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How a Successful Digital Business is Really Built

2009 October 29
by Greg Satell

The digital world is fraught with myth.  A common fable is of a visionary idea executed flawlessly and pursued with certainty by those with superhuman powers of insight.  How things really work is considerably different. It is usually a tale of confusion, doubt and more than a little trial and error.

This shouldn’t come as a great surprise; many eminent companies had inauspicious beginnings.  Hewlett and Packard started out with oddball ideas such as an automatic toilet flusher and a gizmo that would shock people into losing weight.  Sony failed with its first product, a simple rice cooker.  3M was such a failure at one time that you could buy two shares of stock for one shot of cheap whiskey.

Great successes are often born out of failures.  Today’s hypercompetitive digital world is no different, only things happen much faster so there is that much less room for hubris.

A great example of how a company can stumble through and beat the odds is PayPal.  Their first product was a failure, they had entrenched competition from both eBay and conventional financial institutions and they made more than their fair share of mistakes.

The PayPal Wars” as chronicled by Eric Jackson in his excellent book, tell us a lot about how a great digital success is born and then made.  The lessons learned from the PayPal story not only ring true from my own experience, but I believe it can serve as a guide to anyone who wants to develop a digital business.

A Tale of Mistakes and Misteps

The amazing thing about the PayPal Story is not their enormous success, but how much they got wrong!

They didn’t have a clue what they were doing: The original vision of PayPal was to develop an application for the palm PDA.  They expected to change the world by offering people a way to transfer money any time, anywhere, in any currency or denomination.  Currency markets would be up-ended and the lives of countless millions would be changed forever.

Their plans were so big that they dubbed their user-counter “The World Domination Index”.  They failed in all they initially set out to do.  The online business was actually an afterthought and PayPal never became a successful currency exchange platform.

They were disorganized: When Eric Jackson showed up for his first day at work, nobody knew that he was hired or what he was supposed to do.  He didn’t even have a desk!  Coming from an established, buttoned up  company such as Arthur Andersen (this was before the Enron scandal that bought down the firm), Jackson was appalled by the lack of organization.

They misread their market: PayPal initially targeted technophiles and shunned auction users.  The feeling was that auction users were bargain shoppers and hence therefore had no money.  However, there was a mandate early on to spend a lot of money on e-mail marketing and their early target of technophiles was soon exhausted.  They had to find new people to market to.

With few other options they decided to market themselves to auctions, which eventually became their primary path to success.  No grand plan, divine insight or brilliant strategy, their key path to success was actually almost accidental.

They had well-financed, entrenched competition: Not only did they have other people try to do the same thing as they were doing, but big banks were financing some of them as a defensive move. To make matters worse, their biggest source of business, eBay, actually bought one of their competitors, Billpoint.

Getting Important Things Right

Despite a series of misadventures, PayPal got the most important things right, and that made all the difference.

They were fast: While the process might have been ugly, PayPal ran circles around their competitors.  They launched innovations faster and implemented them more effectively.  Although they made mistakes, for the most part they were cheap ones which they were able to correct quickly.

Here, their lack of organization was an advantage.  Low and mid level people could launch initiatives without a cumbersome approval process.  If things didn’t work out, there were no senior executives married to the project and sunk costs were minimal.  Changing course was easy.

They were smart: PayPal had its headquarters in Palo Alto, and had ready access to the best that Stanford University had to offer.  They hired smart, ambitious people and gave them an enormous amount of autonomy.   Very few executives at PayPal had significant business experience.  For many, it was their first job.

They had a dream: While their dreams were somewhat misguided, everybody in the company believed in them; and that made a difference.  It’s what made them work harder and push themselves beyond what anybody thought was possible.

Lessons We Can Learn From PayPal

In the digital world, the right people are more important than the right strategy: The Digital World moves so fast that it’s impossible to pick winners.  Nobody can know what is actually going to be successful until something is actually tried.  The more things you try the better your chances will be.

That’s why it’s important to have smart, motivated people and empower them to make decisions.  When Eric Jackson took the initiative that launched the auction strategy and led to PayPal’s success, he had no mandate to do so, actually quite the contrary.

What PayPal had were smart, motivated people who were driven to make the company a success.  Because staff were empowered, it was fairly easy to recruit – everybody felt responsible and encouraged their friends to join the effort.  Smart begets smart.

Senior management can create the dream, but can’t dictate implementation: The senior management didn’t dictate what was to be done at PayPal; rather they laid out what could be achieved.  They inspired their staff with lofty goals that had meaning.  management guru Gary Hamel calls this a “community of purpose.”  The extraordinarily capable team at PayPal bought in and strived to make the vision a reality.

Moreover as things heat up, too much is happening at once for senior management to control every process.  If the big bosses have to know everything that’s going on, not much will.

Large companies may be better off waiting: Ironically, the villain of the story did quite well.  eBay, acquired Billpoint and failed, then did somewhat better when they eventually bought PayPal.  They remain a profit making organization to this day, despite their inability to manage a start-up culture.

They probably could have saved themselves a lot of time, effort and money by waiting for a leader to emerge and acquiring it rather than jumping into the fray.  The end result would have been the same, but it would have been much cheaper.

How it All Ended

In the end, PayPal was bought out by eBay and the culture was altered considerably.  Rapid innovation gave way to endless meetings and constant vetting.  The decision-making process became slow and hierarchical.  Key people became disillusioned and left to start companies such as LinkedIn, YouTube and Yelp.

While both eBay and PayPal continue to fare surprisingly well (the company as a whole has net profit margins of about 20% and maintains impressive growth), there continue to be missteps.  They are expected to unload Skype, another startup they acquired, at an enormous loss.

Success can be an ugly business.

– Greg

53 Responses leave one →
  1. December 31, 2009

    Thanks and have a Happy New Year!

    – Greg

    [Reply]

  2. Jim Fox permalink
    February 10, 2010

    Greg, As always your post is spot on and just what I needed to see.

    Thanks!

    [Reply]

    Greg Reply:

    Glad to hear it, Jim!

    [Reply]

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