The quintessential Silicon Valley startup, PayPal turns 10

SAN JOSE, Calif. — The need was direct: How to facilitate the exchange of money and goods between a consumer and an online merchant.

The concept was simple: A service that would allow the shopper to purchase an item without sharing financial information, and at the same time, enable retailers, small-business owners and individuals a guaranteed quick and sure payment for a small fee.

PayPal, the San Jose company that revolutionized the way payments are made online, marks its 10th anniversary this year.

Last month it launched a microsite featuring a series of video interviews with PayPal's founders and others who played key roles in the company's history. For Silicon Valley techies and entrepreneurs enamored of the "PayPal Mafia" success story, it's a chance to hear the players talk about how it all came together.

"We have a tremendous, big, recognized brand with 60 million customers now," said Scott Thompson, 50, PayPal's president. A Boston native with a well-known love of the Red Sox, he adds, "But I like to say we're at the top of the first inning in a nine-inning baseball game."

Quite a deal

Founded in 1998 by Max Levchin, Peter Thiel and Elon Musk as a way to transfer money via PDAs, PayPal's start is the quintessential Silicon Valley startup story — complete with a $1.5 billion happy ending, the price eBay paid to acquire the company in 2002.

"The fundamental problem eBay had was that most sellers on the site didn't have merchant accounts with credit-card companies like Visa or American Express," Thompson said of the online-auction site, "and here was PayPal with technology that worked but no demand for it and not making any money."

PayPal today has 7,000 employees around the world. It posted revenue of $582 million in the first quarter of 2008, up 32 percent from last year.

Soon after merging with eBay in 2002, PayPal went worldwide, becoming available in euros and pounds. It can be used in 190 countries and in 17 currencies. Its active accounts total 60.2 million globally, a 17 percent increase from last year.

"The underlying theme with PayPal is that merchants big and small want to sell stuff," Thompson said. "They get access to a worldwide customer base and the customer can buy from almost anywhere in the world without divulging their private financial information."

The unofficial motto of PayPal, he said, is "the world's favorite way to pay and be paid."

In the United States, 12 percent of all payments through the Internet are made via PayPal, which charges a 2 to 3 percent transaction fee to sellers. That's about a 94 percent share of the alternative online-payment market, which also includes Google Checkout, Amazon.com and Bill Me Later.

While PayPal dominates, it's had some glitches. Integrating PayPal's technology into the existing Web sites of retailers and merchants, for instance, has been difficult because of coding issues. Phishers and hackers have compromised security.

To enhance protection for buyers and sellers using PayPal, eBay announced last month that starting in the fall, customers using PayPal for their eBay purchases will be covered for 100 percent of the cost if the item doesn't arrive or differs significantly from its description.

Mobile opportunities

Growing globally has meant triumphs as well as obstacles. Still, Thompson said the biggest opportunities for PayPal's growth are in other countries, particularly developing countries where Internet access isn't commonplace. Which is one reason PayPal is investing in mobile technology.

"We're years away from that becoming standard usage," Thompson said of the service, a version of which launched in the United States in 2006. The new technology will allow it to take off on foreign soil, he said, where cellphone users far outnumber Internet users.

"We can solve a real problem in the way people are paying," Thompson said. At some point, he said, consumers will be able to buy goods directly from a manufacturer, say in China, for example. And when that happens, PayPal plans to be there to shepherd the exchange of money.

Predictably, Thompson won't talk about what's next on the company's creative agenda.

Levchin, Thiel, Musk and a few of the other original employees have moved on to create such Internet enterprises as LinkedIn, YouTube, Slide, Yelp and SpaceX, and even an electric-car startup by Musk called Tesla Motors.

"It's in the DNA of PayPal," said Thompson.

"I think it's objectively true," Levchin said this week, while driving past the address in Palo Alto where the idea that became PayPal was born.

"All these companies that have come out from the original crew ... maybe there was something in the water. A lot of us tasted our first success at the hands of PayPal. We were witness and party to a massive success."

While PayPal is a business that depends on e-commerce, current chief Thompson said he's not worrying about the economic slump.

"People always have occasions when they have to buy things," he said. "What happens in a down cycle is that they move more cautiously. If they want the best deal, they move to the Internet, they don't go from mall to mall. What's predictable is that more and more purchases will happen on the Web."