Founders at Work: Stories of Startups' Early Days

by Jessica Livingston

Apparently sprinters reach their highest speed right out of the blocks, and spend the rest of the race slowing down.

The earliest phase is usually the most productive. That's when they have the really big ideas. Imagine what Apple was like when 100% of its employees were either Steve Jobs or Steve Wozniak.

Suits do not help people to think better.

And yet conventional ideas of "professionalism" have such an iron grip on our minds

(I was notorious for programming wearing just a towel) in offices strewn with junk at 2 in the morning. But no visitor would understand that.

This is what real productivity looks like. This is the Formula 1 racecar. It looks weird, but it goes fast.

Of course, big companies won't be able to do everything these startups do. In big companies there's always going to be more politics, and less scope for individual decisions.

I'd say determination is the single most important quality in a startup founder. If the founders I spoke with were superhuman in any way, it was in their perseverance. That came up over and over in the interviews. Perseverance is important because, in a startup, nothing goes according to plan.

People like the idea of innovation in the abstract, but when you present them with any specific innovation, they tend to reject it because it doesn't fit with what they already know.

As Howard Aiken said, "Don't worry about people stealing your ideas. If your ideas are any good, you'll have to ram them down people's throats."

almost all the founders I interviewed changed their ideas as they developed them. PayPal started out writing encryption software, Excite started as a database search company, and Flickr grew out of an online game. Starting a startup is a process of trial and error. What guided the founders through this process was their empathy for the users. They never lost sight of making things that people would want.

PayPal won because they built a better mousetrap.

PayPal succeeded because it could deal with fraud—and its competitors couldn't.

The company was really not founded to do payments at all. My focus in college was security.

These things are all sort of child's play at this point,

I would say, "I owe you $10,"

I could beam it to you, using the infrared on a Palm Pilot,

The geek crowd was like, "Wow. This is the future. We want to go to the future. Take us there."

Then all these people from a site called eBay were contacting us and saying, "Can I put your logo in my auction?" And we were like, "Why?" So we told them, "No. Don't do it." So for a while we were fighting, tooth and nail, crazy eBay people: "Go away, we don't want you." Eventually we realized that these guys were begging to be our users. We had the moment of epiphany,

When did you first notice fraudulent behavior? Levchin: From day one. It was pretty funny because we met with all these people in the banking and credit card processing industry, and they said, "Fraud is going to eat you for lunch." We said, "What fraud?" They said, "You'll see, you'll see."

The guy who ran X.com became the CEO, and I remained the CTO. He was really into Windows, and I was really into Unix. So there was this bad blood for a while between the engineering teams.

The three of us are pretty good friends now. At the time, already I had hated the guy's guts for forcing me to do Windows, and then, in the end, I was like, "You gotta go, man."

The investigators would only have to deal with the top 5 percent. You'd never go through the entire queue of things for them to judge, but, because they judge things pretty quickly, they would go through half the queue, and they would inevitably start with the ones we thought were the highest possible loss.

I think a good way to describe PayPal is: a security company pretending to be a financial services company.

So the company's core expertise, by definition, has to be in this ability to judge risk—to be able to say, "Is this the kind of transaction I really want to take on or is this something I should steer away from because you people look like thieves?" I think that's the security part. I mean, security not in any sort of a sense of anti-hacking defensive, but just security in a broader sense: risk assessment, figuring out what's the sane thing to do, what's unsafe, what's safe.

The really complicated part is figuring out the risk. The financial industry people understood the risk, but they weren't willing to do the sort of stuff we did, where they would basically say, "Bad guys over here. Let's get all the bad guys out." There are tools to just say, "Give me your social security number, give me your address and your mother's maiden name, and we send you a physical piece of paper and you sign it and send it back to us." By the time that's all accomplished, you are a very safe user. But by then you are also not a user, because for every step you have to take, the dropoff rate is probably 30 percent. If you take ten steps, and each time you lose one-third of the users, you'll have no users by the time you're done with the fourth step.

There was one company—I think it was eMoneyMail—that shut down the company at a conference basically saying that the Internet is not a safe place to conduct transactions. They had 25 percent fraud. So for every $4.00 changing hands in the system, $1.00 was stolen. And it was all coming out of their pocket. They said, "We lost a ton of money," and they just quit.

Then, people like Citibank and other large financial institutions that also competed with us that understood the fraud thing very well—they knew from many years of practice that this was going to become a big problem—didn't really approach it with the same happy abandon that we did. We started with this, "Fraud is going to kill us. What can we do to save ourselves?" They started from, "We have no fraud. How can we build this and not let any more fraud in?" Which is the wrong position to start because you are limiting your users, and new users learning about a new system really don't want to be restricted.

We didn't go public until we had the fraud thing figured out. Somebody like Citibank or anyone with a substantial public visibility announcing that they are suddenly bleeding out $10 million a month in fraud would send serious shocks through the investor base.

We built the system to be viral from day one. The idea was: I can send you the money, even if you aren't a member. If I send you $10, you get an email saying, "You have $10 waiting for you. Sign up, and you can take it." That's the most powerful viral driver there is. Free money available to you.

"I want to pay you with PayPal," and sellers would be like, "I don't accept PayPal." And buyers would say, "That's OK. I'll just send you $10, and you can sign up."

I think I told Peter, "If we ever get to be 25 people, I'll probably quit because I like small companies. Is that OK?" The next time we talked about it, we already had 75 people, so I sort of missed my window. He said, "Why don't you stick around till 100, and we'll see what happens?" Next time we talked, we had 1,000 people.

Levchin: Try to have a good cofounder. I think it's all about people, and, if you are doing it completely alone, it's really hard. It's not impossible, in particular if you are a loner and introverted type, but it's still really hard.

I had run a company before PayPal, alone, and I thought it was fine. I could deal with it. But, you only can count on energy sources and support sources from yourself.

Even more importantly, perhaps, you have to have a really strong cofounder. Someone you can rely on in a very fundamental way.

One night I came over to our CFO's office, and I said, "I really don't understand a lot of the balance sheet math and all this stuff. I'm pretty good at math, so I should be able to get it, but I just don't understand the language, so teach me accounting." We had this crazy multihour session where he was explaining accounting to me. I learned debits and credits and why certain things are called what they are; liabilities versus assets and capital.

I had never really raised money before, so when Peter was raising money, I was tagging along as much as I could,

sprinkles magic dust on technology

We had six different business plan changes, and then the last one was PayPal.

If that one didn't work out, if we still had the money and the people, obviously we would not have given up. We would have iterated on the business model and done something else. I don't think there was ever any clarity as to who we were until we knew it was working.

"We're trying this, this week." Every week you go to investors and say, "We're doing this, exactly this. We're really focused. We're going to be huge." The next week you're like, "That was a lie."

One of the interesting moments was after we got funding from Nokia Ventures, the first VC firm that funded us.

we started the board meeting basically saying, "Hi, John. Hi, Pete"—the new VC guys—"We changed our business plan." And these guys were like, "What?" They just put down $4 million to see something happen, and we said, "Sorry, we're not going to do that; we're going to do this." To their credit, they were like, "All right, you guys are smart. Let's do it." Usually VCs get freaked out by that, but these guys were like, "OK. You're so crazy. Let's go."

"I'm single and don't have a family. Why don't you quit and start working on this and I'll give you half of my salary?"

Whoever built it first would win the market.

They liked the idea right off the bat.

Sometimes ideas are born out of necessity: you solve a problem for yourself, and you hopefully solve it for a number of other people too.

make sure you write a business plan because it will crystallize your thoughts to communicate your ideas with somebody else. Make sure that once you have written your business plan, you have somebody read and critique it and ask you questions.

Essentially it's a plan that says what the company is going to do, what problem it is going to solve, how big the market is, what the sources of revenue for the company are, what your exit strategy is for your investors, what amount of money is required, how you are going to market it, what kind of people you need, what the technology risks are, marketing risks, execution risks. Those are the fundamentals of what goes into a business plan, and many people have it in their heads but don't write it down.

When you design with very few parts, everything is so clean and orderly you can understand it more deeply in your head, and that causes you to have fewer bugs.