Erik Nordeus - The Engineer

To help them developing PayPal, Thiel and Levchin needed the best programmers. “This guy came in, and I asked what he liked to do for fun. He said, ‘I really enjoy playing hoops.’ I said, ‘We can’t hire the guy. Everyone I knew in college who liked to play hoops was an idiot,’” Levchin said. Most employees were introverted. They worked, read the book Cryptonomicon by Neal Stephenson, ate crappy food all day, and slept under their desks. 260Levchin himself worked so much he didn’t bother to go home, so he also slept in the so-called “lucky building” at 165 University Avenue. It’s the same building as where companies like Google and Logitech had their first offices. 252

When the software was ready, they launched PayPal and it was a success. The company took off with 300 new users each day. They also decided to create a website with the same functions as the software on the Palm Pilot. 186

Several years earlier, in 1995, Pierre Omidyar created the website AuctionWeb. It was his hobby project where people could buy and sell products. But the hobby became a profitable business when Omidyar sold his broken laser pointer and realized he could charge sellers a percent fee on their sales. He contacted the winning bidder to ask if he understood the laser pointer was broken. “I’m a collector of broken laser pointers,” the buyer replied. AuctionWeb belonged to Omidyar’s consulting firm Echo Bay Technology Group. He tried to register the domain name echobay.com, but it was already taken. His second choice was the shorter name eBay.com. 189

Users from eBay began asking Confinity if they could use their website PayPal to transfer money. First, they tried to tell the users from eBay to go away because they wanted to focus on the users with Palm Pilots. Then they realized the eBay users begged Confinity to be their customers. 186

The number of people who used Palm Pilots would be considerable less than the number of people who years later bought smartphones. But the number of people who used the website version of PayPal grew every day. While 1.5 million customers used the website, only 12 000 used the Palm Pilot version. As any entrepreneur would have done, Confinity decided to stop developing the software for the Palm Pilots, and instead go full speed ahead with the website version of PayPal. 186

X.com and Confinity were cutthroat competitors because both companies were interested in the eBay users. In 1999, the two companies merged with each other. Almost all employees were surprised. First they worked all day trying to kill each other, and now they would cooperate with each other? X.com was the larger company because they had other services like money markets, index funds, and debit cards, but Confinity had a larger market share on eBay.

One of the reasons to why the companies merged was because both spent huge amounts of money on acquiring new users. If they combined their users, the combined company would become, according to Metcalfe’s Law, four times as valuable. The second reason was that Thiel thought only one company involved in payments on the Internet could become a public company. Of the two companies, Thiel thought X.com would beat Confinity in the race to the stock market because X.com had more resources. If X.com became a public company, they would get enough resources to crush the competition. Therefore, Confinity didn’t have any other choice than to merge with X.com. 189

The strategy of the new company was that after users began using PayPal, X.com could sell to them their supermarket of financial services. Harris became the CEO, Thiel took a sabbatical year and came back to run the finance and investor divisions, and Levchin became the CTO. “I think this is going to go very well,” Thiel said. “This combined company will just blow everyone else away.” Elon thought the new company could become larger than the online grocery service Webvan, which had a market value of $7.9 billion. 189

They kept the name X.com, but would later change it to PayPal because people associated X.com with pornography. Elon, on the other hand, protested against the change. He thought the name X.com was more flexible. 189

The merged company grew very fast. The number of phone calls with customer complaints increased, and so did the complaints coming in through e-mail. “We started off with five people in customer service, and after two months we had 100 000 customers,” Elon said. “So our phone lines exploded.” 439The solution PayPal had to solve these complaints was to ignore them by not answering the phone and by deleting the e-mails. “It took over three weeks to get my money and four calls to their 800 number, waiting an average of 25 minutes each on hold, and five e-mails of which three were answered one week later,” a customer said. 189

Harris decided to leave X.com after only a few months and Elon replaced him as CEO. Now it was time for a technological change. While Elon wanted to replace the Unix platform with a Microsoft platform, Levchin preferred the Unix platform. By the summer of 2000, Levchin gave up and surrendered to Elon. “Well, if this is really going to happen, I’m not going to be able to provide much value, because I don’t really know anything about Windows,” Levchin told Elon. The result of this difference in opinion was a battle between the employees from the two old companies.

Most of the original X.com employees would quit. Jeremy Stoppelman was one of them. He worked as an engineer at PayPal, and would later found the company Yelp. “We had been rivals, so it was awkward,” Stoppelman said. “And that awkwardness turned into total dysfunction and warfare. Most X employees ended up leaving or getting fired. The culture was really an intellectual pissing contest, and some people didn’t like that.” But the battle between the former companies ended. PayPal realized it was a better idea to focus on the battle against other companies. eBay had by now developed a similar service called Billpoint. They also needed to win the battle against fraudsters. 260

PayPal together with all other similar services had severe problems with fraud. In the beginning, they didn’t know they would need to take fraud into consideration. “Fraud is going to eat you for lunch,” they were told. Now they lost $10 million per month. “It was crazy,” Levchin said. One fraud ring cost them $5.7 million over a four-month period. “We can’t switch to Windows now. This fraud thing is most important to the company. You can’t allow any additional changes,” Levchin told Elon. 186

A criminal could buy stolen numbers and open fake PayPal accounts with the help of a computer program. The fraudster could then send payments through these accounts to minimize the traces from the crime. A cardholder who had lost money because of the fraud could contact PayPal and get back the money. It was up to PayPal to minimize the fraud by developing algorithms that judge the risk of each transaction. They also had 30 human investigators that tried to unravel the larger fraud cases and see if PayPal could recover some money or if they had to alert the FBI. 186,189

One of these algorithms was IGOR, named after a Russian criminal who claimed it was impossible to catch his fraud attempts. The algorithm could find suspicious accounts and alerted PayPal if it saw money transfers that appeared to be on its way to questionable destinations. 393Another algorithm tracked unusual patterns of behavior, such as small transfers of money to the same account at regular intervals. “If we’re successful, it’s like pre-crime,” Levchin said. “We try to figure out what they’re going to do so we can stop them before or in the act.” IGOR became so good at detecting fraud that the FBI began to use it. 185

It was in large part because of these risk-algorithms that PayPal succeeded and their competitors didn’t. While another company had 25 percent fraud, PayPal claimed it had found a way to bring the fraud rate down to less than 0.5 percent. 253And you can say that PayPal exported fraud to their competitors. Because they had so good risk-algorithms, the fraudsters gave up their attempts to fool PayPal and began fooling PayPal’s competitors. “I remember all these companies announcing they were going out of business and they expected PayPal to go out of business soon too, because the fraud numbers were so staggering that they could not see any one handling this sort of thing,” Levchin said. 186