PayPal’s Strategy and How It Evolved Over Time

Posted on by Tim Darling

This example is from Jessica Livingston’s interviews with startup founders, Founders at Work. What her interviews reveal overall is that buyers, value pools, and approaches can change in startups’ early days as founders validate market needs and better assess their abilities to serve those needs.

It’s clear that most founders think deeply about the buyer, the value pool, their unique approach to addressing it, and make conscious decisions to evolve the elements as needed. In contrast, the technological insight and/or the source of differentiation / competitive advantage they leverage tends to remain constant throughout the evolutions.

Here’s PayPal’s strategy circa 1999, at the time they were funded by Peter Thiel. I’ve put it into the structure that I introduced in the “4 Steps to Develop a Strategy”.

PayPal’s Strategy (1999)

  1. Buyer + $ value pool. What’s the high $ pain point or unmet need?
    • Companies looking to add security to applications running on PalmPilot but who can’t build all of the crypto algorithms themselves. For example, to replace the credit-card-shaped one-time password generators or communications applications.
  2. How to unlock the $ value pool. What’s keeping the value pool from being unlocked? How unique is our chosen method?
    • Ability to create crypto algorithms is complicated, only academics know how to do it (and they have no interest in commercializing it)
  3. Why us? What are our sources of advantage? What trends will we ride?
    • Founders’ expertise in building complex algorithms, e.g., crypto libraries.
  4. User + how we will delight them. What are the two to five unique and pivotal decisions that will define our solution?
    • Making these complex crypto algorithms plug-and-play for the developer and invisible and seamlessly integrated into the developer’s product for the end user.

And here’s PayPal’s strategy circa 2000, after converting the above crypto libraries into a product that allowed PalmPilot users to beam money to each other … and then getting a lot of excitement from eBay users who started testing out a website-based version that PayPal put up as a demo:

PayPal’s Strategy (2000+)

  1. Buyer + $ value pool. What’s the high $ pain point or unmet need?
    • Individuals who want to transfer money to each other, e.g., eBay buyers and sellers
  2. How to unlock the $ value pool. What’s keeping the value pool from being unlocked? How unique is our chosen method?
    • Taking credit card / bank account payments online results in significant loss due to fraud. Other competitors were folding because they could not sustain the losses. PayPal invented a way to automate the prioritization of potential fraud and inform a human-based team that could then attempt to recover losses or turn it over to the Feds.
  3. Why us? What are our sources of advantage? What trends will we ride?
    • PayPal’s ultimate core expertise is in developing and building an algorithm that would predict the fraud risk of a transaction, determine whether to accept the risk. Also, the post-transaction fraud recovery tool.
  4. User + how we will delight them. What are the two to five unique and pivotal decisions that will define our solution?
    • Making the complex fraud prediction algorithms seamless for the end user.
    • Making the complex fraud recovery tools seamless for the inhouse fraud recovery teams. (Note these tools were apparently so useful that the Feds commissioned to use them on their own datasets).

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All books and other resources referenced in this article