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1+1=3

December 22, 2010 Posted by Ryan Graves

Today’s a big day at Uber. We’re very excited to announce that Travis Kalanick, one of Uber’s co-founders and an awesome mentor to me, has joined Uber full time and taken the role of CEO.

Travis has a long history founding and working with startups at all levels. He is a veteran entrepreneur with a strong technical background. After co-founding several companies and serving as one of Silicon Valley’s most respected Angel Investors, Travis is now back in the game and we couldn’t be more excited.

In the early days of Uber, Travis incubated the company and subsequently hired me to run with it, coaching me along the way – there was a lot to learn and Travis helped me scale the learning curve of how to build a startup.  Along with overall company leadership, Travis will be building out Uber’s technical team and guiding our product vision that will continue to be critical to our success. Strong technology is how we provide such an Uber service and get you cars faster than anyone else. Travis is literally, the perfect person for this job.

Personally, I’m super pumped about how well rounded the team has become with Travis on board full time. After working shoulder to shoulder with Travis in a mentor/mentee capacity, it’s obvious to me that this partnership is the right one, and puts Uber in a very strong position to take our early successes and turn them into a huge business.

I’ll let Travis take it from here…

Ryan, thanks for kind words. I’m frickin’ pumped to be on board full-time with Uber!  After a two-year recharge as an angel investor – following 15 years of entrepreneuring – I am ready to get back in the game.  But being ready isn’t enough – founding and running a startup is in my blood, but as everyone who’s done it knows, it requires real sacrifices, long, long hours and it can be an neverending road.  When the fit is right though, the choice becomes easy to make.

For me it starts with who it is I’m partnering with.  In my short stint as an investor, my criteria was whether the guy sitting across the table is someone I could see myself starting a company with.  When jumping in to run a company I helped start, it’s much the same.  Do I have a profound respect for the people in the company, the people I’ll be working in the trenches with?  Now of course I’m biased with Ryan Graves (I hired him at Uber after all), but there are very few young startup execs who bring the kind of hustle, emotional intelligence, and smarts to the table that he does.  In the last several months with Uber, Ryan has shown the ability to build and scale an operation. Ryan will continue to drive that growth as we expand nationally and worldwide, and he’s the archetype for the kind of people he will hire to further scale the business operations side of the house.

The second meaningful criteria for me is the awesomeness of the idea.  For me, that means disruption, it means contrarian, and it means that technology matters.  For me, Uber is the triumvirate of startup awesomeness.  Disruption is obvious, the taxi guys are losing their cool on Uber.  We are game changers in the urban transportation sector, and our early growth and traction are a testament to that.  The “Contrarian” tag may catch some people off-guard, but when Garrett and I would tell people about Uber 18 months ago, eyes would often roll… we weren’t the cool social network, consumer web app or the next-gen enterprise 2.0 startup.  People would hem and haw about market size, about real-world logistics, etc. etc. We got Uber out there anyways and there are definitely a few angels/VCs who regret not investing now… ☺. The last category, ‘Technology matters’ probably throws a lot of people off. Most people don’t understand how systemically complex scaling and growing Uber is. Two words: Supply. Chain. For the geeks, let’s just say that we get to NP Complete before you get your cup of Joe in the morning 😉 … And let’s also say that the quality of our algorithms and technology will determine whether we win BIG and whether this becomes a true winner-takes-all category. For a true-blue techie and algorithms guy this is where the sexiness is too much to resist.

So the bottom line is that I’m all in on Uber.  The excitement and joy of being Uber is coming out my pores and I’ll stop at nothing to see Uber go to every major city in the U.S. and the world. So what’s next? Taxi frustration is going down. Reliability, Efficiency, Accountability, and Professionalism in urban transportation are going WAY up.  Every city Uber rolls into is going to be a better place when we’re done with it and if you live in that city, your world of transportation is changing forever, and it will be oh so Uber when that change arrives.

Update (Travis K. writing): Some of you may have read of the news on Techcrunch and Arrington’s sensational headline “Uber CEO Pumped about being replaced as CEO” — this is not a replacement. This is a partnership between Ryan and me, something we feel pretty strongly about and the reason we titled our post ‘1 + 1 = 3’ as we believe the sum of what we respectively bring to the table is far greater than the parts.

Source: https://newsroom.uber.com/1-1-3/

 

Luck and the Entrepreneur,  Part 1: The four kinds of luck

Marc Andreessen

Aug 14, 2007

In the last few weeks, I’ve been reading huge stacks of books on the psychology of creativity and motivation — which is the reason for the relative scarcity of substantive blog posts. Said post situation will be remedied shortly, by a series of posts on — surprise! — the psychology of creativity and motivation.

But first, to complement my post on age and the entrepreneur from a few days ago, this post begins a series of occasional posts about luck and the entrepreneur.

Luck is something that every successful entrepreneur will tell you plays a huge role in the difference between success and failure. Many of those successful entrepreneurs will only admit this under duress, though, because if luck does indeed play such a huge role, then that seriously dents the image of the successful entrepreneur as an omniscient business genius.

Moreover, some of those people would shrug and say that luck is simply out of your hands. Sometimes you have it, sometimes you don’t. But perhaps there’s more to it than that.

Dr. James Austin, a neurologist and philosopher (!), wrote an outstanding book called Chase, Chance, and Creativity — originally in 1978, then updated in 2003. It’s the best book I’ve read on the role of luck, chance, and serendipity in medical research — or, for that matter, any creative endeavor. And because he’s a neurologist, he has a grounding in how the brain actually exerts itself creatively — although there is more recent research on that topic that is even more illuminating (more on that later).

In the book, Dr. Austin outlines his theory of the four kinds of luck — or, as he calls it, chance; I will use the terms interchangeably.

First, he defines chance as follows:

Chance… something fortuitous that happens unpredictably without discernable human intention.

Yup, that’s luck.

Chance is unintentional, it is capricious, but we needn’t conclude that chance is immune from human interventions. However, one must be careful not to read any unconsciously purposeful intent into “interventions”… [which] are to be viewed as accidental, unwilled, inadvertent, and unforseeable.

Indeed, chance plays several distinct roles when humans react creatively with one another and with their environment…

We can observe chance arriving in four major forms and for four different reasons. The principles involved affect everyone.

Here’s where it helps to be a neurologist writing on this topic:

The four kinds of chance each have a different kind of motor exploratory activity and a different kind of sensory receptivity.

The [four] varieties of chance also involve distinctive personality traits and differ in the way one particular individual influences them.

OK, so what are they?

In Chance I, the good luck that occurs is completely accidental. It is pure blind luck that comes with no effort on our part.

Yup.

In Chance II, something else has been added — motion.

Years ago, when I was rushing around in the laboratory [conducting medical research], someone admonished me by asking, “Why all the busyness? One must distinguish between motion and progress”.

Yes, at some point this distinction must be made. But it cannot always be made first. And it is not always made consciously. True, waste motion should be avoided. But, if the researcher did not move until he was certain of progress he would accomplish very little…

A certain [basic] level of action “stirs up the pot”, brings in random ideas that will collide and stick together in fresh combinations, lets chance operate.

Motion yields a network of new experiences which, like a sieve, filter best when in constant up-and-down, side-to-side movement…

Unluck runs out if you keep stirring up things so that random elements can combine, by virtue of you and their inherent affinities.

Sounds like a startup!

Chance II springs from your energetic, generalized motor activities… the freer they are, the better.

[Chance II] involves the kind of luck [Charles] Kettering… had in mind when he said, “Keep on going and chances are you will stumble on something, perhaps when you are least expecting it.  I have never heard of anyone stumbling on something sitting down.

OK, now here’s where it gets interesting:

Now, as we move on to Chance III, we see blind luck, but it tiptoes in softly, dressed in camouflage.

Chance presents only a faint clue, the potential opportunity exists, but it will be overlooked except by that one person uniquely equipped to observe it, visualize it conceptually, and fully grasp its significance.

Chance III involves involves a special receptivity, discernment, and intuitive grasp of significance unique to one particular recipient.

Louis Pasteur characterized it for all time when he said, “Chance favors the prepared mind.”

I thought that was Eric Bogosian in Under Siege 2: Dark Territory, but OK.

…The classic example of [Chance III] occured in 1928, when Sir Alexander Fleming’s mind instantly fused at least five elements into a conceptually unified nexus [when he discovered penicillin — one of the most important medical breakthroughs ever].

He was at his work bench in the laboratory, made an observation, and his mental sequences then went something like this: (a) I see that a mold has fallen by accident into my culture dish; (2) the staphylococcal colonies residing near it failed to grow; (3) therefore, the mold must have secreted something that killed the bacteria; (4) this reminds me of a similar experience I had once before; (5) maybe this new “something” from the mold could be used to kill staphylococci that cause human infections.

Actually, Fleming’s mind was exceptionally well prepared. Some nine years earlier, while suffering from a cold [you can’t make this stuff up], his own nasal drippings had found their way onto a culture dish. He noted that the bacteria around his mucous were killed, and astutely followed up the lead. His experiments then led him to discover… lysozyme… [which] proved inappropriate for medical use, but think of how receptive Fleming’s mind was to the penicillin mold when it later happened on the scene!

OK, what about Chance IV?

[Chance IV] favors the individualized action.

This is the fourth element in good luck — an active, but unintentional, subtle individualized prompting of it.

Please explain!

Chance IV is the kind of luck that develops during a probing action which has a distinctive personal flavor.

The English Prime Minister, Benjamin Disraeli, summed up the principle underlying Chance IV when he noted: “We make our fortunes and we call them fate.”

Chance IV comes to you, unsought, because of who you are and how you behave.

…Chance IV is so personal, it is not easily understood by someone else the first time around… here we probe into the subterranean recesses of personal hobbies and behavioral quirks that autobiographers know about, biographers rarely.

[In neurological terms], Chance III [is] concerned with personal sensory receptivity; its counterpart, Chance IV, [is] involved with personal motor behavior.

Please continue!

[You] have to look carefully to find Chance IV for three reasons.

The first is that when it operates directly, it unfolds in an elliptical, unorthodox manner.

The second is that it often works indirectly.

The third is that some problems it may help solve are uncommonly difficult to understand because they have gone through a process of selection.

We must bear in mind that, by the time Chance IV finally occurs, the easy, more accessible problems will already have been solved earlier by conventional actions, conventional logic, or by the operations of the other forms of chance. What remains late in the game, then, is a tough core of complex, resistant problems. Such problems yield to none but an unusual approach…

[Chance IV involves] a kind of discrete behavioral performance focused in a highly specific manner.

Here’s the money quote:

Whereas the lucky connections in Chance II might come to anyone with disposable energy as the happy by-product of any aimless, circular stirring of the pot, the links of Chance IV can be drawn together and fused only by one quixotic rider cantering in on his own homemade hobby horse to intercept the problem at an odd angle.

A recap?

Chance I is completely impersonal; you can’t influence it.

Chance II favors those who have a persistent curiosity about many things coupled with an energetic willingness to experiment and explore.

Chance III favors those who have a sufficient background of sound knowledge plus special abilities in observing, remembering, recalling, and quickly forming significant new associations.

Chance IV favors those with distinctive, if not eccentric hobbies, personal lifestyles, and motor behaviors.

This of course leads to a number of challenges for how we live our lives as entrepreneurs and creators in any field:

  • How energetic are we? How inclined towards motion are we? Those of you who read my first age and the entrepreneur post will recognize that this is a variation on the “optimize for the maximum number of swings of the bat” principle. In a highly uncertain world, a bias to action is key to catalyzing success, and luck, and is often to be preferred to thinking things through more throughly.
  • How curious are we? How determined are we to learn about our chosen field, other fields, and the world around us? In my post on hiring great people, I talked about the value I place on curiosity — and specifically, curiosity over intelligence. This is why. Curious people are more likely to already have in their heads the building blocks for crafting a solution for any particular problem they come across, versus the more quote-unquote intelligent, but less curious, person who is trying to get by on logic and pure intellectual effort.
  • How flexible and aggressive are we at synthesizing — at linking together multiple, disparate, apparently unrelated experiences on the fly? I think this is a hard skill to consciously improve, but I think it is good to start most creative exercises with the idea that the solution may come from any of our past experiences or knowledge, as opposed to out of a textbook or the mouth of an expert. (And, if you are a manager and you have someone who is particularly good at synthesis, promote her as fast as you possibly can.)
  • How uniquely are we developing a personal point of view — a personal approach — a personal set of “eccentric hobbies, personal lifestyles, and motor behaviors” that will uniquely prepare us to create? This, in a nutshell, is why I believe that most creative people are better off with more life experience and journeys afield into seemingly unrelated areas, as opposed to more formal domain-specific education — at least if they want to create.

In short, I think there is a roadmap to getting luck on our side, and I think this is it.

Source: http://pmarchive.com/luck_and_the_entrepreneur.html

The Lincoln Memorial and the 5 Why’s

Build Your Walls! Guard Your Gates!

Lincoln Memorial at NightIf you ever get a chance to visit Washington D.C., take the time to visit the Lincoln Memorial.  Abraham Lincoln was the 16th President of the United States and led the country through the Civil War and the emancipation of the African-American people from slavery.  The memorial erected in his honor is over 63 meters wide and over 33 meters high.  It has a statue of Lincoln at it’s center that is over 6 meters high and weighs 175,000 kg.  Millions of people visit the memorial each year to remember the strong, Christian leader, who preserved the American nation and had the courage to do what was right.

Several years ago, the National Parks Service executives wrestled with a problem.  The stone exterior of the memorial was deteriorating and showing significant signs of wear.  They considered replacing the stone or painting over it on a frequent basis, but this solution…

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Charlie Munger on the Importance of Worldly Wisdom and Consistently not being Stupid

25iq

“I think part of the popularity of Berkshire Hathaway is that we look like people who have found a trick.  It’s not brilliance.  It’s just avoiding stupidity.”http://www.scribd.com/fullscreen/110302239?access_key=key-28dmiqkoda00xd7b7mae 

A Lattice of Mental Models

Understanding how humans make decisions is critical for any investor.  Unless careful attention is devoted to decision making processes the brain can be a mistake-making machine.

“It is remarkable how much long-term advantage people like  [Warren Buffett and myself] have gotten by trying to be consistently not stupid, instead of trying to be  very intelligent.”http://www.wiley.com/WileyCDA/WileyTitle/productCd-0471446912,descCd-tableOfContents.html

One way to “be less stupid” is to adopt what Charlie calls a “lattice of mental models” approach to evaluating decisions.  He believes that by using a range of different “models” from different disciplines like psychology, history, mathematics, physics, biology and economics, a person can use the combined output to produce something he calls “Worldly Wisdom.”

Munger’s method is to…

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How the Economic Machine Works

Containers

Andreessen Horowitz

Imagine carrying around a bag of cell phones everywhere because you needed to use a new and separate piece of hardware for every single app — games, email, etc. — that you currently run on a single smartphone today.

Seems crazy, but that’s essentially what our model for computing used to be, with standalone silos of hardware for separate applications. When an application wasn’t being used, the hardware and operating system dedicated to it was still sucking power and resources. It was highly inefficient. (In our bag of cellphones analogy, this would be like having one cellphone dedicated to games and still carrying it around with you everywhere all day — even though you only needed to do email during the day).

Then along came virtual machines (VMs), which allowed many applications to run on top of a single piece of hardware (by making it look like multiple physical computers)…

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An alternate history according to Elon Musk

The appearance of Elon Musk in the hall of fame on Sequoia Capital’s website, and rapid disappearance, gave us the excuse to write about the colorful entrepreneur. The South African entrepreneur is now off the Silicon Valley scene, devoting himself to a grandiose mission to colonize space. But he was one of the iconic figures of the last internet boom, selling Zip2 and plunging straight into a new venture which he cannily merged with Paypal. Even his failures were successes. Musk, who has a liking for fast cars as well as fast spaceships, was too good a target to miss. In a 2,256-word response to the Valleywag items, after the jump, Musk explains how he stayed friends with the Paypal crew — even after Peter Thiel, one of the founders, funded a hostile account of the company’s history. “Peter sounds like Mel Gibson in Braveheart and my role is somewhere between negligible and a bad seed.” For more:

ELON MUSK — There were some pretty brutal pieces on Valleywag recently. I don’t mind taking it on the chin if the criticisms are true, but most of them are either inaccurate or unfair.

First, it is worth saying that there is no significant rivalry or animosity that I’m aware of today between myself and Peter Thiel or Max Levchin. After PayPal was sold to eBay, the three of us co-invested in and serve on the board of Room 9, David Sacks’s production company, which released “Thank You for Smoking” and will be making another satire this year on the modern art world. I’m also an investor in Peter’s hedge fund, he and I have shared many a meal since I left the CEO role at PayPal, he has stopped by to visit me in LA and he expressed an interest in investing in SpaceX (we are not yet taking any outside investment) when we had dinner last year at the TYFS premiere.

The only negativity in recent years was due to a book called The PayPal Wars, written by a sycophantic jackass called Eric Jackson. This guy was one notch above an intern at PayPal in the first few years of the company, but gives the impression he was a key player and privy to all the high level discussions. Eric couldn’t find a real publisher, so Peter funded Eric to self-publish the book. Since Eric worships Peter, the outcome was obvious – Peter sounds like Mel Gibson in Braveheart and my role is somewhere between negligible and a bad seed. However, to his credit, Peter didn’t realize the book would be as bad as it was and apologized to me personally at a Room 9 board meeting at David Sacks’s home in LA.

Regarding my first company, Zip2 was sold for about $300M, not $400M as you state in http://valleywag.com/tech/elon-musk/a-highstakes-poker-game-227831.php. I’m don’t know on what basis you conclude it was worthless. Zip2 counted the NY Times, Knight-Ridder, Hearst and other media companies as both investors and major customers for its Internet software & services, and would have gone public if not for the acquisition. After Compaq bought my company, it was merged with Altavista and the combined entity was rather poorly managed by execs whose main background was making PCs in Texas, but Zip2 was certainly valuable when it was sold.

As far as who deserves co-founder credit for PayPal, let me throw out a few reasons why it is probably fair to consider me for such (without detracting from Max and Peter’s similar status):

1. I came up with the company’s main viral growth mechanism, as David Sacks (PayPal Chief Operating Officer until the sale to eBay) plainly stated to the LA Times (ref. 1). There were other growth mechanisms, such as Max’s automatic buying system on eBay, where he wrote an auction crawler that offered to buy things on eBay only if you accepted PayPal, but my viral email/incentive mechanism was the primary driver of growth.
2. The business model of charging fees only to heavy sellers and not to buyers or light sellers, while still being able to make a profit, was developed by myself and other X.com executives. See details below.
3. A large percentage of the critical executives and other personnel came from X, including:

* Roelof Botha, who did a great job managing the finances and internal cost structure and took PayPal through a very difficult public offering as CFO. Now at Sequoia, Roelof was the partner who funded YouTube.
* Amy Rowe Klement, who ran the whole product group at PayPal until 2006.
* Julie Anderson Ankenbrandt and Sal Giambanco (still VP of HR at PayPal), who managed to build a huge customer service and fraud investigation group in Omaha, going from nothing to hundreds of personnel in the summer of 2000, when I was still CEO. Without them, PayPal would have melted down in a sea fraud and consumer lawsuits.
* Sanjay Bhargava, a former Citibank exec, who figured out the world’s first low cost method of authenticating terrestrial bank accounts, which was critical to making the PayPal business model work.
* Jeremy Stoppelman, who served as VP of Engineering for PayPal until summer of 2003, went to Harvard Bus School, and then co-founded Yelp.

4. When X reached agreement to acquire/merge with Confinity, it had more personnel, more user accounts and a faster growth rate than Confinity (although it should be said that Confinity had more eBay users). Peter Thiel is a smart guy and would never have agreed to merge if X was just some lame Internet bank. Mike Moritz was not some Svengali.
5. I was CEO or Chairman of X/PayPal from Jan of 1999 to Oct 2000, just over half of the combined company’s three and a half year existence before we agreed to sell to eBay in June of 2002, and was on the board of directors the entire time. I ran the combined company from April 2000 to Oct 2000 or about seven months. It was during this time that X/PayPal (the company was still called X until 2001) established itself as the leading email payments company through an aggressive viral growth system, figured out its business model, scaled from about 60 employees to several hundred, built the customer service & fraud center, added debit card & money market funds and laid the groundwork for multi-country, multi-currency capability.
6. By the time Peter became CEO of X/PayPal at the end of Oct 2000, the PayPal product and business model were largely as you know them today. Peter did a great job managing the company, particularly in controlling the level of fraud, for another year and a half until we reached an agreement to sell PayPal to eBay, but neither the business model nor the end product saw major changes over that period.
7. When PayPal was sold to eBay, I was the largest shareholder by a significant margin. Nobody gives away shares for free, so this is a reasonably objective indicator of contribution.

Taking the above points into account, if:
Founding the company that constituted half the post-merger equity and more than half the employees of the company that became what is known today as PayPal
Coming up with the business model & main customer growth mechanism
Hiring the people who served as CFO, VP product management, VP engineering, customer service, HR (etc) in the combined company
Running X/PayPal for the formative first half of its existence and being on the board the entire time
Being the largest shareholder when all was said and done
are not good tests for deserving co-founder status, then what are good tests?

Provided I’ve not bored you silly at this point, let’s drill further into the background of PayPal, X and Confinity:

PayPal, Inc., as people know it today, is not the company founded by Max and Peter. It was effectively created in Feb 2000 (formally consummated in March) when X, founded by me, acquired/merged with Confinity, founded by Max and Peter. The resulting corporate entity was still called X until 2001, when the board decided to sync up the name of the company with the name of the product.

Confinity was started in Dec 1998 as a Palm pilot cryptography company (crypto is one of Max’s many skills) and Max came up with an application for the crypto that involved beaming money tokens from one Palm Pilot to another via the infrared port. The website where those payments could be reconciled and transferred to your bank account, which only went live to the public in Nov 1999, was paypal.com, but it was a far cry from the system you are familiar with today.

When I started X in Jan 1999 (formally incorporated in March 1999), the initial idea was to bring together a broad set of financial services in one seamless interface and then add special functionality, such as the ability to transfer money or securities instantly between account holders. However, when I showed the system to potential investors and beta customers, everyone was a lot more interested in email payments and not in the other stuff, so well before I had any idea what Confinity was doing, X shifted to an email payments focus.

That was the reason X and Confinity wanted to join forces. You say that X was a failed bank, but when did it even have time to fail, bank or no? Both the X and Confinity websites only went live in the last few months of 1999 and the first merger discussions started in Dec 1999.

Despite the shift to email payments in mid 1999, Mike Moritz asked that we talk to the press as though X was doing a bank. He was trying to avoid having other VCs fund email payments companies just because Sequoia was doing so, which I think made sense, but has resulted in a lingering misperception. This strategy is actually recorded in the X board minutes.

In addition to the email payments functionality, it is true that X did offer bank accounts through one partner (First Western National) and money market funds through another partner (Barclays Global), however X was never itself a bank. Although the banking partnership ended, PayPal still offers the money market fund (among the highest returning in the country) and the debit card (1% cashback!) that I put in place. These play an important role in encouraging customers to keep money in the system by offering a better return than most savings accounts and allowing easy access to the cash at real world stores. It may seem counter-intuitive, but the easier it is to access money conveniently from the PayPal system, the more willing people are to leave money in PayPal, rather than transfer it to their bank account.

As explained further down, getting people to keep money in the system has a big impact on PayPal’s cost structure and is one of the fundamental reasons why PayPal succeeded when other email payments companies did not. Certainly, the idea of transferring money by entering an email address was originated by neither X nor Confinity. Billpoint (acquired by eBay in 1999) and Danny Shader’s Accept (acquired by Amazon in 1999) were both there almost a year earlier. There were also many well funded competitors along the way, such as Citigroup, who spent hundreds of millions on their c2it email payment service, including exclusive distribution deals with MSN and AOL. There was BancOne’s emoneymail, Yahoo’s PayDirect, Western Union’s BidPay, etc.

A vital competitive advantage over time was that PayPal had significantly lower transaction fees (Amex’s high fees are the main reason that many merchants still refuse to accept that card). In order to achieve the lowest transaction fees for sellers, it is critical to minimize the amount of money that enters PayPal via credit card. PayPal is forced to pay almost 2% to VISA/MasterCard for a credit card transfer plus pay for any fraud or chargebacks, which adds about 1%, all things considered. On top of that, PayPal has to charge its own fee to pay for customer service, engineering, server operations and overhead. Add it all up and you are at 4% to 5% on transactions, which is not competitive with a merchant simply accepting credit cards directly.

The original business model of Confinity where the company would charge no fees and make money on interest (ref. 2) turned out to be broken, generating miniscule revenue. If you don’t offer a competitive interest rate, customers quickly transfer their PayPal funds to their bank account. If you do offer a competitive interest rate, you can make at most about 1%/year net. Compare earning 1% over the course of a year vs. making 1% instantly when the transaction occurs. The difference is orders of magnitude.

The other part of the secret behind PayPal’s much lower fee structure was having a low cost way to authenticate a customer’s bank account, so that we could pull money into our system for a few cents per transaction (like writing a virtual check). To the best of my knowledge, PayPal is the only company that figured out how to do this. The credit for this idea is due to Sanjay Bhargava, a former Citibank exec that I hired into X in late 1999 and who was referred to me by Mike Moritz.

Sanjay came up with the idea of making two random deposits of less than a dollar into a customer’s regular bank account, creating a four digit password that a user could enter into PayPal to authenticate that bank account. We biased the random amounts toward the low end, so it cost us less than 50 cents per authenticated account. As soon as a user authenticated, the system would default to paying by electronic check, which cost PayPal pennies per transaction vs. around 3% (incl. fraud/chargebacks) for a credit card payment.

In light of the above, now look at the PayPal fee structure of 1.9% to 2.9% per transaction. The company obviously makes no money on credit cards transactions! Almost all the profit comes from payments funded from customer balances funds or from bank account transactions, which have close to zero cost. Both of these methods, i.e. PayPal’s fundamental business model, came from X. Even the fee structure itself, where business/heavy users are charged, but consumer/light users are not, was developed and implemented by me and David Sacks in the summer of 2000, when I was CEO of PayPal.

Source: http://gawker.com/230076/an-alternate-history-according-to-elon-musk