Risk Tolerance as a Competitive Weapon

After Josh Kopelman sold Half.com to eBay in 2000 he stayed on with the company to witness eBay’s defeat by and eventual acquisition of PayPal—at the time a relatively small startup.

Kopeland suggests that the main reason for PayPal’s success was their risk tolerance in a number of situations:

Legal Risk

Paypal’s product was widely seen as the better product […] Billpoint was clunky and forced the seller (and buyer) to go through several additional steps.  The conventional wisdom was that PayPal had a better product team and that eBay was clueless.

From what I saw inside eBay, that wasn’t really the story.  I believe that eBay understood everything that was needed to build a great payments product.  They were just unable to do so given the risks involved.  Specifically, I believe that PayPal had a better product than Billpoint because they were willing/able to take risks that Billpoint/eBay was not.  For example, when PayPal first launched, it was pretty clear that their product violated the operating rules for Visa, Mastercard and American Express — and violated banking regulations is more than 40 different states.

Financial Risk

According to their financial filings with the SEC, PayPal spent over $15M in marketing fees in 2000 and lost over $169 Million that year.

eBay, on the other hand,  was profitable in 2000 — with Net Income of $48M.  Given the pressures that Wall Street analysts put on the company, there was just no way that eBay could invest anywhere near as much in the payments space as PayPal.  If eBay decided to spend half as much as PayPal did, eBay would have shifted from a $48M profit to a $37M loss — a move which would have reduced eBay’s market capitalization by billions.

[…]  The fact that eBay was a publicly traded company forced them into a different risk profile when it came to financial investment.