need to overhaul existing systems.

Endorsement of Statsig

  • Speakers express enthusiasm for working with Statsig.
  • Encourage listeners to visit Statsig and mention their referral.

"We're pumped to be working with them."

  • The speaker conveys excitement about the collaboration with Statsig, suggesting a positive endorsement.

"You can click the link in the show notes or go on over to statsig.com to get started. And when you do, just tell them that you heard about them from Ben and David here on acquired."

  • This quote provides listeners with a call to action to explore Statsig's offerings and to reference the podcast as their referral source.

PayPal Mafia's Impact on Silicon Valley

  • Discussion on PayPal's acquisition by eBay as a pivotal event for Silicon Valley.
  • Noting the significance of the 'PayPal Mafia' in shaping the tech ecosystem.

"I think you could make a very valid 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."

  • This quote posits that the eBay acquisition of PayPal was a crucial moment that indirectly influenced the formation of Silicon Valley's startup culture.

Companies Founded by PayPal Alumni

  • Lists companies created by former PayPal employees.
  • Highlights the entrepreneurial success of the PayPal Mafia post-acquisition.

"So 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 Reddit for a while."

  • This quote enumerates the influential companies founded by PayPal alumni, indicating their significant role in the tech industry.

PayPal Alumni as Early Investors and Advisors

  • Identifies the involvement of PayPal Mafia in other Silicon Valley companies.
  • Notes their contribution as early investors, advisors, or instrumental figures.

"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."

  • This quote lists major tech companies where PayPal alumni played key early-stage roles, showcasing their widespread influence.

Wealth of PayPal Alumni

  • Discusses the wealth accumulated by PayPal alumni post-acquisition.
  • Highlights that their significant wealth came from subsequent ventures, not just PayPal.

"It's not from the money they made from PayPal. No, I mean, people got rich. Like, people got 100 millionaire rich, or at least like high tens."

  • This quote clarifies that the wealth of PayPal alumni is not solely from the acquisition but also from their later entrepreneurial successes.

Viral Acquisition and Growth Hacking

  • Credits PayPal with pioneering viral user acquisition and growth hacking techniques.
  • Discusses the effectiveness of PayPal's marketing strategies and their influence on current startup practices.

"They invented viral acquisition. Yeah, I was just talking about the company founding and investing part. Let's talk now about the actual tactics that are just now commonplace."

  • The speaker attributes the concept of viral acquisition to PayPal, noting its now widespread adoption in the startup world.

PayPal's Embeddable Payment Buttons

  • Reflects on the innovation of PayPal's embeddable payment buttons for online commerce.
  • Shares a personal anecdote to illustrate the practical application and success of PayPal's technology.

"I built a website for my buddy Nils... And the way that we built out this t-shirt website was by generating a unique PayPal button for every SKU."

  • This quote demonstrates the practicality of PayPal's embeddable buttons and their role in facilitating e-commerce for small businesses.

Payments as a Scale Platform

  • Discusses the similarity between the payments industry and online advertising regarding the need for scale.
  • Emphasizes the importance of network effects in the success of platforms like PayPal.

"Payments are sort of the same thing. I mean, PayPal really needed massive volume before they could have wide adoption."

  • The speaker compares the payments industry to online advertising, noting the necessity of achieving large volumes for success.

The Challenge of Iterating Based on Market Feedback

  • Highlights the ability of PayPal alumni to rapidly iterate products based on market feedback.
  • Discusses the importance of balancing commitment to a vision with responsiveness to market signals.

"They learned at PayPal this ability, 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."

  • This quote underscores the value of agility and market responsiveness in product development, as exemplified by PayPal alumni.

Grading eBay's Acquisition of PayPal

  • Evaluates the acquisition of PayPal by eBay.
  • Contrasts the successful hands-off approach of other acquisitions with eBay's more interventionist strategy.

"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 the acquirer follows the mantra of leave the team alone."

  • The speaker assesses eBay's acquisition of PayPal, suggesting that the best acquisitions typically involve minimal interference with the acquired team's operations, which contrasts with eBay's approach.

Cultural Incompatibility in Acquisitions

  • eBay and PayPal had a significant cultural clash post-acquisition.
  • eBay approached business operations differently from PayPal, with eBay favoring lengthy meetings and extensive PowerPoint presentations.
  • PayPal's culture was more informal and less reliant on structured presentations.
  • David Sachs from PayPal highlighted the cultural differences in an integration meeting with eBay.

"And eBay team gets all the key people from PayPal together in a room and 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?"

The quote illustrates the stark contrast in corporate cultures between eBay and PayPal, emphasizing the informality of PayPal's meetings and unfamiliarity with tools like PowerPoint that were standard for eBay.

Evaluation of eBay's Acquisition of PayPal

  • The acquisition of PayPal by eBay is seen as breaking traditional rules but still creating significant value.
  • There were opportunities for even greater value had eBay handled the acquisition differently.
  • The resulting PayPal mafia and their contributions to Silicon Valley are considered a positive outcome.
  • Ben Gilbert grades eBay's acquisition as a B+ considering the value created and potential for more.
  • David Rosenthal and Ben Gilbert discuss the financial and strategic impact of the acquisition on eBay's growth.

"It's almost know, I think I'm going to net out at like a B plus for eBay on the acquisition. I mean, created billions and billions of dollars worth of shareholder value."

This quote reflects Ben Gilbert's assessment of the acquisition's success, grading it a B+ based on the substantial shareholder value generated.

eBay's Growth and Strategic Decisions

  • eBay's growth is not solely attributed to the acquisition of PayPal.
  • Keith Rabois suggested that PayPal foresaw eBay's growth plateauing, influencing their decision to sell.
  • eBay's net revenue growth from 2004 to present is acknowledged, but not as a mega behemoth.
  • The acquisition is viewed as highly beneficial for eBay stockholders, providing a second business line.
  • Ben Gilbert perceives the acquisition as an A+ for eBay's corporate growth.

"EBay grew like a weed and grew to be larger than their existing, 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."

Ben Gilbert praises the acquisition for allowing eBay to expand beyond its original business line, significantly enhancing the company's growth.

Impact of the Acquisition on the United States

  • The eBay acquisition is considered generally good for the United States and Silicon Valley.
  • The acquisition's ancillary benefits to the startup ecosystem are highlighted.
  • The discussion compares the acquisition to other significant tech acquisitions like Instagram and Pixar.
  • The broader implications of acquisitions on national GDP and the tech industry are considered.

"The eBay acquisition was generally good for the world, right? It's generally good for the United States in terms of GDP."

The quote from Ben Gilbert suggests that the acquisition of PayPal by eBay had a positive impact beyond the companies involved, benefiting the larger economy and startup ecosystem.

Reflections on Other Tech Acquisitions

  • Comparisons are drawn between eBay's acquisition of PayPal and other tech acquisitions such as Instagram.
  • The discussion touches on the potential episode topics, including the failed acquisition of Snapchat and its comparison to Instagram's success.
  • The conversation shifts to recommendations for podcasts and books that are relevant to the tech and business world.

"Gosh, maybe Instagram. I mean, Jerry's still out on that."

This quote indicates the ongoing evaluation of Instagram's acquisition by Facebook and its long-term success, which is still being assessed in the tech community.

Recommendations and Resources

  • Ben Gilbert recommends an episode of the Bill Simmons podcast featuring Chris Sokka.
  • David Rosenthal recommends the book "Anti Fragile" by Nassim Nicholas Taleb.
  • The recommendations cover a range of topics, from startup investing to philosophical concepts in business and economics.
  • The conversation showcases the hosts' interests in continuing education and sharing valuable resources with their audience.

"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."

Ben Gilbert's quote shares a personal recommendation for a podcast episode, highlighting the intersection of technology, investing, and sports through Chris Sokka's experiences.

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