The Signal Interview
Last Friday was Pi Day — March 14 — and Max Levchin was celebrating Affirm Holdings’ 13th anniversary. He chose that date in 2012 to incorporate his buy-now-pay-later fintech because he’s “a little bit obsessed with mathematical constants,” he explained.
So obsessed, indeed, that he delayed proposing to his now-wife until he could find a 3.14 carat diamond for the engagement ring. A math geek since his childhood in Kyiv, he had spent part of last week trying to finish a set of programming puzzles called Advent of Code — “the greatest few days of torture that I’ve had in a long time.”
Math runs through Levchin’s thinking about Affirm, his biggest venture since he built PayPal with Peter Thiel, Elon Musk, Reid Hoffman, and the rest of what became known as the PayPal Mafia. At the heart of his explanation of why Affirm has managed to compete with Visa, American Express, and countless other credit providers is a calculation about unit economics that is just now coming good, with operating profits in sight. He has been telling investors for 13 years that if Affirm can make a sufficient margin on each transaction to cover credit losses, fraud losses, and costs like offices and employees, it will be “a self-sustaining machine.”
Three days after Pi Day, though, an announcement seemed to scramble his arithmetic. Klarna, a rival preparing an initial public offering, struck an exclusive deal with Walmart’s OnePay finance app, which had been a valuable Affirm partner. Investors initially subtracted nearly 13% from Affirm’s $15 billion market value before analysts concluded that the selloff was overdone. Klarna had paid a high price for Walmart’s business, they wrote, offering it warrants over Klarna shares.
Affirm’s ability to maximize value for merchants and customers will keep them loyal over time, Levchin assured Semafor afterwards, with a dig at his competitor: “Financial incentives can try to bridge the gap to Affirm and distort that preference, but only temporarily.” His stock recovered, but remains around the price at which it listed in 2021.
Affirm has seen more severe market swings since going public, which Levchin admits he’s found unnerving. “I made my peace that you cannot focus on a short term,” he says. “You’re far better off asking the question, ‘Am I still on strategy?‘”
The math behind a ‘moral’ mission
The Affirm story begins with Levchin being declined credit when he went to blow part of his first fortune on a convertible. (“A terrible idea. You get chapped lips.”) He flew to Los Angeles, bought the Mercedes, and drove back to San Francisco, getting pulled over for speeding at 2am.
“The entire package of stupid things to do in your early 20s, while you’ve recently become independently wealthy, I accomplished it all in one day,” he recalls. But he ended up having to pay cash for his car, because the dealer said his credit history was “trash.”
Levchin coupled his desire to find a better way for consumers to build credit scores with an insight that came after the financial crisis — that younger generations had become wary of credit card debt. Affirm distinguished itself by pledging never to charge late fees. The strategy was shaped by a key assumption, Levchin says: that “the best and brightest people don’t go to work on payments.” Its stance on fees was in part a tactic for attracting the talent he needed — people who found finance “kind of amoral.”
Its “no fine print” policy, meanwhile, gives consumers a sense of control, he says, while reassuring merchants, “we will not screw your customer.”
It means that Affirm has “zero crutches,” though — if customers do not pay off their balances, it cannot collect the money from fees later. What Levchin styles as his company’s “moral” mission also forces it to focus rigorously on the one thing it must get right: “From the very beginning, the underwriting discipline here was the only thing that stood between us and losing money.”
Finding growth as consumers pull back
Hitting profitability will be “a proof point” of Affirm’s business model, Levchin says. It has passed several other growth milestones recently — its first international expansion via a UK launch last November, a $4 billion funding agreement by investor Sixth Street, and a partnership with fintech company FIS to allow other debit card issuers to incorporate Affirm’s pay-later functionality — “a giant unlock for access to Affirm,” in Levchin’s view. But US consumer sentiment is souring, posing a test for his model in a weaker economy. Affirm will find it harder to extend credit if unemployment starts rising, he admits, but the pandemic and the ensuing inflation spike showed that customers who pass its underwriting bar will use its services more as they seek certainty about their spending.
“In economic turbulence, we know we add so much value to both consumers and merchants,” Levchin says. “In the world of extreme recession, all bets are off.”
Creating a ‘moral capitalist’ culture
Levchin lived in the former Soviet Union before moving to Chicago in 1991, and insists that his views should not be mistaken for socialism. Affirm is “a moral capitalist enterprise” that wants to be very profitable, but without leaving its people embarrassed to admit at cocktail parties what they do.
It’s a complex mission to explain, and he has taken several stabs at articulating the values he wants to foster. Culture “doesn’t take care of itself,” he says. His mission statements stress integrity, but also hard work. “If you can’t keep up, we’ll try our best to help, but eventually you may have to leave,” he wrote in one LinkedIn post.
“Sometimes, Monday starts on Saturday,” he tells his troops. It’s not a requirement to be in the office all weekend, he insists, but a reference to a sci-fi novel he loved as a child about scientists studying Russian folk tale magic, who can’t stay away from their work because it is so compelling.
Learning from the low points
Levchin’s success at PayPal contributed to its $1.5 billion sale to eBay in 2002, but his career has featured its share of failures.
The Silicon Valley mantra that failure is something to be proud of is “a hallucination,” he says. “Failure sucks.”
He recalls moments of realizing that his mistakes will mean having to tell investors they lost their money, and employees they have lost their jobs. Coming through those times can foster a sense of triumph, but mostly, “leading through tough moments actually involves a lot of pain.”
Those failures taught him that surrounding yourself with people who will persevere alongside you is critical. “What is the cost of finding yourself up the creek with no paddle if the right people are in the boat with you? If that is a low enough cost, you should go anyway.”
Making a mafia
Levchin is still friends with people he shared PayPal’s dotcom-era boat with, including Tesla’s Musk, Thiel of Palantir, and LinkedIn’s Hoffman. Levchin and Thiel began by hiring the brightest students they had known at their respective universities. “We filtered for brilliance and non-assholes,” Levchin recalls. But as PayPal grew beyond their networks, they started asking job applicants: “What are you going to do after this?”
Those who replied that they were itching to found their own startups one day got hired. The PayPal mafia was born.
Levchin, who has helped Affirm leavers launch startups, says he would love to see an “Affirm mafia” in the future. By the time PayPal was 13 years old, its founders’ second companies were already taking off, he notes. “I’m waiting for our own SpaceX or Tesla or something that we can say, ‘well, it eclipsed the birthplace.‘”
Friends in high places
Fascination with the PayPal mafia has grown with the political influence of figures like Musk, Thiel, and David Sacks, Donald Trump’s “crypto czar.”
Levchin has been less public about his politics, though he has stated his support for Israel, his belief in skilled immigration, and his view that the insurrection on Jan. 6, 2021 was “a disgrace.”
His friendships with Musk, Thiel, and Sacks are deeper than politics, he says. “We debate and disagree, but we were all boiled in one crucible together for a long time with very little rest or sleep, and so we definitely call on each other for help and advice, and sometimes to tell them they’re doing it wrong.”
Levchin says he is thankful, “broadly speaking,” that Musk is “asking the hard questions” about Washington in his Department of Government Efficiency role. But he is reserving judgement.
“Given the frequency with which change is happening in DC, it’s a little on the crazy side to declare, here’s how the world is different, and I’m so happy for it, or I’m so unhappy,” he says. “You can easily construct a narrative of ‘everything is going to be amazing once they’re done,’ or ‘everything is going to be terrifying.’ I’m confident the truth is somewhere in between.”
AI’s science fiction future
Most of his conversations with Musk are about sci-fi rather than politics, he says, noting that the SpaceX founder got him reading Iain Banks’ Culture novels. They’re about “a post-scarcity society where AI is sentient and capable of discovering new physics and building spaceships for itself, and humans are these species of leisure, and they play games, and do art, and live forever, change genders at will because it’s interesting,” he enthuses.
He doesn’t know whether AI will deliver such a future in his lifetime, but notes that many great innovations of the past 150 years were prefigured by the science fiction written 25 years earlier.
“I love reading this stuff, because it sort of pushes your imagination, but part of it just makes entrepreneurs’ jobs easier,” he explains. “I like reading these books because they tell me what to work on next.”