Speaker 1: Welcome to Tech Stuff, a production from I Heart Radio.
Speaker 1: He there, and welcome to tech Stuff. I'm your host
Speaker 1: Jonathan Strickland. I'm an executive producer with iHeart Radio and
Speaker 1: how the tech are You? Listener Gustavo Ricarte asked if
Speaker 1: I could do an episode about the fintech company, a
Speaker 1: firm which was founded by Max Levchin, one of the
Speaker 1: co founders from PayPal. In fact, I would say this
Speaker 1: episode is going to be at least as much about Max,
Speaker 1: possibly more, but a firm will play a huge part
Speaker 1: in it too. And you know what, this story has
Speaker 1: some really amazing things in it. There's a lot of drama.
Speaker 1: There's a cameo by Elon Musk, there's an evolutionary step
Speaker 1: in artificial intelligence, and we're going to start it all
Speaker 1: off with a little nuclear disaster. That's actually not a joke.
Speaker 1: We really are, Okay. So Max Levchin, who is formally no,
Speaker 1: not not former but for mole lead known as Maximilian Rafaelovitch.
Speaker 1: Levchin grew up in Kiev in Ukraine. Now back then,
Speaker 1: when he was a child, Ukraine was part of the
Speaker 1: United Socialist Soviet Republic or USSR. They gave the Soviet Union,
Speaker 1: and in nine on the outskirts of a city called
Speaker 1: trip yat ninety miles north of Kiev, the Chernobyl nuclear
Speaker 1: power plant experienced a meltdown. And perhaps one day I
Speaker 1: will do a full episode about the Chernobyl disaster, though
Speaker 1: it's it's kind of hard for me to justify doing
Speaker 1: that because there's already an incredible mini series that aired
Speaker 1: on HBO that gives amazing insight into what happened and
Speaker 1: why the disaster was as catastrophic as it was. The
Speaker 1: too long, didn't read version is there was a combination
Speaker 1: of bad engineering decisions and worst bureaucratic red tape that
Speaker 1: made a disastrous situation way worse than it could have
Speaker 1: been otherwise. But suffice it to say that the disaster
Speaker 1: at Chernobyl irradiated the surrounding area, which is putting it lightly.
Speaker 1: Maybe one day I will go into more of the
Speaker 1: technical side of what happened at Chernobyl um and just
Speaker 1: leave all the bureaucratic stuff for that incredible mini series.
Speaker 1: But let's get back to Kiev. So Max's mother, Elvina Seltzmann,
Speaker 1: was a physicist and her job was at the Institute
Speaker 1: of Food Science and Kiev, and specifically she worked in
Speaker 1: the radiology lab, So her lab would receive samples of
Speaker 1: food and then the lab would test those samples to
Speaker 1: check on contamination and pollution, specifically the radioactive kind. I mean,
Speaker 1: some of this was coming from the areas that were
Speaker 1: around nuclear power plants, so this was a way of
Speaker 1: keeping tabs on how things were going in those environments. Now,
Speaker 1: the story goes that in April of nineteen six, not
Speaker 1: long after the Chernobyl accident, which still had not been
Speaker 1: fully revealed by the Russian government, Like, people knew that
Speaker 1: there had been an incident in Chernobyl, but they didn't
Speaker 1: know much more than that, because the government was trying
Speaker 1: to keep a very tight lid on what had happened,
Speaker 1: not just to prevent panic, but also to not let
Speaker 1: the United States know about the severity of the problem,
Speaker 1: because that would be admitting weakness. There were other elements
Speaker 1: as well. Anyway, around that time, Elvina had received a
Speaker 1: loaf of bread from the north of Kiev, so closer
Speaker 1: to where Chernobyl was, and was meant to do tests
Speaker 1: on it, and she saw that it was actually luminescing
Speaker 1: it was lowing in her lab and immediately she knew
Speaker 1: that this was an incredibly severe problem and that the
Speaker 1: incident at Chernobyl was way more serious than what the
Speaker 1: government was living on too, and so she wanted to
Speaker 1: take the opportunity to try and rescue her family. So,
Speaker 1: fearing for her family's safety, she rushed herself and her
Speaker 1: family onto a train bound for Crimea, which is hundreds
Speaker 1: of miles away and presumably in a zone that would
Speaker 1: be safe from the radiation of Chernobyl. By the time
Speaker 1: their train arrived in Crimea, the Soviet authorities were already
Speaker 1: in action. They were using Geiger counters to scan each
Speaker 1: and every person who had fled over to Crimea and
Speaker 1: checking for radioactive contamination. When they scanned Max, the Geiger
Speaker 1: counter went off, and in fact, according to the counter,
Speaker 1: it looked like Max's leg was giving off radiation, and
Speaker 1: so there was a very real possibility that doctors would
Speaker 1: amputate Max's leg. There was uh, not a full understanding
Speaker 1: of what radioactive or radiation poisoning entailed, though they were
Speaker 1: getting a pretty drastic crash course in it in the
Speaker 1: so Union at this time, so this was something that
Speaker 1: could have happened. Max could have ended up having a
Speaker 1: leg amputated when he was just a kid. But Elvina
Speaker 1: had Max taken off his shoes and when they scanned
Speaker 1: him again, the Geiger counter didn't go off, but it
Speaker 1: did go off over the shoes, and it turned out
Speaker 1: Max had stepped on a radiated thorn from a rose
Speaker 1: bush and the thorn had stuck into issue and that's
Speaker 1: what was tripping the Geiger counter. That is a heck
Speaker 1: of a childhood memory. Now, just so y'all know, I
Speaker 1: am only lightly older than Max, like literally by a
Speaker 1: couple of weeks. I am older than Max. I cannot
Speaker 1: imagine having had that experience as a child. Now. Max
Speaker 1: was also really interested in computers. He had been programming
Speaker 1: on things like calculators. He had designed programs on paper
Speaker 1: because he didn't always have access to an actual calculator
Speaker 1: or computer. He did have the opportunity to work on
Speaker 1: some computers when he would occasionally help his mom in
Speaker 1: the food science lab, but the family didn't own a
Speaker 1: computer of their own. In as the Soviet Union was crumbling,
Speaker 1: his family immigrated to the United States Because in the
Speaker 1: Soviet Union, which was rapidly deunionizing, inflation was out of control.
Speaker 1: The money was starting to become like completely valueless, so
Speaker 1: this was a move for survival. They moved to the
Speaker 1: United States, and he had held out hope that his
Speaker 1: family would be able to buy a computer once they
Speaker 1: got to the US, but they only had a few
Speaker 1: hundred dollars to their name when they arrived in the States,
Speaker 1: and of course they had no established credit in the States,
Speaker 1: so there was really no chance for him to get
Speaker 1: a computer of his own. So the reason I bring
Speaker 1: that up is that, as it would turn out, the company,
Speaker 1: a firm that we'll talk about later in this podcast,
Speaker 1: is designed to help consumers buy things they need or
Speaker 1: in some cases many cases, things they want when they
Speaker 1: may not have the full amount of cash on hand
Speaker 1: to actually buy it. So this story is really kind
Speaker 1: of a fundamental one when it comes to why a
Speaker 1: firm exists. But let's get back to Max for a bit.
Speaker 1: His family settled in Chicago. Max was sixteen, and boy howdy,
Speaker 1: this kid was way more forward thinking than I was.
Speaker 1: So while I was running a D and D games
Speaker 1: and then later on a D and D second Edition,
Speaker 1: he was studying computer science. He attended the University of
Speaker 1: Illinois at Urbana Champagne, and while there he founded several
Speaker 1: companies as he studied computer science. This was in the
Speaker 1: early days of the web. I think of this time
Speaker 1: this is about the time I was finally coming around
Speaker 1: to the Web. I had previously turned my nose up
Speaker 1: at it when I first was exposed to the World
Speaker 1: Wide Web, because I just thought it was slow and
Speaker 1: clunky and that it didn't have the usefulness of something
Speaker 1: like a tel net and FTP servers did. So I
Speaker 1: was very The web is another one of those examples
Speaker 1: of something where I was like, oh, this is never
Speaker 1: going to take off. Clearly, I have a terrible ability
Speaker 1: to see into the future. But le Gin saw the
Speaker 1: potential to monetize a business on the web, and so
Speaker 1: most of his early companies were ways of trying to
Speaker 1: sell advertising space, like banner ads on websites. So he
Speaker 1: was essentially acting as a broker, you know, pairing advertisers
Speaker 1: with websites that are willing to host an ad. So
Speaker 1: he did not invent the banner ad. It's not like
Speaker 1: he's the guy who created that, but he got in
Speaker 1: on the ground floor. Now, most of his companies didn't
Speaker 1: go anywhere, but one of these advertising companies got the
Speaker 1: attention of a larger entity in the advertising business. This
Speaker 1: was a company that was called link Exchange, and link
Speaker 1: Exchange was in turn, only in business for a couple
Speaker 1: of years before it got acquired by Microsoft. It did
Speaker 1: continue to operate under the brand name link Exchange for
Speaker 1: several years even after that acquisition. But anyway, that's not
Speaker 1: really important to our story. What is important is that
Speaker 1: Legend being able to sell his business to link Exchange
Speaker 1: meant that he actually had some decent money when he
Speaker 1: graduated college, and he used that money to fund a
Speaker 1: move from Chicago to California, you know, the tech mecca
Speaker 1: of the United States, or Techa for short. I guess. Anyway,
Speaker 1: he got there, didn't have quite enough money to really
Speaker 1: establish himself, so he crashed at a friend's house, a
Speaker 1: friend who was attending Stanford, and so he essentially grabbed
Speaker 1: some floor space in his friend's apartment outside the University
Speaker 1: of Stanford. And at least the story I read was
Speaker 1: that he would spend his days kind of crashing lectures
Speaker 1: at the university, just kind of coming in and listening
Speaker 1: to lectures, which you know, you could get away with
Speaker 1: with big universities. I mean, a lot of those lecture
Speaker 1: halls seat hundreds of students, so it's not like they
Speaker 1: check you when you come in to make sure that
Speaker 1: you're taking the class. So he was sitting in on lectures.
Speaker 1: And the story I heard was not that he was
Speaker 1: so hungry for more information and wanted to get the
Speaker 1: benefits of a stand Stanford University education without actually, you know,
Speaker 1: enrolling in the school, but rather it was a more
Speaker 1: practical consideration of just getting out of the apartment and
Speaker 1: also getting out of the heat of the day staying
Speaker 1: in a nice air conditioned location while watching a lecture. Now,
Speaker 1: one of the lectures he attended, which really ended up
Speaker 1: being more of a tiny seminar, was one that was
Speaker 1: attended by like half a dozen people, and it was
Speaker 1: led by an entrepreneur named Peter Thiel. And there's someone
Speaker 1: else I could do a full episode about. Levechin and
Speaker 1: Feel met after the seminar, and they chatted and found
Speaker 1: that they had a lot in common. They both were
Speaker 1: incredibly enthusiastic about tech and entrepreneurship, and ultimately they decided
Speaker 1: to go into business together. So they first created a
Speaker 1: company called field Link, which was a digital security company
Speaker 1: and made software that allowed personal Digital assistance or p
Speaker 1: d A s create an encrypted IT folder into which
Speaker 1: the user could safely store data. Quick quick word on
Speaker 1: PDAs or personal Digital assistants. These were devices that were
Speaker 1: smartphones without the phone part. So before smartphones, we had
Speaker 1: these devices called p d a s where you would
Speaker 1: have things like you would store a contact list, and
Speaker 1: you would have maybe a note taking app in in
Speaker 1: that particular PDA, you would have a calendar, you might
Speaker 1: have access to email, like you could connect to a
Speaker 1: network and actually um send and receive emails. A lot
Speaker 1: of these. The way that worked as you would synchronize
Speaker 1: your p d A with a computer. So when you
Speaker 1: would do that, it would load new emails into the
Speaker 1: p d A which you could then read and respond to,
Speaker 1: but it wouldn't actually send anything out. It didn't have
Speaker 1: native connectivity. For a lot of these PDAs. It was
Speaker 1: only when you synchronize with the computer again that it
Speaker 1: would go through and say, hey, here's some emails this
Speaker 1: guy I created or this woman created or this person
Speaker 1: created when they were using this medi a, Uh, send
Speaker 1: those out. And so you might compose an email at
Speaker 1: two PM, but it doesn't go out until six pm
Speaker 1: when you synchronized it with your computer. But PDAs were
Speaker 1: an early hint of the revolution that was to come.
Speaker 1: I mean, obviously when partnered with connectivity features, whether it
Speaker 1: was wireless connectivity to like WiFi networks, or wireless connectivity
Speaker 1: in the form of cellular connectivity, it would completely change
Speaker 1: the world. That's where you know, the smartphone would really
Speaker 1: pick up and and carry that forward. Well, they created
Speaker 1: an offshoot service for this encryption solution that they had
Speaker 1: created for PDAs, and that offshoot was a way to
Speaker 1: transfer money digitally between p d a s where you
Speaker 1: could have someone essentially digitally wire money to someone else
Speaker 1: by connecting the two PDAs together. And they called this
Speaker 1: service PayPal. That service turned out to be the most
Speaker 1: popular aspect of field Link. Theel and Lefin would change
Speaker 1: the company's name, but not to PayPal. They changed it
Speaker 1: to a company called Confinity. We'll talk more about Confinity
Speaker 1: and its evolution toward becoming PayPal after we take this
Speaker 1: quick break. We're back and enter Elon Musk, who was
Speaker 1: more than two decades removed from being the guy who
Speaker 1: said he was going to buy Twitter, entered into an
Speaker 1: agreement while waving due diligence and then said just kidding
Speaker 1: and tried to back out of the deal. At this point,
Speaker 1: Musk was not anywhere close to that. He was a
Speaker 1: student at Stanford and he had founded a company that
Speaker 1: he called X dot Com. Now, like PayPal, X dot
Speaker 1: Com was in the digital money transfer business, though this
Speaker 1: was by linking accounts to email rather than linking accounts
Speaker 1: to a personal digital assistant. Musk feel and left End
Speaker 1: saw two potential pathways that were before them. So in
Speaker 1: one path, X dot Com and Confinity slash PayPal would
Speaker 1: squabble over market share. Both ventures were still very young
Speaker 1: at this point and they could get nasty and potentially
Speaker 1: put both companies at risk because there was another digital
Speaker 1: money transfer service that was on the rise at this point.
Speaker 1: So the worry was that if they tried to compete
Speaker 1: against each other, they both would get defeated by this
Speaker 1: third competitor. So the other pathway was to combine forces
Speaker 1: and to corner the market early on, giving a much
Speaker 1: better chance for success in the long run. So they
Speaker 1: chose option to X dot Com and Confinity would combine.
Speaker 1: They ultimately called the new company PayPal, and the service
Speaker 1: would follow X dot COM's lead, with user accounts tied
Speaker 1: to an email address rather than to a personal digital assistant.
Speaker 1: This would put Levchin, feel and Musk, as well as
Speaker 1: a bunch of others further down the line, into a
Speaker 1: group that would later get the name the PayPal Mafia.
Speaker 1: So this tongue in cheek nickname implies that this small
Speaker 1: influential group would see their power and wealth grow substantially,
Speaker 1: which is true. All three of the folks have described
Speaker 1: so far are billionaires in the Musk, of course, is
Speaker 1: the richest person on the planet, so it is very
Speaker 1: much true that they saw their fortunes rise. Legend served
Speaker 1: as Chief Technology Officer or c t O of PayPal.
Speaker 1: THEIL initially served as chairman and Musk became the CEO
Speaker 1: for a few months, but then THEEL would take on
Speaker 1: the role of CEO as well. Musk would step down
Speaker 1: later in that first year. One of Levchin's responsibilities was
Speaker 1: coming up with a way to prevent fraud a PayPal
Speaker 1: and Levechin and his team came up with a method
Speaker 1: to prevent automated scripts from accessing PayPal services. In other words,
Speaker 1: to prevent bots from being able to log into PayPal
Speaker 1: and to go through transactions automatically, it had to be
Speaker 1: a human being behind it. So the method that they
Speaker 1: they relied on used distorted text that humans would still
Speaker 1: be able to read but a program wouldn't, and it
Speaker 1: was an example of what would later be referred to
Speaker 1: as a capture. Capture stands for completely automated public touring
Speaker 1: test to tell computers and humans apart. And to be clear,
Speaker 1: Legend and his team didn't invent this. They were not
Speaker 1: the first to use this particular approach to kind of
Speaker 1: separate out the bots from the humans, but they would
Speaker 1: be the first to really commercialize the process, and it
Speaker 1: became known as the gal Speck Levechin test. Galsbeck in
Speaker 1: this case refers to David Gausbeck, who served as a
Speaker 1: technical architect at PayPal for about a decade. Now this
Speaker 1: is where that evolutionary step in ai I mentioned at
Speaker 1: the top of the show comes in. Let's break this
Speaker 1: down first. The phrase Turing test is in the acronym capture, right,
Speaker 1: And for those who are not familiar with what a
Speaker 1: Turing test is, the phrase as we use it today
Speaker 1: typically means some form of test to see if a
Speaker 1: human can tell if a respondent is another human or
Speaker 1: is in fact a machine and AI. So the classic
Speaker 1: example is you have a human who sits down at
Speaker 1: a computer terminal and they can type into a chat
Speaker 1: program and they're trying to figure out if the entity
Speaker 1: on the other side of this digital conversation is another
Speaker 1: person or if it is actually AI. And if human
Speaker 1: testers cannot reliably tell the difference, the AI is said
Speaker 1: to have passed the Turing test. Now with a capture,
Speaker 1: it's kind of a reverse of this, and the capture
Speaker 1: itself is all tomate it. So instead of having a
Speaker 1: human administering the test, you have the computer doing it.
Speaker 1: And the idea is to create a scenario where a
Speaker 1: human can easily, at least in theory, pass a test,
Speaker 1: but a machine can't. So back in the primitive days
Speaker 1: of the early two thousands, using a block of text
Speaker 1: and image of text that has some distortion effects would
Speaker 1: be enough. Humans would be able to recognize the swirling
Speaker 1: characters sometimes presented in different colors, but computers, which we're
Speaker 1: looking for more uniform representations of those characters wouldn't be
Speaker 1: able to do it. So to the computer, the the
Speaker 1: lower case are, for example, wouldn't look like an R,
Speaker 1: so the computer would be stumped. It wouldn't know that
Speaker 1: that was in fact an R Now that would set
Speaker 1: off a see saw like relationship in the AI community.
Speaker 1: So computer programmers would create software that would get better
Speaker 1: at recognizing characters, even ones that had been distorted. That
Speaker 1: would mean that earlier versions of capture would become obsolete,
Speaker 1: because the whole purpose of capture is to prevent automated
Speaker 1: scripts from accessing something. And so capture designers would go
Speaker 1: back to the drawing board and launch a new version
Speaker 1: of capture, one that would exploit the limitations of text
Speaker 1: recognition software, for example. Then the computer scientists on the
Speaker 1: other side would train up the next batch of recognition software,
Speaker 1: which ultimately would defeat the newer capture strategy, and so
Speaker 1: on and so forth. From one perspective, you could say
Speaker 1: this was the evolution of computer security, and on the
Speaker 1: other you could say it was the evolution of AI.
Speaker 1: And it's kind of both um and in fact, we
Speaker 1: can see even more uh overt examples of this when
Speaker 1: you're looking at things like you know, you're presented with
Speaker 1: a panel of nine different pictures and you're told to
Speaker 1: pick all the pictures that have, say a fire hydrant
Speaker 1: in them. Well, in that case, not only are you
Speaker 1: UH acknowledging that you're a human by picking out all
Speaker 1: the fire hydrants, you're also empowering an image recognition software
Speaker 1: in the background because you are you're teaching the computer
Speaker 1: systems this is what a fire hydrant is, and this
Speaker 1: isn't So legend has played a part in that evolutionary process.
Speaker 1: In two thousand two, PayPal would hold an i p O,
Speaker 1: which is an initial public offering. Now, this is when
Speaker 1: a privately held company goes into a cocoon and emerges
Speaker 1: into a publicly traded company like a butterfly. UH. Investors
Speaker 1: then can purchase shares of that company on a stock market.
Speaker 1: PayPal made the transformation in February two two, with an
Speaker 1: initial valuation of the company at around eight hundred million dollars. Meanwhile, eBay,
Speaker 1: the web based auction site, had launched its own digital
Speaker 1: payment processing service called bill Point with Wells Fargo back
Speaker 1: in two thousands. So bill Point is the competitor I
Speaker 1: was alluding to earlier, the one that x dot com
Speaker 1: and Confinity needed to be concerned about. So bill Points
Speaker 1: stood as the major competitor against PayPal, but by two
Speaker 1: thousand two. Mid two thousand two, PayPal was on such
Speaker 1: a steep climb that eBay sought out an acquisition, which
Speaker 1: was announced in the summer of two thousand two and
Speaker 1: completed toward the you know, in October two thousand two.
Speaker 1: And the deal would be valued at one point five
Speaker 1: billion dollars, which is um a fair chunk of change.
Speaker 1: I think it was an all stock transaction. However, it
Speaker 1: wasn't like a cash purchase, so PayPal went public and
Speaker 1: it was acquired all in less than one year. Selections
Speaker 1: share of PayPal meant that he was more than thirty
Speaker 1: million dollars richer. As a result of this buyout, things
Speaker 1: moved pretty quickly. eBay's culture was different from Paypals, and
Speaker 1: that was a big issue personally. I've seen that happen
Speaker 1: a lot, so tangential to this story. Once upon a time,
Speaker 1: I worked at a company that did human resources management consulting.
Speaker 1: I won't name them, but I worked for them for
Speaker 1: seven years, and I like to say that I was
Speaker 1: kind of working for the bobs from the film office space.
Speaker 1: But one thing that our company really did was observed
Speaker 1: company culture, particularly in the wake of an acquisition or merger.
Speaker 1: That's because more often than not, there were disconnects between
Speaker 1: the two or more cultures, and these often would become
Speaker 1: the source of friction, frequently in the form of lower
Speaker 1: employee morale and productivity. So addressing culture is important. It's
Speaker 1: also really hard to do now. Whether or not eBay's
Speaker 1: culture rub folks at PayPal the wrong way, I can't
Speaker 1: really say, But I can't say that. Over the following
Speaker 1: few years, more than half of the founding members of
Speaker 1: PayPal chose to leave the company, and ultimately that included Levchin.
Speaker 1: Although he hung out longer than most because he really
Speaker 1: wanted to see a smooth transition over to eBay. Max
Speaker 1: looked around his next opportunity, which apparently was a very
Speaker 1: um traumatic experience for him because he found that if
Speaker 1: he didn't have something really occupying his time, he didn't
Speaker 1: know what to do with himself. His girlfriend at the
Speaker 1: time ended up dumping him because she said that he
Speaker 1: was like a junkie who was going without a fix
Speaker 1: because he didn't have a project to work on. She
Speaker 1: would eventually come back and the two would reconcile and
Speaker 1: and ultimately mary and have kids. So it all worked out.
Speaker 1: But at the time, it was looking pretty uncertain. So
Speaker 1: one thing he did was he had kind of an
Speaker 1: incubator that he designed, a company that's meant to help
Speaker 1: other companies, you know, launch, and within it he developed
Speaker 1: a sort of social media service that other platforms could use,
Speaker 1: called slide Now. Originally, the plan was to create a
Speaker 1: image oriented shopping service, so that when you went shopping
Speaker 1: for stuff online, you would see photos of the things
Speaker 1: you were browsing for and that would make the experience better.
Speaker 1: But it then evolved into more of a photo sharing service,
Speaker 1: and it wasn't a standalone competitor to like Facebook or
Speaker 1: MySpace or that kind of thing. Instead, it was a
Speaker 1: behind the scenes media sharing service that those sorts of
Speaker 1: platforms you know, Facebook and MySpace could actually utilize. They
Speaker 1: were essentially apps that could work within those frameworks. In
Speaker 1: Google purchased slide for somewhere between a hundred two million
Speaker 1: and two dwenty eight million bucks. Uh. The amount actually
Speaker 1: depends upon which source you read, and according to a
Speaker 1: two thousand seven Business Week article, Levchin had previously thought
Speaker 1: that any buyout of less than one point five billion
Speaker 1: dollars would be the mark of failure. So I guess
Speaker 1: Sad Trombone, except Sad Trombone feels weird for a deal
Speaker 1: that was still more than a d fifty million dollars
Speaker 1: and maybe more than two hundred million, depending upon which
Speaker 1: sources correct. Google would later shut down Slide, because of
Speaker 1: course it did. I've done episodes about tools and services
Speaker 1: that Google has introduced or acquired and then subsequently shut down.
Speaker 1: It happens a lot some so that if you do
Speaker 1: create something really cool and Google buys it, you should
Speaker 1: probably resign yourself to the fact that the cool thing
Speaker 1: you made is not long for this world anyway. Legend
Speaker 1: briefly worked for Google, and according to some reports, that
Speaker 1: was the whole purpose in the first place. The Google
Speaker 1: bought Slide not to buy Slide, but to get access
Speaker 1: to Lefjin, and he wasn't really happy there. He didn't
Speaker 1: find that it was challenging him enough, so he left
Speaker 1: the company in pretty short order. He had also invested
Speaker 1: in various other startups along the way, including Yelp. In fact,
Speaker 1: he was the largest initial shareholder of Yelp, and he
Speaker 1: got a new idea for a company, the one that
Speaker 1: would be called a firm. Now before a firm, there
Speaker 1: was HVF. This initialism stands for hard, valuable and Fun
Speaker 1: and it's another incubator. It's the second incubator that lef
Speaker 1: Gin made. And again this is a company that helps
Speaker 1: folks bring other companies to life. So it's a company
Speaker 1: air you can kind of work on a concept and
Speaker 1: work on it on every stage, all the way up
Speaker 1: through the company launching. So essentially, HVF is kind of
Speaker 1: a safe space for companies to take shape so that
Speaker 1: they have the best chance of success when they actually
Speaker 1: go live. So sometimes that might mean sitting on an
Speaker 1: idea for a while because you're waiting or you're actively
Speaker 1: trying to develop the technology that will actually support the
Speaker 1: businesses mission. And maybe that I've got this great idea,
Speaker 1: the tech to make it happen isn't there yet, but
Speaker 1: it's on the horizon, and so I'm using the incubator
Speaker 1: to kind of flesh out my business idea while I'm
Speaker 1: waiting for the tech to mature. In other cases, it
Speaker 1: could mean holding off until you've really nailed down the
Speaker 1: business model for the company, because we've seen that over
Speaker 1: and over where the tech is there, but the actual
Speaker 1: plan on generating revenue isn't and ultimately the company fails.
Speaker 1: So that's the purpose of the incubator. Well, a firm
Speaker 1: would be a company that came out of HVF. The
Speaker 1: concept behind a firm is relatively simple. For generations. Wealth
Speaker 1: in America has been tied tightly to the concept of credit,
Speaker 1: and to build up credit you need to make use
Speaker 1: of tools like credit cards and loans, right, but these
Speaker 1: can be tricky to understand, and for younger generations, stuff
Speaker 1: like credit cards and loans represent a huge scary risk.
Speaker 1: We've been through enough economic recessions we're heading towards another,
Speaker 1: and the idea of having to purchase stuff on credit
Speaker 1: is kind of scary. The threat of insurmountable debt is
Speaker 1: very real, particularly for folks who already have substantial student debt.
Speaker 1: That's why there's this big move to have more and
Speaker 1: more student debt canceled, because it's holding people back from
Speaker 1: being able to engage more fully with the economy. There
Speaker 1: already saddled with such huge debt that they can't really
Speaker 1: think ahead to anything else. It's also a big challenge
Speaker 1: for people who have immigrated to the United States who
Speaker 1: have no pre existing credit history in the US. It
Speaker 1: can be hard to integrate into the system, and so
Speaker 1: there are millions of folks who are left behind because
Speaker 1: they aren't part of the traditional banking and credit system.
Speaker 1: A firm is a fintech company that partners with merchants primarily,
Speaker 1: although now they also have a standalone program, but we'll
Speaker 1: get to that. So what affirm does it is it
Speaker 1: offers a buy now, pay later solution to customers. So
Speaker 1: let's say that you wanted to purchase a new computer.
Speaker 1: Let's say that you're newly immigrated to the United States
Speaker 1: and you want to purchase a new computer, but you
Speaker 1: don't have the scratch to do it. You don't have
Speaker 1: all the money that you would need to buy it outright. Well,
Speaker 1: you might find that the seller you're looking at is
Speaker 1: partnering with a firm, and in that case you can
Speaker 1: take what is essentially a small loan to purchase the computer.
Speaker 1: So it's a loan specifically for this purchase. Then you
Speaker 1: pay back a firm in regular installments. A firm does
Speaker 1: have a bank partner to make this work in the background.
Speaker 1: It's c us River Bank, and there are a lot
Speaker 1: of things that have to happen in the background. For
Speaker 1: this to even be possible. We'll talk about that more
Speaker 1: later in this episode two. Now, when we come back,
Speaker 1: we're gonna talk more about what Affirm's model is like
Speaker 1: and how it does what it does, and also why
Speaker 1: some people have criticisms for this particular model of purchasing.
Speaker 1: But before we do that, let's take a quick break. Okay.
Speaker 1: So Affirm offers small loans to customers, loans that are
Speaker 1: enough to purchase something, whatever it might be, and you
Speaker 1: do that at the point of purchase, where you essentially
Speaker 1: apply for this loan. Affirm promises no hidden fees, no
Speaker 1: late charges. Uh you will if you get take out
Speaker 1: a loan with a firm and you refuse to pay
Speaker 1: it back, a firm can report to you to credit agencies,
Speaker 1: so that does have consequences, but they don't ding you
Speaker 1: for being a little late on your payments. You do
Speaker 1: have to pay interest on the loan, otherwise a firm
Speaker 1: would be writing off a way to make revenue. That
Speaker 1: interest rate, however, varies by retailer, and at least according
Speaker 1: to Medium, it can be anything from zero percent, meaning
Speaker 1: that there's no interest at all. You're literally just paying
Speaker 1: back whatever the cost of the item. Was, or it
Speaker 1: could go all the way up to nearly thirty interest. Now,
Speaker 1: whatever the interest rate is, it means that you'll pay
Speaker 1: that much percentage on top of the final price tag
Speaker 1: of the item you're buying. Right, So you know, if
Speaker 1: it's a hundred dollars and it's a thirty interest, it
Speaker 1: means ultimately you're paying back a hundred thirty dollars for
Speaker 1: the item. Um. That's a very simple example, but you
Speaker 1: get the idea. So the flip side of that is
Speaker 1: you're playing paying in installments, right, so you're paying smaller
Speaker 1: amounts over time, uh, that being three months, six months,
Speaker 1: or twelve months. Also, Affirm states that customers can pay
Speaker 1: off their loan early with no penalties or fees. So
Speaker 1: if you have the money to do it, you can
Speaker 1: pay off the balance and save yourself the interest that
Speaker 1: would otherwise accrue over time. So how does Affirm determine
Speaker 1: if a customer is a good fit for a loan?
Speaker 1: Because you wouldn't just go out loaning out cash to everyone.
Speaker 1: You need to at least be reasonably sure that whomever
Speaker 1: you're learning the money out to is going to be
Speaker 1: able to pay you back. Otherwise you're going to find
Speaker 1: yourself out of business, essentially robbed by folks who took
Speaker 1: out loans and then skipped on them, or people who
Speaker 1: took out loans and then, through whatever reason, we're unable
Speaker 1: to pay those loans back. In either case, the end
Speaker 1: effect is that you are left holding the bag if
Speaker 1: you've loaned that money out and they aren't paying you
Speaker 1: back for it. So AFFIRM judges a person's ability to
Speaker 1: pay back a loan own by doing a deep data
Speaker 1: dive on that person. AFFIRM searches through tons of data,
Speaker 1: including social media posts like this gets a bit creepy, y'all.
Speaker 1: A firm is essentially crawling through your payment history on
Speaker 1: any publicly available transactions, your social media history, getting an
Speaker 1: idea of how financially responsible you are. So you know,
Speaker 1: if you're posting lots of stuff about how you bought
Speaker 1: that sweet scooter but you have nowhere to live now
Speaker 1: that you can't make the rent, that might not help
Speaker 1: you out. When you apply to use a firm on
Speaker 1: a purchase, the evaluation only takes a few seconds, which
Speaker 1: is incredible, and that is something I find both impressive
Speaker 1: and scary. So there's this massive amount of information we're
Speaker 1: talking about the software has to comb through all this data,
Speaker 1: identify the points that relate to us, the potential customer,
Speaker 1: and then come to a conclusion. Now, I assume that
Speaker 1: behind the scenes, there's probably some sort of threshold or
Speaker 1: score that a customer has to meet. Uh. It could
Speaker 1: be codified as a score or a rating or something,
Speaker 1: but I don't know because the inner workings of a
Speaker 1: firm are mostly hidden. What I can say is that
Speaker 1: it doesn't just look at a person's FICO score. Uh.
Speaker 1: That's a score that judges a person's credit worthiness here
Speaker 1: in the United States, though reportedly, at least think in
Speaker 1: some journals I've read, a person does need a FIC
Speaker 1: a score of around five fifty to qualify for an
Speaker 1: affirm loan. Again, according to some sources, others dispute this.
Speaker 1: They say that you don't need to have any particular
Speaker 1: FICA score at all, so your guess is as good
Speaker 1: as mine. Now, this is what it's called a soft
Speaker 1: credit check. And that's important because and y'all, I know
Speaker 1: that this is bonkers, but a credit check alone from
Speaker 1: a lender, for example, can affect a person's credit score. So,
Speaker 1: in other words, your credit score could be one thing.
Speaker 1: Then a lender checks your credit score, then your credit
Speaker 1: score could be lower as a result of the lender
Speaker 1: checking it. This is kind of like the observer effect
Speaker 1: in quantum mechanics, this idea that by observe something, you
Speaker 1: actually affect the thing that is being observed. But yeah,
Speaker 1: hard credit checks can ding a person's credit score, even
Speaker 1: if that person is otherwise being a financially responsible person.
Speaker 1: No wonder. Younger generations don't trust credit cards, And to
Speaker 1: be clear, I'm not talking about when you check your
Speaker 1: own credit that should never have an impact on your
Speaker 1: credit score, but if a lender orders the credit check,
Speaker 1: that potentially could do it. Now, the standard repayment plans,
Speaker 1: like I said, come in three, six or twelve months installments,
Speaker 1: And obviously the further out you spread payments over time,
Speaker 1: the less the individual payments will be the monthly payments, right,
Speaker 1: But then the longer you spread out, the more interest
Speaker 1: you will pay accumulatively. So while a twelve month repayment
Speaker 1: plan will mean you're paying out less money per month,
Speaker 1: once you toll it up, you'll have paid more in
Speaker 1: interest than if you had gone with three or six
Speaker 1: months of payment plan. Anyway, a firm is essentially sizing
Speaker 1: up each potential customer to get a judgment on if
Speaker 1: that person will be able to pay back the loan,
Speaker 1: and I can definitely see the business need for that,
Speaker 1: but it also feels invasive because frankly, it is I mean,
Speaker 1: it's going through your social media for goodness sakes, and
Speaker 1: it just makes me lean further away from credit and
Speaker 1: loans and stuff like that. And it really makes me
Speaker 1: understand the appeal of debit card culture, where you're only
Speaker 1: spending what you have. You know, you don't spend more
Speaker 1: than what you have and then put yourself at risk.
Speaker 1: But Leftin's whole perspective is fundamentally different from that. He's
Speaker 1: looking at how people who for whatever reason, have little
Speaker 1: to no access to traditional credit solutions and how they
Speaker 1: can take advantage of purchasing power that otherwise would be
Speaker 1: outside their grasp. So there are two sides to this coin,
Speaker 1: and I think it really comes down to how each
Speaker 1: individual out there judges how they feel about this situation. Like,
Speaker 1: I have credit cards, so it's not like I have
Speaker 1: completely abstained from this. I have a mortgage I pay,
Speaker 1: so there are definitely cases where I've got this thing
Speaker 1: going on right now, But I also can understand the
Speaker 1: reluctance to get into that world is scary to have
Speaker 1: that debt sitting over you. Now, for a firm to
Speaker 1: work it originally had to partner with the merchants like
Speaker 1: that was the only way was by getting a partnership,
Speaker 1: and because a firm would assume the risk of the loans,
Speaker 1: merchants tended to be pretty cool with using it. The
Speaker 1: merchants get paid either way, right, So if the person
Speaker 1: pays back a firm or doesn't, the merchant still gets
Speaker 1: paid the actual price of the item, So that's great
Speaker 1: for them. Now, a firm collects a small fee from
Speaker 1: each purchase. Uh, they also get the interest that's generated
Speaker 1: by the loan, and merchants can pay a firm for
Speaker 1: different levels of interest rates. So if a merchant wants
Speaker 1: to offer lower interest rates and therefore attract more buyers,
Speaker 1: like if a merchant says, you pay zero percent interest
Speaker 1: on this big ticket item, then it can pay a
Speaker 1: firm a feed to do that and affirm well, this
Speaker 1: is kind of in return for the money that affirm
Speaker 1: quote unquote loses by not having interest on the loan.
Speaker 1: Affirm will says sure, we'll offer them alone with no interest.
Speaker 1: You have to pay us to compensate us for that,
Speaker 1: and the merchant, if they want to move this big
Speaker 1: ticket item, might do that, and then the consumer at
Speaker 1: the other end gets a zero percent interest loan. Now
Speaker 1: that's incredible, right. If it's saying you're gonna have up
Speaker 1: to twelve months to pay this off and you will
Speaker 1: be paying only the amount that you need in order
Speaker 1: to buy the item, no interest on top of it,
Speaker 1: that's that's an incredible deal. Doesn't happen all the time
Speaker 1: because merchants again have to pay to offer those kind
Speaker 1: of zero percent uh interest rates. Now. One of the
Speaker 1: early merchants Affirm partnered with was one E. D. Flowers,
Speaker 1: and slowly Affirmed began to grow. It began to add
Speaker 1: more in network merchants over time. There's even a story
Speaker 1: that at one point Legend wanted to buy a gong
Speaker 1: so that the team could bang the gong whenever they
Speaker 1: landed another major merchant part or. In two thousand seventeen,
Speaker 1: Affirm launched its pay with a Firm service, which allows
Speaker 1: loans for purchases from any retailer. Essentially, So I'm guessing
Speaker 1: the gonging at that time must have been excruciating and
Speaker 1: never ending. Now one partner that at least initially really
Speaker 1: gave a firm a boost was Peloton, and this all
Speaker 1: gets concentrated into that very short, intense span of time
Speaker 1: during the early days of the pandemic, when much of
Speaker 1: the world was under quarantine rules. That's when Peloton saw
Speaker 1: an absolute explosion in orders. Now. Peloton, in case you
Speaker 1: don't know, is a company that sells high end stationary
Speaker 1: bikes and treadmills and offers web based subscription training services
Speaker 1: so that you can take classes from the comfort of
Speaker 1: your home. And they have different instructors who lead these classes,
Speaker 1: so you can find an instructor that you vibe with,
Speaker 1: take their classes on the equipment, and then Peloton gets
Speaker 1: data from your workout. You get feedback, all that kind
Speaker 1: of stuff. It's like working with a personal trainer, it's
Speaker 1: just you're doing it remotely. Now, early in the pandemic,
Speaker 1: Peloton saw this huge jump in orders and a firm
Speaker 1: as a buy now, pay later company, got a ton
Speaker 1: of business from folks who wanted a Peloton but didn't
Speaker 1: wanted to shout. The two to three thousand dollars needed
Speaker 1: to get one. There's a whole range of Peloton products,
Speaker 1: and it goes from somewhere like around the dollar mark
Speaker 1: all the way up to nearly four thousand dollars depending
Speaker 1: upon what it is you're buying. Now. According to the Generalist,
Speaker 1: Peloton sales at one time accounted for twenty eight percent
Speaker 1: of affirms overall revenue. Now, when nearly a third of
Speaker 1: all your revenue is coming from a single source, that
Speaker 1: can spell danger if something happens to that single source,
Speaker 1: and Peloton would have a dramatic fall from grace. In
Speaker 1: late one early two, the company reportedly had warehouses full
Speaker 1: of product that was selling like the after that burst
Speaker 1: of interest from twenty came out. It turned out it
Speaker 1: could not sustain itself, and as a result, Peloton found
Speaker 1: itself flush with stock. So it had an enormous amount
Speaker 1: of supply very low demand. Uh, it became really in
Speaker 1: in a precarious position. The company actually had to put
Speaker 1: a halt on production because it had nowhere to store
Speaker 1: the ding dang durn things because they were already chock
Speaker 1: full with inventory. And so this naturally raised questions about
Speaker 1: how that was going to affect a firm, the company
Speaker 1: that had depended heavily on those transactions. Now a firm
Speaker 1: had actually gone public in twenty one. And you know
Speaker 1: I mentioned already when I p O is the initial
Speaker 1: public offering. A firm's initial public offering was a roaring success.
Speaker 1: So the initial price for shares before it went on
Speaker 1: sale on the market was estimated to be somewhere around
Speaker 1: forty nine per share. That's what they thought it would
Speaker 1: open at. In stead had opened at nearly around ninety
Speaker 1: dollars per share. It closed trading for the day at
Speaker 1: ninety cents per share, so nearly twice as much. Ultimately,
Speaker 1: the stock price for Peloton in November of would hit
Speaker 1: around a hundred sixty eight dollars per share. Now, by
Speaker 1: the time it went public, a firm was working with
Speaker 1: more than six thousand retailers, so it's not like all
Speaker 1: of its financial eggs were in Peloton's shaky basket. But
Speaker 1: this still raised concerns. I mean, twenty eight percent of
Speaker 1: your revenue in twenty that's so much so when in
Speaker 1: the late earnings call, when it became clear that Peloton
Speaker 1: was in serious trouble, affirm reps quietly side scept questions
Speaker 1: that related to Peloton because that was obviously a question
Speaker 1: that was going to be very difficult to answer. And
Speaker 1: chances are the folks in a firm we're working very
Speaker 1: hard to find a solution themselves. At that time, it
Speaker 1: didn't have much that they could say. But you know,
Speaker 1: then we have the economic recession that's coming on, and
Speaker 1: that paired with the pandemic has really created a unique situation.
Speaker 1: It's had a big impact with a firm. Now, as
Speaker 1: I record this, a firm's share price is at thirty
Speaker 1: nine dollars and some change per share. That's ten dollars
Speaker 1: lower than what a firm estimated it's opening price would
Speaker 1: be during its I p O. It is a far
Speaker 1: cry below the hundred sixty eight dollar height of the
Speaker 1: stock from November. Now, that being said, it is an
Speaker 1: improvement over where the stock was at a certain point
Speaker 1: back in May and May it dropped down to below
Speaker 1: fifteen dollars per share. So talk about dramatic changes in value.
Speaker 1: Right to go from a high of a hundred and
Speaker 1: sixty eight dollars to a low of fifteen dollars in
Speaker 1: less than a year. Now, again, a firm has recovered
Speaker 1: quite a bit since that fifteen dollar low. I think
Speaker 1: it was like fourteen dollars six three cents if I'm
Speaker 1: being more specific. But still thirty nine is not great,
Speaker 1: right when you when you once were at a sixty eight. Now,
Speaker 1: part of the issue is that so far a firm
Speaker 1: has not been a profitable company. It has operated at
Speaker 1: a loss. But then a lot of companies do that,
Speaker 1: especially early on. Right and a firm expects to reach
Speaker 1: income profitability by the end of fiscal year twenty twenty three,
Speaker 1: so the end of its fiscal year next year, it
Speaker 1: should be a profitable company, at least according to its
Speaker 1: own projections. Now, at least some analysts think that affirm
Speaker 1: is actually in pretty good position right now, and economic
Speaker 1: recession could mean that more people will start to rely
Speaker 1: on buy now, pay later solutions in order to get
Speaker 1: the stuff they need. That being said, there are other concerns.
Speaker 1: There are people who say, well, that could mean that
Speaker 1: fewer people will be willing to do buy now, pay
Speaker 1: later because they're worried about the debt. Then you have Apple,
Speaker 1: which launched its own service called Apple Pay Later that
Speaker 1: stands as a potential threat to affirms business. It also
Speaker 1: reaffirms that a firm was onto something with this business model,
Speaker 1: and a firm had to tighten its underwriting standards early
Speaker 1: in the pandemic, meaning that the company had to become
Speaker 1: more selective when it came to choosing who who would
Speaker 1: get loans and who would not. Uh so much was
Speaker 1: uncertain that you can understand where the company was coming from.
Speaker 1: You know, we weren't sure which businesses we're going to
Speaker 1: survive the conditions of the pandemic and which ones might
Speaker 1: fade away. And yeah, talking about this is ikey because
Speaker 1: at the end of the day, what you're really talking
Speaker 1: about are the human beings who need money in order
Speaker 1: to purchase stuff. I definitely feel way more sympathy for
Speaker 1: the people who rely on buy now, pay later in
Speaker 1: order to get necessities, rather than say, affluent folks who
Speaker 1: just want to spread out their payments for an expensive
Speaker 1: exercise bike in their homes. I don't feel a whole
Speaker 1: lot of sympathy for them. Now, you might wonder how
Speaker 1: the Heck Affirm can actually loan out money in the
Speaker 1: first place. I mean, it's how how do you have
Speaker 1: a company just magically grant money to people? Well affirm
Speaker 1: borrows from around twenty different banks and pension funds and
Speaker 1: other pools of cash, which, yeah, I mean pension funds. Man,
Speaker 1: what a world we live in to think of a
Speaker 1: pension fund is a viable place to borrow money from
Speaker 1: that that a pension fund deps when someone wants to
Speaker 1: buy an expensive toy. Now, maybe that's just me being
Speaker 1: particularly anti capitalist today. Sorry about that anyway. As long
Speaker 1: as folks are paying back their loans, everything works fine.
Speaker 1: But if there is a surge in delinquencies, it puts
Speaker 1: a firm in a really tough position because it will
Speaker 1: still owe the borrowed money to those various funds and banks. Now,
Speaker 1: I know I've talked a lot about finance in this episode,
Speaker 1: but we have to remember this is all built upon technology, affirms.
Speaker 1: Tech includes this process of evaluing a potential customer before
Speaker 1: approving a loan or denying it. We're talking about digital
Speaker 1: money transfers. We're talking about transactions that are mostly happening online.
Speaker 1: So there is a big tech aspect to this um.
Speaker 1: As for what's in the future for a firm, I
Speaker 1: don't know. And as for my own personal thoughts on it,
Speaker 1: I've got mixed feelings. On the one hand, I think
Speaker 1: a better solution for most people is to put money
Speaker 1: aside for purchases and just to to wait until you
Speaker 1: have the money to make the purchase. So, in other words,
Speaker 1: maybe using an app that lets you set aside the
Speaker 1: same amount of money you would be spending on a
Speaker 1: buy now, pay later scheme, but then just using that
Speaker 1: to outright purchase the stuff, and then you don't have
Speaker 1: to pay interest, right, You're just paying the asking price
Speaker 1: for whatever the product is. But that means you have
Speaker 1: to wait, and in some cases you may not be
Speaker 1: able to write for necessities, you might not have that luxury.
Speaker 1: And in other forms, I'm thinking, you know, there there
Speaker 1: is so much of our world that is based upon
Speaker 1: our ability to access credit, and for tons of folks
Speaker 1: that's an avenue that just isn't a viable option. So yeah,
Speaker 1: I have I have complicated feelings about this. I think
Speaker 1: it's a valuable service. It's just a valuable service that
Speaker 1: is built on top of or next to a an
Speaker 1: infrastructure that I personally find somewhat scary and nikki, but hey,
Speaker 1: you know, we got to navigate the world one way
Speaker 1: or another, right anyway, That's the story. On a Firm
Speaker 1: and Max Levchin hope you enjoyed. If you have suggestions
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