In the lobby of a mid-tier Palo Alto hotel in June 2000, PayPal cofounder and chief technology officer Max Levchin sat on an indoor fountain, getting ready to speak at a payments industry event. “This may be the last conference I’m going to speak at about PayPal, because I think we’re going to die,” he told his then-girlfriend (and now-wife) Nellie and PayPal advisor Scott Banister.

Fraud was decimating his fast-growing, 18-month-old startup. Criminals were creating fake seller accounts at PayPal, making bogus purchases with stolen credit cards and quickly funneling the money into bank accounts they controlled. At the peak of the crisis, PayPal was losing more than $10 million each month to fraud while bringing in less than $1 million in revenue.

While Levchin, who was consumed with beefing up PayPal’s anti-fraud architecture, tried different tactics to foil the fraudsters, many of whom were based in Eastern Europe, one had figured out his email address. “He would email me summaries of his takedowns of my latest idea,” said Levchin on a podcast in September 2023. “It would be like a bank executive talking to a bank robber as the robbery is happening.”

Off-the-shelf fraud-prevention tools were too blunt to help, so Levchin insisted on building an in-house fix. One finally worked: He and early PayPal employee Dave Gausebeck created a clever test that displayed curvy letters for users to type to prove their humanity, marking one of the first commercial uses of an automated Turing test. Thanks to this new “CAPTCHA” technology, the rate of phony-account creation plummeted. Levchin was so thrilled that he blasted German composer Richard Wagner’s famous operatic passage “Ride of the Valkyries” throughout the office in triumph.

The episode taught him that being able to forecast losses with extreme accuracy is critical, and to do that well, you need to build your own software and systems. Those lessons have helped shape how he thinks about risk today as the 51-year-old CEO of $4 billion (revenue) buy-now, pay-later company Affirm.

But there is a big drawback to a DIY approach: it’s extremely costly. In Affirm’s early years, Levchin sometimes wondered, “Holy crap! Are we ever going to be profitable?” The question would remain relevant for over a decade as the San Francisco company racked up well over $2 billion in losses. Levchin’s ability to hold onto investor confidence and continually raise funds despite........

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