Despite losses of 231 Million Dollars and more losses expected, Paypal issued an IPO. Since the story was taken down, here is a synopsis. I bolded two statements that I believe to be inaccurate.

(from PayPal Inc. Files IPO Plans by MICHAEL LIEDTKE | AP Business Writer

SAN FRANCISCO -- Popular online payment service PayPal Inc. filed plans Friday to sell its stock in an initial public offering that will try to overcome investors' recent disdain of unprofitable Internet companies. The Palo Alto-based company hopes to raise up to $80.5 million, PayPal said in a prospectus filed with the Securities and Exchange Commission. PayPal is pursuing its IPO in a frosty climate. With Wall Street turning a cold shoulder to tech companies, only three Silicon Valley companies have gone public so far this year. Sunnyvale-based Loudcloud, chaired by Web browser pioneer Marc Andreessen, pulled off the last Silicon Valley IPO at $6 per share in March, and its shares are now trading at $1.12.

As of Sept. 1, PayPal had 10 million registered users and processed online transactions totaling $747 million in the three months ended June 30, according to its prospectus. The system doesn't require PayPal to spend much to attract business. In the first half of this year, for instance, PayPal spent just $48,000 on marketing and promotion. The service is particularly popular among small businesses and sellers on eBay's auction site because it guarantees that they will be paid for merchandise, frequently at a lower cost than the merchant fees imposed by major credit cards. PayPal typically charges transaction fees ranging from 2.2 percent to 2.9 percent of the sale, plus 30 cents. That hasn't been enough to make PayPal profitable. The company has lost $231 million since its inception and management warned in the prospectus that the red ink is expected to continue at least through the rest of this year. But the company is narrowing its losses as its revenues climb. During the first six months of this year, PayPal lost $56.9 million on revenue of $34.2 million compared with a loss of $70.6 million on revenue of $3.3 million at the same time last year.

PayPal is run by one of its co-founders, Peter Thiel, 33, a former securities lawyer. Other major shareholders in the company include another co-founder, Elon Musk, and Silicon Valley venture capital firms Sequoia Capital, Nokia Ventures and Clearstone Venture Partners. The IPO is being underwritten by investment bankers Salomon Smith Barney, Robertson Stephens and William Blair & Co.

So there you have it. A company with a $231 million dollar loss ($277 million currently reported, see the link to the IPO Pick of the Week article below) and millions more in losses expected, raised about $80 million. No mention of the Internet bank, which Paypal abandoned. Now my company has been solvent for 15 years. We have steady profits and expect to remain profitable. Anybody want to buy me out for only $50 million? Sorry, Paypal not accepted.

Paypal Discloses High Rate of Chargebacks

The Banking Channel Article

This article has since been taken off the site, so here it is:

Oct 03 2001 : PayPal's move to file for an IPO at this time, has mystified analysts, but may be a result of its USD 8.9 million in chargebacks from unauthorized credit card use in 2000, which led to an unspecified fine from MasterCard. In its filing, PayPal states that its liability for chargebacks from fraudulent transactions could cost it the right to accept credit card payments, which comprised 50.5 per cent of its business in the quarter to June 30. Since the firm has enough funds to remain in business for two years without new funding, Avivah Litan, of Gartner, notes, "they have cash, so this doesn't compute. This is the worst possible time for an IPO".

Apart from the risk of online fraud, PayPal faces competition from Citigroup, which is co-marketing its C2it service with AOL Time Warner and Microsoft, and can quickly gain substantial market share. IDC analyst, Ian Rubin, expects further competition to emerge, as "eventually some of the incumbents like American Express, Visa and MasterCard will either create their own products, or evolve their credit cards to do something that will compete head-to-head with PayPal". Rubin also notes, "P2P online payments are kind of in vogue right now, but I don't see them necessarily having a long shelf life".

PayPal's filing also indicates that its undefined status under state, federal and global financial regulations, especially in light of US, and international, regulation of Internet transactions, could lead to penalties. For this reason, Gartner analyst, Avivah Litan, questions PayPal's filing for an IPO, since "they're not likely to raise very much money, and now they subject themselves to public reporting and the whole overhead of being a public company". PayPal itself refused to comment on the filing, due to being in an official "quiet period" with the SEC, but is known to have had USD 134.6 million of cash and short-term securities, at June 30, 2001.

Here are some undisputable disclosures from Paypal themselves. Since Paypal itself is admitting to these negative facts, maybe for once even the cheerleaders will believe them. Just watch them manage to wiggle out this one. Perhaps the great "conspiracy" theory? "The SEC is anti-Paypal and forcing them to admit to things which aren't true?"

Here is a link to the full IPO statement prepared by Paypal.

Here are some excerpts with my comments:

As of September 1, 2001, we had 10.0 million registered users, including 2.0 million business accounts and 8.0 million personal accounts.

80% of Paypal accounts are personal accounts which cost Paypal money to administer and pay nothing in fees. How many businesses have decided to go to personal accounts because they will not accept credit card payments through Paypal?

Here are some of Paypal's goals to increase revenue:

Expand small business payment volume

Does this mean that they will force more personal accounts to become business accounts or that they will raise fees yet again? Either one of these moves will results in more people abandoning them.

Strengthen our position as the payment method of choice on online auctions

How? By restricting more accounts, allowing more chargebacks, having their lack of customer service infuriate even more members?

Expand recurring revenue
with more fees?

Increase volume of international payments
considering their high fees and the complete lack of protection on International transactions, how likely is this?

Maintain low variable costs, particularly transaction losses
I guess by passing on more of the cost of fraud to their members.

Grow PayPal ATM/debit card usage
How will this help? They are supposedly paying a percentage back for purchases made with the debit card.

We depend on online auction transactions for a significant percentage of our payment volume. We generate a significant portion of our business on eBay, which has established a competing payment system.
And ebay doesn't freeze accounts and make customers jump through hoops for months to get access to their own money. So what does this mean? That Paypal recognizes they have competition but just doesn't care?

The payments industry remains highly competitive. If we do not compete effectively, the demand for our product may decline.
So how do you reconcile this with Paypal reps hanging up on callers who report their accounts being hacked, sending out emails against members' wishes and telling them "if you don't like it, don't use Paypal"? OTWA post.

We compete with existing payment methods and other companies... Many of these competitors have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater name recognition or a larger base of customers in affiliated businesses than we do.
I guess their research and marketing department has assured them that by being heavy-handed, rude and arrogant, they will attract more customers. They must have a lot of confidence in their Research and Marketing Department since they received their "expert" training in the same place that their Customer Service Department received their CS training and their Fraud Department received their training in Fraud Prevention.

We also compete with providers of traditional payment methods, particularly credit cards, checks, money orders and Automated Clearing House, or ACH, transactions. The associations have initiated programs to enhance the usability of these payment methods for online transactions and could lower fees charged to other online merchants. Either of these changes could reduce the competitive value of our product and make it more difficult for us to retain and attract customers.
Particularly since Paypal's emphasis will be on raising fees.

We have not reached profitability to date. We have accumulated net losses of $231.0 million from our inception, March 8, 1999, through June 30, 2001, and net losses of $27.7 million during the three months ended June 30, 2001. We intend to continue to make significant investments in our systems, infrastructure and customer service operations. As a result, we anticipate having a net loss from operations in fiscal 2001 and may not be able to reach or sustain profitability in the future. Our ability to achieve and maintain profitability will depend on, among other things, market acceptance of our product. We face significant risks of loss due to fraud and disputes between senders and recipients. We face significant risks of loss due to fraud and disputes between senders and recipients, including: unauthorized use of credit card and bank account information and identity theft, merchant fraud and other disputes over the quality of goods and services, breaches of system security, employee fraud and use of our system for illegal or improper purposes.

For the year ended December 31, 2000, our provision for transaction losses totaled $11.0 million, representing 0.87% of our total payment volume, and for the three months ended June 30, 2001, $2.4 million, representing 0.33% of our total payment volume. Our provision for transaction losses may increase in future quarters following our recent increase from $250 to $1,000 in the initial sending limit for senders who have not yet verified a bank account with us.

When a sender pays a merchant for goods or services through PayPal using a credit card and the cardholder disputes the charge, the amount of the disputed item gets charged back to us and the credit card associations may levy fees against us. Charge-backs result not only in our loss of fees earned with respect to the payment, but also leave us liable for the entire underlying transaction amount. If our charge-back rate becomes excessive, credit card associations also can require us to pay fines. Earlier this year, as a result of high charge-back rates in the second half of 2000, MasterCard determined that we violated its operating rules by having excessive charge-backs and fined us. Although we resolved this situation to MasterCard's satisfaction and have reduced our charge-back rate, we cannot assure you that new causes of excessive charge-backs will not arise in the future.

We have taken measures to detect and reduce the risk of fraud, but we cannot assure you of these measures' effectiveness. If these measures do not succeed, our business will suffer.
I think freezing any account that you deem suspicious EVEN WHEN NO COMPLAINTS ARE MADE and making the owner jump through hoops for months is not very effective but Paypal has yet to come up with a better method. I have some suggestions: How about a customer service department staffed with trained employees instead of rejects from the unemployement department? Folks who can listen to a problem, come to a reasonable conclusion and take reasonable action. Folks who have the brains to suspend accounts of scamming buyers who charge things back without ever contacting neither the seller nor paypal. Folks who will restrict the accounts of sellers who pop up out of nowhere with a hotmail ID, sell a few high ticket items, withdraw the money and disappear during that 30-day grace period that Paypal gives them before they take action on a complaint?

We incur charge-backs and other losses from merchant fraud, payment disputes and insufficient funds, and our liability from these items could have a material adverse effect on our business and result in our losing the right to accept credit cards for payment.
In short, if fraud measures don't improve, Paypal might find itself restricted. Poetic justice, don't you think?

Despite measures we have taken to detect and prevent identify theft, unauthorized uses of credit cards and similar misconduct, our payment system remains susceptible to potentially illegal or improper uses. These may include illegal online gaming, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, software and other intellectual property piracy, money laundering, bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. Despite measures we have taken to detect and lessen the risk of this kind of conduct, we cannot assure you that these measures will succeed. Our business could suffer if customers use our system for illegal or improper purposes.

So in this disclosure, Paypal admits that what they have done to combat fraud isn't really working while in their public announcements they boast about their great Igor system and pretend it's infallible.

Our status under state, federal and international financial services regulation is unclear. Violation of any present or future regulation could expose us to substantial liability, force us to change our business practices or force us to cease offering our current product.

We operate in an industry subject to government regulation. We currently are subject to some states' money transmitter regulations, to federal regulations in our role as transfer agent and investment adviser to The PayPal Money Market Reserve Fund and to federal electronic fund transfer and money laundering regulations. In the future, we might be subjected to: state or federal banking regulations, additional states' money transmitter regulations and federal money laundering regulations, international banking or financial services regulations or laws governing other regulated industries or U.S. and international regulation of Internet transactions.

If we are found to be in violation of any current or future regulations, we could be: exposed to financial liability, including substantial fines which could be imposed on a per transaction basis and disgorgement of our profits, forced to change our business practices or forced to cease doing business altogether or with the residents of one or more states or countries.

If we were found subject to or in violation of any laws or regulations governing banks, money transmitters or electronic fund transfers, we could be subject to liability and forced to change our business practices.

We believe the licensing requirements of the Office of the Comptroller of the Currency, the Federal Reserve Board or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services do not apply to us. One or more states may conclude that, under its or their statutes, we are engaged in an unauthorized banking business. In that event, we might be subject to monetary penalties and adverse publicity and might be required to cease doing business with residents of those states.

Although there have been no definitive interpretations to date, we have assumed that our product is subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. As a result, among other things, we must provide advance disclosure of changes to our product, follow specified error resolution procedures and absorb losses from transactions not authorized by the consumer. .. Even technical violations of these laws can result in penalties of up to $1,000 assessed for each non-compliant transaction. During the three months ended June 30, 2001, we processed approximately 165,000 transactions per day, and any violations could expose us to significant liability.

Our status under banking or financial services laws or other laws in countries outside the U.S. is unclear.

What's the best thing to do when you are operating in a "gray area" and may be subject to regulations and fines if you are noticed? Ask any ticket scalper and he'll tell you that the answer is shout at your customers and call attention to yourself. Well, not really. Only Paypal believes that the best way to remain unregulated is to freeze your customers' accounts, hold their money for months, let them complain to the Better Business Bureau, Attorney General, FBI, newspapers and television. Drive them to complain to their congresspeople, sue you in court. What better way to make sure that you remain unregulated?

Our financial success will remain highly sensitive to changes in the rate at which our customers fund payments using credit cards rather than bank account transfers or existing PayPal account balances.

And by promising a buyer protection plan and then refusing to stand behind it unless buyers use a credit card, you will encourage folks to trust you with bank account payments. And by restricting accounts at the drop of a hat, you will encourage folks to leave money in their Paypal accounts. I guess the only training Paypal employees received is in reverse psychology, but it sounds like they didn't have a very good teacher.

Changes to card association rules and practices, or excessive charge-backs, could result in a termination of our ability to accept credit cards.
All the more reason for Paypal to start restricting accounts that make charge backs, something they still refuse to do. Is that because they take it back from the seller and still get their fees? Whatever their reasoning, it makes as much business sense as everthing else they do.

Customer complaints or negative publicity could affect use of our product adversely.

Which is why they ignore their customers until complaints are made to agencies, public forums and newspapers. It's that reverse psychology at work.

Customer complaints or negative publicity about our customer service could diminish severely consumer confidence in and use of our product. Breaches of our customers' privacy and our security measures could have the same effect. Measures we sometimes take to combat risks of fraud and breaches of privacy and security, such as freezing customer funds, can damage relations with our customers. These measures heighten the need for prompt and accurate customer service to resolve irregularities and disputes. We received negative media coverage in the second half of 2000 and the first quarter of 2001, as well as public criticism from the Better Business Bureau, regarding customer disputes. Effective customer service requires significant personnel expense, and this expense, if not managed properly, could impact our profitability significantly. The number of customer service representatives we employed or contracted increased from 296 as of June 30, 2000 to 324 as of June 30, 2001. Any inability by us to manage or train our customer service representatives properly could compromise our ability to handle customer complaints effectively. If we do not handle customer complaints effectively, our reputation may suffer and we may lose our customers' confidence.

Then why the hell are they still freezing accounts on which no complaints have been made and ignoring their customers' complaints? Did anyone at Paypal actually read this thing besides the guy who wrote it?

We rely on our customers for distribution of our product, and this method of distribution may not meet our goals.
Maybe because they have changed the terms for that $5 referral fee to something so ridiculous, even the cheerleaders aren't pushing it anymore. C2it IS paying the $5 bonus and $10 sign up fee without any requirements.

We do not plan to pay dividends in the foreseeable future.
Well, why not? Make all investors get Paypal accounts, fund them with $250 from their bank accounts, leave the money there for 6 months and then promise them a $5 dividend if they do this. If Paypal expects their customers to do this, why not their shareholders? In any case, if the company isn't profitable, just freeze all your shareholders' accounts.

So here is a company that admits they are new, their people are untrained, they have no idea of what regulations they operate under, what penalties they will face, how to stop fraud, how to get customer confidence, how to cut expenses, how to gain profitability, whether the banks and credit cards will even allow them to operate and they want people to buy into this with millions of dollars. Wake up. The days when a dot-com's value was equal to the inverse of its losses is over. My recommendation is if this IPO ever happens, sell short. And if you can pay for your options using Paypal even better. Maybe you can even charge it back.

Why Paypal Can't Possibly Succeed

Here is some math I hope you can follow:

Paypal is currently in the hole for about 277 million dollars. They are charging approximately 3% on *some* of their transactions. On bank account and instant paypal transfers, that is almost entirely profit. On credit card transactions, they pay about 2% in fees so only 1% is profit. Based on what I have read, most buyers are using credit cards because that is the most convenient and safest way to shop. So let's take an average and say that Paypal is making 2% on those transactions with business accounts. Remember that only 20% of the members are business accounts. Assuming that business accounts make up half of the transactions, Paypal is averaging 1% profit on all their transactions. So to generate 277 million dollars in fees to cover their deficit, they would have to transact 27.7 billion dollars. Now you have to add in the costs Paypal will pay during the period in which these billions of dollars in business is transacted. There is the cost of staff, servers and the other expenses of running a company. Figure in the people who get a reduced rate and those who get a percentage back due to using the Paypal debit card, the referral fees that they sometimes pay, the legal fees they are paying to defend against lawsuits by individuals and by state agencies investigating them for running an illegal bank, the fraud costs and charge back costs. I'd like to find the person who can calculate how many decades or centuries it will be before Paypal shows a profit.

But you don't have to listen to me. Let's see what a recognized IPO analyst has to say, one who the Paypal cheerleaders keep quoting. IPO Pick of the Week

Sounds great, doesn't it? I emailed David Menlow, asking if he was aware of all the problems reported with Paypal. Here is his response:

It seems that my article has rubbed a number of people the wrong way. I have looked at the information on your site and it does provide for some interesting reading.

Let me just clear the air about this subject. My goal is to select that IPO each week that will be the best performer for the week, basis their 1st day performance. Paypal, irrespective of the thoughts and/or facts you have shared with me, is such a stock, in my opinion. For the short term, this could be the best performing IPO for the quarter. I get interviewed by over 250 reporters from all over the world. When I am asked questions as to the viability of any company past the 1st few days of trading, my standard answer is that I will leave that to the supposed experts of Wall Street, the analysts (is that an oxymoron?). My time horizons are quite short and that may add to your opinion that I am not taking an honest look at the 'entire' company. That being said, I revert back to the fact that we believe that the stock will be the best performer this week and I have clearly warned the readers in the last paragraph of the article, to not chase the stock and be the guy at the top of the mountain with only one direction as their next move, down. I appreciate the feedback and I hope you now understand a bit more about the function of this article.


David Menlow, President
IPO Financial Network
New Issues Site -
Trading Tool Site -
10 East Willow Street, Millburn, NJ 07041-1417
973-379-5100       973-379-1696 (fax)

Hardly the glowing endorsement the Paypal cheerleaders pretend it is. So let's hear from the cheerleaders. Is David Menlow also part of the big conspiracy against Paypal? You know, the one that involves the Better Business Bureau, the Wall Street Journal, Bankrate, American Banker, Salon Magazine? Or perhaps you will do the same thing you did when I reported that Citizen Bank was not accepting Paypal transactions - wait a while and then say I made it up. David Menlow's email ID and phone number are right here. You can ask him yourself.