The Sharp Startup: When PayPal Found Product-Market Fit
By: David Sacks
Tags: Startup Lessons, Marketing Strategies, Marketing, Venture Capital, Startup

Reflections on the 20th anniversary of a $100+ billion product

Twenty years ago this month, PayPal found product-market fit. I remember the moment vividly because it’s a dramatic example of a strategy that still works today. I call it “going Sharp.”

Whereas the average startup launches a bunch of features for a bunch of use cases to appeal to many possible users, the Sharp Startup focuses on a few killer features for the most desperate customer segment. In short, it finds a wedge into the market.

The Sharp Startup focuses on the most desperate customer segment. It finds a wedge into the market.

While it’s important to have a larger vision, the Sharp Startup remains opportunistic and agile enough that when it spots this kind of opening in the market, it drops everything else and drives all of its troops through it.

I recall the moment that happened at PayPal. I was sharing an office with Luke Nosek at the legendary 165 University Avenue in Palo Alto. Luke ran marketing while I was in charge of product. It was a contrast in styles as Luke was terrific at brainstorming new ideas whereas I was obsessed with getting the product to work. Crammed into a tiny office, our impromptu jam sessions resulted in some great collaborations.

In November 1999, our customer service rep forwarded me an email from an eBay power seller. The eBay seller had turned the PayPal logo into a nice-looking button for her auctions and was asking our permission to use it.

Ironically I was forwarded the message not for product reasons but because I was temporarily handling the company’s legal affairs, owing to a law degree I’ve hardly ever used. It was a potential trademark infringement question.

At the time, we were vaguely aware of the auction use case but it was discussed along with splitting dinner tabs, student allowances, and a bunch of other nebulous value props. The truth is that we thought “emailing money” was a terrific product idea but we had no idea who would actually use it or what the market would be.

Luke had come up with PayPal’s now-famous $10 signup and referral bonuses to encourage the product to spread. But without a clear picture of the ideal user, we didn’t know who to target, and adoption had been tepid.

I brought up the email with Luke. It seemed extraordinary that an eBay seller had taken the time to create her own PayPal auction button. If she cared that much, how many others did too?

It seemed extraordinary that an eBay seller had taken the time to create her own PayPal auction button. If she cared that much, how many others did too?

We went to the eBay website and searched for ‘paypal’. Hundreds of auctions appeared in the search results because PayPal was mentioned in the item description as a possible method of payment. Our minds were blown!

eBay sellers were desperate for a solution because their alternative was to wait a week for a check to arrive in the mail and then wait for it to clear. Some of them had already found PayPal on their own. One of them cared enough to make an auction button and ask our permission to use it.

We were giddy. We knew we had just found signs of initial product-market fit. Now how could we accelerate it?

First of all, you can use our logo, we told the auction seller. Better yet, we’re going to give you an even nicer one. We pulled in our web designer, who was none other than Chad Hurley, the future founder of YouTube.

PayPal’s famous Buy Now buttons were inspired by a customer service email.

Chad quickly created a pay-me-with-PayPal button that eBay sellers could embed in their auctions. They just had to copy & paste the HTML. To reduce friction further, we allowed sellers to enter their eBay credentials and we would automatically insert the button into all their auctions. In other words, we productized the idea.

Fueled by the powerful incentive of the referral bonus, the program spread like wildfire in the tight-knit eBay community. Soon, most auctions were advertising PayPal. We rolled out other features for auction sellers that made it even more convenient to use PayPal. We dropped other plans and went all-in on the eBay use case.

We dropped other plans and went all-in on the eBay use case.

Results were immediate. At the end of 1999, PayPal had less than 10,000 users. By the end of January 2000, we hit 100,000 users. A few months after that, 1 million. By the summer of 2000, 5 million. It felt like the servers were melting. The growth curve looked like a perfect hockey stick.

It was a classic Sharp strategy: we identified the most desperate customer segment, went all-in on their use case, and found ways to turbo-charge the adoption. Notably, many of the key features were distribution tricks, not just product enhancements. As a result, we captured the key beachhead market of the nascent online payments space, ahead of our many competitors.

Admittedly, we were very lucky. After casting a wide net, we stumbled onto the break-out use case. But at least when fortune smiled on us in the form of a customer service email, we didn’t send it to the spam folder.