How I Built This with Guy Raz - Affirm: Max Levchin (Part 2 of 2)

Episode Date: June 20, 2022

After PayPal sold to eBay in 2002, Max Levchin could have relaxed on a beach for the rest of his life. But that’s not the kind of person he is. He isn’t happy unless he’s coming up with new ideas and building companies – so much so that he actually fell into a dark place after leaving PayPal. He didn’t fully find himself until years later, when he rediscovered his passion for the “hard, valuable, fun” problems of fintech. Now, Max runs another billion-dollar company: Affirm, a “buy now, pay later” service that’s transforming how we purchase things on credit. This is the second part of a two-part conversation with Max; to hear the story of PayPal, be sure to listen to part 1!  See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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Airbnb.ca.ca. As we were brainstorming ideas, the first filter I would apply is what is sort of gut-wrenchingly difficult that just people are willing to go to the ends of Earth to figure out. And I said, credit scoring is such a gnarly problem. I still brace for impact every I hand my credit card over because who knows, they might cut it up and bring it to me in two pieces because my credit is so bad. And it was sort of this like, uh, that's really hard. There's a lot of people like me who screwed up in college and probably would like to buy things using credit, but have these horrendous triple digit rates they have to deal with. So that was the jump off point. And we went to work feverishly.

Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built. I'm Guy Raz, and on the show today, how Max Levchen regained his sense of purpose after losing himself in the long shadow of PayPal and eventually built a firm, another multi-billion-dollar fintech company that's changing how we buy things on credit. I love every conversation I have with founders for this show. I learn so many things from each interview. And as a team, we spend a lot of time.

trying to find founders who've built brands that have had some kind of wider cultural impact. But most importantly, we look for founders who are willing to be open, because really what I'm asking each founder is to share his or her story in the hope that you, you the person listening, will benefit from it. And in some ways, Max Lovechin could be the poster child for this mission, in part because Max is obsessed with solving hard problems, So much so, he named his tech incubator HVF, which stands for hard, valuable, and fun. Not only was he a key founder and developer at PayPal, but he went on to have a hand in the founding of Yelp, Glow, which is a suite of apps around fertility and pregnancy, and now a firm.

It's a platform that allows you to buy millions of products by splitting up the payments into equal installments. This is one of those rare how I built this episodes where the interview went on for such a long time, and the interviewee was filled with so many great stories and insights that we broke it up into two episodes. And if you missed last week's episode, please go back and start there before continuing with this one. Last week, we heard about the origin story of PayPal and all the characters who helped build it, including Reed Hoffman, Peter Thiel, and Elon Musk. PayPal eventually sold to eBay for $1.5 billion. But after walking away with a significant chunk of money, Max was bored.

He wasn't going to sit on a beach for the rest of his life. He needed a new hard problem to solve. And so he started to explore. He first went down the social media rabbit hole with a product he built called Slide, before he landed on a new idea, an idea to make it easier for people to buy products on your own. credit without punishing interest rates and late fees. Over the past 10 years, a firm has grown to become one of the country's most highly rated brands in what's known as the buy now, pay later

sector. But for now, let's pick up the story where we left off last week. It's around 2002, 2003, and Max has walked away from PayPal with a reported $34 million. But he's having what he describes as the worst year of his life. He feels ruddered. He's just sitting around his apartment in his pajamas and waiting for something to happen. And to make matters worse, his then-girlfriend Nellie has just broken up with him. Yep. She basically said you're insufferable, go figure out what you want to be. I'm pretty sure we're going to get back together, but you're impossible to be with,

go away and be on your own for a while. Did you ever want to kind of be a 27-year-old with some money and, you know, get an awesome car and get a great place to live and just kind of blow some cash. Did you, did you ever do any of that? I attempted a poor excuse for that right after she broke up with me. I always wanted to live in a loft. Somehow I was obsessed with this idea of extremely high ceilings. So I got this loft south of market in San Francisco and I decided to learn how to DJ. I think I was trying to call myself DJ irate. I'll leave it to the reader to understand what that meant.

But I took a bunch of lessons, got some equipment, and then started inviting my nerdy PayPal friends to come to my loft and have dance parties. And I had like two or three. And then the neighbors complained. And I was like, wow, this is quite a different level of misery. Probably shouldn't be doing this. And then I decided this whole thing was kind of silly.

and I stopped. No shame. We've all done things in our youth that, you know, are important. You need to do those things. You need to live those experiences to be able to reflect on them. But it sounds like one of the things that you actually did do at that time was to use some of your money to create like an incubator, right, called MRL Ventures. You did this with, I guess you got some backing from Peter Thiel. Yeah, exactly.

So right around the DJ phase, I realized that basically the only way out of the pit of despair was to work. I wasn't going to be happy with just more money or cars or anything really. And I was missing my girlfriend desperately. So I was sort of like, well, I need to return to some kind of notion of what I was when she thought I was okay. And I basically said, well, kind of what's the essence of work for me? Like I can write code, but I don't seem to be motivated. and I can brainstorm product ideas, but it just nothing's on the whiteboard, what's going on. And I sort of went back in my mind to the earliest days of PayPal, and sort of the happiest moments

was Luke and Kenny bought all these really cheap whiteboards, and we would just fill it with ideas, and some of the ideas were completely insane, but that was like intellectual fountain of just craziness and creativity and cool. And so basically I decided what I need is to rent an office that I could mount lots of whiteboard on the walls and just start brainstorming and bring in some people that I love brainstorming with and something good will come out of it. And so it was less a formal incubator and more of a, I need to pack a room with brilliant minds and something will happen. And as we started doing this, it actually very, very quick that cool ideas started to appear and it's like, wow, what I really need is a structure and maybe some engineers

to start prototyping things. So it evolved as opposed to what's created. So you got some office space in Soma, and we heard about this when we did our episode on Yelp with Jeremy Stoppelman, who you had met through the merger. He became like one of the people that you brought in to come up with an idea. And he had this idea for like a review website. When you heard that idea was immediately in your mind, you're like, yeah, let's do it. This sounds great. You know, let's go for it. Yes, actually.

This may be the only time in my life that I had sort of jumped off a clip. without checking if there's water. So I had already gotten back together with then-girlfriend, now wife, who had graciously took me back after, I think we stayed apart for maybe six weeks, by the way. So this was not like a true long separation or anything. But my spirits were suddenly very much up because the love of my life was willing to have me again. And I was coming to work and I was brainstorming and my whiteboard was filled with ideas. and Russ, who was my chief architect at PayPal, and Jeremy, who was my VP of engineering at PayPal, were hang out in the space and brainstorming all the time. They're kind of in this corner together

talking about all these various ideas around local search, and they pitched me on what became Yelp. And entirely on a whim, I basically said, I will buy as much of this company as you'll sell me for a million dollars. And I don't think I've ever done that before or after. Yeah, it was a great, great fortunate decision because I think you got about 11% of the company. By the time of the IPO, yes, but in the moment it was much more since there was really nothing. Meantime, this incubator was also a place where you could come up with your own new idea. And the idea that you eventually land on was a company called Slide. For people who don't remember what it was, can you just briefly describe what Slide did?

It did a lot of things. They're in license problem. The very original idea was this realization that I had that content online will start to become more like TV, where you do nothing and just content washes over you. And this is before YouTube. So this idea of video on demand on your desktop just wasn't a thing yet. And video, by the way, was very, very expensive to stream and to post and to encode. And so I thought, all right, so video isn't a thing yet. and maybe it won't be a thing for a while.

But what's the closest thing to a video that people could interact with it the same way they interact with TV where you get news and you get content and you get beautiful images and maybe ultimately get advertising and that's how you monetize it. And so I come up with this idea of a kind of an application

that sits on your desktop in a corner, like sort of a tape that just scrolls images of things and goods and advertisements and stories and news. And you get to configure it. And it was inspired in a way, by a much earlier company that died in the dot-com crash called the pointcast. I remember obsessing over what pointcast was and what it did wrong, what it did right.

And eventually I decided they did nothing wrong. They were just too early. So your idea was basically to create a way to share photos and videos that was going to be easier and sort of nicer and sort of more user-friendly. Yes. It was primarily about personal photo sharing. So it was very clear that regular people, people that kind of don't really care about cryptography and complex problems are going to start

flooding onto the internet. And I'd start as well, if the world of the internet becomes suddenly very social, there are all these humans that are emotional, what will they do? What will they need? They're all going to just follow the seven deadly sins because that's what humans do. We're all wired to transgress in sinful ways. And so I wrote down the seven deadly sins and said that my motto will be one startup for every deadly sin.

I remember reading or hearing the quote, vanity is the devil's favorite sin. So I thought, well, what does vanity look like online? It has to be media sharing. It has to be photo sharing, has to be video sharing. And so the slide was very much invented through this sort of intellectual, rigorous attempt to figure out what will people do once vanity becomes the dominant behavioral force online. Yeah. I mean, remarkably prescient because that, that of course did happen, but probably you were just a little. bit too early, right? Because I was thinking about this just the other day, looking at Instagram,

and so many Instagram accounts are just people taking photos themselves, right? Social media is really, I mean, something we would have called vanity a few years ago is just normal now, right? Yeah. To call it vanity is almost weird. People would be like, what do you mean? It's vain for me to put photos of myself on my account. That's what everybody does. But you were a little bit early on that. Yeah, probably a good decade. Yeah. What was it about this idea that appealed to you? I mean, this is very different from what you had been doing, not just a PayPal, but just like it was different from your interests and like cryptography and just like really intense like mathematical problems. And this is like consumer photos. Like what was it

about it that appeal to you? I think you just answered the question yourself. Part of my existential crisis was I was super successful building a payment system at 27. And all I knew was how to secure things, which mostly you secure money. And I knew about payments and I knew about banking now and I knew how to fight fraud and all kinds of really intense things. How could I top that? In my 30s, how was I going to build a better PayPal? And really, from what I've read, it sounds like you were motivated by this idea of like you wanted to make something that was bigger than PayPal. Because to you, PayPal was, but you could measure it by a number, 1.5 billion. And in your mind, it wasn't about the money.

It was about surpassing that number. So you could feel like you created something on your own. PayPal wasn't your, like the peak of your career. Yeah, that was certainly a significant motivation. I'm not sure I was explicitly comparing it in terms of the sort of exit number. but I definitely thought of how many people will use this thing and how valuable would it be for some definition of value? And so absolutely it was a, how can I want up my younger self?

I read that around this time, you were, again, you were quoted as saying, I don't know what I would do if I couldn't start companies. I'd probably think about slitting my wrist. Oh my gosh, Max. But really, I mean, that was, and to some extent is, as we will continue to talk about your story, is your motivating force.

There's a restlessness, right? Like, you do have this restlessness. Yeah. Starting companies is clearly the thing that gets me going. All right. So Slide becomes your idea. And did you go out and raise money for it right away? Pretty much.

I think the original idea was that Peter and I funded it And then fairly soon thereafter, I sort of went out and raised a quote-unquote proper financing around. And this time, I had a brand name to bring to Sand Hill Road. So lots of San Hill Road firms were excited to participate, and we were off to the races. Slide was a, can you tell me what it was like as a consumer? How would my experience be with it? What would I do with it? So by the time Facebook started really growing explosively and MySpace was still a thing,

we'd really kind of nailed this one use case. It's exactly as you mentioned, most photos people post online are of themselves. And so we had basically evolved the product to be just a really beautiful way of showcasing your own photos. And instead of sharing them to a specific individual, you just broadcast them to anybody who would come to your MySpace page or your Facebook page or anywhere. So it was basically a little scrolling self-advert showing off your photos. And eventually we added things like photo effects.

and stickers and all the things that you see today in photo sharing software just 10 years earlier. By the way, at its peak, how many employees did you have at slide? 128, if I remember correctly. And I mean, I think at one point it was hitting like 150 million users a month. That's right. I remember noticing that we were something like the seventh largest property on the web. I'm curious, having gone from running PayPal, which was about, you know, financial transactions to a really sort of much more consumer facing site that was more about fun,

right? Did you enjoy it? Did you find your passion for it? So the honest answer is I loved the team that I built, but we had some pretty serious challenges throughout, there were multiple sort of realizations at my part that the culture wasn't going the way. I wanted to, at one point, I had to ask a couple of people to leave because I thought they were just creating what is now called toxicity in the team, blowing the company up from within.

And throughout the whole thing, I felt like a fraud. I never played video games growing up. I was not really into photography. It was not a photo shareer. And so this idea of building entertainment products was this sort of mask eye too con. And in some ways, I was using my own product in real life. I was putting sort of a happy face sticker on Max Lefj. I mean, it's interesting because I would imagine that you were,

able to attract really great engineers and a great team because of your reputation. But what were the problems that had began to unfold? Probably the most important learning from the problems is that this is going back all the PayPal, but PayPal was this unbelievably combative, kind of about truth seeking by any means necessary, almost culture. And when I left, I thought to myself, you know, next time around, I wonder if we have to fight so much. Maybe it's better if we had a little bit more love all around. So as I was building a slide, I over-indexed on this idea of, hey, we really have to have just a lot more collegiality. And that works really well if you are doing great as a company. But inevitably, every company goes through ups and downs, and sometimes downs

take a long time and you go through the pit of despair for a while. And in that moment is when all the veneer is stripped, you know, sort of all the superficial, you know, such a nice guy and, you know, gosh, I just really enjoy spending my time with you. It goes away because you start to ask yourself, whose fault is it? And why are we not doing well? And the professional emotion, if you will, you need at that time is respect for your partner's abilities. You don't actually need to feel like that person is an amazingly nice guy. The key thing is, I know you will be, your foxhole holding your position sort of almost like a military level intensity. And as slides started unraveling a little bit here and there, I noticed that there are all these people

who are extremely loving towards one another that would, I would find out they didn't respect each other at all. And I sort of had to start asking the question, all right, well, if you don't respect this person professionally, one of you cannot be here. But obviously things are going well enough at slide that, I mean, Google decides to buy it in 2010, I think for around $180 million and you become a Google employee. But I'm assuming when you got there, you did not think you would be at Google for the rest of your career. I knew that I would leave and start another company at some point, but I certainly didn't

enter the campus thinking, hey, this is a very temporary thing. I was actually quite genuine. I'd never worked for anyone for more than a couple of months, and that was one time at eBay. And so I sort of thought, all the stress of being a founder, maybe I don't want it. It turned out I did. You became a vice president of engineering at Google. I mean, it's a pretty important job. How did you find the environment there?

Did you find it liberating not to have to be awake at 3 a.m. stressing out, or did you find it actually stifling? I think for a little while I was suddenly worry-free, but I found myself bumping into some of the corporate walls reasonably quickly. And by the way, I don't mean to sound like an advert, but there's lots of good things to say about Google and none of it is in any way disingenuous. But for an entrepreneur, you get reminded you're an entrepreneur when you're not trying to run a company the most. You start realizing that sort of rules are written and you kind of have to follow them because you're in someone else's backyard. And eventually, I sort of said, look, I think I'm probably better off on the outside stressing it three o'clock in the morning.

I think you lasted at Google for about almost exactly a year from an August to an August. That's right. I actually knew a little bit earlier. Sundar, who's now, of course, the CEO of the whole thing, was singularly the kindest person I met at Google. When I was sort of lost in the corporate wilderness there for a little while, he took me on walks and talked to me and let me sort of pour my confused heart out. And so as he was counseling me through what's really going on in your head, man, I pretty quickly, maybe six months and figured out like this probably isn't going to work. And then I chatted to his Larry and Sergey and they sort of said, look, before you, you know, hang up your cleats, poke around at Google X. Look at all the really amazing stuff we're doing.

Like, surely there's something intellectually interesting that you can try to find. And I did that for six months. I honestly looked for something cool and maybe more autonomous and independent that I could do. Were they disappointed when you, I'm sure they were when you, when you said you were going to step down? Yeah, I don't think they were, they were pleased. Was that a hard conversation? Yeah. It was honest. I mean, I, I sort of said, look, I have a road. I have to go find again. Meantime, so you leave Google in 2011, but there's other things going on in your life. I mean, For one thing, you're still very involved with Yelp. I think you'd become the chairman in 2012, but you still had the incubator, right?

Yes, I kept my fingers involved in a fair number of pies, and Yelp was certainly a very important one. All right, so 2011, you are now, once again, out in the world trying to figure out what you're going to do. And from what I understand, because the first time this happened, it was a rough period. I mean, personally, because you were lost. You didn't really know what to do. Did you go back into a slump? I mean, this time it was different.

You're married. You've kid. I think you had at least one kid at that point. We had the second one just as I was leaving Google. So this is the same wonderful Nellie and now plus two kids and a puppy. and my primary thought at the time was, hey, last time I ended up almost losing everything. So I am definitely going to go start some company or do something to keep my brain occupied. Otherwise, I run the risk of being told to move out again.

And so I was actually very, very keen on finding something interesting. And in fact, I was like literally talking to people to start brainstorming maybe the day after I walked out of Mountain View for the last time. But I also decided I would take longer figuring out what I want to do because throughout slide for sure. And even throughout Google, Nelly would tell me, I know you're going to start a company. Next time around, just sit back and ask yourself, what would make you happy? What is the thing that you're really meant to do? And what was the kind of thing that made you happy that you thought I need to do?

I didn't know. and most of 2012, I spent kind of brainstorming completely random ideas, but the probably most important output of that time, I wrote this essay for myself titled Hard, Valuable Fun, where I try to sort of explain what is it that drives me? Like, why do I do the things that I do in sort of this rigorous self-reflection process? And the very shorthand is, it has to be difficult. I'm an engineer at heart. I like solving puzzles. And if it's not hard, I just don't really value it enough. And going all the way back to PayPal, one time I was working, you know, very late at night, I was working on some project outside of PayPal at the PayPal office. I was still kind of had enough time to tinker.

Peter walked in and he asked me, what are you working on? And I'd sort of describe whatever program I was trying to hack together. I said, that sounds really difficult. So yeah, it's really hard. But is it valuable? How valuable? I don't. I don't. no, it's just really fun. So, well, hard is not always valuable. Valuable is typically hard, but the inference doesn't work the other direction all the time. And it sort of really stuck with me. Like, that has such an easy way of explaining why a lot of puzzles are kind of worthless.

And so it's still important for me to build these really, solve really hard problems, but they have to be valuable, sort of a nod to Peter Thiel. And then I said a whole paragraph on what is fun for Max? and I don't really think it's photo sharing and I don't think it's social games. That was sort of this moment of truth that was like, oh, I know the class of companies I'm going to start and then I showed it to Nellie

and just said you finally figure yourself out. And that was a liberating moment because I then said, well, it sure sounds like something in financial services again, but I'm definitely not going to do that. She said, just give yourself permission to go build something that's like another PayPal but better. When we come back in just a moment, how Max starts to build a business that makes it easier to buy things on credit.

A need he identifies after discovering that his own credit rating is pretty terrible. Stay with us. I'm Guy Raz, and you're listening to How I Built This. Hey, welcome back to How I Built This. I'm Guy Raz. So it's around 2012 and Max Levchen is hammering out an idea for a new fintech company. And he starts to formulate a plan around this very embarrassing thing that had happened just after he left PayPal. He was a multi-millionaire at that point, and he had decided to buy a new car.

So I fly down to L.A. and try to buy this beautiful, one of the very first hardtop fully retractable convertibles, which was probably my most coveted possession in my late 20s. And the dealership said, oh, you know, cool, you're the PayPal guy. I saw you guys went public, you're still going to have to pay cash because your credit that I just checked is terrible. I don't know what you did, but my God. And I'm standing there next to Nelly and next to Luke, one of our PayPal co-founders and sort of my, you know, I'm slowly shrinking and my face is probably purple with embarrassment. And it was not the only. In fact, it was one of many, many experiences where my credit would get checked.

And it would be this moment of like, oh, God, please don't say out loud that I came to the US as a 16-year-old. until my first credit card on campus, which I promptly went delinquent on. I had no record at all. I had no idea how many of my payments were in college, and my FICO score went through the floor. And it's been a decade, and I took a company public, and it still doesn't matter. I still look like a deadbeat to the rest of the world because of my credit record. So I guess you start to think about how to solve that kind of problem, like somehow, sort of how to make it easier to presumably to buy things on credit or to build up a good credit record. As we were brainstorming ideas, the first filter I would apply is what is sort of gut-wrenchingly difficult, you know, a real problem in the world that people are willing to go to the ends of Earth to figure out.

And I was chatting with Nathan, one of my closest friends from college days, who was my head of risk at PayPal. He went on to co-found Pallantir with Peter Thiel, yeah. And I said, I know credit scoring is such a gnarly. problem. I still brace for impact every time I hand my credit card over because who knows, they might cut it up and bring it to me in two pieces because my credit is so bad. And Nathan said, you know, what's really stupid

is that at PayPal we had access to all this amazing purchasing data. We never once tried to use it for credit scoring. We did so well with anti-fraud and all this data-driven risk decisioning. Credit is kind of the granddaddy of them all, And it's actually sort of the consumer-facing part of risk decisioning, can you and will you pay your bill if I gave you money up front and asked for it back later? And it was sort of this like, uh, that's really hard. There's a lot of people like me who screwed up in college and probably would like to buy things using credit, but are either priced out or have these horrendous triple digit rates they have to deal with. And it seems to be kind of stuck in 1970s.

And so that was the jump-off point and we went to work feverishly. So you started to ask yourself, can I solve this problem, right? Maybe there's a way to create some kind of mechanism to evaluate consumers in a different way. That's right. And this idea that there must be other forms of figuring out what do you really are like as a financial acture beyond your 10-year-old college record or lack they're off. And then fairly quickly, we realize that fundamentally what people really want is not some abstract better credit score. They want to buy things. They don't want to be confused and they don't want to be scared by the cost if they're paying over time. All right. So you start to ask yourself, how do we solve this? And how do you solve it? I mean, banks and lenders have a system.

They evaluate your credit score based on a variety of factors, whether you pay your bills late. you know, if you've missed a rental payment or mortgage payment or, and that's basically how they figure out whether you are going to predictably pay them back. And that has more or less worked for banks, not great for consumers, but there's a reason why that works because it's risky to lend money, presumably. So how are you going to solve that? The short answer is there's no short answer. The most important thing we realized very early on. was the problem isn't so much with the credit score, although there's plenty to improve thereon, but with the tools available to consumers to borrow money.

This will sound harsh, but I generally believe what I'm about to say. So payday lending is a well-understood, awful thing where you have very high rate, compounding of interest into principle, an ability to extend your payment period essentially arbitrarily so long as you're here to kind of feed chunks of money to the lender. You know, that's the anathema. That's the worst thing in the world. That's the payday lending. Now, reduce the rate by, let's say, one zero.

And you're describing a credit card. The two products are basically identical. You can revolve more or less in perpetuity. The rate's lower, so it looks a little bit nicer, but it's still an exponential curve. And the most common way to borrow money in America is a credit card. Yeah. So one of the key insights for our firm was Gen Z and millennial generations, which are now make up more than I think half of American spenders are starting to actively ask the question,

is this the best way? And the fairly loud answer is, no, it's not. It's a lot nicer to say, hey, I'm going to borrow X dollars. It will cost me additional Y dollars. Or maybe it'll cost me nothing because the merchant that really wants me to buy, whatever the thing that I'm trying to buy, is prepared to pay my interest for me. So maybe there's really no upcharge, no interest. And that's it. And then I know that after six payments or 12 payments or 18 payments, whatever the good number is for me, I am done. And if I'm late, there's not going to be gotcha like, ha, late fees. So we said, like, let's not do late fees and let's not compound interest into principle.

And sort of just stripped out all the payday lending like yuck from payments. So, all right, just to explain, what you're describing is known as BNPS. which is buy now, pay later, right? And the company you launched, a firm, is one of several companies in this space right now. That's right. But anyway, in the case of a firm, I guess the way it works is you make these short-term loans to consumers and there's no compounded interest and no late fees. And I guess when you launched, you were trying to be like an alternative to normal credit cards, right? Yeah. Big part of credit. cards is that there's some gargantuan limit and you know you're encouraged to fill up your bucket of

debt and never really fully empty it the product we built was all about hey borrow a hundred dollars paid back in six weeks be done if you need to borrow another hundred let's have that conversation separately and it might unfortunately result in us telling you we don't think you can take on another hundred dollars and as i as i understand it right from from looking at it um the loans can work in different ways, right? Like, you guys do some loans where the customer does pay some interest, and then there are other loans where the customer doesn't pay any interest at all. Like, like basically, if you bought a $100 pair of sneakers, you would just pay it in four installments of $25. But what I wonder is how do you assess risk, right? Because like when I go for a home loan,

they look at my records and my scores, but when you're just looking at a random new customer, how do you assess whether they're going to pay a loan back? It's not that different from getting a rate for a mortgage, except we do it in a matter of seconds. And you use different data points? So we don't look at traditional credit scores since we founded the company with a belief that we can do much better. But we do look at the data that goes into that score. In some ways, we can think of us almost computing a different score using much of the same data plus a bunch of other data. Right.

At the limit, we literally say, hey, we can't figure out how to reason about your financial situation. Like maybe you are, you know, what's called a thin file where your information is there, but it's just not enough of it. Would you please log into your bank account right now? We'll look at your cash flow and we'll actually decide whether we think you can carry this amount as a monthly obligation. And we'll honestly tell you. And obviously it has to happen fully automatically. no human can look at us data and calculate it quickly enough. Okay, so essentially, you're basically using artificial intelligence to underwrite pretty much every

alone you do. But like when you were pitching this model to investors, did they believe that that approach was good enough to mitigate the risk, that, you know, that you'd make such smart lending decisions that you wouldn't need to charge late fees or things like that? You're absolutely right. Every investor I talked to, and for a while, I'd sort of funded it myself because I've been fortunate and people didn't really believe that this is possible. But every time someone would ask me, like, how in the world are you going to do this without late fees, without deferred interest, without all the sort of natural, quote unquote, natural. I'd said, look, I think we're going to lose a lot less money because vast majority of people are going to pay us back. But if there's no late fees, right, and you don't, it's just a straight, you know, four payments, what's the disincentive to just not pay on time? Well, for one, if you're delinquent, you can't transact again.

If you are what's in the industry is evocatively called a sloppy payer, which is someone who generally pays their bills, but are almost never on time, the normal financial industry behaviors say, great, you're a fantastic revenue opportunity. You have the money. You just don't care about being on time and we'll charge you a fee for that. And so instead of doing that, we basically said, look, we will go out of our way to remind you and remind you and remind you and remind you. We'll send you multiple notifications through multiple channels through our app, through

a text, through an email. And we'll also give you an opportunity to set up a fully automatic, kind of a timed withdrawal from your bank just so you're not late. And for vast majority of people, this is more than enough and that they are on time. But if something happens and you're unable to make the next payment, that's fine. But that prevents you, generally speaking, from transacting again until your current or at least until we understand what's really going on. All right.

I want to dig into this from the merchant's perspective because from what I understand, when a consumer makes a transaction with a firm, the merchant pays a fee, right? Like, I mean, whether it's a 0% loan or even a loan with interest, the merchant is assuming some of that cost, right? So why would they even go for that? Like, what's in it for the merchant? The reason the merchant finds that compelling is because without a firm, this transaction most likely would not have happened. Because the consumer might not have a credit card. Yeah, or chose not to do it.

About half of the United States adults are revolving on their credit card right now. And the revolving is expensive, and it gives you extreme anxiety if you're revolving for a long time on a lot of money. And so putting more onto your credit card for those people is a very, very stressful event. And the choice they have is, well, I'll buy it anyway, you know, the damn of the interest rate. Or, you know what, I'm not going to buy it. The firm being the third choice was a really powerful enabler. People said, okay, so I can buy this thing. I will pay no interest or some number of dollars on top of the retail price.

But then I'm entirely out of debt for this thing in six months or six weeks. That seems like a pretty clear value proposition. So, all right. So in 2012, once you set out to launch this thing, how did you find customers who would be comfortable using it? We were looking for a hack, basically a trick to get consumers who are interested in borrowing money to pay for things over time without having to spend marketing dollars. And so we had a couple of friends that were in e-commerce and literally called around and said, hey, would you consider putting up pay with a firm right now? next to your pay with Visa and Pay with MasterCard. We think there's a whole world out there that doesn't have access to Visa and MasterCard that probably would use us or nothing.

And then the sort of the wow moment was when one of them called me back and said, all right, we just saw a 30% spike in volume as soon as we added your button. When we come back in just a moment, how Max gets merchants to use his brand new payment platform and why he's spent way longer working at a firm than it's. any other job he's ever had. Stay with us. I'm Guy Raz, and you're listening to How I Built This. Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2012, 2013, and Max has launched this new company, a firm, a buy-now pay-later service that simplifies the experience of buying on credit. And at this point, he's looking for some merchants who will sign on to the plan.

The very first one you would have heard of is 1,800 flowers. It was actually fascinating conversation where I talked to to founder CEO there and 100 flowers have been around for quite some time obviously and I thought this would be a what in the world are you talking about and he actually said oh my god this is very similar to what we used to do in the 70s where people

would call us in the phone and order and they'd say I don't have the money right now I'd like to pay later it would say oh no problem you know just write down a phone number of course and come back Layaway. Yeah. Well, layaway, but you get the flowers today. And so kind of a layaway with an instant delivery.

Yeah. But he grasped the idea instantaneously. He's like, yeah, it's great. Let's give it a test. And so it was probably the easiest sale I've ever closed. And having a brand name merchant was a huge enabler. It literally allowed us to say, hey, you know, what? It worked for them.

They're a referensible customer. That's when I sort of started knocking on much sort of larger doors, if you will. And then who was, who were the next one? What were the next dominoes to fall, so to speak? So the next set that we were unbelievably lucky to get were a lot of the online, kind of a new direct-to-consumer sellers of homewares and home workout equipment. Like Peloton revolutionized home workouts. And Casper just completely rewrote the rules on mattress replacement cycle and how you sell it, how you deliver it. And so all of these brands were kind of being born in the.

early teens, you know, the last decade. And we were able to sign up an incredible number of them very, very quickly during 2014-15. So I wonder when you when you got this together and launched in 2014, I mean, did you have to bring in a lot of money? Did you have to have a lot of cash on hand? Or was all of these sort of the interest payments essentially paid by the retailers and, you know, and then in some case as the actual consumer. You guys never, a firm never had to pay any of those fees? Oh, no, we certainly, we certainly did. So when we launched a product, just the very, very first launch with $1,800. So the way the product was just from the cash flow perspective,

as long as you're growing, it's a negative cash flow product, you approve a consumer, they get their flowers, you send money minus fees to $1,800 flowers. The consumer pays you back. First payment is due, let's say, 34 days from the transaction. So for the Those 34 days, you've already paid your retail partners, and you're waiting for consumers to come back and pay you. So at any given time, you are waiting for money to come back, and you need to continuously get more capital to grow the company. So essentially, you had to have the money and have to have the money to pay the full amount to the retailer, minus your fee that they're going to pay you. And then you get the money directly from the consumer. Yes.

So the day we launched, I sort of said, well, we have no way of financing these loans and it's going to be a negative cash flow of business. And so I will put up $100,000 of my own money to front these payments. And if there's any uptake at all, we're going to have to figure out how to scale some sort of a capital program. And I went through sort of a sleepless night thinking, oh, my God, this thing launches and everybody wants it. and my $100,000 will run out and what I do then. So I actually had this moment of angst, like, you know, asking Nellie, like how much more should the left should family be willing to put up? And of course, it launched and nobody cared.

You know, true, true revelation from the world of startup. Very, very rarely does a product launch immediately have this sort of an explosion. Just typically, things don't work. It was crickets. Nobody showed up. Exactly. On day one. So we had to learn how to promote it a little bit, how to work with 100 flowers, to tell

consumers as they're considering their choices in bookcase that there's, in fact, a way to pay over time is available later. But as we started seeing transactions, very quickly, we had to figure out how to fund the actual loan flow. And the way that works, first, you borrow money so you can lend it. You go to bank partners, non-bank partners, and say, hey, here's the financial profile of my product. I would like to borrow from you.

And obviously, I want to pay a lower interest rate that I think is fair to charge the consumer or the merchant on the other side. And the spread will be my fee. And you can imagine scaling that program to larger and larger and larger. And eventually you effectively issue bonds and those become tradable. So how fast did it, I mean, did you feel like a firm once you got through that initial period with 1,800 flowers? how quickly before you convinced other big retailers? Because now it's pretty much everywhere. I think it's on Amazon now, right?

It is on Amazon. The first major kind of break retailer for us with Walmart, and it took a long time, and I got to know some of the folks in the senior management team there. And the thing that was pretty amazing is how similar their thought process was about the good, and then not so good of the financial products. I was struck by just how aware they are of their customer

and how these financial products can be really harmful. And so we had sort of a meeting of minds long before we were official financial partners. One of the things that's been really interesting about a firm is, and it sounds like you very sort of intentionally thought of Gen Z millennials as your consumer base, right? Is it fair to say? There's a fair amount of Gen X as well, but it definitely skews very young. I was looking at some just kind of broad data around a firm, and it has a very high use rate among people of color. I mean, this is obviously always sensitive to talk about, but from what I understand, it's been particularly among black consumers, has been very welcome.

I mean, it's a fact that credit ratings can disqualify. disproportionately negatively affect people of color in the United States. And payday lenders in particular have been particularly predatory in underserved community. So yeah, I mean, this is an option for lots of people who didn't have another option before. That's right. It is a natural consequence that we don't look at traditional credit scores and traditional credit data as much. There's plenty of great people across many, many underrepresented groups. by great, I'm not passing character judgment of here, of course, but financially solid footing enough to borrow money and pay it back successfully without the needs for the, for nasty

alternatives. And if you treat them right, they tell their friends, which is true for, I think, any of us. And therefore, these products take off because of their honesty and transparency that we bring to bear. And so I, you know, I would lie. I said it doesn't make me happy. You know, Max, it's interesting. I mean, a firm is, it's a math problem, right, that you're solving here because I'm assuming that you're looking at the math and a firm is a public company.

And so it's, you know, all your financials are open and it's not yet profitable. But you know looking at the math where it's headed. Yes. Is that true? Yes. The probably most important thing about a firm is exactly what he just said. it is a really, really, really cool, big math problem that we're solving. If you look at the unit economics, which is what happens to every transaction, if you

divided the overall dollars in by the total number of dollars transacted, you'll see that that number is very positive. And so over time, so long as we don't spend the excess transactional economics, we'll sort of inherently become profitable. And it is something that we can model. and can see in our future. Because we're a public company, I will stop short of prognosticating

when that immediate future or not so immediate future is, but it is exactly that. Which I guess leads me to my next question, which is running a public company is very different because you are now quarterly earnings reports and you've got to answer your questions from the media and from shareholders. But over the last year,

the stock price has gone from 176, down to, you know, in the low 30s. Does that, does that keep you up at night? Or are you confident enough in the math that you're not worried? I'm not worried. I am very confident in the math. That's probably the thing that I'm most confident in in most, most worlds. The stock price matters for two really important reasons. They're two constituents. So there are people who bought the stock when it was higher than it is right now. And it is my job to try the absolute hardest I have to make sure that they don't feel that they made a mistake. I think the company is an exceptional shape. And so my duty to my shareholders is not lost on me. But the way to do

it, of course, is to build a great company over a long period of time. And so the fluctuations of the stock today or tomorrow is something that I don't really look at to be completely. honest. The second group that I really care about is the employees. And for them, the mission is truly important, but they have choices in their employment. And I need them to believe and I need them to be here and continue building things with all of us together. And so the stock price matters as a indicator of value that we have created for the personal finances of our employees. So that's really important, which is why I care about the stock price, but I care more about building something that five years from now is 10 times more successful financially than we are today.

There's a great, I think, Graham quote, in a short term, the market is a voting machine and in the long term it's a weighing machine. And I like that thinking process. Max, you've been working on a firm now for 10 years. This is the longest you've been at one job. Yeah. Right? In your entire career, 10 years. by a wide margin too, yeah. Yeah. I mean, if I'm looking at you, I'm thinking, based on his record, he's restless. He's got to find some new challenge.

He's got to just to live, to survive, to thrive, to be happy. He's going to have to come up with something new. Is that true? A little bit in the following sense. So, I mean, this sounds weird to some people, presumably, extremely, prosaic, but financial products is like a playland for me. I feel embarrassed saying that out loud, I guess. But the ideas that are sloshing around in my head, the things that need to get built, you know, needs to get built tomorrow, most of them these days are really in financial services

because everywhere I look, every sort of rock we turn over as we run a firm, there's like, oh my God, that clearly needs to get reinvented and done better. And so the opportunities that I see these days are just predominantly in my own industry. So how do I stay fully engaged and fresh at a firm if I really am going to sell shares to the public and commit to them, which I certainly have, that I'll be here a long time. So we organized in some ways sort of the incubator 3.0 inside a firm. And there's a team called ZTS, 0 to 60, fortunately, not just me, but a bunch of other pretty smart people who are constantly coming up with ideas that.

that we're incubating inside a firm and launching. And the way I describe it to my investors, if you look at any successful startup, not just a firm, it's always a S-shaped curve, where you start with nothing, and for a while it's just nothing and nothing and nothing. And then something clicks, and then it goes vertical,

and you just keep going up and up and up. And then eventually it has to slow down as you saturate the market, as the market becomes more and more competitive, as consumer preferences change. Businesses don't go away, but the growth curve slows. And we're lucky to have hit on a giant opportunity in a giant market.

So a firm, as it exists today, is very far from asymptoting and turning into an S-shaped curve. But if I'm going to be here 10 years from now, I'm going to be here 20 years from now, I better have another S-curve type product in my pocket. And so a lot of what I work on these days, sort of what gives me greatest happiness, really, is experimenting within the ZTS team, building new ideas. And most of them are going to go exactly the way of the dodo as any other startups. But even if one of them becomes another S curve, that propels a firm to the next big thing. It's purposeable to be fulfilled. So I'm pretty sure I'm exactly where I need to be or quite sure I'm exactly where I need to be. So I'm not, in fact, restless.

The restlessness comes from, gosh, I have to do another really, really important management meeting. And I'd rather tinker with ZTS. I've been thinking a lot about the story you told of when you met Peter Thiel. You went to this lecture that he gave in front of four or five people. And I think that was a very lucky moment for him. And I think it was a very lucky moment for you, too. And I think both of you had you not met, would have figured something out and been successful. You were motivated.

You came out there and you were clearly a talented computer programmer and mathematician. So there's no doubt that you would have figured it out. But you did have those moments like going to that lecture at Stanford and, you know, eventually, you know, being part of PayPal, which is kind of the history of Web 2.0. I mean, all those people who came out of PayPal are hugely influential, hugely powerful for better or worse. How much of your journey and what happened to you do you attribute to those lucky moments and how much do you think have to do with just how hard? you work and in the grind and in your intelligence. It's a great question. I've heard you ask this before and I thought, what is my answer and came up with very

little canned anything? You know, I think the role of luck is vastly underappreciated. I think the action you take when an opportunity appears is yours. And it's the choice and willingness to take the risk and decision to just go for it and sort of damage to repeatos sort of moment. But if you are unwilling to move or unable to recognize or don't encounter these moments of opportunity, you know, it's probably not available to. And I feel a certain degree of guilt that some brilliant people I know may not have

had some of these moments and they could have been much more successful than they are. And yet, I do think that probably moments of luck appear in front of most of us at some point or another in our lives. And what do you do after, once you see one of those, have one of those, it does come down to work ethic and just willingness to grind and, you know, sleep less and compromise things like work-life balance, which have their own consequences. It's not free and it can be very damaging. But luck is the kickstart. That's Max Levchen, founder and CEO of a firm and co-founder of PayPal. By the way, whenever you're asked to verify you're not a robot online by trying to figure out what those wiggly letters spell, you could be taking the Gaussbeck Levchen test. Only a human

has the ability to discern those letters. Max created that test after PayPal was getting hammered by hackers. That was back in 2002, and the test in modified form is still widely used across the internet. Hey, thanks so much for listening to the show this week. If you want to contact the team, our email address is hibt at id.wondery.com. If you want to follow us on Twitter, our account is at how I built this, and mine is at guyraz. And on Instagram, I'm at guy. This episode was produced by Alex Chung with music composed by Rumtin Ereblewe. It was edited by Neva Grant with research help from Claire Murashima. Our production staff also includes J.C. Howard, Casey Herman, Josh Lash, Liz Metzger,

Carrie Thompson, Sam Paulson, Catherine Seifer, Elaine Coates, John Isabella, Chris Messini, and Carla Estevez. I'm Guy Raz, and you've been listening to How I Built This.