Uncommon brilliance and .com-era luck powered PayPal’s growth and dominance in 2000s peer-to-peer payments and internet commerce. Stripe benefited from a similar formula in the 2010s: The app economy, SaaS, and fintech market froth gave Stripe its early customers.
The PayPal Mafia (PayPal cofounders; frequently household names) backed Stripe early. The $53 billion bid for PayPal by Stripe and private equity firm Advent International’s brings some Mafia members full circle in payments.
“Elon and Peter have been very insightful. They have sharp opinions on what PayPal did right and wrong…it's really helpful to have someone who can talk about the future in 15 years..."
PayPal and the .com Boom
30.1% of Americans (about 85.5 million), had access to the World Wide Web in 1998; the average millennial was in grade school. (Source: St. Louis Fed). US internet adoption tracked an S-curve, as would be expected, with an inflection point in the mid-2000s.
Visa processed the first online payment in 1994; Authorize.Net (1996) was the best-known gateway for internet card processing. Peer-to-peer payment acceptance was new; payment solutions for small merchants were few. Online banking was a barely tested idea. The .com bubble popped in 2000; hype for internet-everything bottomed out as the pace of internet adoption slowed. PayPal survived.
Enter the Mafia
In 1998, Max Levchin and Peter Thiel founded Confinity, which built security software for the PalmPilot and soon pivoted to “beam-based” money transfer.1 Elon Musk cofounded X.com, which made online banking software. The two merged in 2000 and rebranded as PayPal in 2001. The pitch: to send money between anybody with an email address.
📘 Members of the Mafia
PayPal cofounders and early employees form the retroactive “PayPal Mafia,” founders and investors whose fingerprints cover Silicon Valley. Max Levchin, a cofounder and former CTO, is the founder and CEO of Affirm.
Peter Thiel (Palantir, Founders Fund; early investor: Facebook)
Max Levchin (Affirm)
Elon Musk (Tesla, SpaceX, OpenAI; ousted before sale to eBay)
Reid Hoffman (LinkedIn; early investor: Facebook, Airbnb)
David Sacks (Craft Ventures, second Trump admin.)
Keith Rabois (Founders Fund, Khosla Ventures)
Roelof Botha (Sequoia Capital)
Chad Hurley, Steve Chen, Jawed Karim (YouTube)
Jeremy Stoppelman (Yelp)
Luke Nosek (Founders Fund)
Money was given out freely in 1991-2000 .com bubble. Founders, venture capitalists, and observers in the epicenter remember deals being done in parking lots. PayPal picked the right moment: It shoveled VC cash out the door, including in the form of signup and referral bonuses to build its two-sided marketplace.
The .com bubble peaked on March 10, 2000, and its collapse wiped out names that for today’s founders are at best casual curiosities. PayPal had scaled enough to survive. Then it lucked into the most consequential chain of electronic payments legislative, regulatory, and technical standards of the early 21st century, survived lawsuits, and built a risk and compliance firewall.
PayPal user counts from its early days as a public company were flatteringly similar to the consumer fintech bubble of the 2010s. After a pandemic pop, and under pressure from competitors in P2P and commerce, user growth stalled.
Founders, venture capitalists, and observers in the epicenter remember deals being done in parking lots.
PayPal user counts from its early days as a public company to today. It switched from total users (gold) to trailing-twelve-month active users. Active-user growth stalled c. 2020 after a pandemic pop, and under pressure from competitors in P2P and commerce.
The E-Sign Act, which went into effect in 2000, started a waterfall that ended when NACHA introduced the WEB SEC code. The intent was to enable online payments for banks. The effect: PayPal could move money as cheaply as a bank without a bank charter.
PayPal’s commercial strategy was to to convert free consumer accounts to paid business accounts, absorb the merchant relationship with payment processors, and allow anyone with an email address to pay or be paid.
But fraud nearly ended PayPal before it got started. PayPal’s exponential growth attracted credit card chargebacks, money laundering, and phishing attacks. Open registration and instant transfers made it an excellent conduit for criminal activity. Fraud losses were brought down by 2001; The Patriot Act tightened BSA/AML and KYC requirements, which PayPal used to build a moat.
📘 The Regulatory Waterfall
PayPal, after huge early problems with fraud, built infrastructure that made it quicker to comply with the Patriot Act. It wasn’t all smooth: PayPal came under scrutiny for allegedly operating without state money transmitter licenses, which it resolved by acquiring licenses and raising capital.
E-Sign Act (2000): Gave electronic signatures and records the same legal status as records and signatures on paper. (This preceded Check 21 by three years.)
Revised Regulation E (2001): Electronic authorization is recognized for debiting bank accounts enabled by the E-Sign Act.
NACHA WEB SEC Code: The technical standard for web-based ACH payments enabled by Regulation E.
Patriot Act (2001): Imposed AML and KYC rules on money services businesses that under the Bank Secrecy Act had only applied to financial institutions.
Next Issue: PayPal, Stripe… and 2027
Cloud computing created the precondition for a new startup boom, collapsing the capital cost of building a software product to nearly zero. Developers needed payment processing as code. Stripe solved it.
Mafia members Peter Thiel, Elon Musk, Max Levchin, and Roelof Botha were in Stripe’s angel group.
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Thanks for reading Fintech Notebook: A weekly intelligence briefing read by fintech operators, strategists, and investors. Connect on LinkedIn or visit my website @ tylerbrown.co.
AI disclosure: The author used AI to assist research and charting.
1 The PalmPilot was a handheld device popular from the 1990s to the mid-2000s. Each had an infrared transponder used to send (“beam”) data between devices. The feature was fundamental to Confinity’s pivot to P2P payments.