If I couldn't write code anymore, I would feel like I'm missing a finger. Like it's that core to sort of how I think of who I am as an engineering first CEO. I know exactly what it'll take. I know what I would do. I know what prompts I would write. I know which agent I would use. I know which set of techniques would apply here. It's exciting for me, but it's also, I think, more compelling as you tell people, hey, like we're going to go take this hill and it'll be fun. It'll be faster than you've ever seen and will be 10x more productive and they get to believe me because they know I actually know how to do this. I'm not just reading it in a newspaper.
Today on the CEO Signal, we're talking to Max Levchin, the founder and CEO of a firm, a company built to challenge the way traditional consumer credit works.
The firm began with a simple idea, but a pretty radical one. Lenders should not make more money when borrowers fall behind. That idea took a firm from a checkout option to a public company.
The challenge is how he turns this disruptive model into a lasting business at scale. From SEO, this is the CEO signal.
Hello, Edge. How are you?
Great Penny. Good to be back.
Good to be here. So we have a different kind of guest this time. Max Levchin, founder of a firm, is the first founder CEO we've had on the CEO Signal show and 14 years after founding the company, he's still firmly in charge.
He has a fascinating founder story. He comes to the United States as a teenager from Ukraine. He's part of the PayPal mafia, founding PayPal with the likes of Elon Musk and David Sacks and Peter Thiel. He then goes on to have a frustration in trying to borrow money to buy a car and that leads him to starting a company called a firm.
Yeah. And the business really interests me. He started with this simple idea. No late fees, no compounding, none of the penalties that customers hate about credit card companies. But what I'd really love to dig into is what he saw that others missed about how you could still make money in that world. In fact, if you take away some of the ways that lenders have traditionally made money, I have a real question. How does his business model work? And now he's leading a firm at a very different phase. He's going from proving the model as the plucky startup into running a much more scaled financial network.
We've got a really interesting episode ahead of us.
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Welcome, Max. We're so glad to have you here.
Great to have you, Max. Thanks for joining us.
So Max, you came to the United States from Ukraine when you were how old? 16.
16. And I moved to Chicago, my hometown.
And how has being an immigrant informed who you are and what you are today?
It's definitely a core part of my identity. Although I also consider Chicago my hometown. It's more than anything American by choice. I want to be part of this country with all my own bag of tricks and perhaps quirks, but it is important to me to assimilate as much as I could.
I love that.
So you have this early foundational entrepreneurial experience with a group of other very very prominent now entrepreneurs, some of them immigrants themselves at PayPal. You do quite well out of that and then you go to make quite a big purchase and you have this experience where you are refused credit. Can you just tell that story quickly because this is the foundation story of a firm, isn't it?
Yeah. I'm not good enough to come up with foundational myths. So, this is a true one. The very short version is I was bumming rides off my friends for quite some time during PayPal and right after we went public, I decided it's time to own a car. And so I flew to LA with my then girlfriend, now wife, and with great panache decided I'm going to buy a convertible and then drive it from LA back to San Francisco. And I had this great plan. And we showed up at 9:00 a.m. to the dealer having landed in LA and the guy checks my credit and says, 'I cannot sell you a car.' Like, what happened? So as it happens, this was not my first startup, it was the first successful one. The first few failed while I was still in college and I lived primarily off credit cards which I was not particularly diligent in paying off on time. That destroyed my credit score, by that I mean like mid 500s, so like bad credit score. And then he recognized me and said, 'Wait a second, aren't you one of the PayPal guys? You guys took the company public, congratulations.' Like, oh cool. And they're like, 'But your credit is still no good here. Pay cash or go home.' The worst part of it was the woman of my dreams was right next to me going like, 'Wow, I've been dating a deadbeat. I never want to go through this again.'
So how did that experience of being turned down to buy a car, to get a car loan, inform what you built at a firm?
This is long before a firm. This was like a full 15-ish years before plus or minus before a firm was born. But as I was debating with actually some of my University of Illinois compatriots also at PayPal sort of what to do next after another startup. So there was this one thing that stuck with me, the most embarrassing moment of my life when I was trying to buy a cool car and was told that I am basically unwelcome as a customer. I wonder if that's just me and within 15 seconds like, oh, we all had this experience. Borrowing sucks. It's embarrassing. We don't understand the terms. All of us have gotten to like, how did I get this giant revolving balance? This idea that I have no idea how this works. I know I'm paying too much. I'm probably getting screwed and it's too complicated. And that's the origin story in that.
Okay. So, you describe a firm as its mission is building an honest financial services company with honest products that improves lives. So help us understand what does that mean and what is a firm?
A firm at the product level is a way to pay for things at the point of sale. It's now in many different products. So we have a card, we have integrations with many retailers, but it's a way to pay for things over time. But unlike credit cards, it's deliberately transparent. It goes over the top to be transparent. You see a schedule. We don't charge late fees. We don't compound interest. We pre-price the total cost. If there's interest, you find out how many dollars you'll pay. If you pay early, we take out the interest. So there's an incentive for you to get out of debt sooner. So how much of your role as a founder CEO is just explaining the model that didn't exist 15 years ago? You know, for a long time that felt like the only role because before we started the company, I sat down with a bank CEO and I tried to explain here's what I'm going to do and the guy said, 'I got to tell you, you seem like a smart guy. Don't do any of this. This is the way we make money in this industry is late fees. You're not going to charge late fees? It's half my profits. Just go do something else. You're obviously talented.' And explaining that to a layman was a thousand times harder because if you are used to getting charged late fees, your answer like, 'Yeah, I'm not a crook, no late fees,' like you're not actually telling the truth, are you? And so just explaining this to the team, you would be interviewing someone and like, 'Hey, so we're not charging late fees.' 'Yeah, we got it, we got it.' That's like the thing you do as an intro. It's not an introductory offer, it is the thing we do. We have never charged late fees, we never will. But then behind the curtain, there is no curtain. What you see is exactly what you get. And it got easier but it took a long time.
Do they ask you, you know, so how are we going to make money and margin?
Oh yeah, every time. And we will make money by people coming back and saying this was a great thing, I want to do it again. 96% of our transactions today come from repeat users. Extraordinary draw. People love transparency in their financial products.
What's the biggest misunderstanding now about the model? Because I know a lot of people park you with buy now pay later lenders. You don't like that term.
Yeah, I've made my peace with BNPL. I now prefer to refer to it as an acronym because maybe over time it'll just become a thing onto itself without the full unpacking of the four letters. But the thing that used to bug me when you told people I lend money for a living, like compounding, like we don't compound. How is that possible? Like we don't compound. We tell you it's this many dollars and that's it. That's the most you'll pay. Like, oh, you make your money on late fees.
But the point, part of the point you're making is that the retailer, if they want to make the sale, can say I can compensate you for what you're doing, which is you're facilitating a buyer.
So then my next question is what responsibility do you have to that buyer? Because somebody's buying something they can't afford to buy. Unlike your car situation where you could afford to pay cash, someone's buying something that otherwise they would not be able to buy. How do you manage that part of the system?
That's actually not accidental but absolutely crucial component of not charging late fees and not compounding interest. Our entire motto was if we don't charge late fees, we don't compound interest, the only time we can lend structurally is when we have 100% conviction that you will pay us back. If you cannot pay us back and we can see it in the data we understand about you, and we have to be good at using this data. So underwriting etc has to be extraordinary. But if you have that level of expertise, you don't need late fees. In fact, you are buying insurance, intellectual insurance on never making a loan you think is not going to come back. But it's okay because there's late fee income to house.
This is the thing I said to Edge when we were first trying to unpack your company and said they've got to really believe in their underwriting because they're basically saying, you know, we're not going to penalize the borrower.
You get it exactly right. We pay for the wrongs we make, the mistakes we make. We pay for every one of those.
I don't think I've heard you mention a single percentage in this conversation so far. You know, we talked about margins.
But what I hear you talking about instead is fundamentals. You know, I think a firm is your ninth or 10th startup. Is that a broad approach you have generally to start with first principles rather than with, hey, I could make 2% more than the next guy?
No. In fact, there's actually a cool story in that. So, PayPal was incredible. It was the most transformative thing, not just financially, but I grew up, I came into PayPal being very much a crazy freshly minted undergraduate computer science kid with ambitions and no idea what I was doing. And I exited a seasoned chief technology officer with a public company. And I never understood why I was so successful. I like, well, we just did it right. Then I started another company and I just said, 'Well, I'm going to dive right in, do it another, going to be like PayPal because I learned my lesson.' That company did fine, but it was a shadow of what PayPal was. And it never really quite had that same intensity and excitement and the team dynamic. And I tried, I was genuinely trying very hard. In fact, I tried to do better than PayPal. I tried to shape the culture to fix the wrongs of PayPal. And I knew some things that I didn't quite like and I would do better. I was a CEO, so I had full control. And at the end it was sort of like, okay, well people made a bunch of money but it did not feel that way at all. So right before I started a firm, I sat down and said I'm going to compare the two and I'm going to be very very deliberate about what it is that made PayPal so special and why the next one was such a dud from the culture perspective because that's clearly what happened.
And what did you identify?
I had a whole list and the most important thing I learned, and again this is the thing that I took for granted. So at PayPal, we recruited the smartest, but also the highest integrity people we knew in college. And then like we wouldn't want to work with jerks. We literally had the best people we knew from the crucible we just spent four years in, pulling all nighters and eating pizza on the floor and all the things you do in college. And we never had to write down core values. We never had to say things like the mission is X because the shared context of how we do things was just ingrained. So at a firm founding, sort of like before I write a single line of code, before percentages enter the conversation, I have to have a mission, I have to have core values, I have to write down not just the core values but the Bible interpreting core values so when someone comes in and says I want to work here, I say read this, if you can sign your name under it you're at the right place, if you can't please go. I would love for you not to join this company if it doesn't ring true. And I try to make all of it public so if you search a firm core operating principles online, you'll find a document from I think 2012 where I say here's how you interpret what we mean. And it was very very deliberate. I want to reproduce this: smartest people I know, zero jerks, high integrity, no deviation from mission. Mission is more important than dollars. On and on and on.
Where did you get the most push back early on? Where did it look as though this might not get traction?
We got rejected by a fair number of people, which was actually quite embarrassing. Like, I'm starting a payments company. I'm the PayPal guy. They're like, 'Yeah, you're Max Levchin. You've made a name already.' Yeah.
But what did you see that others missed?
So, my co-founder, Nathan, and I go back to high school days. So, he was one of the two smartest kids I knew in college. Full stop. He was my head of risk at PayPal. He built all the really sophisticated anti-fraud stuff. He managed a team and he and I built it together a lot, but he's incredibly good at this. And I read this study as we were discussing this idea that said it was called Millennial Disruption Index and it basically said the study could have been boiled down to what do millennials hate and like what do they hate the most? And it turned out that they hated banks the most. So that was sort of like the product and marketing insight. And then I said, 'I'm going to do this. I'd love for you to help me. Do you think you can build a model that does not need the safety margin of late fees and compounding interest and all the stuff that the guys who are hated rely on?' He said, 'I'm sure I can. I have no idea if he thought he could. It would be a fun adventure to do another company with Max.' But he was like, 'I'm in. Let's go build this model.' And that was that.
But in those early years, was there ever a moment where you thought, oh yeah, this is not going to get too big?
Oh, we have had so many. There many stories and I would love to save them for the Tell memoir one day, but if you're a non-depository lender, you're lending against capital that someone provided and we were not exactly having a great time raising money. So, the bank of the Levchin family was in fact the capital provider for first loan book. I am perfectly comfortable putting a few medium-sized inheritances into the bank of a firm to lend against. The day before launch I was like, 'What do you think the loss rate is going to be on our first iteration of the model?' Nathan was like, 'I don't know, 25%.' Like, we're going to run out of money and I was terrified and of course I couldn't show it. Like this is not a thing you do on the eve of your launch to your team that you recruited and told we're going to break this industry's bad habits and teach them how it's done. Like if you're losing a quarter of the principal, the math doesn't work. The math does not work. And so like, well, we're going to find out. And of course, this is a classic example of the fear you have is not the fear that you should. As an entrepreneur, that is a and I was dumb enough to forget that, but I literally wrote that down for myself years ago. Like the thing you're scared of is the wrong thing. There's another thing, and that's the true scary thing. This isn't one. Like, whatever.
This is the true scary thing.
No one cared. So, I said, I'm okay losing $100,000 of my personal money in the first week. We'll make $400,000 worth of loans and if a quarter disappears, I will live. I'll explain it to my wife. We'll be fine. And we made I don't know $500 worth of loans in the first six months. Nobody showed up. No one cared. No one cared.
We actually experimented with the product. We experimented with how we explained it. We launched a product that said pay us back in 30 days. We introduced the idea of a firm as here's an affordability calculator. It's a $500 thing. You can pay for it in four $125 hits. And that was the thing people were clicking on a little bit. It wasn't yet a thing, but it was like, wait a second, people care about affordability. They like this idea of a schedule. They love the predictability of when it's done. And that was the tail we grabbed. So explaining what a firm is and how we make money was a huge deal in those days.
So Max, it's a little bit of a tight rope it feels like you're on. In other words, you're serving merchants, you're serving customers, you've got to make loans that are responsible as well as profitable. So you're judging individuals. What happens when the economy changes?
