The Story of a Cap Table: Affirm
How Lightspeed became the largest venture capital shareholder.
Max Levchin, the technical wizard behind PayPal, could have raised money from almost anyone he wanted when he set off to build his consumer lending company Affirm. The company, founded in 2012, went public last week and is worth $26 billion today.
So I set out to figure out how he picked his earliest investors — and why Roelof Botha, a groomsman in Levchin's wedding, never invested.
I remember talking to Levchin back in early 2014 when Affirm was just one of several companies the nerdy genius was juggling. He was the chairman of Yelp, the co-founder of pregnancy company Glow, and the chief executive officer of Affirm. I wrote a story with the headline, “When One Company Is Not Enough.” Up until that point Affirm had been funded by Levchin and his wife, along with a few investors in his incubator, Hard Valuable Fun.
It wasn't just that Levchin was busy. That prolific work ethic helped expand Levchin's network across Silicon Valley. There was the PayPal mafia: Peter Thiel at Founders Fund, Botha at Sequoia, Reid Hoffman at Greylock, and Keith Rabois then at Khosla Ventures. Levchin also sat on the board of Yelp with Benchmark's Peter Fenton and Bessemer's Jeremy Levine.
But it was another company — one that's largely forgotten — that would shape Affirm's first institutional funding round. In 2005, Levchin founded a photo sharing software service called Slide.
At Slide, Levchin considered two notable people to be his chief operating officer — Jeremy Liew, who'd been a senior executive at AOL and then AOL-owned Netscape, and Rabois, who Levchin knew from PayPal.
Liew ultimately ended up taking a job as an investor at Lightspeed before he could have received an offer. So we’ll never know what might have been. Levchin hired Rabois for the job.
Still, Liew stayed in touch. “I stayed close friends with him,” Levchin told me last week.
Slide never really found its footing. In 2010, the company sold to Google for about $200 million — a stellar exit for a company that was struggling at that time. Google shut Slide down the following year.
So then Levchin started to think up ideas for new companies. He’d spent years commiserating with PayPal co-founder Peter Thiel about how brutal the fintech business was.
“Peter and I spent so much time telling each other fintech is dead,” Levchin said. “It was such a slog. How would anybody want to do this again?”
Slowly, Levchin started to think he just might get back into financial technology. His wife nudged him to get back into the domain he’d mastered at PayPal.
While Levchin was toiling away on a couple companies, including Affirm, Liew made the case for the consumer lending opportunity. Lightspeed had invested in a machine-learning-for-underwriting company, called Zest AI, so Liew had a front row seat into the possible disruption. “For 18 months, I was meeting with him once every six to eight weeks or so," Liew recalls. "I laid out this framework — if you're in a lending business, you can't charge higher interest rates than the market — for you to be successful, you have to do better on costs.”
Liew believed that companies like Lending Club and SoFi were making loans to people who rarely defaulted, meaning that their underwriting couldn't really be much better than the incumbents. “Their innovation was on cost of capital and passing that on in the form of lower interest rates,” Liew told me.
Affirm, on the other hand, could lend money to people who traditional lenders were wary of — people like immigrants or young people with thin credit files — so any improvement Levchin could come up with would give the company a competitive edge.
In the second half of 2014, Levchin decided to raise his first institutional round of funding. Rabois, who had now worked with Levchin at PayPal and Slide, was gunning for as much of the round as he could get. It was a competitive round. “The way we did the valuation was I basically said, 'Hey Max, you tell me what's fair and I'll do it," Rabois told me from his new home in Miami. “So I basically said, 'We've known each other for a while — you decide what you think is a fair offer and I'm in.’”
Levchin proposed an $85 million pre-money valuation. "It was much below where other VCs and much below where Lightspeed was offering," Rabois said. Khosla Ventures invested about $14 million and Lightspeed put in about $12 million, Rabois recalled. Both Rabois and Liew took a board seat.
When Levchin came to explain Affirm to Lightspeed's broader partnership, he didn't bring a pitch deck — a perk of being one of the most in-demand founders in Silicon Valley. So instead of the normal one-page document that is customary at the firm, Liew wrote a lengthy memo to his partnership, explaining the deal dynamics and the pitch for Affirm. "He just came in and told his story and answered questions," Liew recalled.
I asked Liew for some of his emails about the deal or that big memo. He declined to share them. “Issue is it was a competitive deal given that Max had friends everywhere,” Liew wrote. "A lot of the email traffic was about competitive positioning etc and i wouldn't want to expose that given the high esteem that we hold our colleagues ;-)”
Lightspeed ultimately invested $117 million in Affirm across several rounds. On a fully diluted basis, by my calculation, Lightspeed owns 6.3% of Affirm, making it the venture capital firm with the largest stake and fourth largest shareholder. Founders Fund owns 5.7%. Khosla Ventures owns about 4.6%.
Levchin is the largest shareholder with a 9.2% stake. GIC, through an entity called Jasmine Ventures, owns 7.4%. Shopify which struck a partnership with Affirm owns about 6.8%
There are different methods for calculating the total share count which would shift the percentages. Levchin could also receive performance-based stock options which would allow him to increase his ownership stake.
I emailed Botha at Sequoia to ask him why he didn't invest and he gave me a call last week. Sequoia's Michael Moritz led the partnership’s investment in European payments company Klarna in 2010. “We'd already invested in Klarna when Max started Affirm. Since Klarna intended to enter the US market, the companies were too close to each other competitively,” Botha said. “Because of Sequoia's position, where a founder chooses to work with us as a business partner and not just a financial investor, it does present us with awkward conflict situations.”
“At a personal level, I wish I was there with Max as his friend, but I'm delighted for him," Botha said. Botha called Levchin last week, and said he's glad that Levchin won't just be viewed as the person who started PayPal 20 years ago. “I’m delighted that I can now introduce you, ‘Here is Max. He is the CEO and founder of Affirm — and earlier in his career, he also founded PayPal.’”
Botha isn’t the only high-profile investor with ties to Levchin who didn’t end up investing in Affirm. Former PayPal mafia member and Greylock partner Reid Hoffman missed the investment. “I think that when Max was raising his Affirm rounds, I was busy at those moments with other high priorities,” Hoffman wrote in an email. “So, just a miss from an investing perspective since Max is great and fintech interesting.”
Benchmark — whose partner Peter Fenton sat on a Yelp’s board with Levchin — has sat out a number of fintech deals over the years.
While Levchin was famous, fundraising wasn't always a slam dunk. There have always been questions as to whether the company's business was too concentrated. Whether it's selling mattresses or Pelotons, investors have wondered whether Affirm was just riding ecommerce bubbles. (The New York Times reported Sunday Peloton is struggling to make deliveries.)
"I definitely can think of a few people that passed,” Levchin told me. "I’m not sure they want to have their name stated out loud.”
Still, many investors were extremely bullish. Spark Capital marked the deal up significantly in 2015. The funding round valued the company at about $530 million, according to Pitchbook. The deal — which included existing investors and Andreessen Horowitz, Silicon Valley Bank, and Jeffries — totaled $80 million in corporate financing. Spark’s Jeremy Philips sits on Affirm’s board.
Founders Fund didn't invest until 2016 when the firm led a $140 million round that valued Affirm at $840 million. Firm partner Brian Singerman took the board seat. The firm contributed $60 million of that round and ended up investing about $150 million across several rounds.
The mid-stage investment, paired with aggressive follow on, has become a theme for Founders Fund. The firm took a similar strategy with Airbnb, Stripe, SpaceX, and Wish. “If you look at some of the best returns Founders Fund has produced over the last decade, many of them are leading a Series C and then doubling and tripling down thereafter,” said Rabois, who left Khosla to join Founders Fund in 2019.
Khosla — despite initially winning a marginally larger share of that first institutional round — didn’t maintain its stake in Affirm in later rounds as aggressively as Lightspeed. Khosla saw similar results with its investment in DoorDash, where it didn’t convert its early investment into a leading equity stake. Still, it’s a phenomenal exit for the firm, a former Slide investor.
The sovereign wealth fund GIC built up its position in a series of late state rounds. GIC led a $200 million Series E investment in 2017. Then, Thrive Capital led a $300 million Series F in 2019, which GIC also participated in. In 2020, Durable Capital and GIC led a $500 million investment in Affirm, and Shopify struck a partnership deal in exchange for equity.
Despite Levchin’s Silicon Valley celebrity status, he insists that fundraising isn't easy — even for him. “They're all hard,” he said. Most investment rounds involve a period where venture capitalists are eyeing their competitors to see “if this is a worthwhile thing,” Levchin said. "You have to have perseverance to ignore the jitters,” he said.
Eventually, hopefully, someone sends you a term sheet. Then suddenly, Levchin said, “You become the prettiest girl at the ball.”