A payment network is useless until the people you pay are on it. PayPal solved that with cash, and the bill nearly outran the company.
Every network starts empty, and a payments network starts emptier than most: you can't pay someone who isn't on it. In late 1999 PayPal's answer was to pay people directly. $10 to open an account, and $10 more for every friend who opened one. It was the most expensive currency a loop can use, and for a few months it was the right one.
By Max Chafkin's account in The Contrarian, his 2021 biography of Peter Thiel, the bonuses came to about $20 for every new user. PayPal had a few thousand users in November 1999, 100,000 in January 2000 and a million about four months after that. By then it had spent something like $20 million of the $28 million it had raised on referral payments.
That's Andrew Chen's cold start problem, solved with money. A network has to reach a density where it's useful before anyone joins for the product itself, and paying people is the fastest way to get there. Thiel's own book, Zero to One (2014), argues that distribution is part of the product, not something you add after. PayPal treated it that way from the first month.
PayPal's S-1, its registration statement for the 2002 stock offering, picks up the count from March 2000:
The income statement has one line for this, "Promotional and marketing." It ran $0.9 million from inception through 1999 and $21.0 million in 2000. PayPal's revenue in 2000 was $14.5 million, and its net loss was $169.5 million. The company spent more buying accounts than it earned from all of them together.
Cash is the one currency with no gap between what the customer sees and what you pay. A $10 bonus costs $10, every time, whether the new account is a real customer or a second account the same person opened. And cash is exactly what fraudsters want. The next chapter shows what that did to PayPal's losses.
Cash is the one reward that costs exactly what it's worth.
Divide each period's marketing spend by the accounts it added and you can watch the loop take over from the money:
DerivedThe first two rows divide the "Promotional and marketing" line by the change in account count; they cover all promotion, not only bonuses. The third is the 2002 filing's own figure: average total marketing expense, including promotional bonuses, per new account.
Accounts kept arriving at the same pace or faster: about 18,000 a day in the second quarter of 2001 and about 28,000 a day in the first quarter of 2002. The money stopped doing the work because something else had started.
Most brands run PayPal's first phase forever. A discount for signing up, a discount for referring, paid in the currency closest to cash, with no end date and no second phase behind it. The bonus becomes the price.
Pull your cost per new customer by quarter since your referral reward launched. If it fell without the reward ever changing, the loop is already carrying you, and the reward can step down. If it never fell, the reward is a discount with extra steps.
This is one chapter of Close the Loop, which is free and readable in full on a single page with no form in front of it.