Monday, December 19, 2005

Eric Jackson on PayPal (Tom Peters interview)

Eric Jackson managed the marketing operations of PayPal, the world's leading online payment service, and played an instrumental role in guiding the company to profitability. Prior to joining PayPal, he had worked as a financial consultant specializing in corporate turnarounds and litigation. He holds an economics degree from Stanford University and studied Russian history in Moscow. He serves on the board of directors of the Stanford Review and is the chairman of World Ahead Publishing, the West Coast's premier publisher of conservative and libertarian books. He is the author of The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of the Planet, a chronicle of the legal, regulatory, and competitive threats entrepreneurs must overcome in today's business environment. The book won the 2005 Writers Notes Book Award for best business book, and Tom said it was such a page-turner he stayed up all night to read it.

tompeter.com asks ...

So, Eric, what prompted you to write this book?

EJ: Being there at PayPal from the early days and seeing from the inside what the company had to overcome to become a successful dot-com and really a revolutionary technology and agent for change, I felt that story was so amazing and so positive that it had to be told. And frankly, the accomplishments of the amazing people involved with PayPal deserved to be shared with the world.

It's really well written. It's a great history of the birthing of a company. Even though you were there, I understand there was still a lot of research that had to be done to get all the dates and every little thing that happened.

EJ: Oh, certainly. It truly takes a lot of effort to make sure you've documented a thorough history, that you've tied it back to publicly available information without disclosing too much data. It takes a lot of energy—scouring through notes, talking to people—to make sure that you've accurately painted the picture that you want to paint in a factual, reliable book that can provide a trustworthy account of how a company got off the ground.

But, as you point out in the book, this may well never have happened since, I believe, you were working for Arthur Andersen's financial consulting practice and someone had to drag you away from that and plop you in the midst of this startup. I'm curious how that happened, how you went from looking forward to a long career with a stable company to jumping into the entrepreneurial maelstrom. What changed?

EJ: As a young professional going into a job straight out of college, I was looking for something that would give me a wide exposure and a lot of experience in different industries. What I didn't realize was just how frustrating it could be to have such a lack of empowerment, such a lack of ability to play a role I could consider meaningful. In my first year and a half as a small cog in a huge machine like Arthur Andersen, that realization left me primed and ready for a new experience.

So when Peter Thiel, the CEO of PayPal, who had been a friend of mine for several years, approached me about joining his venture, I was ready to do it. And certainly the "product of the times" equation was a factor. After all, it was Silicon Valley 1999, the height of the dot-com boom, and it was certainly appealing to try my hand at the startup thing as well.

I also have to add that one thing Peter did not pitch me on was job security. But of course with the way things turned out for Arthur Andersen and PayPal, respectively—

Exactly. That's a wonderful twist.

EJ: It is. And it tells you something about the new economy.

Yes. And to get into that, what do you want your readers to take away from this story?

EJ: What I tried to do in this book is perhaps unconventional for a business book. I spent a lot more time recounting the narrative, profiling the people involved, and giving first-hand accounts of the business decisions that had to be made and the difficult issues that had to be confronted. So the book is by design not a preachy book. It's an adventure book in a way, such that business can be an adventure. I think most people who have done interesting things in business know it certainly can be.

I think there will be different takeaways for different people, but the big message is that when you're in an environment like a startup or a business that's trying to be innovative, what's really key is to have good people and empower them, give them the ability to put up big ideas and not feel that they're going to be penalized. And then, if somebody comes up with a home-run idea, you have to be nimble enough to implement it.

I think that's ultimately what the business lesson of PayPal is: You have to have good people and they must be empowered if you're going to be able to move quickly and put forward either new technology or new service. Certainly The PayPal Wars is not a guide for anyone's employment, and I don't necessarily recommend that they just blindly plunge into a start-up the way I did. But I do think if business people in start-ups and in more established companies would emulate some of these examples, they would have not only happier, but also more productive employees in the process.

You point that out a number of times. As I read through the book, the biggest story was the constant struggle with eBay. And so here's this young company trying to make its way in the financial transaction business, and you latched on to eBay and they kept trying to shake you off. It's like the big brother and the little brother who keeps trying to tag along or something.

EJ: That's a good analogy.

But you guys stayed in the game through your innovation, and the speed at which you could enact changes. You mention that when Meg Whitman took over eBay she brought in consultants and a lot of MBAs, and I think the suggestion is that these are not innovative types, but a more managerial kind of folks.

EJ: Yes, that is a fair summary of what I wrote. It's certainly not that anyone with an MBA is de facto not cut out for the start-up environment or a nimble environment. But I do think that when you're running an organization that's just looking for MBAs, you're often looking specifically for a similar skill set for all your people, and I think that can be contrary to the kind of nimble environment we had at PayPal.

When you staff an entire organization with MBAs, you also have a lot of people who are at a point in their career where they'll be looking pretty hard at climbing the management ladder. And if everyone has those same career goals, you do create a certain dynamic where people can be focused more on their career moves than on the product or service you're bringing to the marketplace.

So there is that tradeoff. We had MBAs at PayPal who contributed a lot, but the kind of prototypical employee that Whitman had at eBay was certainly different than what we had at PayPal. Perhaps there wasn't a prototypical employee at PayPal. There was the 21-year-old college dropout sleeping under his desk at night ... or myself, the recovering consultant ... or the CEO, an experienced hedge fund manager. We had a very diverse set of people with very different skill sets, and in our case that worked to our benefit.

So what do you think you went through personally as a result of being an employee at PayPal—you were there for about three years?

EJ: Three and a half years, from right after the launch of the website until eight or nine months after eBay acquired us. I was there through the launch, the turmoil, and growing pains, and eventually through the IPO, the acquisition, and a good part of the transition.

There's no doubt that it changed me in a lot of ways. First and foremost, you learn just how flexible you have to be when you're trying to grow a business and how rapidly market conditions can make you find new ways to adapt to all the competitive pressure. Certainly my sense of flexibility and intellectual nimbleness was challenged on a daily basis, so I learned to value those qualities more, and to think in terms of how a company can move fast and innovate.

But I also changed on a personal level. For one, in that environment, you have no choice but to learn how to focus on the things you can change and not obsess about the things that are outside your control. Uncertainty perpetually hangs over such a company and you have to detach from the anxiety or it will eat you alive and make you a nervous wreck.

Another way that I changed was that, frankly, I just enjoyed the creative environment there. I'm not likely to go back to a situation in the near future where I'm in the kind of position I was at Andersen: a small cog in a very big machine. I think if you've gone through an entrepreneurial experience and enjoyed it, you're going to tend to want to replicate that in the future. The thrill of creating something new and bringing it out to the marketplace is something that isn't easy to get in most big companies unless you're in product development or perhaps a small start-up within a larger company. So the experience changed what I look for out of my career.

On the other hand, PayPal could have crashed and burned.

EJ: Oh, absolutely. It almost did.

Let's say things went in the opposite direction. Would that have thrown you back into a more stable, Andersen-type job? Or do you think the experience of working in that environment would still have been positive?

EJ: I think that on the whole it still would have been a pretty positive experience, just because it was a good culture and certainly great people. Even if you don't have a financially rewarding experience, on the whole you can look back at any situation where you liked what you were doing and who you were working with, and you can see it as positive and encouraging.

I could tick off a half-dozen ways that PayPal could have failed or in some way been destroyed. From the competitive pressure to the broken business model to the turmoil that the young company had after the merger of two start-ups, there was a lot of internal turmoil.

So there certainly were ample reasons for it to fail, and those reasons changed over time. We were much more focused on eBay's competitive threat as we began to grow, having our number one source of customers become a competitor, and then the threats really became more of a legal and regulatory thing as the company aged.

So there may have been different take-aways for each scenario, had any of them been the silver bullet that finished us off. But I think it would still have been a positive experience even if we hadn't been able to accomplish what we ultimately did do.

You were involved in marketing most of the time you were there, right?

EJ: Yes.

In your book, you write, "The problem with the discipline of marketing is that everyone knows enough about it to make suggestions, but most don't know enough to offer good advice." Can you talk a little bit about that?

EJ: Yes. I think marketing is something that is so visible, or at least aspects of it are, certainly in an advertising sense, that everyone thinks they know something about it, or they know what works for them. That certainly isn't true for every discipline in business. Most people don't have an inclination to go into the CFO's office and tell him why they really think that FIFO is better than LIFO for their company. But when it comes to putting out some sort of creative, they're more than happy to offer advice to their marketing colleagues. That certainly was true for us.

But there's a lot more to marketing than people realize, the ability to not just speak to your customers, but also to learn from them and to use that information to guide strategy, products, and services. That's something that makes marketing really interesting to me and also makes it really, really critical. Almost everything in business is a cost center, but marketing is not. It's actually the lifeline of your company, of your revenue.

Just as people who have not studied economics are willing to opine on how politicians in D.C. are handling the economy; so too are people who have no background on the subject more than willing to opine on marketing. It's just a natural instinct to comment on things that are visible and often seen. That leads to a lot of unsolicited advice for anyone in marketing. Anyone who has held a position like that, especially in an engineering-dominated environment, can relate to that generalization.

You mentioned communicating with the customers. You mentioned a number of times how, even though you didn't have message boards at PayPal, you were using message boards at other sites, at eBay and I think AuctionWatch, to effectively communicate with your PayPal customers, which I thought was pretty brilliant.

EJ: It really was. I mean, the fact that we had communities out there that we could reach out to and evangelize to was a huge help for our company, especially at a time when we just couldn't scale up our customer service capabilities as quickly as our customer base was growing. I give a lot of credit to Damon Billian, whose pseudonym was PayPal Damon. He's at a new start-up now—Simply Hired, a meta-search engine for job listings. His philosophy is that you go out to the customers, you give them honest information, and you don't BS them. You let them know that you're listening to them and trying to help.

So while going out to those boards was a key thing for us to do, having that philosophy of straight-shooting and letting them understand what we were doing was really important in establishing a two-way street for information exchange. It not only addressed practical issues, like the lack of customer service support, but also instilled a lot more trust by our customers in us than in eBay's service, Billpoint. That was a key source of our competitive edge as well.

Absolutely. That was what struck me the most, that ability or that willingness to communicate even though things were dreadful. At some point people were trying to communicate with PayPal, and it was taking them days or even longer to get a response. You confronted that head-on, and I think that served you in an infinite number of ways.

EJ: Oh, it did. It did. And we were pretty blunt about our difficulties in scaling up customer service. If you're experiencing exponential growth in usage, it's really hard to hire customer service reps that quickly. And if you do try to go that fast, it's hard to control the quality. So certainly we had that issue, along with the technical needs of our customers. Believe me, people do get concerned if they can't get access to their money. That's much worse than not being able to format your HTML emails properly or having a shipping delay with the book that you ordered. Money is certainly a source of a lot more anxiety and passion.

But beyond the technical problems that customers faced, when we had to change our website and our business radically, especially when we had to start charging fees for what had been a free service, the ability to get that message out there and be straight with customers was key for us. I shudder to think what would have happened to PayPal if we hadn't had that communication strategy.

Exactly. I think it would have broken down and your customers would have flown away. I wish companies would hear that message, or the people reading your book would understand the importance of being up-front and, as you said, blunt with your customers. In my experience, people can handle a lot of adversity and crap; it's not knowing what's going on that will drive them away. If you've had a good experience up to a certain point and then something goes wrong, if somebody tells you why it happened and that they're sorry and they're trying to fix it, people can handle that.

EJ: Absolutely. They want to know that much more than they want to hear spin. It's important to get the company's side of things out there and to tell people your rationale for doing it. But the flip side of that is you can't do it in a way that's insulting. In PayPal's case, we had to start charging fees for people that were doing business-related activities on the side because we just couldn't afford to pay for the credit card processing charges and also the fraud losses. We simply made it clear to them what we needed to do and what the rules would be. But we also let them know we weren't going to just sit on our laurels. We also outlined ways we were going to expand the service, improve it, make it go international. We let customers understand that we weren't just going to take money from them and get rich; we were going to plow it back into the company and offer them new value as well.

So customers respond well to that. Just talk to them; don't talk down to them.

I noticed at one point somebody went east and started up a call center in, I think, Omaha, Nebraska. The woman in charge was very entrepreneurial and kept trying to figure out how to turn it into a profit center rather than a cost center. That rang a bell with me because Tom Peters talks about PSFs—Professional Service Firms—and how departments need to think of themselves as profit centers, even if all of their clients are internal. So that was an interesting story. Can you talk a little bit about what she did to change that mindset?

EJ: I'd be happy to. I believe you are referencing April Kelly, who was one of our more senior managers at the Omaha Call Center. April's philosophy was "Let's find a way to create value; let's find a way to have the people who are taking care of customers' needs also provide an educational and promotional experience." So she put together a team that could handle high value accounts—in this case it was our top eBay sellers—to give them customer support, but also to call them and introduce them to new features, to encourage them to try things out, to use exclusive offers to get cash back if they weren't using Billpoint. We had a number of initiatives like that, but also the realization that we could have messages about new features and services for customers to listen to when they called in and were on hold waiting for a representative.

You could also make sure that all the customer service employees were aware of new features and services, to make sure that callers went away with some knowledge of these valuable new offers.

So that was a shift in philosophy. We were initially just trying to scale very rapidly what really was a cost center for us, and of course that was very expensive. But the realization came in a year or two that we could use the call center to educate our customers and promote profitable new services and products. It's hard to train people to do things differently overnight and think a different way overnight, but when you get an innovative manager like April acting as a catalyst for change within, it can become infectious. I certainly can recall that more and more people in Omaha were eager to follow that lead and it was something that really spread. By the time I left PayPal, Omaha folks were visiting the Palo Alto headquarters regularly and they would want to stop by marketing and get the latest update on the next campaigns and the most valuable things they could be focusing on. So that philosophy really did trickle down and spread throughout the entire division out there.

As you looked back at this whole thing and then began writing this and collecting information, what surprised you the most in revisiting your experience of the time? Was there something that you had forgotten or was there some piece of it that seemed minor that became major or vice versa? Were there any surprises as you went back through this?

EJ: What surprised me the most was just how many near disasters were averted. I think that when you're in the process of this, you have to have a real sense of determination and optimism, not necessarily naivety, but optimism that you can find a way to tackle the things that come up. Things like running out of money when we're losing 10 million dollars a month. Or a 100 million dollar venture capital round nearly falling apart in April of 2000 because the NASDAQ and tech valuations collapsed that month.

It's all the more shocking when I look back at it, because at the time we just breathed a sigh of relief and moved on to the next thing. You can never really let yourself be down and think, "This challenge is the one that's going to get us." You have to say, "What can I do to attack this thing?" Being removed a few years from it, it's all the more amazing to think about what we had to overcome. Frankly, I'm glad that neither I nor any of my colleagues were spending too much time dwelling on that fact at the moment, because it probably would have been the kiss of death for us.

So you left PayPal eight or nine months after it was acquired by eBay.

EJ: That's correct. There actually were a lot of folks, old-timers, leaving around that time. I wanted to stay for a little while to do what I could to make the transition a positive process. I served as the interim vice president of the marketing group and I think I was able to play a positive role. But at some point, adventures come to an end. Things change; the priorities and culture of organizations change. That always happens after an acquisition. And you feel that it may not be the best place for you anymore. I felt I had done all I could do, all I wanted to do, and I was looking for something different at that point. So it made sense to move on.

And we assume you walked away with a lot of stock options.

EJ: I did fine for myself.

So what have you been up to since leaving PayPal?

EJ: I started a media venture in Los Angeles; it's called World Ahead Publishing. We put out my book, for one thing, as well as a number of other books, and website content. I stayed in the realm of communication and marketing and running my own company. So I'd say the entrepreneurial bug bit me pretty hard.

I will reflect quickly to one thing I should have said when you asked about the stock options. I think the company did a pretty good job of making sure that everyone was eligible for the stock option plans there. I'm not necessarily going to add any groundbreaking insight to what's already been written and said about this, but that did a lot to help motivate people. I never felt that anyone in the company didn't have their heart in it and wasn't giving it their full effort, because frankly, people were motivated. I think the stock option thing, much derided by some and certainly the subject of a lot of controversy—

Not here. I always thought that, as you say, that's a great motivating factor.

EJ: Well, there's been a lot of debate over how to handle this kind of thing, but frankly I'm sure that without that complementary mix of incentive and empowerment and freedom, we wouldn't have had a bunch of intelligent but rugged individuals running around the company coming up with great ideas for what PayPal had to do next. I think we needed that specific mix.

So fortunately a lot of folks did okay for themselves from PayPal and there really was enough success to spread around there. I think it was in everyone's best interest.

So just one last question. What do you think of the eBay Skype purchase?

EJ: Well, I obviously don't have insight into all of their thinking behind it. As a general rule, I think it's always tricky when a company is looking to really diversify what it does. PayPal and eBay are undeniably complementary. I think PayPal will be much bigger than "eBay proper" in a decade or two, and I think eBay's auction site is probably destined to be an ever-decreasing subset of what PayPal does. But there's a similarity there of enabling transactions—there's complementarity.

In terms of Skype, it's an interesting technology. I'm not sure that it's proven necessarily to be a money-maker, but it's also pretty different from enabling a transaction. I can understand wanting to have that technology as a component of the buyer and seller experience, enabling them to connect. But it seems to me that you could certainly outsource a lot of that. EBay does already outsource a lot of things. They don't build every type of email system they have in-house or do all the auction services that they offer. They already have third parties that plug in as complementary services, and they don't try to do it all in-house. So from my perspective, I worry that it could be a distraction for people, trying to integrate something that is an interesting and perhaps complementary service, but at its core a very different technology.

I think the most important thing for eBay to do is to look for bold ways to really expand their ability to facilitate transactions. There's always the risk that their core auction site may go the route of AOL. I think we're seeing this a little bit as small to medium sized merchants easily can set up their own websites now and use paid search to transact. Google is eBay's competitor. Not enough people understand that. But I think what eBay needs to think about is that they need to find ways to take their eBay and PayPal technology and spread it throughout the web and decentralize it and facilitate more transactions wherever you are, whatever media you choose to use, as opposed to worrying about expensive and/or technologically complicated add-ons.

So I hope Skype goes well. I suspect that I wouldn't have made that decision if I were sitting in the corner office, but that notwithstanding, I think that goal number one for them should be finding ways to continue to expand PayPal and eBay. I personally would have preferred a hostile takeover of Amazon.com and integration of PayPal as the Amazon payment service—have 200 million PayPal users overnight and see what you can do with something like that. But we'll see. I hope it goes well and I hope they figure out ways to monetize that new technology.

I want to thank you very much for your time. It's been a pleasure speaking with you.

EJ: I really enjoyed our conversation. Thank you so much for your kind words about the book.

Really, really well-written book, and it's a great read.

EJ: I'm just lucky to have lived through it. Frankly, telling the story is pretty easy when you get to go through all that firsthand. I'm glad you enjoyed it.


Website: worldaheadpublishing.com

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