Just finished reading "The PayPal Wars" by Eric M. Jackson. It is a riveting story about the rise of a start-up from the point of view of the trenches.
PayPal founder Peter Thiel saw an opportunity to capitalize on the internet's lack of borders to give the individual more freedom of choice in commerce and currency.
The business model was to earn money on the reserves held by "non-commercial" customers in PayPal accounts rather than charging fees, making PayPal a better bank for individuals.
But PayPal didn't execute this strategy. It wasn't international in scope, it was US based. To avoid banking regulations, it was a money transfer service (aka Western Union). But they never acknowledged this detour and adjusted the business model to include the fees a money transfer service is based on.
Jackson was hired and put in charge of marketing despite zero experience and limited resources. Although he joined the company based on Peter Thiel#39;s vision - free for individuals - his instinct was to find a customer to whom PayPal offered significant economic value. He targeted EBay auction sellers.
His instincts gave the company viability. PayPal value was so attractive for the big volume sellers that PayPal could weather competitive offerings and ultimately charge fees for services.
In a move which represents a true economic revolution, management rewarded these customers with accesss to pre-IPO options.
One wonders how much bigger and resilient the company would have been if they had started out by offering to share the wealth, similar to a local community bank or credit union. In fact, one wonders if the company would have been more profitable earlier, making it less reliant on investors for capital to grow. And if it did not have over $200 million of investment, would it have had to sell to EBay?
Jackson concludes that the factors leading to PayPal's need to sell to EBay inhibit entrepreneurship in general: competition, regulation, litigation, and ineffective law enforcement.
I'd offer that relying on capital from investors rather than customers contributes to a startup's vulnerability to all of the above. Raising hundreds of millions puts a startup on the radar screen before it even understands the dynamics of its market and customers. The life preserver for PayPal was knowing who the customers were that valued their service, where to find them and communicate with them efficiently, and the mutual respect between them.
A real economic revolution would be raising capital from customers to fund a start-up. This "creative destruction" would be irreversible by old economy competitors, the politicians who regulate capriciously, limit the interest in class action lawsuits, and engage citizens in collaborating with law enforcement.
