Donna Driscoll waits patiently as a web-site tester wanders through the prototype of a new online bill-paying service. Product launch is just two months away, and things aren't going well. In the right-hand corner of the screen, a blue-and-white image invites visitors to send money. But the tester's cursor hovers aimlessly in a dead zone.
Driscoll isn't flustered. She is a senior usability engineer at PayPal Inc., which, in just three years, has become the dominant player in the new field of moving money by email.
By this month, the company expects to have more than 10 million registered users who generate transactions at a rate of more than $3 billion a year. Already, PayPal has become a favorite way to settle bets and shop online with small merchants, but now the company has more markets that it wants to conquer. Need to pay your energy bill? Your phone bill? Even though plenty of long-established commercial banks offer online bill payment, PayPal believes that it can provide this service better than the old guard.
All summer, Driscoll worked inside a tiny demo room at PayPal's headquarters, in Palo Alto, refining the company's most important service extension to date. She listened to and learned from disgruntled users -- skills that she developed through jobs at Netscape and WebTV. After one hour-long session, she conceded that the new BillPay service still had glitches. But she and her colleagues planned to fix most of these flaws by the October launch and somehow sort the rest out later. That's the PayPal way, and it has worked so far.
Minor missteps, rapid experimentation, and strategic zigzags have been PayPal hallmarks ever since founders Peter Thiel and Max Levchin teamed up in 1998. Even the basic mission of the company has changed since its start. Yet for all of its short-lived mistakes, PayPal has always been able to regroup. "We have the first-mover advantage, and, in this instance, that makes us hard to beat," explains Thiel, 34, who started out as an investor and then decided that he wanted to be CEO.
What's more, PayPal has mastered two key insights that, so far, have helped it pull ahead of other startups and potential rivals at big commercial banks.
First, PayPal didn't try to reinvent everything. Its founders realized early on that the rise of email had revolutionary implications for money transfers. But Thiel and Levchin were also humble enough to realize that they didn't need to create a new currency. By contrast, other startups, such as beenz.com, Flooz.com, and various Internet barter ventures, tried to combine email technology with their own form of digital currency. Most of them have either gone out of business or been acquired.
"As far back as 1995, there were a hundred companies that used cool technologies for moving money and that were going to change the world," Thiel recalls. "They had these weird new currencies." Pulling a greenback out of his wallet, he adds drolly, "This is still the biggest competitor to any payment system. Real currency is still really useful."
PayPal's other big edge came from a willingness to launch its system fast -- before all of the bugs had been worked out. Fraud from both small-scale thieves and from Russian hackers has proven to be a nagging and hard-to-eliminate concern. But by moving early, PayPal has been able to attract a huge user base. That has forced major banks to play catch-up, a natural consequence of their risk-averse and planning-intensive culture.
All the same, competition is likely to intensify over the coming year, and there are plenty of opportunities for PayPal to go off course. The company is not yet profitable, and, while it has raised more than $200 million in venture capital in the past two years, last year's market turmoil makes it hard to predict future funding prospects. Some analysts regard PayPal as a takeover candidate. Thiel isn't ruling out anything; he says that he would consider working with partners.
Ironically, PayPal wasn't even supposed to be in its current business. Levchin, 26, was an online-security maven who in 1998 wanted to start a company that specialized in safeguards for transferring money through wireless devices. At that time, Thiel was running a hedge fund, and Levchin approached him as an investor.
"We thought that it would be cool and fun to build a company," Thiel recalls. Things looked even cooler when they got a $3 million investment from Nokia -- and convinced its executives to beam the money to a PDA. The only problem with the original idea, Thiel admits, was that "consumers showed no interest in it."
For a time, Thiel ignored the market's feedback. But then he and Levchin, who is PayPal's CTO, regrouped. They noticed that while pretty much anything could be bought online, paying for it was another matter. As late as 1998, some 90% of eBay purchases were settled with checks or money orders, Thiel says.
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