They should have been paying me more.
That was my thinking, at least. I was building predictive models for PayPal to detect fraud, and my models were effective at saving the company money. From 2002 through 2004, that work was likely saving PayPal at least ten million dollars a year.
Knowing how much I was helping the company, I figured I’d have some pretty sweet leverage if I ever wanted to try to negotiate a better pay package. My work was easily quantified, and it was making a big difference.
If my models were capturing an extra ten million bucks, surely the company could reward me with half that, or at least a quarter of it, right? Especially since PayPal was being valued relative to earnings; at a multiplier of 30x earnings, those models had created an extra $300 million in shareholder value. Even a few percent of $300 million would make my day!
(At the time, I was not the type to “lean in” and negotiate harder, so that never came to fruition — but that’s a separate story.)
The Non-Zero Baseline
Sadly, my thinking was flawed. My assumption was that the baseline — the business equivalent to the “replacement” player in baseball was a business that was exactly break-even. I could add $10 million in profits, four others could do the same, and the company could effectively divvy up those $50 million in profits among the five of us.
The problem is that the baseline for PayPal — what would have happened with average players at every position — wasn’t zero. The baseline was a business that was losing hundreds of millions of dollars a year.
So I was saving the company $10 million per year, so were perhaps nineteen of my colleagues. My statistical models were ‘A’ work and a huge improvement over the baseline, but so were our fraud policies, our viral growth channels, our eBay integration, our legal maneuverings, and many other areas.
Without all of those accomplishments, PayPal would have gone on losing hundreds of millions of dollars until we went out of business. If the baseline of mediocrity was a business that lost $180 million per year, adding twenty strong people (or teams) whose “above replacement” value was each $10 million per year could collectively improve our bottom line by $200 million — but that would still only lead to a business that made $20 million in profits.
In that sort of business — which is roughly what the pre-acquisition PayPal of 2002 looked like — my original reasoning made no sense.
Collusion Is Good
Recently, I’ve been evaluating a new startup idea. It’s something that’s as ambitious as PayPal, but also just as fraught with challenges: there are a lot of ways that it could lose money. And that’s encouraged me to revisit some of my PayPal memories.
One of my biggest lessons is the importance of team quality for such a difficult and ambitious company. Looking back, it’s as if a bunch of smart and hard-working people colluded and decided to work together on a business that would have failed if we hadn’t all worked on it. Without that collusion, PayPal wouldn’t even have a Wikipedia page, let alone a huge business or a mafia.
2002 was the ideal time for that sort of collusion, because there weren’t a whole lot of options in Silicon Valley. No one was starting their own company, and the list of hot private companies I was aware of had exactly two entries: PayPal and Google.
To solve the toughest problems — and building a slightly more elegant social networks doesn’t qualify — one still needs that type of collusion from ‘A’ players. The good news for founders is that Silicon Valley is attracting more talent than it was in 2002; the bad news is that starting a company has become cool again (I’m guilty too!) and the hot company list has grown from two to dozens.
Collusion generally has a negative connotation, but in this context it can be a very good thing. If, rather than spread themselves among ten mediocre companies, ten all-stars can be like LeBron (and Dwyane Wade and Chris Bosh) and collude, they can see better results and solve bigger problems. And unlike LeBron, they don’t have to do it in zero-sum games.