Max Levchin of Affirm: Why I Built Affirm after PayPal

Glenn Solomon  01:41

Max is an engineer by training. But around 20 years ago, he co-founded the company that ultimately became PayPal, along with Silicon Valley legends Peter Thiel and Elon Musk, and he served as its CTO for several years. Later in his career, he went on to found Slide, a developer of social apps, which was acquired by Google. Max became VP at Google for a period of time.

He was also a first investor and a former chairman of Yelp, and has been on the board of Yahoo, Evernote, and several other Silicon Valley startups. He is also the co-founder and chairman of Glow, a data science company that empowers women and couples to control the reproductive health. In late 2011, Max started a startup studio called HVF Labs, which stands for hard, valuable and fun. Now it was intended to explore and fund projects that create value by leveraging data. In early 2012, Affirm was spun out of HVF.

Hans Tung  02:3

Affirm’s mission is to deliver honest financial products to improve lives. It is a financial service company that offers installment loans to consumers at the point of sale. Affirm allows shoppers to pay for purchases across multiple months with transparent and fairly priced fees built into every payment. Late last year, we became a partner of Affirm.

Glenn Solomon  02:55

So there’s obviously a ton we could cover with Max. Today we’re going to focus on Max’s experience as a founder and his journey with Affirm.

Hans Tung

Your name for your incubator is HVF, which stands for hard, valuable, and fun. You have said that there are three criteria for evaluating projects or involving in. Why is, and how is Affirm hard, valuable and fun?

Max Levchin  03:18

I’ll try to explain what HVF is. And then hopefully, Affirm will obviously fit all three criteria. So the name actually came from a conversation I had with Peter. Over 20 years ago, the very early days of PayPal, I was typing at some project in midnight when he walked into our first office and asked me what are you working on.  And I sort of rattle off whatever something I was working on. I said, Oh, that’s interesting. That’s really difficult. He said, Yeah, it’s a really hard problem. It was not a paper related thing. It was like a side project. It’s like, oh, what do you Why do you do this? I said, Well, it’s really hard. And he sort of stared at me for a while. I was like, well, but is it valuable? I don’t know. It’s really difficult. I know how he sort of blurred out. The inference only goes one way in this one. If it’s valuable, it’s typically really hard to do. But just because it’s hard to do is not necessarily true. It stuck with me. I was like, Yeah, I can name a lot of times in my life where I’d work on something really hard and be like, well, that was a really cool project that didn’t really add any value to the universe, but I am sure I had fun working on it. So I definitely took care to choose valuable projects as the first order of priority. But it turns out that most valuable things are actually quite difficult to do. The fun part came much later. Slide, which was fundamentally a social media or video game, cut to the core. It was an entertainment company. And it’s kind of the opposite of what it sounds like. I really loved the team we put together to run Slide and I enjoyed every person I hired and it was a good outcome ultimately when Google acquired it. I never had any fun, right? And the reason for it is it turns out that I don’t like video games. Not only that, I don’t even like entertainment that much. I like coding, I like running companies, solving hard problems. Some point my wife told me, You’re no fun. That’s why you’re not enjoying this.

So after slide journey was over, you know, I completed my mission at Google, I actually sat with my wife and said you have to help me figure out what to do next because, you know, for every computer scientist, every nerd I knew in high school, the dream job was to work for a video game company. I got to run a video game company, and I didn’t have any fun. So help me figure out what the next move. She was like, well, the last time I saw you really had fun was when you were beating your head against the wall of some of the really difficult security problems at PayPal, right. So, one, consider going back to financial services; two, don’t try to be something you’re not like. You’re not ever going to be that guy who loves video gaming so much that he dedicates his life to building them. So find what fun for you is as is opposed to what everybody else thinks fun is. So I end up writing a fairly lengthy essay for myself, basically like a letter to Max: When you start your next company, think about that hard doesn’t necessarily mean valuable but valuable has to be hard, or everybody would replicate it; and find out what it means for you personally to have fun.

From that conversation, I sort of spend a bunch of time thinking and eventually said, PayPal, never really dug below the rails, the sort of a payment industry jargon. Credit card rails is what Visa and MasterCard provides. Everything above it is above the rails and below the rails are the issuing banks, which actually lend the money and take the risks. People generally don’t go there, it’s very hard, you can lose 100% of the money, you can never make more than a couple of percent. So it’s a very asymmetrically distributed risk reward thing. But if you dig deeper, you will find all kinds of yucky things like late fees that account for more than half the profits, and deferred interest which is kind of an ugly way of making money because it promises somebody a free loan, but then finds a way to charge them interest in the part that was actually supposed to be free. So the more I read up on that stuff, the more sort of I recall those PayPal experience like, Oh, I should go there, a gnarly little place to open up and really try to make a difference. The more I talk about it, the more people’s eyes would glaze over, except for few people that were like really sort of payment nerds. And they’re like, wow, that sounds like a lot of opportunities and  we should really do something about this. And I was like, yeah, I’m having fun just thinking about it. So hard, valuable and fun. I should go and do this. That’s how Affirm came about.

Glenn Solomon  07:54

I don’t think I’ve ever heard about a founder writing a letter to his or herself prior to starting a company to kind of really try to crystallize what it was they wanted to accomplish. But that may be something we should start recommending other people think about doing, it’s very useful.

Max Levchin  08:08

I rewrote it and rewrote it over and over again. And then when it was done, I thought it was a sort of private note to self, but I sent it to one friend who proceeded to send it to his kids because he was so impressed with the logic. It was not meant as a letter to society. Actually, if I had read this letter before starting my video games company, maybe I wouldn’t have spent seven years trying to build something but I wasn’t especially well suited to.

Glenn Solomon  08:36

So speaking of Affirm, and you being very well suited to do it, you’ve talked about the fact that millennials and young people more generally are not enamored with the financial institutions of the prior century, and are open to looking for a new answer to help them in their lives from a financial services aspect. And you want that firm to be that next generation solution, sort of an online financial institution that can help that class of customers in an efficient and honest way. There’s obviously a very well-established banking industry that you’re kind of going up against in some ways, what about that industry makes it ripe for disruption?

Max Levchin  09:14

Lots of things. For one, even 1% of those customers choosing to commit their financial decisions to a start-up, like Affirm. It necessarily means billions and billions of dollars, because finance is probably the largest or second largest market in the world. Maybe energy is the larger market, but finance is really up there in terms of scale. Just a basic stat on credit cards alone, revolving credit accounts in the US in the last 12 months ran a trillion dollars, right? So it’s a pretty big nuts to crack. If we can make a difference for a small number of people, we want to make a difference for a larger one. The other thing that makes it compelling and interesting, vast majority of banking and even non-banking institutions in the US are sort of a lenders and service providers, but are software developers. There’s an interesting side note there, hopefully I’ll get to it in a second. Why this is the case? Every single one of them are amalgamation of software packages that were acquired and integrated in or sometimes stitched together. So if your average bank has something like, 100 software systems that were provided by different third parties, most on prem, some in the cloud; if you read jobs pages for companies like Amex, or Chase, or any of these companies, they are actually more technology centric in their own fields than most of the programmers. The amusing part of this is like, oh, wow, they’re still hiring COBOL people. Oh, good luck with that. People who used to code in AS400 are retiring now. And they’re being asked to not retire. My mom was one of these people, she was persuaded by her employer not to retire for a couple years in a row, because they couldn’t find anybody who could write fourth D on AS400. That’s kind of like the superficial thing is, haha, these guys are in 500 years ago. But then if you look more carefully, they’re actually using Python, JavaScript, fourth D, Lua, Haskell, and Erlang. It’s not just the fact that they’re sitting on ancient technology, they’re sitting on every imaginable mishmash of old technology. So if you’re saying, hey, let’s introduce a brand new kind of loan. One of the decisions that they have to make is where would we build that? What part would we have to change? It’s almost a certainty that if you employ a meaningful number of Haskell programmers, you’re probably also not rich with Erlang engineers. One of those two came from an acquisition or someplace where you’re no longer prepared to support. And so these crazy collages of software decisions make these companies incredibly vulnerable to disruptors that come in with a brand new stack who says we’re gonna build everything on one system in one language and one set of frameworks, and by the way, we’re still employing every single person involved in a design. So when we want to modify, we can literally call the guy or the girl who put this stuff together and said, hey, how would you add this feature. So the ability to execute on the software side very quickly is really powerful. The other side of it is a little bit more subtle, but sort of really came true with Affirm. A lot of these companies, if they ever had a sense of mission, it’s been gone for a long time. And it’s really hard to get the very best software engineers, generally the very best people, but certainly software engineers, It’s such a hot job today, so they would not join companies that cannot speak to a sense of mission clearly. So if you have choices, if you’re a computer science graduate from CMU, MIT, or UMI or any one of these, the top computer science schools, you’re not really thinking about how will I make enough money to feed my future family. You’re thinking, what is the coolest thing I can work on? My computer science degree is a key to any door, so flying cars, or AI, or something that inspires me. And the one industry that you normally don’t think is truly inspirational is the banking industry. So FinTech, the type that has an inspiring mission actually stands to benefit if you woke up one morning. Money’s interesting, it’s such a fascinating concept, I’m gonna work on something to do with money until Affirm I would argue choices, it was not because you’re going to work on some crazy monstrosity of software decisions that you would not enjoy, right? Or go to Wall Street and just be in the back office, you know, pinch your nose and trade, or build software for traders. And so Affirm created this place and a company where mission comes first. And we’re all here because we want to make the world a better place. And we’re doing it through changing the way money is paid and transacted. But it is about the mission more than anything else. And there is that subset of people that would say, I want to work on interesting financial systems, somewhat aided by the emergence of cryptocurrencies, because lots of people woke up and said, Oh, I didn’t realize money was such an interesting big and important thing as a technology as opposed to just money itself. So I think that’s why the disruption in this particular space is now as opposed to other times.

Glenn Solomon:

So I have been really looking forward to have this conversation to be… I remember back to the time when we invested in Square in 2010 timeframe. And I asked Keith who at that time was the COO there how are you guys able to manage frauds. He just had a one-word answer, and it was Max. And I was like, um, Max Levchin, but he doesn’t work here. And he said yeah, but firstly he said that you helped, so thank you for that. Hopefully, got some advice, shares or something for that effort. He kept reminding me that if you see PayPal as the first venture-backed FinTech, the biggest problem for PayPal, to solve was how to manage who to underwrite and avoid fraud, right? And I think those are the two issues that you guys must overcome. Can you talk a little bit about how you are doing? You are the father of this science.

Max Levchin  15:33

I’m a legend in my own mind. Keith is too kind, I did have a hand in several companies actually, anti-fraud or fraud-management systems over the years. There was an infamous email I wrote to Elon Musk many years ago during our time at PayPal, the subject line was Fraud is love. And it was obviously totally unjust. And it was mostly freaking out about the fraud numbers we were seeing and kind of like, What the hell are we gonna do about this thing, but also sort of committing to be the guy who goes and figures that out. But in retrospect, it was more than a joke. I’ve actually really gotten to something like sign. It’s the closest thing you can get to like cloak and dagger. I’m a closet a fanatic reader of spy novels and the closest thing and get to spy craft, if you’re a FinTech nerd and a payments nerd. And so anyway, I actually like the problems a lot. But yes, I worked on those in PayPal years, and then helped Square a little bit.

Glenn Solomon  16:29

So given the business, you guys are in any new wrinkles that you’ve had to deal with?

Max Levchin  16:33

Yeah, so part of the reason why fraud is so interesting is that it changes all the time. One of the interesting truth about fraud is it’s hardest in the early days. So the good news about humanity, as I found out through experience, there’s actually a fixed number of bad people that really wants to rip you off. That number is probably kind of changing up and down, but it’s not growing proportionate with the size of your company. And so any earliest days, bad guys went like, oh, cool, new targets, let’s go have fun. My job is to steal money. And essentially, fraud is a very asymmetric threat type problem, because we have to be right once, and then you’re out of business. 99.8% of the time, it would be a good and acceptable target. And so the thing that happens, though, is some of the fraudsters probably retired and some of them go to jail. But most of them just kind of do this because that’s how they make their living. But they’re very creative bunch. They come up with all kinds of wacky new ideas. So during PayPal, notion of synthetic identity was like kind of theorize about one day, bad guys will figure out how to get themselves a human created whole cloth by registering a social security number. But that’s too much work, kind of probably will never happen. And I don’t think we ever saw that synthetic identity during the PayPal years during my time there. Today’s synthetic identity is a huge issue there, literally billions of dollars lost to humans taking out loans, where the human doesn’t exist. And I know how because we fight this every day. Bad guys have figured out how to create these identities at scale, scalable fraud is the scary kind. One person figuring out how to steal $100,000 is very unpleasant. But if that was a one sort of a special case scenario, you lick your wounds and try to move on. Somebody figured out how to steal $10 every second, you’re out of business. And if you don’t catch it quickly enough, and don’t figure out how to plug it. Lots of interesting news stories, it’s always the one where you reveal a little bit but not enough to tip the bad guys off. So last year’s explosive concepts and fraud for a time, some group of criminals figured out. But these are always criminals who like as much as I enjoy jousting with them. These are not just bad people, they’re actually breaking the law and stealing money that’s not theirs, but it doesn’t make them less fun in terms of being opponents. So for a time, group criminals figured out how to temporarily basically hijack calls and texts from a selected phone number, which is a very specific to a carrier specific to a prefix actually. But if I call you and your phone wouldn’t ring would ring in someone else’s phone.

Glenn Solomon  19:14

So that person can be the second factor authentication.

Max Levchin  19:17

That’s a great way of circumventing it. Normally, two factor auth is pretty bulletproof. No, it’s not, not if I get hijacked your phone. And most carriers actually have systems in place to catch that and deal with it very quickly. But for a time, one carrier had a vulnerability where they’re just in an opening for about 10 minutes. Once the phone was hijacked, 10 minutes a long time. A lot of damage can be done in 10. You can write a piece of code, you can do a lot of things in 10 minutes. So that was interesting. We lost a few drops of blood on that one. We caught it very quickly and we help the carrier fix their problems. But that was a definitely rude awakening. Synthetic identities continue to crop up in all kinds of exciting ways and most of them are unfortunately money losing ways. There’s always fraud rings that get all the classic stuff be around where you buy sensible goods and you sell them at a loss. And he sort of figure out, what’s the discount you’re willing to take to get rid of something that probably will not be bought at full price, because obviously stolen goods. Those are old staples, and they’re not very hard to catch. Because you can do velocity controls and figure out sort of clustering of types of transactions and types of skews. All that stuff has been dealt with at some point, the new stuff is always fascinating. We’re like, two factor auth, there’s undoubtedly someone somewhere probably in their kitchen cooking up a way to defeat two factor auth, including, but not limited to things like one time password generators, which haven’t been defeated, but not yet. Someone’s going to figure it out. Wow. It seems like my virtual eyes are lighting up on this podcast. That’s because despite the fact that it’s so annoying, it’s also really fun to work on.

Glenn Solomon  20:51

This is what payment geek fun feels like.

Hans Tung  20:56

So on the other hand, part of what made us super excited about Affirm, besides your ability to solve fraud issue, is that we heard from merchant partners that the checkout processes are resolved by the firm is truly differentiated. You also have a lot of competition in this field, you and I talked about a few of them? How have you been able to continue to create a differentiated product? And what does it take for you to stay ahead of your competitors,

Max Levchin  21:19

Two different things. In general, the company is founded by four software engineers, so the DNA of the company is like we should be able to out product, out build everyone else out there. And so far we have always been very good at figuring out new features, new products, new ways of delivering our experience to the customers that is truly different. Some of it is creativity, where you can say, hey, would it be possible to do x and then we can build it very quickly and find out if it works. And then the other side is also being able to measure, test, fine tune, and iterate at a much higher pace. So not exactly, but here’s a secret to Affirm’s success, just having a robust engineering approach. And one of things that we did early on was we spent the first two years building a full stack from scratch. So everything from the general ledger all the way to the underwriting systems is built internally. So it allowed us to be very nimble with what we want to try, how we want to build it, and how we instrument and optimize it. The other side, I sometimes take for granted, is actually very powerful. The notion of sort of sticking true to the mission and making sure that we actually mean it when we say we won’t screw our customers, we won’t take advantage of them when they misstep, or have misfortune befalls them. We’re well into many billions of dollars lent out, we have never charged a penny of late fees, which is very controversial in the industry. There’s always some investor or board member, advisor, payment veterans that says, all right, you guys are leaving money on the table. Late fees are profit center, go to it. And we certainly heard that advice over and over again, and nothing beats the brand value you get when a customer calls your call center and says I’m late by day, I’m so sorry, what’s the late fee. The rep says, oh, there’s no late fee, don’t worry about it. And they’re gonna be like Holy Mother of God, I’m going to tell all my friends about you, right. That’s a very powerful thing to build at a more kind of a retail level, if you let that be your guide, as you design the product, you are actively leaving a little bit of money on the table here and there. But you are creating something that competitors cannot compete with, especially in the traditional incumbent parts of the world because they’re over time. It used to be kind of a nice little side pocket of cash and a form of late fees or some kind of fees. A lot of these have now been optimized into being massive profit centers, most card issuing banks in the nonprime territory, which is  not where people get their Sapphire reserves and  their Platinum cards. Most of those banks derive about half the profit from late fees. So if they wanted to come into the space and say we’re gonna be just like Affirm, we’re gonna cut the late fees out. I was gonna tank their stock price because they can’t take the P&l project. So I think that’s been actually a incredibly valuable thing for our ability to compete. The cool thing about it is that merchants are now figuring out very quickly, especially last year. A half year ago, Walmart made a fairly public stand against deferred interest, which is a particularly noxious creation of traditional financial services industry where you’re promised zero percent loan, but in small print, it says that if you’re a day late or short, the interest becomes simply 30%. But it compounds from time of purchase. This is the most ridiculous version of it, as you can buy a mattress for 144 month, so 12 year interest free loan? And typical useful cycle of life for a mattress is like seven years. But you can pay it off interest free for 12. But if on month, 144 months, you have not paid up the last dollar. It’s as if it compounded at 29% rate for 144 months. That’s one easy way of finding yourself near bankrupt. One thing that brought should be legal, but that’s my personal opinion. Although I’ve never want to shy away from saying this to any politician who wants to listen to me on that one. But, obviously, we certainly wouldn’t offer anything remotely similar to this sort of thing. But even with lesser version of his words, you know, maybe it doesn’t quite hit you with 144 months; or maybe it’s something a little bit gentler. Merchants are starting to realize that these are not the kind of products where you want your good name and your brand to be associated with. And most of the traditional products are white labeled, or the merchants’ names are on the loan. One of the things that we did from the very beginning is made it very clear that we’re always going to have our name fairly prominently in the conversation with the consumer, not because we have to supersede the merchant brand. But because we want the consumer to understand that we’re different. We’re different. But if we treat you badly, your quarrel is with us. It’s not the merchants’ fault. We screwed up and we have to hold ourselves to a higher standard. So it worked pretty well.

Hans Tung  26:23

You also have been able to help some of the merchants that you work with. Some  have told us that sales conversion with you has increased by as high as 30%. How are you able to do that?

Max Levchin  26:35

That’s primarily iteration. Obviously, there’s a secular demand for the products, you wouldn’t see 30% increase in volumes, conversion, or ARV, all these different metrics where we tend to have a double digit impact. Just because it’s there. People clearly have responded to the product offering, they think it’s good, it’s fair, it’s transparently priced, all the things that we’re trying to make it. But it’s probably started out at 20. The fact that we are a software engineering shop, first and foremost. We could continually optimize it to higher and higher numbers. And in some cases, it’s above 30 at this point, but optimization and iteration is core to how we do our job.

Hans Tung  27:17

How fast do we iterate?

Max Levchin

We ship code at least once a week, typically many times a week.

Hans Tung

No, it’s a lot faster than most banks and do for sure.

Max Levchin  27:27

Definitely. If you’re comparing banks.

Glenn Solomon  27:29

that’s an unfair fight.

Max Levchin  27:30

Yeah, I think somebody told me that they have very proudly switched to sprint based software shipping schedule, which I think is really cool. Like, we have a sprint, a summer sprint, and a fall sprint. We don’t do a winter sprint, because that’s what people like to take time off. With three times a year, a sprint for three months. Sounds like a quarterly sales schedule. But so you know, we sprint once a week, or sometimes more often.

Hans Tung  28:01

On the consumer side, you have several million consumers now using Affirm and your NPS scores is high in the 80s. It’s very difficult to achieve for a FinTech company or financial service companies. How have you been able to do that? What techniques have you used that worked for you? No late fees obviously was one of them. But what else?

Max Levchin  28:20

Just sticking to core values, we’ve never actually set a goal of increasing our net promoter score. In the sense that we always believe that if we treat the customer right and do the right thing and stick to our core mission, it should speak for itself, which it does. We use a third party to serve our customers. And if the score dips, we would ask the question what have we done, as opposed to ask what can we do to bring it back up. We try to fix the problem. It is definitely my belief that a good product should have a very high net promoter score. If you’re not serving the general public, you’re not asking do you remember what it is. People who haven’t used it probably have no idea. People have used any product will certainly, hopefully say that was amazing or gladly to tell my friends about it. Because I didn’t feel screwed. I didn’t feel like there was a feat baked in there. I should have known about it and it would warn me. So it’s on us to figure out how to keep that front and center of everything we do. But don’t do anything extra to have our net promoter score high. We definitely do lots and lots of things to make sure we do the right thing for the customer.

Glenn Solomon  29:26

Max, you’ve also talked about data being a real competitive advantage for Affirm. And you mentioned you’ve now loan billions in the billions. So you must have a growing corpus of data with millions of customers. And I assume that data is growing rapidly now. How do you guys use data as an advantage in your company and when you advise startups, what do you tell them about use of data?

Max Levchin  29:48

Data is definitely the lifeblood of everything we do here. So we try to measure everything. Be very smart about what we store. Be very safe about how we store it. Obviously, one way of disrupting your high net promoter score is not being careful about what do you record or not telling people what you’re going to record or not being smart about how you store it. But so far, we’ve been very good about it. The most interesting corpus actually may not have been where you took the question, but it’s a question that comes up a lot. How are we able to underwrite better than the average bank? So the typical bank uses a FICO score, but we don’t, that’s normally not a good enough answer. And that’s right, you should ask the brokers how is it possible that some of these startups are able to underwrite so much better? Or are they just giving loans to anybody who’s asking for? So one easy way of getting high net promoter scores is to give money to everybody, okay? We don’t, it would be fun to be sort of the lender for every person. But obviously, everybody has their risk tolerance under the risk constraints. We do approve about 30% higher than the industry; for different credit crunches, we approve a little bit more. But pretty much in every credit profile, we approve more than the history on average, 30% more. The way we’re able to do it is actually through data. One, we look at the standard, quoted, and typical data the average lender would look at. We tend to buy this data raw, and then minded for features internally and build our models as opposed to rely on external scores, which is how you can find a little bit of information value or a little bit of a competitive advantage via data. The most interesting data corpus that we’ve gathered over the years is actually our own history. It is the information around our users’ choice of purchase and pricing information. We get skewed level data for merchants about what it is they’re actually buying and under what circumstances. Sometimes we know things like what marketing program led to what kind of a purchase, how the pricing impacted person’s willingness to convert, how they went about choosing the term. So typically, as an Affirm customer, you get to pick 3, 6, 12 or 6,12,18 months. There are many choices on the duration. And so all of that feeds into answering the basic question: is this a loan that this person is able to safely repay given our ability to estimate their cash flow, which is fundamentally what we’re trying to do every time we lend money. That’s the second question to ask. The first question is typically, is this person who they say they are? Are they trying to rip us off? And those who are fundamentally different, and all of that is answered through data. We have pretty much no human intervention, obviously, all these things are either online or very rapid offline purchases. So everything is done through machine learning. And data is what feeds that.

Hans Tung  32:41

Great. And we look back in your career, how have you seen yourself grown as a leader, from PayPal to Slide, and now to Affirm?

Max Levchin  32:48

There all the obvious stuff here I’ve gotten. I’m a better communicator. I used to freak out about having to speak publicly. And now I don’t, and I used to stress about having to beat a podcast, and now I’m on one right now. So all the sort of things you learn to do by doing it a lot. It’s kind of self-evident. The thing that I actually realized recently is I’ve never really worked for anyone, even during my time at Google, my boss was one of the cofounders. And so my interaction with him was that of a kind of entrepreneur to entrepreneur. I sort of told him what I was gonna work on and we’d read on things, and sometimes we didn’t. I’ve never actually had a relationship where I had concerns about my ability to make my next promotion or worry about my compensation, structure, and fairness, those are things you just don’t have to worry about as a founder. You have other things you need to be really stressed out about. It’s a more stressful job, perhaps than the other way around. But to be a good manager, a good leader, you actually have to understand that side of the question, too. Sometimes, I would hear someone tell me, oh, I’m really concerned about this. I was like, oh, why do you even worry about things like that? It would never happen here. Right? Well, but it happened to me in my previous job. And no matter how many times you say that this is a very different kind of company. If people have gone through life, meeting bad bosses, and seeing bad behaviors. Then they come to your company and they’ve heard that this is a great place with great culture. People really take themselves very differently here. They still have their concerns about the bad habits that they’ve seen in the past. So just understanding that and relating to it and try to be able to speak to people in the way that makes them feel more comfortable. This is a different kind of company, something that I think I probably learned only at Affirm. The other thing that kind of an interesting reflection to PayPal and back. In many ways PayPal and Affirm are quite similar, right? We’re building a financial services company who have these lofty aspirations, kind of surround ourselves with these really bright, mostly technically savvy people that are trying to sort of use software to fix these really old decrepit systems. A big difference at PayPal, we never actually sat down to write our core values down. Our core values were fundamentally commercial in nature, we were building the new world currency. And that was the plan. And that was kind of enough. At that time, it didn’t bother me. It was like, alright, we’re doing this and that’s what we’re doing. The growth is amazing, the team was fantastic. We’re sort of really smart people debating all day long and sort of writing code all night long. And one of the things that I really wanted to do with Affirm is to capture the opportunity to define what the company is beyond its commercial aspirations? And writing down the core values and debating them and asking questions like what highest order bit is and what isn’t. What follows from a core value and what doesn’t. It is not something I did at PayPal. Initially, I started doing  things I’ve heard but never done before. I heard of all these companies that have their core values written on their walls, and I want to try that, too. It is more of an experiment. By the time I was done with the first iteration, I was like, this is really valuable. This is like a catharsis you get, knowing what matters to you. And kind of setting down rules of how the company is going to be run, which is very helpful. Because then you will know what kind of people you want to work with. People that are ok with bending some of those core values are probably not going to survive. If you really mean it, you have to go through the block of defining what really matters and what really doesn’t. I don’t know if that was a big difference of me in doing things in my 20s versus my 40s.Or I’m having 20 years extra experience, or just the time is different now so that core values matter more. But I really enjoy that a lot more than I thought I would.

Glenn Solomon  36:33

Did you come up with the core values kind of before founding the company on your own? Or was this a team effort with others in the company.

Max Levchin  36:40

I wrote down the original set of core values with my co-founders. We start a company with an actually interesting beginning, where we spent about a year toying around with various concepts that were all flavors of what Affirm ultimately became, but we weren’t quite ready to go jump off and do it. And then once we were kind of, Okay, this is the thing, we’re going to do it. That’s roughly around the same time as I wrote down the core values. As soon as we started hiring people, I made a point of publicizing core values saying: here’s what we stand for, here’s what we will and will not do. There are a lot of questions people asking like so you have this core value of transparency, what does that really mean? Like transparency? Like, so? Can I know everyone’s income? Can I sit in on a board meeting? And I had to answer a lot of these things. These are kind of cute, but more like, is it our core value that we never charge late fees? Or is that an outcome of a core value? And if it’s a core value, why didn’t we write it down? Well, no, actually, that’s an outcome of something else. And so I ended up writing a note document about a year later titled Affirm’s Operating Principles which was a much longer form where I sort of write here’s how to interpret the core values. It is like writing commentary on the gospel of Affirm. It’s a little bit of religious experience. And that actually became kind of a very useful document that I would tend to use it like, hey, read this before you join the company and see if you’re willing to abide by these rules. It’s actually public. If you search for Affirm Operating Principles, you’ll find it. I published a few years ago. And then about a year later, I realized that that thing was way too long. And so I sat down with a couple of executives and rewrote the core values, the same core values and same number, same everything. But basically, boiled down into like a page you can memorize or you know, a few paragraphs that you can actually memorize, as opposed to this multi-page operating principles document that I put together. But as I am prone to obsessed, and probably perhaps over invested in like really finding the optimal way of communicating this stuff. But it’s good in the sense that people now kind of know what to what to look up if they’re like, Oh, I wonder if this is within our ethical bounds or not? Like, it’s, it’s fairly descriptive.

Glenn Solomon  38:51

That’s very cool. Another question on culture and building the company. You’re an immigrant, and you you’ve prioritized diversity and inclusion as a core preset here at Affirm. It’s definitely a hot topic among startups that Hans and I and others of GGV are involved with, of course, beyond just GGV these days. Two questions for you on this focus on diversity inclusion: one, how have you done it? You’ve been pretty successful so far; two, what have the benefits been for you?

Max Levchin  39:23

The two are kind of the same. Actually, I think that the same thing can be said about for both questions. So the thing that I found as a guiding principle to the previous point, to think about DNI is actually answering the question. Not in terms of how do I improve my DNI numbers. Or how do I hit my DNI goals. I think that those are all kind of misplaced second order things. You want those numbers to be good. You want to be able to say, hey, we’re proud to have increased our underrepresented group participation by X percent this year, which sounds like those are all the things that you should be doing as a good CEO and a good citizen. But fundamentally, the business need behind is you want the best possible team. One part of that is you want to get varying opinions, varying backgrounds, and understanding of customers through people that look like your customers, as opposed to everybody who looks like they went to the same school. But the way of accomplishing that has been successful and sort of allowed us to achieve all the numerical goals. There’s always the very best person in an underrepresented group, they’re not necessarily where you think the very best people are, according to your intuition. I went University of Illinois, the obvious thing is I can go and recruit people. And we do every year because that’s my alma mater and I love being there. And I kind of know what the university students there look like. And thankfully, I has actually been increasing diversity too. It’s good because I have an unfair advantage when I try to convince students to graduate and come to Affirm. But the other thing you can and should do, and what we’ve done is you go to schools where you don’t normally find a lot of other tech companies looking for talents, because that’s just not the obvious place. Basically, your fish is in fish territory, and you don’t lower your standards, you don’t compromise, you don’t say, oh, because you’re going to fit my check box so I am gonna make room for you. Quite the opposite. You say you are an amazing person with the best talents possible. And I found you because I was willing to go to some school or some place or some area where people don’t even travel here, because there’s obviously no computer scientists. I’d like to hang out here sort of thing. And so we’ve been very successful recruiting from majority x, x is your favorite underrepresented groups, schools, and places and groups. Every time I go recruit on campus, I try to make time to sit down with not just the computer science clubs, but computer science for black. There’s plenty of groups now that are specifically designed to attract underrepresented groups as participants. Inevitably, there’s some amazing jungle,. They’re amazing and talented. You can be the first person they interact from Silicon Valley saying, hey, I want you to come work here. And by the way, we hired someone just like you a year ago. And so it also begets itself, once you start showing that this is a place where whatever your kind is not just welcome, it thrives. It’s the best place for them. People want to join. And so we’ve done pretty well there. We’ve just announced one really cool female executive. And we’re about to announce a few more. I’m doing especially well on my male to female executive ratio right now. Which I’m quite happy about.

Hans Tung  42:33

We’re seeing more and more real companies building a second or third office with tech talent. You’re doing one in Pittsburgh, we’ve seen in some portfolio like Slack in Denver, or in Phoenix and in Atlanta. What made you decide on Pittsburgh? And how did you come to this decision to have a second office in first place?

Max Levchin  42:51

Like everything else, it was a one of these 36 variable optimization where someone here did a ton of research as best place for criteria 123 through 36. And everything from price of real estate access, to diverse computer science talent, to flights to our other offices, not frequency of flights or times of flight, stuff like that. So, it was not pulled out of a hat. I guess that’s the short version of it. But I’m generally very bullish on not building offices in Silicon Valley, in particular, because the competition for talent has gotten completely insane. It’s also just really hard to retain talent here. Even if you’re obsessed with attracting it, there’s so many opportunities, and people understandably sort of want to try out everything. So there’s real sort of business sense in finding places, if people want to live in Pittsburgh, or Denver, or Nashville, being one of the few companies that have a really exciting place to work makes it a little bit easier than being in Silicon Valley where the choices are infinite,

Hans Tung  43:53

The benefits are obvious, but also a lot of companies prefer all the engineers and product people to be in the same building on the same floor, so you can talk to each other and be more efficient that way despite the higher costs, how do you solve those issues?

Max Levchin  44:08

I think that’s generally true. If you could have floors that could comfortably house 500 people, which is roughly where we are now. I’ve never seen a building that had a floor plate where one floor could have 500 people, probably not a safe building to be in anyway. Last time I’ve seen a building that big in that flat was 1840, the Embarcadero PayPal office, I think it was like a former dealership or something. One huge floor. But I think we’re past the stage where we could actually fit all our engineers and product people and designers onto one floor. So you kind of have to, like even in San Francisco, we now have two buildings where we sort of cross the streets all day long. And soon enough, I think we’ll have a third one. At some point, you end up becoming comfortable with having offices that are in different time zones. So our New York office has been both thriving and pretty, a cool place and a fun place to go visit if you’re based in San Francisco want to go travel to New York. So long as you’re able to maintain the culture. If you go there, and it feels like home and you come back and you know, it’s the same vibe, I think it’s not that difficult to deal with a distributed set of offices. The difficult part is the cold start problem. If you’re going to a new city, and you’re not fully committed, you’re gonna end up hiring one or two people, and probably they will leave because there’s always one or two cool companies to work for. And if there’s a critical mass of people there, and they’re excited to come to work, you don’t wanna be the guy who goes into a dark office and flips on the light switch, because you’re the only one who works there, or one of the two people who work there. So it’s actually more of a problem of  can we convince ourselves that there’s a critical mass of 20 employees, 30 employees that will be here if we choose to open an office in city x? I think after that, it’s a little bit easier.

Glenn Solomon  45:49

As Hans mentioned, a lot of our companies are doing similar things with a lot of the constraints in Silicon Valley. And I think it’s fundamentally a good thing. Because obviously, Pittsburgh, taken as an example for you guys. You’ve got Uber, you’ve got Carnegie Mellon, you’ve got a lot of great talent. That’s grown up in Pittsburgh. And My bet is, you’ll have a lot of luck hiring great people there. And eventually, for our business, the next great entrepreneurs are going to be the folks who get hired into Affirm in Pittsburgh, or Slack in Denver, or Opendoor in Atlanta, who then go start their companies. I think this this is kind of the beginning of startup activity in other markets.

Hans Tung  46:28

Yeah. Speaking of having different offices in different places, one of the hot topics last year in the valley is, can you work smart? Or do you have to work hard, implying that if you work hard, you may not be working smart? What’s your schedule? How do you feel about that?

Max Levchin  46:44

I think founder CEOs generally work 999, we try to make a couple extra days, somehow. I roll out of bed, typically between four and 5am. And if I’m falling asleep before 11, that was a comfortable day.

Hans Tung  47:04

So even today, as a billionaire, this is what you would do.

Max Levchin  47:09

I don’t know if there’s any external factors that impact that. That’s how I’m wired. Over the years, I’ve definitely recognized that what they used to call face time. Sometimes it is critical, and other times is absolute horse bleep. Because as often as not, he could sit in front of a computer and type as hard as you can and put out not useful code, or not useful product specs, or not useful spreadsheets. And so there’s definitely “Work Smart”. It is very real, and it’s really important. Sometimes you have a moment where you have to sprint, and if you’re sprinting and you’re doing it with a bunch of colleagues, you’re better off being in the same room. I can name product I’ve got built here, starting in the middle of the Christmas break with a bunch of engineers. This is a seven-year old company, these people are not all founders. And they were really motivated, we have to hit a deadline. And a bunch of people basically locked themselves in a conference room. And we’re just going as hard as they could. And I don’t think there was the seventh day where they took it to rest, they just worked until it was done. Sometimes that happens. And as a leader, you have to be prepared to lead. If you’re going to shove that, you better be there with them. For example, the 996 for everybody except the CEO doesn’t work if people are like, well, how is that person special. But I do think that 996 is not the solution to every problem, you’re far better off saying, this is something that needs an all-hands-on deck approach. And in that situation, it’s really rare that somebody says I have to go home because my work life balance is hurting. Work life balances doesn’t work right now, because we need you and we need everybody. And a lot of times if telling someone Well, you better stay at your desk. Yes, it’s Friday and 4pm. And you’re thinking happy hour, but instead, we’re going to make you work through Saturday just to train that sort of self-harm muscle. That’s also stupid, right? So I think Work Smart is generally more my speed. But I’m no stranger to the work hard part, which I think that so long as you have the ability to work hard when necessary and you’re willing to put it to work, you have an advantage. And I think if you just bang your head against the wall, it’s your head that’s gonna crack. So it’s probably not the best use of your skills. But if you occasionally find a soft spot and you put in a little bit of extra elbow grease, it pays off.

Glenn Solomon  52:41

Okay, Max, we’re at the end of this episode, which means you’re on the hot seat, we’re gonna ask you a couple of quickfire questions. Just say the first thing that comes into your mind. So first off, who’s an entrepreneur or a company that you admire most? And why?

Max Levchin  52:57

Tobias Lutke at Shopify. I think it is freaking amazing. Yeah, I think that’s funny. The obvious answers are obvious. But I think he gets a lot less fanfare than he deserves. He’s a stunningly successful entrepreneur and very strategic, very smart, super unassuming. I admire him in part because I like the way he conducts himself, as opposed to people that did something amazing, and are not too shy to talk about.

Hans Tung  53:21

What’s something you read recently that you would recommend?

Max Levchin  53:23

I read a lot of trashy spy novels, and I don’t recommend them. But they’re great to take the mind off the pain in entrepreneurship. I read a book called Habit. I read a lot, also a lot of psychology books. And this is a good one. Just explaining how brain forms, habit patterns and how to disrupt them and how to rekey habits. I’m rereading the Hero with A thousand Faces. you need a long book to blow your mind and not have to do anything with Silicon Valley. It’s a great book. That’s what I’m reading right now.

Glenn Solomon  53:56

Okay, what’s one piece of advice you like to give to founders.

Max Levchin  54:00

it’s a bad idea to start a company alone. It’s really, really lonely. If you’re a sole founder CEO, you won’t know how lonely it is until it’s too late. And then it can be just a very dark place to crawl out of. And if you’re doing this with someone you don’t know, think of it as choosing a life mate.You don’t know how long you are gonna be together. And you don’t want to find out that you really dislike this person. Either over trivial things like, oh my God, this person has terrible personal hygiene and we’re stuck together as cofounders. That’s a bad thing to find out. But the worst thing you find out is I don’t like this person, because their ethics are not exactly the same as mine. So don’t do it alone and to get to know the person you’re doing it with.

Hans Tung  54:55

Last question is can you see Affirm as a global company one day?

Max Levchin  55:01

For sure. I see it as a global company very soon. The question is which country first and how quickly the second.

Glenn Solomon  55:07

Great. Max. Thanks so much for joining us. This was fantastic.