FULL TRANSCRIPT

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Slava (00:00)
In this episode of Smart Humans, we talk with Max Levchin who's a Silicon Valley legend, having founded PayPal in the early days and then invested in over 200 companies as an angel. Now as CEO and founder of Affirm with a market cap of over $10 billion. He covers what it's like to start companies, what it's like to angel invest, his point of views on the economy, and of course, AI.

Slava (00:51)
Hello and welcome to another episode of Smart Humans. I am super excited for today's guest. I say this all the time, but today we have a legend from Silicon Valley. Having started PayPal to now being the founder and CEO of Affirm which is worth $10 billion in the public markets and many investments in between. Max Levchin, welcome.

So we always like to get started with the same simple question. How did you get into ALT? Where did it all come from?

Max Levchin (01:20)
It all depends on your definition of alts. I think in many ways, I'm still not into alts. I'm super plain vanilla. I invest in little startups here and there and through a strange quirk, fate, I ended up investing in some Bitcoin, which I certainly had no expectations of doing. You know, I don't own a lot of...

altcoins or art or real estate on Mars or anything. So I'm just very boring that way. But the primary alternative investment strategy I have is as an entrepreneur.

You kind of realize how hard it is to raise money even if your idea is amazing or you think your idea is amazing anyway. And at some point all of us with whatever modicum of success we achieve end up thinking, man, if the younger me would just run into the older me, totally persuade him to put some money into my cool new thing. And that's inevitably how you fall into the, well, maybe I should do a little angel investing here and there.

Slava (02:21)
When was your first angel investment? Do you remember?

Max Levchin (02:24)
That is a great question.

I think right after PayPal had just a little bit of liquidity and as a, they probably went public and that was acquired by eBay. And so there was sort of nonstop supply of events that would delay access to actual cash as we were navigating the complexity of public markets and things like restricted trading, et cetera. But at some point there was just, just a few shares that I sold and

pretty much immediately after.

One of my friends asked me to invest in a company of his, which is now lost in the annals of time, but the process was scary and interesting. I'd not been on the other side. I've certainly raised plenty of money during the PayPal years, and actually before, most of which I had lost for my investor, of course.

Yeah, it was an email infrastructure company. It wasn't that exciting.

Slava (03:30)
Nice, so you mentioned something there subtly. So it was an email infrastructure company years later after you said you lost the money for investors previous to PayPal, et cetera. When was your first entrepreneurial venture where you took money from investors? Like how many years before that angel investment?

Max Levchin (03:50)
So the exact timeline is something like this. So I came to University of Illinois in 1993. By 1995, and this is very timely because Champaign -Urbana, 1993 happens to be the birthplace of Mosaic, which within a year became Nutscape, which gave birth to sort of all the madness we're now living through.

And, or you could easily argue that a lot of the madness began even before Mosaic, but Mosaic was quite a bit of a moment for me personally. And so as all of us freshmen, et cetera, were figuring out what is we're going to do with our lives, we saw Marc Andreessen and another handful of engineers from NCSA Mosaic project just up and go to Silicon Valley and start a company and take it public. And it was the moment of inspiration.

Pretty much around that time, there were probably three dozen startups being mulled over on our campus and I was involved in one of them. We had started it in 94, by mid -95 it had already failed, but at least nominally, we had raised some money from ourselves where we would go into some very deep credit card debt and finance our entrepreneurial activities by doing some very stupid things with our...

student credit cards. it has an echo to affirm because I was so fresh off the boat. I did not realize that you must make minimum payments to your credit card. So while financing my first failed company out of credit card cash advances, I conveniently skipped that part where it says, well, if your company doesn't work out, you gotta still make payments. That company didn't work out. And of course I'll pay them back eventually, but right now I need a break and the break was not forthcoming.

And it ruined my credit record. So when after PayPal went public, I tried to buy a car. I couldn't because my credit rating was just too low. Anyway, that, that story is well documented elsewhere, but the first capital I'd actually raised was from myself and my co -founders through primarily savings and credit card advances, et cetera. That company failed. The next one, very similar story failed. Next one, very similar story failed. The next one we had.

actually tried to raise money. And so we would go to local, at the time venture capital industry was really not a thing, but there was just enough of it in 1996 in Chicago, where we would drive up and be like, hey, we have a pitch deck, we have 17 pages, here's a PowerPoint. And these people would be like, I invest in parking lots. What are you doing here? Web advertising, what are you talking about? And so it was a very difficult time raising money in central Illinois.

back in the late nineties, but the first kind of a real experience raising money from what is more like traditional venture was a couple of weeks after I moved to Silicon Valley. I randomly met Peter Thiel, which of course became my PayPal co -founder. And I had left champagne by car or rather by a very large, Pensacote truck and, drove myself to Silicon Valley and met Peter.

a Stanford event that he gave a lecture at and then had breakfast with him the next morning and sort of said, all right, you know, my name is Max. I come from afar. I have a bunch of company ideas. And so one of these things where I was like, I'm sure he's just about to laugh me out of this particular breakfast. And so I pitched him on two ideas that I had in mind. And he's like, all right, second one is terrible. First one is really great. I want to invest. I was like, what just happened? Like, this is not supposed to be this easy. And so he on the spot offered $300 ,000.

if I were to go and get 200 ,000 more from other investors in Silicon Valley, like I accept, but, I don't actually know how to get the other money. And so I basically on the grounds that I had still no idea what I was doing. I roped him into helping me raise money and the rest of history.

Slava (08:00)
Nice, so was that hard to keep track of the count was that six failures before the

Max Levchin (08:06)
I, it really depends on how you count. I think the canonical number I like to give is four failures. Fifth was PayPal. But at this point, I actually, it's been long enough where I could easily decide, well, and this has not meant as like a too, too glib of an answer, but there was net meridian and net momentum, which sort of blew by me at dramatic speeds of like three months and we failed and so close in time that I literally just reused the logo.

because at the time everything had to be net something. So like Net Momentum, what a great name. It failed. All right, well, can't use the same name. Net Money, I just paid a guy $500 to design a logo for me. What starts with an Meridian, okay, that's Meridian, sounds good. And so I could take a clip art of a globe and that's a Meridian right there. So anyway, so there was a little bit of freestyling going on as far as entrepreneurial activities go. So.

Slava (08:33)
Nice.

Max Levchin (09:00)
depending on whether you count those two as a single thing or multiple things, you can sort of squint and say four or five, but yeah, there are many.

Slava (09:05)
and your first angel investment was like the early 2000s, is that right?

Max Levchin (09:09)
It must have been 2000. I actually don't remember exactly when, but I think it was 2002. So PayPal went public in 2002.

Slava (09:16)
So about five to seven years after you started operating companies. Amazing. So I know you're saying NASA went to ALT, but really for us, any pre IPO company, any private company we consider as an alternative investment. So you're pretty deep into that space. You mentioned some BTC. So are you bullish on Bitcoin? You can give your point of view higher level on crypto.

and then we're gonna touch on the other assets quickly as well.

Max Levchin (09:48)
on crypto. So when the original bitcoin paper came out, I read it because before I sort of went down the entrepreneurship rabbit hole, I was actually very, very serious about cryptography and wanted to become code maker slash code breaker. That was sort of my path in life was going to eventually take me to the NSA where I would design unbreakable codes and read the mail of the bad guys. And obviously that didn't work out. I ended up doing far less.

Interesting entrepreneurship stuff, but my sort of love of cryptography before crypto meant cryptocurrency, meant cryptography, which is how you secure messages and other things like that. In fact, PayPal origin story really isn't about money. It's about securing messages and then very reluctantly just securing IOUs and IOUs are of course money. So that's very abridged how PayPal became PayPal, but because of my interest in

cryptography and just broad cryptographic developments. I somehow got my hands on the original Bitcoin paper in 2009. Think about it. and I read it next year. And at times I was like, you know, I'd seen things like Hashcash and other prior sort of interesting ideas that preceded Bitcoin. And so I was very interested in Byzantine general problem and the solution that was proposed by Satoshi, et cetera. And so it was very interesting, but at the end I sort of thought, what a beautiful piece of math.

No one in their right mind is going to actually use this as a currency. And as a store of value, you can kind of imagine like this really clever one way door, you know, you put your gold brick in there and then nobody can take it away because it's public, but it's not what it is. And so I sort of parked that idea in my head and I think I probably still feel that way today where I can't imagine myself spending a bunch of Bitcoin because it's still growing in value, but it's a really cool piece of technology and math and

The star value turned out to be pretty good. So in the process of all this was going on, a friend of mine that I'd run into during PayPal years said, I'm going to start a company to make ASICs to mine Bitcoin. I was like, that seems like a totally out there. Like no one's going to use this for anything. Crazy. So I kind of just like, I don't know, give me $25 ,000 so I can use your name in my fundraising. Sure. That seems like a reasonably low risk bet. So I gave him $25 ,000, I think, and promptly.

Well, obviously it's such a silly academic idea. It'll never come back, but it's fine. I like the guy. He's a good friend. And the one thing I forgot or didn't know, the company paid dividends from its Bitcoin finding activities in Bitcoin. And so at some point in the beginning of this journey, I get an email from him saying, hey, you got to set up a crypto wallet because I need to pay you your dividend. I'm like, my gosh, now I have to do work. So I sort of set up some wallets somewhere and I send them the address.

I forgot all about it. And then years later, I got a note saying, I'm very sad, but at this point, these other companies are really much better at designing ASICs and so we're going out of business. I hope you enjoyed the benefits of the dividends while it lasted. I was like, huh, I had dividends? I didn't even know where the wallet is. So this was like 2015 or 16. And I went on this crazy journey, or actually someone who worked for me went on this crazy journey just to find out where.

Where's my Bitcoin at? And eventually found it. And that was a nice surprise, I have to say. But it was not a lot, Bitcoin by any stretch of imagination, but I was sort of like, my God, I really appreciate it. So at this point, it's very hard to keep a straight face in Black Wall. Obviously, I would never... It turns out that I'm a BZ holder and I haven't sold a single Bitcoin, but mostly because I still haven't figured out how to. But I'm kidding. But no, I tracked down the wallet and was able to unlock it and so on. But...

Slava (13:34)
Hahaha

Max Levchin (13:42)
I'm still not a huge believer in cryptocurrency as a spending or purchasing device. I'm also not a huge believer in a lot of the swirl that takes place in the altcoin world and sort of the collapse of Terra Luna was extremely predictable. So what I think you 10 minutes worth of reading how the whole thing's organized, be like, okay, it is magical, but then the music will stop and sure enough it did. And so I love financial services. I love everything having to do with real world.

real humans using money and access to capital and access to credit to better themselves or to achieve their personal financial goals. Once you get into kind of a sorely bucket of financial engineering, they start getting very impatient and beyond. And so Bitcoin as a form of, if you could just go back in time, buy a few more coins and get yourself a nest egg to retire, that would be quite an amazing trick. But for those who did without having to travel backwards in time, congrats, it's awesome.

obviously extremely foresighted investment decision in terms of, and by the way, big asterisk, I've had this debate with many, many people who are really into cryptocurrencies and Bitcoin in particular, and they routinely tell me, you just don't get it. Like buying a house in America is easy, buying a house in Colombia or, you know, fill in your favorite country where, or actually Colombia is probably a very stable currency, like buying a house in Venezuela.

currency is not stable with all kinds of corruption. Everything is really difficult. And so if you just want to transfer value, suddenly Bitcoin is a really good alternative. And I've never bought a house in Venezuela. So what do I know?

Slava (15:21)
So appreciate that. What do you think about the yield oriented assets like real estate or private credit? Are you into either of those?

Max Levchin (15:29)
I am not personally, but I think private credit is an extraordinarily important piece of the world. I occupy. So day in and day out. So Affirm is a fairly sizable now publicly traded lender. And we rely on funding from all kinds of places, but ultimately the asset that we generate is a very short -term, relatively high yielding, relatively low losing, on a relative basis, obviously.

consumer loan and the ability to produce those by the billings at this point has fueled among other sort of events, but certainly that, you know, we've done our part to fuel the demand for private credit. These are great interest yielding assets. They are really short -term, which means that if you don't like it, you can get out. There's not a long tail hanging onto you, you know, sort of the SVB collapses like events.

are not likely to happen to someone who's holding these assets who bought it from companies like Affirm. And so it's a great product. The fact that there's demand for these kinds of loans and obviously we averaged a really short term four and a half months of the weighted average loan life. But if you look at some of the even longer assets, they're still really, really good relative to things, traditional things like mortgages, et cetera. And so the demand for this type of product has been skyrocketing, not just in the US, but worldwide.

And it's a great product. I think especially for deposit gathering institutions and people that invest in those, it's a really good form of reducing the exposure on the, on the investment side. And so huge fan more as a producer versus a consumer. if I could buy my own loans, I, I would buy lots of them, but, to do that, I think it's theoretically not,

Not impossible, but I currently own zero affirm yield other than significant amount of firm equity, obviously. But generally speaking, buying short -term high yield, relatively safe, well -rated consumer credit, I think is a great asset. And then real estate strictly as a consumer. One of the things that I realized is that if you are super duper diligent and thoughtful about real estate you own.

you're never going to live in a house of your dreams. You're always going to optimize for something a little bit different. And, I live in a home that I really love. And so I'm quite happy to own this particular piece of real estate.

Slava (18:09)
I have one more question with two different parts here. Usually somebody who's as accomplished as you that we interview actually leans a little bit more into the yield oriented assets like the private credit or the real estate because they're more into preservation as opposed to growth. Similarly, you know, the old school breakdown of a portfolio is like 60 % equities and 40 % bonds and 0 % alternatives. It sounds to me like

you have a lot of alternative exposure in relation to equities and obviously your own personal position in Affirm. How do you think about 60 -40 -0 in your ratio? How much do you go into public markets? How much are you thinking about bonds? How much into these alternative assets? Again, those are two parts of the same question.

Max Levchin (18:59)
So the, I think you must interview much more sophisticated investors or people that have sort of reached that point of the journey where they're not actually working 22 and a half hours out of the day just on their main quest. And I'm certainly still there and I'm hoping to keep it that way for quite a while, but I don't think of my Affirm Holdings as part of my investment strategy. I've never sold a single Affirm share.

I'm sure at some point that will no longer be a statement that I can rattle off, but I currently don't really have a plan.

Slava (19:31)
But even if you put that aside, even if you put the huge position of Affirm aside.

Max Levchin (19:35)
Again, I'm probably far less sophisticated than you might think maybe. So my wife runs our venture fund slash single, single P venture fund slash family office. She's extraordinary. She is very, very good at managing the entire field of view of our investing. But even there, we primarily err on the side of find amazing teams, back really great ideas.

lean very heavily into the future we want to see happen as investors and enablers of entrepreneurship. I don't think we've ever had a dinner conversation around, how's our ratio of equities to bonds doing right now? I'm not sure what the ratio is, to be honest. I do know we have lots and lots of very cool private companies that she backed and some of them have gone public and have done really well and others have not done well and that's all part of the gig. But I think

I mean, by the way, it results in every time we go through like a massive market correction, kind of like, that just happened. So we were not, we're not sitting on a layers and layers of safety net, but what we do have is extraordinary exposure to some really brilliant people. And good news is that markets typically value brilliant people with brilliant ideas, with brilliant execution really well through most cycles. And so you're, you're not, you're not too disadvantaged. And then

in the upswing of a cycle, you obviously get disproportionate returns.

Slava (21:04)
And are you guys investing into the public markets beyond the privates that go public? Are you investing like into indexes or stock picking?

Max Levchin (21:10)
She does, she does. So, you know, at this point you'll have to have her on your podcast and interview her because day to day I only care about exactly one stock. So we have a perfect marriage in the sense that we're both into investing to one degree or another, but I love operating. And so the freedom I have is to operate in the company that I founded and love and she gets to invest in.

Slava (21:22)
Perfect.

Max Levchin (21:40)
By the way, as a public company CEO, you're quite restricted. So there's a lot of things that I couldn't buy or sell or trade just because we're now big enough where we touch pieces of non -public information that cannot be taken advantage of. And so as a result, some of the favorite companies I have are exactly the companies that I probably know a little bit too much about to do any sort of trading or.

Slava (21:59)
Got it. Yeah, we'll have to.

We'll have to have her on. Switching gears, open -ended question. What do you think, and you have a great position to provide guidance on this. What do you think of today's economy and market? And again, it's a very open -ended question. And you could take it towards the interest rate. What's the Fed gonna do? What's happening in labor? What's happening in the stock prices, et cetera. So take it wherever you'd like.

Max Levchin (22:26)
If I knew what the Fed would do, I would probably not need to do anything with my life, just sit there and play the curve. No, I would get painfully bored if that's all I... Even if I knew what the Fed would do, I would still start companies. So on the state of true economy in the US, I think the metric that I care about the most is employment. So long as the economy is fully employed.

or close to, and the first derivative is flattish, plus or minus in either direction, we're in good shape. And we are still really close to fully employed, but we're very, very slowly trending towards the negative. And so if the next print comes out and it's a little bit over four, and maybe the one after is a little bit even more over four, I will start worrying more. If...

It comes out and it's back down below for, and we're trending in a positive direction. I'll be less worried, but generally speaking, the US economy is on a really solid foundation as viewed through the lens of I lend money to folks that have jobs and I want them to still have jobs when it's time to pay me back. And so in that sort of fairly simplistic view of the world, we're in a good shape. Consumers are still buying. They're still shopping. They are becoming choosier and smarter about how they spend.

where they spend, but there's still quite a lot of fuel left in a tank for things like travel and experiences, which something that we put on pause during the pandemic. And so the reality of where will the consumer put their money to work? A lot of it on the consumption side is happening, not in goods, but experiences. And for a time, it looked like goods were really going to slow down and kind of become visibly negative growth.

I feel like even that is starting to swing back. For a time, we saw electronics just be like not a thing people needed because they, you know, built a small home theater during the pandemic. And the last few quarters, we're seeing pretty good signs of life. People are back to upgrading their electronics. Obviously, new products are coming out all the time. So generally speaking, I have a fairly benign view of the US economy right now. I do think we are in the strangest period of time ever where on the one hand,

inflation appears to be kind of not really going up, but not really going down very much anymore. The fed has made a very clear stance that, Hey, 2 % is the goal. We're not going to change your plans. We're not going to mess around until we get to two. And that's not where we are. So on the one hand, they all, but said, Hey, one cut is coming. But on the flip side, they're saying, and probably correctly, Hey, if this thing's not going to come down, we're going to make it come down. And so

The balance currently is quite benign and maybe even a little bit beautiful, but I'm not sure it's a stable balance. Something's going to have to give. And obviously my hope is the inflation cracks in a couple of other places. And then we see a more dovish fat fed that tells us, Hey, it's time to put a few more drips of gas into the engine.

But I don't know what if the inflation goes up a few every I'm sure everyone has seen these charts of like, it goes down, down, down, down, down, and then it bounces back up and then Paul Volcker has to come in. So hopefully, hopefully J Powell doesn't have to be Paul Volcker.

Slava (26:01)
And any opinions on predictions slash implications of the election as it relates to any of this?

Max Levchin (26:07)
I've long figured out that understanding or being involved with politics is well outside of my sphere of expertise and beyond. I think the contrary intake I have is that I'm not sure it really matters all that much. I think the impact of decisions made by administrations is so delayed that we may like, and I don't know if we're living through.

Clinton era decisions, but we're definitely living through Bush era decisions and definitely Obama era decisions. And so sort of the years of Trump and years of Biden, you know, the future will judge those calls, not the present.

Slava (26:46)
Excellent. Switching gears. So not everybody has heard of Affirm, even though it's a massive company crushing it and just announced a huge partnership with Apple. Can you just share what is Affirm?

Max Levchin (26:59)
Sure. A firm is a access to alternative credit, but for consumers, it's not an investment alternative credit. It's a credit that you get typically at the point of sale. So if you go to buy something in the range of a hundred dollars, $200 all the way up to I think the largest transaction we've ever funded was in the tens of thousands range.

You'll find us embedded in a huge number of websites so we can go to walmart .com or amazon .com or Target or any of the gazillion Shopify brands. We're always there We are quite sizable at this point the 20 billion dollars of loan volume last fiscal year this fiscal year is wrapping up in just a few days and We're we're still doing well and so the product is very simple

If you want to pay for something, but you don't want to use your credit card, you can use Affirm. You apply on the spot, we'll approve you in real time. We will show you a rate, interest rate, about a quarter to a third of the time, the interest rate is zero because the retailer actually wants your transaction to occur so much, they will cover the cost of time value of money. And what makes us unique,

And at this point, fortunately, we're no longer the truly unique one. But when we launched this thing over a decade ago, we were the only ones who didn't charge late fees, didn't compound interest, did not do deferred interest, did not do any of the gimmicky promotions that the financial services industry loves so much. So remember my trashed credit from back in during my college days. So that really stayed with me. And I hated the fact that, so the credit card that I got on campus, I'm not going to mention the bank, but I certainly remember it.

The issuing bank had this giant thing on it that said 0 % APR for 36 months, blah, blah, you know, go, you know, and a t -shirt. So I got the t -shirt and the credit card. And what I didn't read was the fine print that said, by the way, if you're a week late with your minimum payment or a day later, whatever it is, then whatever amount of money you borrowed is going to compound retroactively starting from the day you borrowed. So imagine

getting one of these cards saying, well, what I need to do is pay for my office supplies and my rent and my computers and all the stuff we need for my first little baby startup. It's thousands of dollars. And then a year later, startup fails and you're kind of broke and you just need a little extra time to make a payment. And so you do because that's sensible and that's what people should do. And then you look at your next bill is like, holy crap, I thought it was interest free, but no, it wasn't.

It's all gone back to the beginning of time and compounded away. And so as that happened, you know, someone ought to build a product that doesn't screw consumers this way when they're just having a moment of hard time. So that's what if our methods, a credit card alternative, we will not screw our business model is not in our fine print. When we say no interest, you cannot pay us interest. And if you tried, when we say it's 10 % interest or 20 % interest, that is a simple interest. That means interest.

does not compound into principal no matter how long the loan is. And if you email us and say, man, I'm having a hard time, I gotta take a little extra to pay the bill, we tell you, great, please do that. And people inevitably say, all right, so what's the late fee? There is no late fee. Just get current when you can and we'll keep going. And it's obviously not entirely without consequences if you are late and late and late and late at some point, you will not have access to Affirm anymore. So we are fairly...

fairly fair in our approach to people who abuse the system. For people who are really just stumbling for a moment, it's a fantastic way to access credit. So that was our life for the first eight or nine years. And then recently we launched a card, which is not a credit card, but it's a debit card with a borrowing capacity. So same exact product that I just described. And people use for all kinds of things. During the pandemic, we financed uncountable number of everything from Peloton bikes to couches to...

kitchen supplies to all sorts of things that people needed to rapidly come up to speed during the lockdowns. And then now that everybody's out of the home, we finance lots of tickets and vacation packages and travel experiences and in between everything from fashion and baby strollers and all sorts of fun stuff. So it's a, it's a very versatile product. Obviously I'm very partial. I don't want.

the younger Max to experience the crappy deferred interest experience that I had. But it's got, you know, we've underwritten well north of 50 million Americans. And in the last 12 months, something like 17 ish million of them transacted with us. So it's a, it's a, it's a fairly popular service. We're now live in Canada, as well as us. We announced we're going to be live in the UK pretty soon. We partner with all sorts of amazing brands like Amazon.

and Walmart and et cetera. So it's a good company. I'm a big fan.

Slava (32:09)
incredible accomplishment after a few failures in the early days. So how is it that typically these large companies, the Walmarts, Amazon, Shopify, Apples, they rarely like to partner. They love to just compete and roll their own and put the smaller players out of business. How is it that you've been able to partner with these organizations and sometimes even force them to stop what they're doing themselves and work with you instead? What's the secret sauce there?

Max Levchin (32:36)
So it turns out that lending is really hard. It's actually not an easy thing to do. And that's good. In general, my entrepreneurial advice slash posture slash strategy has always been build really difficult things. And it's easy to convince yourself that something that's really difficult is also really valuable. That's not always the case. So you need to start with things that are valuable, but of all the things you could build that are valuable and therefore marketable and therefore investable.

You kind of want to skew difficult and difficult can mean different things. It can be difficult technically, it could be difficult, you know, clever marketing play, but if it's really, really easy and it's really, really valuable, chances are it's no longer available. Like back in the day when we didn't have a wheel, somebody invented it. And in retrospect, I'm sure it was really easy. And now we have a wheel, but if you invent it again, no one's going to pay for it. And so the reason Affirm has been successful at

lining up with these amazing partners is a couple, but lending is hard. Building a really good underwriting engine takes a long time. It's expensive because inevitably you make mistakes. And when you make these mistakes, you end up losing money. One of the interesting things about credit as a lender is the most you can make is a few points on top of your original amount.

but you can lose a hundred percent. So if I gave you a hundred dollars and you chose to not come back, I will lose a hundred dollars. But if you came back and it's a short -term loan and total amount of interest you'll pay me, you know, maybe 20 bucks. That's like a really high interest loan over the course of let's say a year. And so the asymmetry of building a product like this and the discipline you have to have and the data access you have to maintain to do underwriting decisions, especially if your consumer is not the gold plated, you know,

I don't need credit. I'm just using it because I can versus regular people who are basically borrowing because that's what they need to do. It's very, very difficult.

Slava (34:44)
So you mentioned that build something difficult and build something valuable. Sounds like part of your philosophy on angel investing as well. You've had so many winners, including Yelp and others. How is it that you think about angel investing having done it now for almost 25 years?

Max Levchin (35:00)
You know, it hasn't changed much at all.

The formula that made PayPal successful and even companies that I'd encountered, and even the ones that failed incidentally, that I thought had a really good chance of succeeding in through whatever quirk of luck didn't always had the same pattern. The really amazing team people involved were just brilliant. And, you know, I'm happy to exclude myself, but I was very lucky to just run into all sorts of truly brilliant people all through my professional career so far and, you know, going back.

Pre PayPal, PayPal, et cetera. So first thing, if the team is just unbelievably impressive, that's already a really good reason to care. And then if it's not, it's a really good reason to stay out. And once you've established the team is exceptional, what do you really want is differentiation, which is shorthand for can someone else do this as quickly and cheaply or faster or cheaper? And if the answer is, eh, probably these guys are just first.

That's also a bad investment because inevitably good ideas are public property and then everybody's going to come after you. And so you better hope you have the absolute best team. But if you have something that's just a brilliant team and actually difficult to do where they cracked some really difficult computing problem or something that is not parent or just something that takes a long time and they found a way to shortcut it or they've worked on it for a long time and they have a lead that. Brilliant team, high value problem.

Difficult to solve, but has been solved or has the beginnings of solution that that's sort of my formula. And if you look at our angel portfolio, it's all kind of that story repeats itself over and over. We've never invested in things where, you know, amazing brand, which I think it's very, very hard to establish a brand, but it's much harder to protect it and so on. And so I, many years ago, wrote a short essay, mostly for myself called the hard valuable fun. And that sort of became the.

cornerstone of my philosophy where you want to find something that's really valuable, has to be fun to work on it, or you'll run out of patience and it better be hard because others will come after.

Slava (37:06)
How many angel investments do you think you all have done directionally?

Max Levchin (37:10)
It's well north of a hundred, probably well north of 200 this points.

Slava (37:16)
And of the 200, how many directionally become a hit? Let's call it a unicorn.

Are we talking one out of 10, one out of 20, like for you, one out of every two, joking. So directionally, what is it? I just want everybody to understand, like you can't just get a hit every time.

Max Levchin (37:26)
I.

No, no. I think unicorns are probably on the order of 15 to 20 companies that we've ever invested ended up being unicorns. Some of them took a long time to get to that stage. And so, but I'm not sure I sure, but I think that's a, that's a long, I mean, we've been doing this for 25 years. So it's a, it takes a while to, to build that up.

Unicorn.

Slava (37:50)
And that's exceptional still. That's still exceptional.

What do you consider a good exit? Because you're typically investing quite early, right?

Max Levchin (38:08)
Yeah, exactly. So great return on investment does not have to be, well, my company, the company I invested in is a billion dollar company now just needs to be my $10 ,000 is suddenly worth a lot more than it was. So it's not, it's not, we don't unicorn hunt. We look for brilliant people, sort of solving interesting heart problems, but definitely we've been very lucky with some very early investments that ended up being hugely valuable.

Slava (38:33)
Nice. You've been a part of so many waves being in the Valley for over 25 years, whether it's the browsers like you mentioned, and then computers and mobile and social, and I'm sure I'm forgetting many different waves, but the latest one is AI. What are your thoughts on the current AI wave? Is it just another wave like all the others? Is there anything different about it? How are you thinking about it? How are you investing?

Max Levchin (38:54)
You know, I think the idea that every wave is some way similar, even structurally to a previous wave is actually wrong. So you can kind of squint and find similarities, but the reason these waves exist is because they are fundamentally different from each other. If you had said, well, you know, we have these desktop computers and now we're going to make them smaller and make them laptops. I was, I'm old enough to remember when laptops suddenly became a thing and

from laptops to mobiles and from mobiles to brain plugs, who knows. It's not as though people can't create those narratives on a piece of paper in their mind years in advance. And so if the process of wave creation is non disruptive, it wouldn't present interesting opportunities because you just know what happens and you'd sit there and wait. One day we're going to have brain plugs and poof, we have some software to download. But that's not going to work. Something else will happen. So every time a new platform begins,

You have profound changes that are definitionally unlike the things that happened before. And interesting investment strategy is always about, all right, so how is this thing profoundly different from all the other things? What makes it not like others? And AI is very interesting because, obviously it's super impressive and it's exciting that all these interesting things happening and the hardware aspect through things like Nvidia, et cetera, is just different and new. And we haven't been excited about a hardware company in a long time.

as an investor community and suddenly Nvidia is the most popular, most important investment. The brand is less known to consumers than it is to investors. It's the most valuable company in the world and yet, you know, front page of CNBC says Nvidia brand's still unknown. So I think it's all kinds of fun stuff is happening. The most interesting version of it that I can think of is it's an invention of a computer, at least as it exists today, that is inherently

unpredictable. Computing became, in my lifetime, very inexpensive and very predictable. You could tell a calculator, sum up these numbers for me and it literally costs nothing in electricity or compute and it's guaranteed to be accurate. If you go to Chad GPT and you say, hey, I need you to write a poem for me, you'll get a poem and it's actually going to be

pretty good at this point. Super expensive. Like there's some real money being spent during inference and all the things that happen to actually produce that poem. And yet it is completely unpredictable. Like you give it the same instruction twice, it'll give you completely different poems. And so we've just rewired how computing works. And if you think of AI as models, you know, addressable through either prompts or APIs or whatever, as computers,

You have this complete different new computer that can be addressed for now, at least very expensively to produce extremely complex tasks, but we don't yet know exactly what the completion of the task will look like. And so I think that's the most interesting thing that's happened. And I don't yet know whether it trends to more and more predictability. I know it trends towards lower cost, but can it be low cost to the point where it's just like.

What do we have in our laptops and calculators today? And if so, how do you differentiate there? Like if everyone has a access to essentially free foundational model in the sky, that's just always there available to write poems or perform complex tasks. How does it change humanity? And so it's very interesting. I don't yet know how to reason about all these things, but the thing that's stark is the change in computing paradigm from cheap and dumb to

super expensive and super smart.

Slava (42:48)
How does the angel investor in you want to invest into the world of AI over the next 36 months?

Max Levchin (42:55)
I would love to formulate my AI -ish thesis a lot more as an investor.

But reality is I spend 99 % of my time formulating my thesis around what to do with Affirm today, tomorrow, five years from now, 36 months from now. The Affirm AI strategy is really well understood and articulated and we're chasing it down as fast as we can. And so when I think invest, the first thing that comes to mind is actually how I'm going to spend my time over the next 36 months to make sure Affirm is best positioned for the future and that we are harnessing all the cool new things that are happening in computing.

As an investor, I've grown to rely on my wife's deep and incisive investment strategies. And so I'm primarily on that one is going to be going to be a passenger and watch all the cool things she does and try to offer opinions when asked.

Slava (43:51)
All right, another reason to have your wife on soon. So coming towards the end here, a lot of us want to be as smart or as connected as you. So what is it that you watch, read, listen to that makes Max Max?

Max Levchin (44:03)
I'm pretty omnivorous. I try very hard to read as much as I can.

I read and listen to a bunch of podcasts, mostly to expose myself to business models and product ideas that are not directly in my daily field of view. So there's all sorts of, sure. I read strategiciary or strategiciary, depending on how you want to pronounce it. Ben Thompson pretty much every day. I think he's very smart.

Slava (44:26)
Can you name one or two that you like?

Max Levchin (44:38)
and his takes on kind of the structure of business is really profound. I read...

a whole host of FinTech related newsletters, but that's really sort of inside baseball for my own little industry.

Slava (44:54)
That's all right, can you give us one? One that you like in Fintech?

Max Levchin (44:57)
Fintech Takes is a good one. There is some of these all blend together, so I hope I'm not insulting anyone's newsletter by misnaming it. I love money stuff. Matt Levine is my secret or not -so -secret hero. If I could have an alternative sense of humor, it would be Matt Levine. He's freaking brilliant. He's hilarious and brilliant.

Slava (45:22)
Nice.

Max Levchin (45:25)
He also now has a podcast on Bloomberg podcasts, which I listen to pretty religiously. I just finished listening to a whole sort of collection of acquired podcasts, which are celebrated these ultra long form teardowns of businesses. I initially wanted to listen to the famous LVMH one because everybody talked about it at some point and I'm very late to the party, but it's a couple of years old.

But it's quite good. But in the process, I found that they recorded one about Visa, which I thought, well, I know probably more about Visa history than most people do. So I listened to that and found some nuggets that I didn't know about. So that was pretty awesome. I listened to Gamecraft, which is Mitch Lasky, who is a, I think now a retired partner at Benchmark, did a really good series about business models of video games. And so that's actually the quintessential sort of thing that I love learning about.

It's a very, very business focused collection of ideas and distillations and analysis and cool stories about an industry that I know very little about. So just learning how business models work somewhere else, still business, still capital allocation, but in an industry that I know nothing about is fascinating that you sort of get like about like, if I could just do this, like they did, that would be a really interesting twist. So I get a lot of ideas that way.

Let's see.

Slava (46:48)
Anything that you watch.

Max Levchin (46:49)
I really do.

Slava (46:50)
or anything that you do outside of rewatch listen that makes Max Max.

Max Levchin (46:53)
I ride my bike a lot. I try to ride a bike every day. That's my...

Slava (47:00)
What's a lot just for people for perspective? How many miles is that in a week?

Max Levchin (47:04)
I try to get to 400 miles a week, but that's a big ask. If I'm not traveling, that works.

Slava (47:12)
Nice.

And then the last question, which is, what is one investment that you would recommend? Obviously, this is not investment advice, and you're not allowed to say Affirm because that's too easy, that you would recommend. We prefer if it's a private, you know, an alternative asset, but it could be public. But the more, you know, tangible it is that somebody else can go do it, the better. And obviously, we understand Affirm's awesome. You're crushing it. Three years from now, it's going to be worth a lot more.

but I'm gonna stop you from choosing that one.

Max Levchin (47:47)
So no names since it's not investment advice, but I do have a pattern to suggest that I think is going to be important and it may well be very obvious. The interesting thing about the wave of AI, as you put it, is that all the major players, people with capital and resources are aware of it much earlier than major players were about just about every other wave. If you looked at the rise of Dell,

I think one of the things you could say it was the laptop revolution was sudden and everybody had these big towers and they're kind of ugly and Dell made them cool by making them a little better designed. But then laptops came in and Dell just wiped the floor with everybody else. Like their laptops became lingua franca for anybody who spent a lot of time on a plane trying to write code or build presentations. And that I was certainly there for that. And so on and so forth. You saw, you see these startups come out of the woodwork and

inexplicably perhaps just take over an industry or create an industry because the incumbents were sort of like, I'm not so sure if this really makes any sense for my company. And time moves quickly and suddenly the startups are established and they're now big companies themselves. With AI, it appears to be that every major player, Facebook, Microsoft, Amazon, Apple, certainly Google are all basically saying,

We have a plan and a strategy and we're investing enormous amounts of capital into AI. So there's not an open AI is the one, you know, to some degree, anthropic and a couple other companies, but the number of huge players saying, I'm going to allocate a ton of capital towards this new thing dwarfs the number of dollars or companies on the AI side of things. And so how do you find ways to play that? Obviously right now, Microsoft market cap may be buoyed by AI, but it's certainly not a significant.

And I think the big differentiation in the world of AI, especially for companies that are not in the FANG acronym and are not the true really, really private, difficult to get to startups, maybe public, maybe soon to be public companies that have enormous amounts of proprietary data. I think if you wanted to find a list of targets to just double and triple down on who might benefit from AI independent of the winner between the two, I think, is the answer.

the Microsoft's and the open eyes or the Google's and the anthropics. It's the companies that say, well, sure, your models are great, but I'm going to choose one or many to go rent the data I'm going to use for fine tuning and inference is mine and mine alone. And the proprietary data, which by the way, was a winning trend or winning recipe. The last couple of waves, I think is maybe five times more valuable now than it was ever. And so.

And there's a handful of companies that are explicitly branding themselves as we are the data company for the AI revolution. You know, we can easily find them by doing a few Google searches, but I'm not sure any one of those have, has really gotten public yet, but they will. There are plenty of companies suddenly selling data, aggregating data, cleaning data, finding innovative ways of using proprietary data. I think that's going to be a pocket of underappreciated value until.

Until it's out.

Slava (51:11)
Amazing. Thank you for that. So this has been quite the conversation we've covered so much from you starting by saying you're not even into alts, which is quite comical since we then find out that you started so many companies and invested into over 200 going back to 1993 with Netscape and Andreessen and then getting to meet Peter, Peter Thiel, having so many failures, whether it's four or five or six, you can't even remember that you fail fast and then crush it with PayPal.

It's interesting. I didn't know this, but PayPal started just to secure messages, but then it ended up securing IOUs, which then obviously becomes money. I love financial services. That was your quote. And you know, the market always values brilliant people doing brilliant execution, solving, you know, tough problems. And then you said this in passing, but even if I knew what the Fed was going to do, I would still start companies, which just shows how entrepreneurial you are. We really need to keep an eye on unemployment. Is it going above or below 4 %?

You use the phrase, it's a beautiful economy right now, which is really interesting. You're right now crushing it with Affirm with over 50 million Americans having served and over 17 million being served in the last 12 months, which is a huge number. And at the end of the day, lending is very hard, which why these massive companies like Walmart, Amazon, Shopify, Apple, and others are all partnering with you as opposed to just trying to compete and beat you. And that's all because building difficult things that are valuable are just.

hard to do and people should focus on, which is part of your angel investment strategy, which you then ran out to be hard, valuable and fun, find an amazing team that's differentiated, trying to do something of high value. Your AI point of view is really interesting. It's all coming from a world of cheap and dumb to now expensive and smart. So compute is totally switching. You gave us a great list of things to listen to or watch. Maybe one day we can do the 400 miles a week with you. And you told us where to look into investments into the AI world.

of clean, valuable data while keeping it private. Thank you, Max.

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