Meeting the PayPal challenge

Entrepreneur Shvat Shaked, who parlayed his training as a former Israeli intelligence soldier into co-founding a cyber security firm, had the chutzpah to accept a dare from PayPal’s president that he and his handful of technicians could do a better job at detecting online fraud than thousands of PayPal engineers.

Not much later, PayPal bought Shaked’s firm for $169 million.

Seeking a venture capital loan for his company, Fraud Sciences, Shaked met with PayPal President Scott Thompson to describe his system. Basically, Shaked explained, Fraud Sciences looked for “good people” and “bad people.”

“Good people leave traces of themselves on the Internet—digital footprints,” Shaked said, “because they have nothing to hide. Bad people don’t, because they try to hide themselves. All we do is look for footprints. If you can find them, you can minimize risk to an acceptable level and underwrite it.”

Shaked told the highly skeptical Thompson that he’d learned the technique while hunting terrorists on the web for the Israeli army. What’s more, he said Fraud Sciences had used the technique on 40,000 online transactions over five years and had been right about all but four.

Still skeptical, Thompson gave Fraud Sciences 100,000 PayPal transactions to analyze that PayPal already had processed. PayPal scrubbed the personal data for privacy, which made Shaked’s job more difficult.

The 40,000 transactions that Fraud Sciences had processed previously had been done manually. Shaked knew that to meet PayPal’s challenge, he would have to automate his system to handle the volume, do so without compromising reliability and crunch the transactions in record time. That would mean taking the system he’d tested over five years and turning it upside down.

Less than a week later, Thompson received an e-mail from Shaked. “We’re done,” it read.

A surprised Thompson handed over Fraud Sciences’ work to his team of experts. Shaked and his small team produced more accurate results than PayPal had, in less time and without the benefit of complete data. The difference was particularly pronounced on transactions that had given PayPal the most trouble.

The lesson: Sometimes, chutzpah and a simple solution make the best expansion strategy.

— Adapted from Start-Up Nation, Dan Senor & Saul Singer, Twelve.