PAYPAL’S INCENTIVE PROBLEM
Last week eBay announced that PayPal would be spun out into a separate company, fixing two big problems for PayPal:
While PayPal grew big by being the payment method of choice for eBay transactions,1 off-eBay transactions have since become the majority of PayPal’s revenue, meaning management’s need to prioritize eBay’s needs was misaligned with PayPal’s growth opportunities
PayPal also had an individual-level incentive problem because they didn’t have their own stock. Stock options and/or grants are the incentive tool of choice for everyone from the CEO down to new hires in the tech industry, which meant any new PayPal hire was necessarily hitching their wagon to eBay
Still, I understood eBay’s previous argument that there were tremendous synergies between the businesses, and there’s no question that the loss of PayPal and the insight gained from being party to every transaction on the eBay marketplace is going to hurt the core business. Moreover, I think it’s highly likely that much of PayPal’s recent (impressive) growth was paid for with cash thrown off by eBay’s marketplace. There is a lot of logic to staying together.
That’s the thing with most big company endeavors, though: they almost always look good on paper. After all, the big company has all the cash, all the experience, all the developers that they can throw at any problem that arises. And yet, Silicon Valley is in many way premised on the idea that big companies can be beaten by, as the myth has it, a founder in a garage with little more than an idea. On paper it doesn’t make sense, and yet the examples are legion.
I’m not surprised though. Something I’ve learned over time – and believe today more strongly than I ever have – is that nothing matters more than incentives. It doesn’t matter how much money or experience or developers you have if your incentives are not aligned to solve the right problem. This is the big advantage that startups have vis a vis corporations: a startup starts with the problem and then creates the incentive structure under which their company operates. To put it another way, for a startup the incentives are defined by the problem. Small wonder, then, that startups are so focused on a solution.
A start-ups incentives are defined by the problem they are seeking to solve
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