"The Founders" and finding success in innovation (Part 2)

More lessons from a legendary startup

In the last edition of Forestview, I shared 6 key insights from my summer read called The Founders by Jimmy Soni about the beginning of PayPal. In this edition, I’ll share 6 more lessons learned I took away from this book that are highly relevant for organizations looking to boost their innovation efforts.

7. Build a culture of candor

One of the most challenging aspect of examining the beginnings of PayPal looking in hindsight is the revisionist history and myth making that tends to take place anytime people or companies achieve a high degree of success. Another book I recently read on PayPal co-founder Peter Thiel called The Contrarian by Max Chafkin focuses on Thiel’s career and politics, and asserts that PayPal was an insular culture. There has been much made of the PayPal Mafia and the deep ties that early employees of the firm have built over time in Silicon Valley, which has led to many subsequent successes. Soni’s book describes how PayPal’s founders initially recruited people that they knew well to join the firm and that it had a male-dominated culture, but it also asserts that many of the early female employees who were instrumental in the firm’s success have been written out of that history after the fact, starting with the 2007 Fortune article coining the term “PayPal Mafia”.

Remember, PayPal initially was formed as the result of a merger between Confinity and X.com. Both firms viewed each other initially with suspicion and there was certainly “palace intrigue” with the hiring and subsequent overthrow of both Bill Harris (the former head of Intuit) and Elon Musk as CEO before Peter Thiel eventually took over. While some loyalists to these leaders left the firm during this time, others stayed - and these clashes led to creative differences and a culture of candor that many early employees cited as crucial for the firm’s success.

While not a model for ideal corporate culture by any means, PayPal’s rejection of traditional thinking and allowance for dissent and argument allowed for a thorough vetting of different ideas. In many firms, these differences are never surfaced at a senior level because mid-level managers intervene to adjudicate disagreements before they are fully aired. This can stifle new ideas and also send a signal to employees that it is best to simply fall in line. It can also put a premium on office politics to see which ideas do gain traction and which are never heard.

8. New approaches and not being afraid to iterate

The assembly of people willing to take personal risks to embrace the powerful vision of PayPal and attempt to make e-payments a reality was a critical component to the startup’s success. Many interviewed from traditional banks were not hired, and people that were usually looked to replicate solutions they had used at their previous employers. Over time, PayPal’s leadership recognized that inexperienced employees that were smart and shared a passion for “figuring it out” were less constrained in their thinking, leading to new and novel approaches to solving problems.

Because the firm was not afraid to try new things in their quest for success, PayPal became quite good at iteration and moving through ideas quickly to see which ones worked the best and which did not. With incremental success came more confidence that traditional approaches were insufficient, and that hiring for talent and not experience was a solid strategy. The founders were not as wedded to certain “pet projects” and were more likely to pivot where they saw progress; this was likely a result of their limited funding and tight timeline for gaining traction compared with more established firms.

9. Dedication to provide a superior value proposition

One of the themes that resonates throughout the story of PayPal’s early beginnings is the singular focus to provide a superior suite of products and services to customers than traditional financial firms did. Originally, the firm struggled to identify a core customer base, but once they gained a following among eBay sellers the startup became laser focused on ensuring they offered the best products and services to this group. Crucially, PayPal was intent on staying ahead of eBay’s in-house payments solution Billpoint, which they developed in collaboration with Wells Fargo.

Despite having a disadvantage as a third-party payments provider that was reliant upon another firm’s platform, PayPal worked hard to provide the best solution for eBay sellers and turn them into active supporters of the firm. Any new enticements or improvements that eBay made to Billpoint were quickly responded to by PayPal, and when PayPal had to increase pricing and tighten their terms and conditions, they made sure that the value proposition remained superior to any other alternative. Even when customers complained, when they started to shop around they found that PayPal remained the best deal in town for their needs.

10. Stay nimble by empowering decision making

PayPal was launched before agile development became a formal concept, but the firm embraced much of the ethos that later led to the agile methodology now ubiquitous in modern software development. The firm eschewed staff meetings and the need for formality; it sought to work quickly and stay nimble. This ability to move quickly and decisively and create a culture of empowerment led to dedicated employees. Yes, many worked long hours - too long - and the pace was brutal, but for a lot of PayPal employees it was a worthy trade-off in return for the autonomy they felt in their jobs.

After the PayPal IPO and acquisition by eBay, many PayPal employees struggled with the more formal corporate culture that eBay introduced. In particular, the amount of meetings, status reports, and additional oversight from management was unwelcome, even with the added security that the acquisition of PayPal by eBay brought to workers who no longer had to worry about the day-to-day existence of the firm. Keeping teams small and empowering them to make decisions, along with support a culture of candor, was a big part of PayPal’s success. Quick decisions made in a timely manner were favored over “perfect” decisions that were made late.

11. Secure funding strategically

Perhaps one element of luck in PayPal’s ultimate survival was the timing of their funding rounds, which appeared to come at just the right times following the dot-com bust in 2000 and 9/11 attacks. The initial merger between Confinity and X.com was well-timed ahead of the dot-com bust, and the combined entity of PayPal was able to build enough of a war chest to survive throughout 2000 and 2001 and became the first major IPO in 2002 following 9/11. Funds from international expansion also helped prop up the firm for the eventually acquisition by eBay.

If you look deeper, however, the PayPal founders appeared to have a sixth sense for market developments and when they needed to secure funding most - before times got really tough. In today’s challenging economic environment, securing funding has become much tougher. On my recent trip to Silicon Valley, I found some firms that had secured a war chest ahead of the recent downturn while others were attempting to raise capital, even at significantly lower valuations. The key lesson here is to not assume that the “good times” will always prevail and to be forward-looking and anticipate market changes in advance as much as is possible. Scenario planning and what-if analysis can be great tools to assist in this area.

12. Develop brand awareness and loyalty

One of the most underrated moves that PayPal made was to consciously develop brand awareness with their customers, many of whom were looking for a payments solution but not necessarily a natural for becoming a brand advocate. PayPal worked with a branding firm on selecting their name and designed a simple yet powerful logo for use by eBay sellers to post on their sites to communicate to buyers that PayPal was an option. Along with their new sign-up and referral bonuses, targeted customer acquisition campaigns that leveraged the brand went a long way towards building awareness. Additionally, PayPal’s focus on always providing the best payments solution, especially against eBay’s own Billpoint solution, turned notoriously independent-minded merchants into supporters who built more loyalty with PayPal than eBay itself.

It is counterintuitive, but the policies and pricing of eBay often ended up creating frustrations with the very people whom they were trying to entice to sell items on their platform. Subsequent moves to favor Billpoint at the expense of PayPal ended up backfiring, as merchants were suspicious of eBay’s motivations and saw PayPal as a spunky upstart compared with the eBay monolith. PayPal worked hard to build and maintain the loyalty of their customer base, and when eBay held their first ever customer event PayPal widely distributed T-shirts with their logo for free, negating eBay’s attempt to charge attendees for their branded T-shirts and ensuring that a large number of people were walking advertisers for PayPal. Ultimately, creating a loyal following helped PayPal achieve lasting success despite the uphill battles they faced as a firm.

Which of these lessons learned most resonates with you? Which of these best practices does your organization demonstrate today? Which ones would you like to see your organization pursue in the future? How much of PayPal’s success would you ascribe to luck and good fortune compared with good decision-making and top talent? Leave a comment below and share your thoughts along with this newsletter with a friend or colleague.

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