The Founders

Key Takeaways

Under Consideration — to be added.

Interconnections

Under Consideration — to be added.

Highlights

• It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. This coolness arises partly from fear of the opponents, who have the laws on their side, and partly from the incredulity of men, who do not readily believe in new things until they have had a long experience of them. —Niccolò Machiavelli, The Prince
• If you have used the internet at all in the last twenty years, you’ve touched a product, service, or website connected to the creators of PayPal. The founders of several of our era’s defining firms—the creators of YouTube, Yelp, Tesla, SpaceX, LinkedIn, and Palantir, among others—were early PayPal employees; others occupy top posts at Google, Facebook, and Silicon Valley’s leading venture capital firms.
• Both in the foreground and behind the scenes, PayPal’s alumni have built, funded, or counseled nearly every Silicon Valley company of consequence for the last two decades. As a group, they constitute one of the most powerful and successful networks ever created—power and influence captured in the controversial phrase the “PayPal Mafia.” Several billionaires and many multimillionaires have emerged from PayPal’s ranks; the group’s combined net worth is higher than the GDP of New Zealand.
• To skip PayPal’s creation is to neglect the most interesting stuff about its founders. It is to miss the defining experience of their early professional lives—one that defined so much of what came later.
• “There was something really special, and I think we may not have all realized it at the time,” one member of the product team said. “But now, when I go into teams, I’m just looking for what is that magic that we saw in the early days of PayPal. And it’s rare, but it’s what we keep searching for.”
• “Calling us a mafia is an insult to mafias,” joked John Malloy, an early board member. “A mafia is far better organized than we were.” During its first two years of existence, PayPal cycled through three CEOs, and its senior management team threatened to resign en masse—twice.
• The company wasn’t hard to create at all, he said. Rather, “it was a hard company to keep alive.”
• Many remembered the company as a crucible—cutthroat as it was creative, and unforgivingly intense.
• Bell Labs was the research arm of the Bell Telephone company, and as a group, Bell’s scientists and engineers won six Nobel Prizes and invented, among other things, touch-tone dialing, the laser, cellular networks, communications satellites, solar cells, and the transistor.
• I began to wonder about other Bell-like constellations of talent—including tech companies like PayPal, General Magic, and Fairchild Semiconductor, but also non-technological cohorts like the Fugitive Poets, the Bloomsbury Group, and the Soulquarians.
  • Talent vortexes
• The British musician and producer Brian Eno once said that as a visual art student he was taught that artistic revolution came from solitary figures—Picasso, Kandinsky, Rembrandt. But as he looked into these revolutionaries, he discovered them to be products of “very fertile scenes involving lots and lots of people—some of them artists, some of them collectors, some of them curators, thinkers, theorists… all sorts of people who created a kind of ecology of talent.” Eno called it “scenius.” “Scenius,” he said, “is the intelligence of a whole… operation or group of people.
  • Talent vortexes
• Modern technology tales are usually told as stories of individual achievement—more “genius” than “scenius.” Jobs is inseparable from the Apple narrative, as is Bezos from Amazon, Gates from Microsoft, or Zuckerberg from Facebook. PayPal’s success is a story of a different kind. There is no single hero or heroine.
• Nosek was bright, with a technical bent and a love of learning, but he found school stifling. “I started to shift into thinking that my education was about the things that I do—not the things that they’re making me do,” Nosek said.
• Together they tried to indoctrinate Levchin, encouraging him to attend various libertarian events and read books like Ayn Rand’s The Fountainhead and Friedrich Hayek’s The Road to Serfdom. “[Nosek and Banister] were the subversives of our group,” Levchin said. “They were burning libertarian love. And I was just like, ‘Guys I just want to write some code.’ I always felt a little bit like the dumb Beatle.”
• Levchin’s class schedule was thick with technical coursework, but one of his nontechnical courses left a lasting imprint. In a film class, Levchin studied some of the twentieth century’s critically acclaimed motion pictures, and he became obsessed with Akira Kurosawa’s Seven Samurai. “I thought that it was the best movie ever,” he remarked. “I’d never seen anything like it.” During a college summer, Levchin binged the three-hour-twenty-seven-minute black-and-white film with abandon. “All you’ve got is you, the TV, and air-conditioning… I watched Seven Samurai at least twenty-five times during the course of that summer. I got addicted.” As of this writing, Levchin claims to have watched Kurosawa’s classic over one hundred times—and calls it his sole source of “management training.”
• Andreessen’s rise inspired this generation of Illini engineers: here was evidence that the internet was an economic force, not just an eccentric hobby. “One thing that really shaped me—and probably a lot of other people at Illinois—was this constant sense of opportunity in the air because of Mosaic and subsequently Netscape,” Levchin would later tell the UIUC alumni magazine. “It was this notion that students like us built these amazing tools that were not at all contemplated by the industry.”
• Thiel was responsible for fundraising, editing, and soliciting pieces. He also penned editorial essays to open each issue, tracts titled “Open or Empty Mind?,” “Institutionalized Liberalism,” “Western Culture and Its Failures,” and “The Importance of Being Honest,” among others.
• Howery was impressed—not just by Thiel’s depth of knowledge, but also by his range. Howery returned to his dorm and said to his girlfriend, “Peter might be the smartest person I’ve met in my four years at Stanford. I think I might work for him for the rest of my life.”
• The four met at Hobee’s, a local fast-casual chain, the first get-together leading to more. In his emails, Nosek winkingly referred to these gatherings as “the billionaires’ breakfast club.” “We all believed that the others were going to build big things,” Nosek explained. Over meals, they’d discuss the latest developments in technology, philosophy, education, start-ups, and their predictions for the future. It was here that Nosek learned of Thiel’s interest in start-up investing.
• But for Thiel, the value of Smart Calendar wasn’t as an investment so much as a crash course in start-ups. Nosek had shared the blow-by-blow account of the company’s rise and fall, walking Thiel through the intricacies of internet marketing, customer acquisition, and product design. Thiel would later cite his Smart Calendar investment as a rich vein of learning, a failure whose lessons—including choosing cofounders wisely and minimizing competition—paved the way for PayPal’s success.
  • #[[Post-Mortem]]
• “Peter wasn’t technical,” Nosek said of Thiel, “but he was an intellectual in the way that Max was in that they were both always trying to understand things. They enjoyed pushing themselves to the limits of their own minds.”
• Levchin recalled one interview with a promising candidate who had a PhD in mathematics. Given a puzzle, the mathematician began scribbling, his calculations occupying an entire whiteboard and then the office’s glass door. For Levchin, the candidate’s long and winding process was a definitive knock. This is your future as a software engineer: You’ll get it right, but it will probably take too long, he thought.
• To fill their empty Rolodex, they started cold-calling people they read about in the newspaper.
• Over lunch, they discussed “philosophy, economics, the way the world works,” and Musk confirmed his perception from the article that Nicholson was “super smart… a giant brain.”
• Musk joined Scotiabank because of Nicholson, not to become a financier. Nicholson joined the bank for similar reasons, lured not by finance but by the firm’s CEO, Cedric Ritchie. Ritchie had installed Nicholson at the head of a small internal consulting team. “We were a little like DARPA [the Defense Advanced Research Projects Agency],” Nicholson remembered. “We were this little crazy organization off to the side.”
  • Follow people
• Musk was dumbfounded. In his view, the past was no guide; Brady Bonds were new, and that was the point. “In fact, that was why the debt was for sale—because there were so many other bank CEOs who had that same absurd notion,” Musk said. “It blew my mind that there was this massive arbitrage opportunity just lying there, and they did nothing.”
• For Musk, the Scotiabank internship proved “how lame banks are.” Fear of the unknown had cost them billions, and in his later efforts at X.com and PayPal, he’d return to this experience as evidence that the banks could be beaten. “If they’re this bad at innovation, then any company that enters the financial space should not fear that the banks will crush them—because the banks do not innovate,” Musk concluded.
• Later, Musk admitted to studying business as a hedge. “I was concerned that if I didn’t study business, I would be forced to work for someone who did study business, and they would know some special things that I didn’t know,” he told the American Physical Society newsletter. “That didn’t sound good, so I wanted to make sure that I knew those things, too.” If he redid his studies, he admitted, he might have ditched the business classes altogether.
• lot of times,” Musk explained, “the question is harder than the answer, and if you can properly phrase the question, then the answer is the easy part.”
• At Pinnacle, the researchers weren’t publishing-or-perishing; they were producing—crafting technologies to change cars forever.
  • #[[Academic Research]]
• Mere months before Musk came west, Stanford graduate students Jerry Yang and David Filo toiled in a trailer and created “Jerry and David’s Guide to the World Wide Web,” which they renamed “Yet Another Hierarchical Officious Oracle” and later shortened to “Yahoo.” In 1994, an ex–hedge funder left New York, moved to the Seattle suburbs with his wife, and launched Cadabra Inc. in their garage. He, too, would later rechristen his company—Amazon.com.
• From where he sat, the brains behind Yahoo and Amazon were just a few years older than him and surely no wiser.
• Musk didn’t receive a reply from Netscape—but he also wasn’t rejected outright. So he decided to venture to Netscape’s offices and loiter in the lobby. Perhaps there, he could start a conversation that would lead to something. This didn’t pan out either. “I was too shy to talk to anyone,” he later told Digg founder Kevin Rose. “So I’m just, like, standing in the lobby. It was pretty embarrassing. I was just sort of standing there trying to see if there was someone I could talk to and then I was too scared to talk to anyone, so then I left.”
• “I would spend several years watching the internet go through this incredibly rapid growth phase and that would be really difficult to handle—so I really wanted to be doing something,” Musk said. He requested a deferment from Stanford to begin his program in January 1996 instead of September 1995.
• The growth came at a price, though. In the fall of 1996, Musk clashed with his investors and fellow executives, who raised questions about his leadership. Impatient and perpetually sleep-deprived, he was prone to setting unreasonable deadlines, chewing out other executives and colleagues in the open, and retooling code written by other people without asking first.
• Money and fame were welcome, but Musk felt that Zip2’s success came with an asterisk. The company had triumphed financially, but Musk felt it was handicapped technologically. He took deep pride in Zip2’s innovations—creating some of the first working online maps, for instance. But those technological pearls, Musk believed, were cast before swine. Zip2’s products had not exhibited the awesome potential of the internet—at least not to the extent he’d hoped. “I knew how to develop technology,” he observed, “but I hadn’t seen it flourish, and it had been stifled.”
• The business types treated the internet as the twentieth century’s latest, garish gold rush. Musk saw it differently. “I thought it was something that would fundamentally change the world,” he said. “It was like a nervous system for the world that would potentially make humanity somewhat of a superorganism.”
• “Previously we could only communicate by osmosis. One person would physically have to go to another person. For a letter, someone has to carry the letter,” he observed. “And now, you could be in the middle of the Amazon jungle, and if you had just one satellite signal to the internet, you’d have access to all the world’s information. That’s unreal.” Unreal—yet being made real all around him. Musk craved the chance to do more. He wanted to be responsible, as he put it, for constructing the internet’s “building blocks.”
• By the late 1990s, the digital finance and banking space swarmed with start-ups. But Musk found those services lacking in one respect or another—he wasn’t keen on launching just another dot-com bank. Musk’s vision for his new financial services firm was—unsurprisingly—ambitious. What if, he wondered, a single entity unified a person’s entire financial life? In some of his earliest investor pitches, he called this idea “the Amazon of financial services”: finance’s one-stop shop, offering not just standard-issue savings and checking accounts, but everything from mortgages to lines of credit, stock trading, loans, and even insurance. Wherever money went, Musk believed his new company should go, too.
• 1990s-era banking infrastructure was bad. He saw its primary operators—bankers—as armies of middlemen charging big fees and offering little of merit in return.
• Musk pitched Fricker his idea for a new kind of financial services firm. “He’s one of the greatest salesmen I have ever met,” Fricker said of Musk’s entreaties. “Like a Steve Jobs. When he articulates something, he tends to find the kernel that will appeal to a broad mass intuitively.” By early 1999, Fricker was sold. He gave up his million-dollar salary and moved to Palo Alto.
• In the early months of 1999, Musk’s new company was essentially some ideas in Musk’s mind, but Ho joined enthusiastically as employee number four. “There’s a wave, right?” Ho said. “And you either catch the wave, or you can sit there waiting—and Yahoo goes by.”
• Heads down writing Zip2’s code, Musk had outsourced the renaming of Global Link—and regretted it. “I deferred brand and marketing and whatever to people I thought were domain experts,” Musk said. “And then discovered subsequently that you just have to use common sense. And that’s actually a better guide.”
• “One of the things that Elon was highly adept at, which frankly I underestimated… was on the VC side,” Fricker said. “He would articulate what was wrong with the industry. You know, the big monoliths, the lack of democracy in pricing… everybody would get all fired up.”
• Fricker and Payne had run models about X.com’s growth and revenue, but the numbers on the financial superstore model didn’t seem to add up. “This was all a little bizarre to me. My training was very classic Wall Street. Very fact-based. Very numerical. Very much spreadsheets and sort of forced complexity around what you thought the future was going to be,” Payne said. “It was logical and mechanical, especially around how I thought you analyze risk and opportunity.” To Musk, the models didn’t add up because the assumptions baked into the models were false. “What was more potent than the mathematical exercise was the story,” Payne would appreciate later, “and Elon was very good at pointing to the future—just as he is today—and saying the objective is over there, and I know it’s over there, and we should all go over there.” Even in hyperrational Silicon Valley, vision weighed as much as data. “There’s a reason why entrepreneurs who succeed in the technology world get paid as well as they do—it’s because it’s not a straight line between I build the factory and the widgets come out and the widgets get sold,” Payne said.
  • #Forecasting #Storytelling
• Programming, like writing, was halting and uncertain—less paint-by-numbers than most appreciated. “It’s not linear, and you might burn three hours going this way, and you go, aw, shit, and you don’t want to tell someone you went down the blind alley,” Ho said. But those blind alleys mattered: At Zip2, Musk had learned that start-up success wasn’t just about dreaming up the right ideas as much as discovering and then rapidly discarding the wrong ones. “You start off with an idea, and that idea is mostly wrong. And then you adapt that idea and keep refining it and you listen to criticism,” he’d tell an audience years later. “And then engage in sort of a recursive self-improvement… keep iterating on a loop that says, ‘Am I doing something useful for other people?’ Because that’s what a company is supposed to do.” Too much precision in early plans, he believed, cut that iterative loop prematurely.
• On May 9, 1999, he wrote a long email to Musk, concluding with, “Elon, please rejoin us in the trenches at X… As smart as you are, we are smart enough to know when it is not fully engaged—the curse of competent partners.” He reminded Musk that the opportunity to work together had motivated his move to California in the first place. Musk responded graciously—but rejected Fricker’s premise that he was asleep at the wheel. “Well said, although I think you may misread me a little. My mind is always on X by default, even in my sleep—I am by nature obsessive-compulsive,” Musk wrote back. “What matters to me is winning, and not in a small way.” Musk suggested they get dinner together that evening and signed off “Your friend and partner in turn, Elon.”
• He also told Nicholson that Musk was brilliant, his ideas were farsighted, “but you’ve got to be able to execute.”
  • Interesting to think of Elons core competency as being far sighted while bringing in others to execute more often in the weeds
• To head this off, Musk met with the remaining X.com employees, asked them each to stay, and promised a chunk of additional equity if they did. “Elon sat everyone down in the conference room… was basically saying, ‘Look, are you in or are you out? Because if you’re in, you’re in, and we’re going to build this thing,’ ”
• More persuasive to Nosek was the team’s alchemy, which now included three members—Levchin, Pan, and Simmons—that he knew from college. “I decided to work on it because of this feeling that, together, we’re going to do something amazing,” Nosek said. “Even if they had been wanting to do something completely different, I would have wanted to work with this group.”
• The business plan anticipated the obvious question: “How will the Confinity network ever come into being if its value to each particular customer depends on the prior existence of the whole network?” The team developed two approaches to addressing this tautology: top-down and bottom-up. From the top down, Confinity would find and target prime business and market candidates. The bottom-up approach would see users inviting members of their own networks. “Confinity,” its founders wrote, “will combine these two approaches, albeit with the major initial emphasis on the second, grassroots model.”
• In the plan, the preamble to the founders’ biographies offered a window into how Thiel and Levchin thought about building start-up teams at the time: In bringing together Confinity’s founders we have been driven by two overriding considerations. The first is to identify people who are highly talented and individually diverse, so that each of them is capable of taking on several different business and technology tasks. The second is to form a group that will work well as a team. Each of Confinity’s founders has worked with at least one other founder in some past startup context. As a result we are aware of both the strengths and weaknesses of each member of the core team. We know who is best at what and how to allocate the various tasks. This common history enables Confinity to execute with efficiency and celerity.
• But Thiel’s view was that trust among teams was hard to build, and that friends-turned-employees came preinstalled with trust. “It was this network hiring sort of effect where we had a great deal of trust that everybody was reasonably bright, and trying to work toward making this successful,” early employee David Wallace recalled. Trust produced speed.
• Janardhan was amazed. “If you think through this… five minutes into me joining, they gave me the root password for the site. The amount of either foolhardiness or trust it takes is amazing, right? On the flip side, when I said I didn’t [take the site down], they just said ‘Okay’ and walked away. There was no grilling. There was no ‘Show me what you’re doing.’ In a weird way, I felt more in the trust circle than anything else they could have ever done.”
• “They hired really good people, gave them a lot of trust, and so people ran at their own pace, just made sure that they checkpointed to make sure we were in sync occasionally. And then we would just keep on running. So they got the best out of some very, very smart people.”
• “We had to recruit our friends because no one else would work for us,” PayPal’s future COO David Sacks would later say.
• Brilliance, nonconformity, availability, and the willing suspension of disbelief—these qualities defined Confinity’s first hires and formed the foundation of its culture.
• Venture capitalists, too, were unenthused. During what Thiel called “an excruciating process,” the team presented over one hundred times—with pitch after pitch falling flat. Would-be investors asked sensible questions: Would people really beam money from handheld devices? What were the odds that four separate lunchtime companions would all own PalmPilots and have Mobile Wallet installed? Also, what exactly was seigniorage, and could Confinity really make money, as Thiel put it, “off the float”?
• “This was one of the lessons we had about PR early on,” Nosek remembered. “It was much more important for recruiting and for perception among investors than it is about actual product adoption.”
• “If people don’t know how to say something, or if they are fearful of saying it incorrectly,” Master said, “they will do anything to avoid saying it. Embarrassment is a very strong emotion.”
• To win, you need to tell a story about cogs. At Google, you’re a cog. Whereas with me, you’re an instrumental piece of this great thing that we’ll build together. Articulate the vision. Don’t even try to pay well. Meet people’s cash flow needs. Pay them so they can cover their rent and go out every once in a while. It’s not about cash. It’s about breaking through the wall of cynicism. It’s about making 1% of this new thing way more exciting than a couple hundred grand and a cubicle at Google.
• Levchin kept the bar for talent exceedingly high, engineer Santosh Janardhan noted, even if that came at the expense of speedy staffing. “Max kept repeating, ‘As hire As. Bs hire Cs. So the first B you hire takes the whole company down.’ ”
• Lee left intrigued by the team. “I can’t really put words on it, because I go by my gut,” she said, “but the energy there, I hadn’t felt that before. And I’m like, ‘There’s something here.’ ”
• She came in to meet the team. “I left the interview not being able to tell you anything exactly about the product or much [else]—other than, those are the people I want to work with,” Aptekar recalled. “Clearly hypercompetitive. Clearly workaholics. Clearly want to change the world. It was like, I found my people.”
• Early on, Thiel instituted an informal no-firing rule. “Firing people is like war,” he explained, “and war is bad, so you should try not to do it.” The no-firing rule set a high bar for talent, but it also caused underperforming employees to be shuffled around the company, rather than efficiently dismissed. “We probably should have fired more people,” one early employee admitted.
• In Confinity’s early days, Levchin observed that the number of people in a room correlated positively to friction in basic communication. “If you’re alone,” he explained, “you just work really hard and hope it’s enough. Since it often isn’t, people form teams. But in a team, an n-squared communications problem emerges. In a five-person team, there are something like twenty-five pairwise relationships to manage and communications to maintain.”
• Levchin said. “A good rule of thumb is that diversity of opinion is essential anytime you don’t know anything about something important. But if there’s a strong sense of what’s right already, don’t argue about it.”
• The email money demo dramatically simplified this sequence—Levchin could now test transfers with a few mouse clicks. Within weeks, Levchin had become an avid user of the afterthought product, even as he remained committed to the vision of the original. “That should have been a clue,” he said.
• In hiring David Sacks, Thiel pulled rank and overruled the team’s objections. This was a rare move for Thiel, who believed Sacks a rare candidate: After all, few people would come into an interview guns blazing against their prospective employer’s flagship product. Thiel valued bracing honesty, and he trusted that Sacks would speak candidly. “Peter said, ‘I need people here I can scream at,’ ” Sacks remembered.
• Approaching problems fresh and feeling the pressure to launch, the team had to devise solutions quickly, but that approach left the engineers with an operating style that served them well in PayPal’s near future and in their later work.
• You learn to ‘invent’ instead of ‘research and implement,’ ” Erik Klein observed.
• “Elon, as the world knows today, is a very gifted storyteller,” Moritz said, smiling. “And some of the stories even come true.”
  • #Storytelling
• Both Bezos and Musk knew that one site offering everything trumped five sites offering one thing apiece. This wasn’t an especially groundbreaking insight—the concept of a general store was centuries old. But it took foresight to bring such a thing to life at internet scale, and to do so when customers were still taking their first, tentative steps toward online shopping and banking.
• “If somebody couldn’t cut it—if somebody wasn’t doing their job—Elon always let them go with dignity and grace.” Bezona recalled severance packages being given to departing employees regardless of rank.
• At X.com, Klement came to realize what David Sacks had experienced just blocks away: it took discipline and strategy to wring products from code.
• Klement had interviewed with X.com on a lark, mid-application to graduate school. But joining the company changed her life. She joked that her product role evolved to become a mix of “therapist, historian, and operator.” “The therapist was just that, you know, things were difficult, and there was some buffering that needed to go on,” she remembered. “The historian was that it was really hard to come in there and build product if you didn’t understand the codebase or how it would trip up a certain localization challenge.” And finally, Klement the operator. “I really care a lot about the how,” she said. “I did a lot of sitting down and saying, Okay, how are we going to work together across design, content management, engineering, QA, customer support? I viewed that as a critical part of my job, which was making sure that things were flowing for everybody.”
• Musk himself called Klement “an unsung hero.” Another colleague shared that she studied Klement’s operating style as a model. “I always wanted to be just like Amy,” she noted. “She was my idol.”
• Narratives like Musk’s played well in the media, successfully tapping the public’s perennial interest in underdog stories. But Musk also had a special knack for capturing the press’s attention. He discovered that his willingness to veer into exaggeration often did the trick; X.com wasn’t even in existence yet, and it was already earning breathless press mentions. So was Musk himself. In August of 1999—weeks after his company hemorrhaged half its team—Salon.com wrote that Musk was “poised to become Silicon Valley’s Next Big Thing.”
  • #Storytelling
• No detail escaped Musk’s notice, and more than one employee described the stress of working under his watchful eye.
• “Most CEOs are not very transparent with their staff,” Spikes said. “Elon was like, ‘We’re in the trenches together. Let’s do this’… It was powerful to work with him because of that.”
• Donahoo overheard someone urge Musk to change into a suit and tie. “I remember him saying, ‘If they don’t like the way I dress… they’re not going to like my product—and it’s the product that’s going to get them to invest, not the way I look.’ ” The moment stayed with her. “If you’ve got something that’s important, people are going to want it—it doesn’t matter what you look like.”
• “At X.com we had this philosophy: frameworks are good,” remembered Alexander. “Today, everybody uses frameworks. But back then, X.com said, instead of writing everything yourself, we should use frameworks. You can get a lot more done in little time.” Musk supported the decision because it swapped flexibility for efficiency. “If
• X.com’s services went live to the world over Thanksgiving 1999. Soon after the launch, the team left the office as a group and stopped at a nearby ATM. Musk inserted an X.com debit card, punched in his PIN, and requested cash. When the machine whirred and issued bills, the entire team celebrated. “Elon was very, very happy with that,” Sullivan recalled.
• One way in which X.com and Confinity did it right was by choosing email as the backbone of their platforms—riding a surging wave of adoption. In 1999, Americans sent more email messages than the Postal Service delivered packages.
• “We would show people the hard part—the agglomeration of financial services—and nobody was interested. Then we’d show people the email payments—which was the easy part—and everybody was interested,” Musk explained in a 2012 commencement speech at CalTech. “So I think it’s important to take feedback from your environment. You want to be as closed-loop as possible.”
• He soon discovered that product management was as much about avoiding distractions as producing breakthroughs. “As I took over product in the company,” Sacks remembered, “I kind of became, like, ‘Dr. No.’ Because I’d always have to say no to everyone’s stupid ideas… it was really important that we not squander our precious engineering bandwidth on ideas that didn’t make sense for the long-term strategy of the company.”
• While both X.com and Confinity blasted off thanks to email, another tactic helped them reach escape velocity: X.com and Confinity both paid new users cash bonuses to sign up. In time, this bonus effort was hailed as one of the all-time great “viral marketing” programs, but starting out, there was something vaguely disreputable about it.
• Two Hotmail investors, Tim Draper and Steve Jurvetson, wrote about the idea in a piece published on January 1, 1997, for a newsletter popular among early technology enthusiasts—including then-undergraduate Nosek. “Attention is finite,” Draper and Jurvetson wrote. “Rising above the noise of a thousand voices requires creativity. Shouting is not very creative. Just hanging up a web shingle and hoping for visitors is not very creative. Rather, new companies can structure their businesses in a way that allows them to grow like a virus and lock out the existing bricks and mortar competitors through innovative pricing and exploitation of these competitors’ legacy distribution channel conflict.”
• Technology thinkers frequently urged founders to build companies that solved problems in their own lives, but X.com’s and Confinity’s eBay-driven success offered a powerful counterpoint: solving a problem could be just valuable as solving your problem.
• Hoffman said. “The cadence of learning at a start-up… fucking intense is an understatement. It’s everything from ‘How do you hire people? How do you assemble it? How does the capital game work? How does go-to-market strategy work? How does the thinking around innovation work?’ ”
• Hoffman’s board was moving in a strategic direction he thought unwise for the company. “This is what happens when venture capitalists who think they know what they’re doing, but don’t, get in control,” he said of the strife.
• Hoffman didn’t mine her for every scrap of intel; instead, he wanted to know who Go was and why she wanted to be at Confinity. “[Hoffman] sees people in a very three-dimensional way,” she observed. “Some people put a formula or label to someone; Reid isn’t like this. Reid is really very emotionally intelligent.”
• Dan Madden worked in business development and joined calls alongside Hoffman. “He’d sit, and I’d sit in the second chair, meaning taking notes. And he would go through, and he would constantly mute. And then he’d say, ‘He’s gonna say this. I’m gonna say this. Then he’s gonna say this. Then I’m gonna say that.’ ” Hoffman unmuted the phone, Madden remembered, and the negotiation played out precisely as Hoffman predicted.
• Thiel sought a $100 million buyout for Confinity—which BeFree’s board thought unacceptably high. “It was very hard for us to convince our board of directors to go up to what Peter’s clearing price was,” Gerace said. The board instead authorized a price less than half of Thiel’s target.
• retrospect, Thiel and Levchin were less wistful. BeFree became one casualty of many when the internet bubble burst. Following a precipitous fall in stock price, BeFree was sold for $128 million to a competitor in 2002—a little more than three weeks after PayPal IPO-ed at a market cap of nearly $1 billion.
• X.com and Confinity launched a weeks-long war to win customers on eBay. “It was kind of a race to see who could run out of money the fastest,” Musk said wryly.
• And Thiel didn’t like to lose. “Show me a good loser,” Thiel once said to a Confinity employee, “and I’ll show you a loser.”
• And if all of that weren’t enough, Thiel also foresaw market risks in the year ahead. Hype about the internet had hit a peak—newly public internet companies like Priceline.com were more valuable on paper than the entire airline industry combined, and so on.
• “Let there be no doubt, that what we are witnessing is, indeed, history’s greatest financial bubble,” wrote an investor at the market’s peak in 1999. “The indescribable financial excesses, the massive increase in debt, the monstrous use of leverage upon leverage, the collapse in private savings, the incredulous current account deficits, and the ballooning central bank assets all describe the very severe financial imbalances which no amount of statistical revision nor hype from CNBC can erase.”
• Up the street at X.com, CEO Bill Harris wasn’t resting easy. “We were both the same size, growing at the same speed,” Harris remembered. “We would have destroyed ourselves competing.” He saw the writing on the wall: two payment networks catering to the same market couldn’t achieve scale simultaneously. “True networks are a naturally monopolistic business,” Harris explained.
• Others praised the deal—seeing the potential. “Mike Moritz came in to tell me that this was a merger for the ages,” Levchin remembered, “that it was going to be the most important merger in the history of Silicon Valley.”
• To this day, Harris is circumspect in speaking about what happened next. Musk is not: “I was like, ‘Fuck you. We’re just going to kill [Confinity].’ ” If Confinity wasn’t going to accept a junior partnership, that was their problem as far as he was concerned. “It’s like, Okay, back to hack-and-slash on account growth,” Musk said. Harris responded by dropping the bomb: he told Musk that absent a deal between the two companies, he would resign as X.com’s CEO. Musk remembers saying, “ ‘Bill, we need to raise a round. And you’re basically putting a gun to my head. And saying that if we do not do this deal, then basically the CEO of the company is departing. And we are literally raising a round right now. That’s a very difficult situation. Like this could kill the company.’ ” Harris stood firm—leaving Musk no choice but to concede. “The reason I agreed to the fifty-fifty is because Bill Harris said he would resign if I didn’t,” Musk said. “Otherwise, I was going to pass on the deal.”
• To Harris, the merger wasn’t just defensive—it was a strategic piece of offense. He cited Metcalfe’s Law. Devised in the 1980s by Robert Metcalfe, the inventor of Ethernet, the basic idea was simple: The value of a network grows by the square of the size of the network. If a computer network contains five machines, the total network has a value of 25—5 squared; if it has a thousand machines, the network has a value of 1,000,000—1,000 squared. Per Metcalfe, the bigger network has 200 times more machines—but its value is 40,000 times bigger. True for telephones, faxes, and the world wide web, Metcalfe’s law also applied to payments. “Volume wins,” Harris explained. “Nobody wants to be on a payment system where there’s no one to pay. And no one wants to be a recipient on a payment system where there’s no one paying. And so it’s all about getting size.”
• What followed taught them all valuable lessons about mergers—what makes them work and what makes them fail. “A merger isn’t two companies joining together,” Luke Nosek remarked. “It’s actually closer to hiring fifty people, sight unseen.”
• The joint company was on track to spend almost $25 million that quarter alone, with salaries, bonus payments, credit card fees, and fraud tearing through its balance sheet. “If we were standing on the roof of our building throwing wads of hundred-dollar bills over the side of the building,” remarked Reid Hoffman, “we’d be spending money less [quickly].”
• Musk remembered the myriad crises colliding at the point of the merger: “If the fraud thing is not solved, we’re gonna die. If customer service is not solved, we’re gonna die.… If we didn’t have a revenue model—if our business consists of only costs and no revenue—we were obviously dying.”
• The crazed nature of it all confirmed Thiel’s suspicions about the market. “I remember thinking to myself that it felt like things couldn’t get much crazier, and that we really had to close the money quickly because the window might not last forever,” he said.
• Musk predicted a reckoning. “This is the longest peacetime expansion in history,” Musk said, “and for young people who’ve never really seen a serious recession—and anyone who’s studied history knows they happen—a downturn will be a rough experience.” This prediction contrasted with his usual bombastic optimism—if Musk preached caution, it meant something.
• The timing was auspicious: just days after X.com closed its round, US public markets entered a downward slide that would ultimately wipe out $2.5 trillion in market capitalization and sour the mood on technology stocks. “Months of greed that fueled one of the greatest bull markets in history,” reported CNN in April 2000, “turned to fear on changing sentiment that the highest flying technology stocks rose too far, too fast.” By the end of the year, Nasdaq stocks had lost half their value. On the eve of 2001, CNN asked a portfolio manager for stock picks. “I would sit on the sidelines for six months,” he replied, “and let the angel of death gather up the corpses.”
• Later, Thiel would call the cataclysm clarifying. “Perhaps the peak of insanity was also the peak of clarity,” he recalled, “where in some sense you saw very clearly what the distant future was going to be, even though it turned out that a lot of specific things went very wrong.”
• In January 2000, Pets.com purchased a pricey thirty-second Super Bowl advertising spot titled “If you leave me now.” On November 7, 2000, just 282 darkly ironic days after the ad’s debut, Pets.com shut down and its assets were liquidated—turning “Pets.com” into a synonym for the dangers of dot-com speculation.
• That Confinity and X.com didn’t end up in the Valley’s discard bin was attributable to a number of factors, not least that it had enough runway to ride out a rocky year. “Back then, there were probably five to seven other little piddling online money moving services… that just got starved of oxygen over time. And they all died out by the fall,” said Vince Sollitto.
  • Survival is the number one triumph
• Thiel presented a solution: the company should take the $100 million closed in March and transfer it to his hedge fund, Thiel Capital. He would then use that money to short the public markets. “It was beautiful logic,” board member Tim Hurd of MDP remembered. “One of the elements of PayPal was that they were untethered from how people did stuff in the real world.”
• “The tide was changing and Peter is always pessimistic, but he recognizes it is changing, and he was definitely right,” Malloy said. “We would have made more money [investing] than anything we did at PayPal.”
• Customer service, company leadership decided, must be made a priority.
• Years later, Anderson reflected on her scrappy approach to solving customer service for the company: “I never stopped and thought, Will this work? That question was completely foreign to those years. It was, What can we do? And how fast can we do it?”
• “I remember once Elon saying one thing which was like, ‘If you can’t tell me the four ways you fucked something up… before you got it right, you probably weren’t the person who worked on it,’ ” Giacomo DiGrigoli recalled.
• Musk echoed this sentiment. “If there were two paths where we had to choose one thing or the other, and one wasn’t obviously better than the other,” he explained in a 2003 public talk at Stanford, “then rather than spend a lot of time trying to figure out which one was slightly better, we would just pick one and do it. And sometimes we’d be wrong.… But oftentimes it’s better to just pick a path and do it rather than just vacillate endlessly on the choice.”
• As a part of a spring 2000 promotion for Billpoint, eBay had announced that sellers could list auction items for free if they included Billpoint as a payment option. After a single “free listing day,” Billpoint went from being listed as a payment option on 1 percent of all auctions to 10 percent. Achieving that kind of market share, wrote Eric Jackson, “took PayPal a month to reach.”
• At X.com, the original plan had been to upsell people into an expansive set of nonpayment banking services—which would in turn generate revenue. At Confinity, meanwhile, the team had intended to earn interest on PayPal account balances—a strategy dubbed “making money on the float.” In both cases, the plans hit hard reality: X.com’s other banking offerings didn’t attract many users, and Confinity’s earnings from “the float” turned out to be negligible. To make financial matters worse, X.com also had to pay hefty transaction fees. Most X.com accounts were linked to customer credit cards, requiring X.com to pay fees to credit card companies like Visa, Mastercard, and American Express with each customer transaction. “The more transactions we did,” Amy Rowe Klement observed, “the more money we lost.”
• Both sides believed that once the company had successfully wooed enough customers, revenue could be sorted out.
• The basic vision is to build the financial operating system for the world, and thereby provide the underpinnings for global commerce. I’m more of a visionary and less of a manager. And precisely because the initial vision has gained so much traction, it has become all the more critical to transition to a team that will manage and scale X.com’s operations.
• Harris’s imposition of additional meetings, formality, and process, he believed, came at the expense of releasing new features. Sacks also disagreed with the decision to reduce customer incentives, doubting that bonus spending was as unsustainable as Harris believed. The bigger risk, in his view, was X.com losing the eBay payments war. Besides, Sacks felt, boosting revenue should take priority over cutting bonus costs. Musk agreed.
• “The bottom line here is that whatever mishegoss was going on between X.com and Bill Harris, Peter, and Elon and all that, I would come in every day and enjoy myself every day working. And I think that that is probably a testament to those people that that stuff was not trickling down on me. I could just do my job,” Denise Aptekar said. “Whatever was going on, I would usually hear about it when it was all over. Oh, we have a new CEO. Okay, I go back to work.”
• Harris’s lasting contribution, however, would be the merger of X.com and Confinity. Had he not, by hook and crook, brought Levchin and Musk to the table, it’s entirely possible that Confinity would have run out of money, or that X.com would have lost the race on eBay—or both. Without that deal, PayPal may not exist today.
• Right or wrong, this episode cemented the team’s allergy to “executive experience.” This belief would emerge as a start-up truism later, but at the time, the team’s sense defied received wisdom. Standard operating procedure saw boards installing a seasoned CEO to steer dot-coms once they found their footing: eBay’s Meg Whitman, Yahoo’s Tim Koogle, and Google’s Eric Schmidt stood as but a few high-profile examples.
• X.com’s leaders took Bill Harris’s rocky tenure as evidence that such “supervision” was not only unnecessary, but counterproductive. For every Schmidt-like success, there seemed to be a John Sculley waiting in the wings. Sculley, the former CEO of PepsiCo, had been installed to lead Apple following the ouster of Steve Jobs—with mixed results. “We saw what had happened at Apple when they brought in the Pepsi executive,” David Sacks recalled. “We saw what had happened at Netscape when they brought in Jim Barksdale. And we saw that we were on a similar trajectory.”
• Musk’s reorganization included an important change: engineering leads would now work with product managers as discrete, semi-independent teams. Prior to this, engineers functioned more like free agents, tossed at problems by dint of their ability, interest, and company need. But that could cause confusion and disorganization.
• More programmers assigned to a given project, Brooks explained, multiplied the number of communication channels. This time spent talking—whether keeping team members up to speed or building interpersonal relationships—was time not spent coding. Two heads, in other words, weren’t necessarily better than one.
• Sacks and Musk believed small units freed innovators from the entanglements of bureaucracy.
• The big changes to team structure paired with smaller, atmospheric changes. For instance, the team opted to call the product role—whose work involved a mix of strategy, analytics, and operations—“producers” instead of the more traditional “product managers.” “The word manager had acquired this negative connotation,” explained Sacks. “To call them ‘product managers’ would imply that their job was just to ‘manage things’ as opposed to ‘make things happen.’ ”
• “When I joined PayPal, it’s like no one tells me how to do things,” He remarked. “They just throw me questions. Question after question. And I just figured out how to answer the question. The whole company was… no nonsense.”
• They sacrificed solidarity for speed and made decisions by fiat when necessary. “It wasn’t an open democracy of ideas,” recalled early X.com engineer and later Yelp cofounder Jeremy Stoppelman.
• “You’ve just been up all night. Why?” Cringely asked. “I’m having fun, and that’s what you do when you have fun, you just don’t want to stop,” Levchin replied, matter-of-factly. Then Levchin offers a lengthy meditation on the wonders of the wee hours. I think there’s something very special about the all-nighter ethic… There’s definitely something about the nocturnal lifestyle for engineers specifically that really opens up the chakras of creativity or code-writing. People get slightly sillier, but also maybe a little more creative. They get tired, and some spirit and camaraderie wakes up in those hours. And you get more done because you’re not afraid to tell people to “shove it” when they’re doing something wrong, and the interactions become more interesting. But I also think there’s this massive value that you harness when you’re doing an all-nighter when you’ve gone for presumably seven or eight hours of work, and you’re really getting up to a point when something’s about to be born—and then you go for eight more hours! And instead of stopping to go to sleep and letting these ideas dissipate, you actually focus on the findings you’ve made in the last few hours, and you just go crazy and do some more of that.
• William Wu remembered that Musk expected employees who worked late on a Friday night to return by Saturday morning. (Later, Wu purchased shares early in Tesla, just after its IPO, based on this experience. “[Workaholism] does no good for me as an employee, but then I feel like, if Elon does that at Tesla, then Tesla’s going to succeed no matter what. It’s painful to work with him as an employee—but as an investor in his company, it’s a wise decision.”)
  • #[[The Renaissance of Rise and Grind]]
• Visa and Mastercard serviced X.com’s transactions and competed with it directly. “They should have killed us when they could have. We were so competitive, and we were so abusing their system,” remembered Todd Pearson, one of the caretakers of X.com’s credit card relationships. “It’s hard to feel sorry for them—these giant companies that are monopolies… But they should have shut us down.”
• Musk saw the company’s North Star as the accumulation of total user dollars—not just the total transactions. “Whoever can keep the most money in the system wins,” Musk explained. “Fill the system, and eventually, PayPal will just be where all the money is because why would you bother moving it anywhere else?” Musk walked the talk, of course, keeping millions of his own fortune on the platform.
• The X.com authentication process proved to be one of the company’s lasting contributions to the machinery of digital finance. It came by way of a book, a walk for coffee, and an X.com team member’s breakthrough insight on signals and noise.
• Musk was in recruiting mode and, on Moritz’s prompting, called Bhargava to request a meeting. “I said, ‘Okay, next time I’m in the Valley, we’ll meet,’ ” Bhargava remembered. “And [Musk] said, ‘No, no, I’m buying you a ticket, you’ve got to come down right now.’ ”
  • Urgency
• Of those early X.com days, Bhargava recalled hundred-hour-weeks and a culture where speed beat planning. “Colin, Elon, and I would just sketch out stuff until two or three o’clock in the morning,” he said. “I remember saying to Colin once, ‘Oh, I’ve got to write this thing down,’ and he said, ‘No, we’ll talk, I’ll build, and that’s how we’ll get this thing done.’ ”
• Signals were the meaningful bits of information that a sender hoped to get to a recipient—a song on the radio, for instance. Noise was anything that interfered with the information’s arrival—i.e., static that distorts the song. X.com needed, Bhargava realized, a cleaner, quicker signal than voided checks or inscrutable faxes to confirm bank account ownership.
• Then, Bhargava had a thought: What if X.com generated its own onetime equivalent? Specifically, the company could manufacture four-digit passcodes by sending two random deposits of under $1 to a user’s bank account. If a user received $.35 and $.07, for example, they could now enter the code “3507” on the PayPal website. Entered successfully, the onetime code confirmed bank account access—and without grainy faxes or snail-mailed checks.
• Sanjay Bhargava’s innovation, for instance, endures: today, random deposit is common within banking. Musk was unreserved in his praise for random deposit: “That was a fundamental breakthrough.” David Sacks captured the idea’s elegant simplicity in his launch announcement, calling it “an idea that, like Velcro, you wish you had thought of.”
• The change seemed quaint, obvious, even trivial—but it shaved precious seconds from transactions. And in the view of David Sacks, every moment of friction was fat to be cut. Small, time-saving improvements, he believed, led to stickier products—and instant gratification won over impatient users.
• X.com knew fees were inevitable. Deep debates emerged over the correct course of action. Should the company charge senders or recipients? How would X.com transition users away from its “always free” promise? And if X.com charged for its services, wouldn’t eBay’s Billpoint undercut it? “This is it,” Lal said. “This will determine if our customers stay with us.” Musk himself captured the company’s conundrum: “We had to have a means of generating revenue that didn’t destroy our user growth.”
• But with its premium accounts taking root, the company had achieved what many of its digital contemporaries could not: its website was earning money, not just giving it away.
• When they met in fall 1999, Musk pitched Botha on joining X.com with signature urgency. Botha declined—he was in the US on a student visa with no work authorization and didn’t want to skirt immigration rules. Besides, he wasn’t about to drop out of Stanford to join a start-up. Some months passed, and Musk tried Botha again. Botha, yet again, said no. Still, Musk left an impression. “There are people you meet, and then two weeks later, you can’t remember anything about them,” said Botha. “Elon lingers.”
• Shortly after he started working, one of Botha’s Stanford business classes welcomed a guest lecturer: Meg Whitman, CEO of eBay. As Botha sat watching, Whitman was asked about PayPal’s emergence on eBay. Would this third-party company, a student wondered, be permitted to nest within eBay’s auction ecosystem? Botha remembered her answer: We’re going to crush them. Botha was stunned. “It was like, Don’t tell me that!” he remembered. This precariousness haunted him and many others for the duration of their time at the company. “David [Sacks] said that we had the sword of Damocles hanging over our head the whole time,” Botha recalled. “And that was my first exposure to the sword.”
• Botha was invited to join the company full-time after graduating and attend a board meeting in June 2000—which proved memorable. “[Mike] Moritz arrived at the June board meeting and said, ‘Look, you guys have seven months of runway left,’ ” Botha recalled. “ ‘You’re not going to raise money again. The market is gone!’ ” Moritz’s comment was bracing but clarifying. “It was really helpful because he just drummed into us that we should not assume we could raise any more money,” Botha said.
• Sugu Sougoumarane had interviewed with X.com before the merger—and was rejected. “I come back home and I get an email from the recruiter saying, ‘Elon has passed on you.’ So then I send an email back to the recruiter, saying ‘Give me Elon’s email. I’m going to send him an email.’ ” Sougoumarane wrote an effusive note to the X.com CEO that led Musk to give him a call. Once on the phone, Sougoumarane “told him that [X.com] is going to change the internet, basically. And I said, ‘I don’t care what you give me. I’ll work there if I have to sweep the floor.’ ” Musk hired Sougoumarane—and forwarded his email to the entire X.com team.
• Musk tried to reward (and accelerate) the team’s efforts, launching an incentive program in August: “To make timing of the V2.0 & V2.1 launches interesting, the following bonus plan will be in effect: $5,000 for pushing V2.0 to production by midnight September 15, declining by $500 for each day of slippage, e.g. if site goes live on September 20, then everyone gets $2,500.” The end result “must meet the scalability requirements as defined by Max, and any problems that ensue from going live with V2 must not be significant (i.e. reach the press).” “Work like hell,” Musk signed off. But the deadlines came and went—without a finished product. Even non-engineers began to worry. “I knew this engineering thing was a major problem,” Todd Pearson, a non-engineer, said, “[Finishing the rebuild] was three weeks away, then three weeks turned into three months.”
• Musk’s colleagues acknowledged—even admired—the vastness of his vision. “I think the thing I would give Elon tremendous credit for was that he had sort of the biggest, most ambitious vision for PayPal and for what the business could be—of any of us,” Thiel said. “It was not just a payments company.” In the right context, this big thinking was Musk’s ace in the hole. “He’s the kind of entrepreneur who has a vision, where he’s absolutely sure that that vision will play out,” Hoffman noted.
• Levchin debated quitting the company entirely. He had enjoyed the start-up’s gestational period, when the future was unknown and his imprint unmistakable. Now, as just one of dozens of employees, and with his underlying work being unwound by his boss, he spoke about leaving it all behind and launching something new. I’m just going to leave, Levchin remembered thinking. This V2 thing is just destroying my will to live.
• “He behaved for the better of the company,” Malloy recalled. “He does not hold grudges,” Levchin observed. “He’s been remarkably gracious with a bunch of people who basically ousted him as CEO while he was on his honeymoon.”
• Thiel and Levchin heard Stoppelman out and took the time to explain themselves—winning him over in the process. “They didn’t just say, ‘Oh we don’t care about you. You’re just some junior engineer,’ ” Stoppelman remembered. “They made me feel the love and it definitely de-fanged me.”
• When Thiel asked Lal what the most pressing company issue was and Lal offered his thoughts, Thiel organized a meeting the next day, set a team to work on it, and demanded a fix within twenty-four hours. “To this day, I’m amazed at the amount of trust he put in me without knowing me,” Lal said.
• Two decades later, Musk could muster a bit of grudging respect for the revolt. “It was a well-executed coup,” Musk said, smiling. “It’s slightly complimentary that they would only do it when I’m not there.”
• Musk also reflected on the human dimension of the struggle. “I did not fully appreciate the emotional element of this,” he admitted. “It’s a little tough if you’re thinking about getting rid of something called ‘Max code.’ Understandably, Max would be a little miffed about that.” Musk also felt that he could have done a better job communicating his vision—particularly to Levchin. “I should have put a lot more effort into convincing Max in particular that this is the right technical move,” he said.
• Still, obsessive to the end, Musk lamented what he saw as his biggest X.com failure: that it didn’t become the Amazon of financial services he hoped it would, a potential “trillion-dollar company.”
• “Steve Jobs made Pixar great because he was fired from Apple,” observed early X.com engineer Scott Alexander. “Elon did SpaceX and made Tesla great because he was fired from X.com.”
• When the board pushed Musk out, Mike Moritz had insisted on a stipulation. Thiel could be interim CEO, but PayPal would have to run a proper CEO search.
• Following the interview, Solo raved to his wife about PayPal’s emphasis on merit—an echo of what he’d enjoyed at O’Connor. “When I was in my upper twenties, the managing partner of O’Connor said, ‘David, we want to make you the global head of the fixed income and derivatives division of the bank,’ ” Solo recalled. “And I remember saying, ‘… that’s great, but don’t you think you’d be better off hiring somebody from Salomon Brothers who actually knows all this stuff?’ And [he] said, ‘You know what, we might actually lose nine months or a year by not hiring the guy who has more experience, but in the end, we’ve always succeeded by betting on the people who we think have the talent and work ethic—and who we know.’ ”
• For Thiel, the mandated search process left a bitter aftertaste. One observer said Thiel felt “pretty unhappy” that some on the board had been trying to push him out. It created a rift between him and Sequoia’s Mike Moritz, which never fully healed, and it reinforced PayPal’s allergy toward “executive experience.”
  • Similar to Marc Andreessen and ben Horowitz experience
• Thiel was both an example of and a proponent for putting talented neophytes in charge. Early on, Thiel appointed Reid Hoffman as COO—cutting against his board members’ advice. He installed Sacks as VP of strategy—despite concerns about Sacks’s collegiality. He promoted a fresh-out-of-business-school Roelof Botha to CFO and put a young attorney named Rebecca Eisenberg as the first legal chair on the IPO. Later, talk of Thiel’s contrarianism would focus on his decisions in markets and politics. But during the PayPal years, his tendency to buck convention had nothing to do with math or political philosophy—it had to do with people.
• Ultimately, Sacks relented. But his resistance spoke to what would become a perennial balancing act at PayPal between the website’s security, its usability, and its coffers. “Peter called it ‘the dials,’ ” Sacks remembered. “It’s easy to stop fraud if you’re willing to kill usability. What’s hard is maintaining a sufficient level of usability without letting fraud get out of control. So Max controlled the fraud dial. I controlled the usability dial. And we’d come together to agree on a compromise.”
• In this effort, the company used applied mathematics to compensate for inexperience. “The people who ended up working on this were not domain experts,” engineer Santosh Janardhan observed. “And that, frankly, is good. They had no preconceived notions; they approached it with very fresh eyes. And converted [fraud] to a tractable, mathematical thing.”
  • #[[First Principles Thinking]]
• In 2000 and 2001, the industries that would spring from machine learning and big data were still far-off—but PayPal pioneered many of the techniques that defined those sectors. PayPal’s use of random forests, for instance, was among the world’s first applications of that learning method for a commercial purpose.
• The team’s fraud-fighting success earned its members recognition. Levchin notched a place on the 2002 prestigious, peer-reviewed “Innovators Under 35” list, compiled annually by the MIT Technology Review. Other honorees over the years have included Facebook founder Mark Zuckerberg, Google cofounders Larry Page and Sergey Brin, and Linux founder Linus Torvalds. For Levchin and Frezza’s efforts on IGOR, they earned US Patent US7249094B2: a “system and method for depicting on-line transactions.”
• PayPal employee Damon Billian’s full-time job was to immerse himself in customer discussions. Each day, he sent the company an overview of message board sentiment, along with select quotations, both positive and negative.
• For the team, this episode offered a vital lesson in user behavior and switching costs. They realized that once embedded in users’ lives, dislodging a product or service took meaningful effort. “Human beings are creatures of momentum,” observed Amy Rowe Klement, “and finding ways to change the default (behaviors, thinking, narrative, etc.) can result in massive change.”
• “We were always eating away at the frankly fundamental flaws in the original business idea,” Klement observed. “PayPal started off as a product with no use case. Then we had a use case but no business model. Then we had to build a sustainble business.”
• Much later, internet companies could turn to established bodies of research on “freemium” pricing models. Answers to the vexing questions of when to charge, how much to charge, and how to levy charges emerged through well-developed case studies and examples. But the word freemium didn’t exist until 2006—and in this, as in much else, the team relied on instinct, improvisation, and iteration to find answers.
• A blogger captured this schizophrenia: “Freemium developers act just like cocaine dealers,” he wrote. “They give the basic services for free and charge you when you ask for more.” Then, mere paragraphs later, the writer acknowledged the model’s adoption power: “The onset of the freemium model is probably the best thing that has ever happened to the world wide web.”
• “Wells Fargo had a competing bill payment system thing. But they weren’t going to go away if they got hacked,” McGrew explained. “At PayPal, any computer security issue was just absolutely an existential threat.”
• “You know when you meet magnanimous, charismatic, genius people that you want to be around them?” Cervantes asked. “That’s kind of how everybody felt in the office.”
• Even Levchin could look back on that which almost killed the company as a formative part of his PayPal experience. He recalled an infamous email he had written to Musk bearing the subject line: “Fraud is love,” a sardonic inside joke. “In retrospect,” he offered, “it was more than a joke. I’ve actually really gotten to like [fraud fighting.] It’s the closest thing you can get to cloak and dagger. I’m a closeted, fanatic reader of spy novels, and this is the closest you can get to spy craft if you’re a fintech nerd.”
• Omidyar knew that auction payments could be a lucrative revenue stream. He had witnessed rivals like Auction Universe introduce programs like BidSafe, which provided seller credit card processing for $19.95 per year. But then and later, eBay remained focused on growing and improving its core auction business, which meant sidelining many proposed bells and whistles. For that reason, eBay chose to remain remarkably hands-off with its users. In addition to letting users choose their preferred payment providers, eBay didn’t offer shipping and handling, take auction photographs, or provide expansive customer service. Omidyar’s laissez-faire approach was born of his libertarian sensibilities and his bedrock belief that “people are fundamentally good.”
• Jason May, a cofounder of Billpoint, remembered intense discussions at eBay about whether Billpoint ought to distribute bonus money or forgo fees. “We couldn’t do much about [competing with bonuses and fees]. Because our pricing model was kind of controlled by our board owned by eBay and Wells [Fargo]. We did occasionally say, ‘Well, maybe we go free for six months, or we do this thing to maneuver.’ And this was where I feel like PayPal won… It was very explicit that our organization kept saying, ‘We’re not going to just go for broke,’ ” May recalled.
• Buy It Now launched—then quickly tanked. On October 23, just after its launch, eBay message boards lit up with criticism about an eBay Payments bug. Payment notifications were delayed, enraging users.
• The article pointed out that Buy It Now failed if the seller set an opening bid price equivalent to their Buy It Now price. In that instance, buyers who clicked Buy It Now would receive a “Problem with bid amount” error message.
• “David and Peter would get totally hysterical and say things like They can’t do this! and How dare they?” an executive observed. “And we’re like, ‘It’s their platform. They can do whatever they damn well want.’ ”
• Over time, Chestnut came to respect the PayPal team’s aggressive growth efforts. “I’d say their competitors were probably going home at six or seven o’clock at night,” he joked. “PayPal was just wheeling in dinner at that point… They were highly entrepreneurial, very aggressive. You’ve got to admire that.” eBay’s CEO, Meg Whitman, mirrored Chestnut’s reflections. “PayPal was a company of extremely aggressive people with a real bias for action,” she wrote in her business memoir, The Power of Many.
• “We went through the database, we looked at the top 150,000 eBay sellers, and we just started sending them debit cards without them even asking for it,” noted product team member Premal Shah.
• Baldwin ended with the haymaker: “Billpoint is not a good enough product on its own merits for sellers to want to use… the only way to avoid ebaYs [sic] sleaze tactics is to close your Billpoint account permanently.” She then provided a link for sellers to do exactly that.
• “One of the thought experiments I ran through was ‘If I was running eBay Payments, what would I do to kill PayPal?’ and I came up with lots of different things!” Sacks said. “I was always worried that one day they were gonna figure it out.”
  • #[[Pre-Mortem]]
• As tensions mounted, the PayPal team worried that eBay would hit the limits of tolerance—and simply shut PayPal down, consequences be damned. Levchin, Hoffman, Thiel, and Nosek arrived at a radical solution: They would build their own online auction network, a plan they dubbed “Operation Overlord,” the code name given to D-Day, the Allied invasion of Normandy during World War II. PayPal could use its reams of information about PowerSellers to lure them to a competing auction network. The idea was outside the realm of possibility, but its mere discussion illustrated PayPal’s level of concern over eBay’s power.
  • Platform risk
• “We were really reluctant to do something that was against the community’s wishes,” eBay’s Rob Chestnut remembered. “The community liked PayPal. The community was successful with PayPal. We didn’t like it—but it was what our community wanted.”
• “These things sound simple,” Martin would say of the team’s efforts to ingratiate itself with the eBay PowerSeller community, “but you have to remember that all of these things were very difficult to build for us in terms of programming. Because we weren’t building these things on our website. We were building things to work on someone else’s website—who did not like us… it was almost like we were creating malware.”
• Far more intimidating to eBay than an antitrust case: the actual trust PayPal had built with eBay’s own users. “What I really was worried about,” Chestnut remembered, “was what would be the reaction of the seller community if we shut them down.”
• Musk thought about currencies “from an information theory standpoint,” a reference to the field founded by Dr. Claude Shannon in 1948. “Money is an information system,” he explained. “Most people think money has power in and of itself. But actually, it’s really just an information system, so that we don’t have to engage in barter and that we can time-shift value in the form of loans and equity and stuff like that.”
• The team chose to use its international expansion to pursue two major goals: growth and fundraising. It began this effort as it had begun much else over the prior years: with little planning, quick action, and faith in itself to iterate its way to success.
• Shortly after joining, Braunstein was tasked with setting up PayPal’s European operation in London—and given little direction beyond that. “I hadn’t set up a company in Europe,” Braunstein remembered. “I’d never looked at lobbying or regulatory stuff either.” Upon his arrival, he began to grasp the scale of the challenge. “European banking laws are arcane compared to US banking laws,” Braunstein explained. Sandeep Lal, who eventually oversaw PayPal’s international expansion, went one step further. “[US] regulators are actually quite good in terms of innovation,” he said. “They keep a light touch… but that’s not the case in Germany and all these [European] places.”
  • Professionalization of startups; they didn’t have seasoned experts who had done it before. They just did it
• Lal recalled an eBay gem seller based in Thailand—www.thaigem.com—who became the top PayPal merchant abroad for a period—and proved a case study in PayPal’s off-eBay business. Calling it “an e-commerce success story,” the Weekly Pal wrote that the company “started small, with five items on eBay, and has grown to be the major supplier of cut gemstones listed.” PayPal was bringing in roughly $600,000 per month from Thaigem’s transactions, but the real coup de grace was the gem seller’s evolution: “They have migrated 95% of their business from Amazon and eBay to their own website.”
• Much of it came back to the grim data the company’s leaders crunched for years: the majority of its payments still came from eBay—leaving the company on a perpetually shaky foundation. Thus, expanding into other markets became a pressing priority.
• Sacks estimated that it took the company three months of pre-launch preparation and an aggressive post-launch sales and marketing effort to conquer a new market. Thus, whenever possible, PayPal would explore markets that “(1) are relatively proximate to our existing territory in terms of functionality and (2) have a strong need for our service because they are under-served by existing options.” That criteria led to a culling of possible expansion targets—as when Sacks rejected one employee’s proposition that Pizza Hut or Amazon were ripe for the taking. For Sacks, offline retailers were “a revolutionary (rather than evolutionary) step from where [PayPal was] today, and it’s also not clear that PayPal adds much over existing options.” He also considered expansion to Amazon and similar sites a nonstarter: The team understood all too well the frustration and friction of burrowing into eBay’s payment process. Established sites, he wrote, “are loathe to outsource their checkout line to PayPal.” The bottom line: PayPal would choose its conquests selectively. “World domination,” Sacks concluded, “will not be achieved by indiscriminately parachuting into hostile lands.”
• But a year past PayPal’s founding, the markets had just survived a major blast of their own—and gone sour on technology IPOs. The Amazon-backed Pets.com was exhibit A. The much-hyped online pet food company IPO-ed in February 2000, opening at $11 per share and later reaching a peak of $14 per share. By November, the stock had cratered to 19 cents a share. Only months after its IPO, the company was forced into liquidation. It wasn’t alone: in 2000, internet stocks collectively lost three-quarters of their value, wiping out a staggering $2 trillion in market capitalization.
• The team notched an early win when Morgan Stanley agreed to serve as its lead underwriter. The Morgan Stanley team, headlined by its star analyst Mary Meeker, had a strong reputation for tech IPOs, including the legendary 1995 Netscape IPO, seen as the starting gun for the dot-com boom. That same year, Meeker published the inaugural issue of “Internet Trends”—her “state of the union” for the digital world.
• The team had met with Morgan Stanley and came away frustrated. Thiel reported that the pair of analysts he met with seemed uninformed about PayPal’s business and hadn’t even used the PayPal service prior to the meeting. Thiel found their questions—“How do people get money out of PayPal?”; “How much does PayPal charge?”; “Does PayPal charge the sender or the recipient?”—“perfunctory.”
• In college, Thiel had immersed himself in the work of a French literary theorist and philosopher of social sciences, René Girard, who was best known for a concept called “mimetic desire.” “Man is the creature who does not know what to desire, and he turns to others in order to make up his mind,” Girard wrote. “We desire what others desire because we imitate their desires.” Girard postulated that such imitation could produce rivalries and conflict, and that one ought to be on guard for it.
• One critique that especially irked Thiel was titled “Affairs of State—Earth to Palo Alto.” “What would you do with a three-year-old company that has never turned an annual profit, is on track to lose a quarter billion dollars and whose recent SEC filings warn that its services might be used for money laundering and financial fraud?” the author asked. “If you were the managers and venture capitalists behind Palo Alto’s PayPal, you’d take it public.” The writer of the piece chalked PayPal’s proposed IPO up to insufficient “adult supervision” and concluded that the world needed a PayPal IPO “as much as it [did] an anthrax epidemic.” Thiel raged about the media’s coverage at the office. “It really pissed Peter off,” engineer Russ Simmons remembered. “And he gave this speech in front of the whole company talking about how they were idiots and we were going to prove them wrong. That’s one of the times when I’ve seen him most fired up.”
• “PayPal going public is what allowed me to have the capital to start SpaceX, because I could sell stock or borrow against the stock,” Musk said. “Before that, I didn’t really have meaningful cash.”
• “So much of our volume came from eBay,” Amy Rowe Klement emphasized. “We were completely dependent on our enemy.” Few on the PayPal team saw that risk dissipating without a deal between the two companies, though. “Reid had a pithy means of describing the challenge: ‘Just because someone shoots five bullets at you and misses… does not preclude the sixth one from killing you,’ ” Keith Rabois wrote on Quora years later.
  • #[[Platform Risk]]
• “This repeated experience of almost dying is not something people can stand,” Luke Nosek said. “You want out because of the exhaustion. It’s better to have a financial exit than to have everyone so drained that maybe the next thing you need to do just won’t come out.”
• David Sacks told his product team that it wasn’t clear who the “victor” would have been if the two companies had continued fighting it out. “In these cases, if it’s clear, then a deal usually cannot be struck,” he explained to his team, per Eric Jackson’s recounting. “Victors wouldn’t want to be acquired because they’d know they were going to win, and losers wouldn’t be able to convince anyone to acquire them.”
• And then there were those who felt the sale polluted PayPal’s abiding mission—changing the financial system. “If this was the revolution, would you sell it for money?” Luke Nosek asked.
• “We told them we wanted to meet at their first available convenience. ‘You literally tell us the day, and I—a member of the exec team—and the general counsel and whoever else will come out at whatever hour you select,’ ” Hoffman described his strategy. “You’re trying to steer into the ‘We’re adults and honest. We’re collaborative. We’re not trying to evade or delay.’ ”
• “There are two major trends of the twenty-first century,” he said. “First, the globalization of the economy. The economy is growing internationally and people from all over the world are becoming interconnected. One billion people now live in a country other than their place of birth. Second, the quest for security. In this globalized, decentralized world, violence and terrorism are widespread and hard to contain. Terrorism has contaminated all countries, and it’s difficult to stop it. The challenge is finding a way to fight violence in the context of an open, global economy.”
• I have always known that people are the most valuable part of any business, and today I’m more certain than ever that this is the case.
• In founding PayPal, Max and I started by hiring a number of our friends. Over time, we also hired our friends’ friends, and so on, moving out in concentric circles. I consider it a lasting testimony to our success that the existing friendships have grown stronger, and many new ones have been formed.
• Thus PayPal went public for the second time in mid-July 2015, thirteen years after the announcement of its acquisition by eBay. As of this writing, eBay’s market cap on the Nasdaq is more than $40 billion. PayPal is today worth more than $300 billion—more than 300 times its 2002 IPO valuation.
• Years after they had left all of it behind, Musk proposed to Reid Hoffman that PayPal’s founding team should reacquire the company and grow it into the world’s financial nerve center. Hoffman recalled the moment with humor: a musing of a compulsively ambitious friend whose to-do list included electric vehicles, space technology, mass transit, solar energy, bespoke flamethrowers, and much else. “It’s like, Elon, let it go,” Hoffman said.
• Along with Levchin, Woolway, Thiel, and Musk, Sacks produced the satirical film Thank You for Smoking, which was nominated for two Golden Globes in 2007.
• The iconography of the PayPal Mafia photo turned into a false idol—and a worrying one. As carefully documented in Emily Chang’s book Brotopia and elsewhere, Silicon Valley has long had troubles with ensuring that women are treated equitably in hiring, fundraising, promotion, boardroom representation, and in the recognition of their achievements. The PayPal Mafia photo and mythology exacerbated this problem, and it gave photographic evidence of the “boys’ club” critique.
• Though the founders engaged in little explicit talk about “company culture” at the time, PayPal’s culture definitively shaped the approach of a generation of Silicon Valley talent. Today, the outsiders who built PayPal are among the most influential insiders in the world of technology and engineering, their utterances decoded, dissected, and debated. They are both leading and investing in companies, and they receive hundreds of pitches per week from up-and-comers full of ideas, ambition, and energy.
• The alumni also came to see inexperience as an asset. “Very few of the top performers at the company had any prior experience with payments,” Mike Greenfield, a member of the fraud analytics team said, “and many of the best employees had little or no prior background building internet products.” Had the company built its fraud process traditionally, he said, they “would have hired people who had been building logistic regression models for banks for twenty years but never innovated, and fraud losses would likely have swallowed the company.”
• “Immigrating is an entrepreneurial act,” Sacks explained. “You take an affirmative step to leave your country, and you frequently leave everything behind. That’s the ultimate entrepreneurial act. So it’s not surprising that when people get to the US, they continue to try to do entrepreneurial things, to mold their own environment.”
• “The very best employee at any job at any level of responsibility is the person who generally believes that this is their last job working for someone. The next thing they’ll start will be their own,” Levchin said. “Having as many people like that as possible is what made the difference in the company, and it’s what made it such a fertile ground for entrepreneurs later on.”
  • #[[Talent Vortex]]
• Levchin takes regular meetings with smaller student organizations at the various colleges he visits, harkening back to his ACM days. Thiel is known for taking sit-downs well outside of his immediate orbit, including the occasional high school student who reaches out with a compelling note. Hoffman forces himself to regularly ask others: “Who is the most eccentric or unorthodox person you know, and could I meet them? They might be crazy—or they might be a genius.” He’s searching, it would seem, for the less than perfectly polished founder who resembles his once less than perfectly polished colleagues, a group that turned a “hot mess” into one of the world’s largest public companies.
• “We were really very focused on building the best product we possibly could… We were incredibly obsessive about how do we evoke something that is really going to have the best possible customer experience,” Musk said of his work on both Zip2 and PayPal. “That was a far more effective selling tool than having a giant sales force or marketing gimmicks or twelve-step processes or whatever.”
  • Have a product so good that your competitors could make their products free and your customers would still RATHER pay for yours.
• Reid Hoffman’s neologism “blitzscaling,” for example, and Silicon Valley’s obsession with fast growth can trace at least partial roots to the pair of start-ups on University Avenue. Russ Simmons remarked that one unintended side effect of that scale of growth was that it colored his view of future start-up experiences. “It definitely spoiled me for later, because it’s like, ‘Oh, you just launch a thing and then it takes off, right?’ ” he said.
• “The majority of our experience,” Jack Selby observed, “was after the bust.”
• “The best teams deal with meteors,” Malloy observed. “Meteors that don’t hit you create opportunity.”
• “The thing that brought us really close together was battling eBay,” Skye Lee noted, “because nothing brings a company together like having a mortal enemy.” Thiel points to this pressure as the defining characteristic of his PayPal experience. “If you’re at a fantastically successful company like Microsoft or Google,” he explained, “you will infer that starting a new business is easier than it is. You’ll learn a lot of wrong things. If you’re at the company that failed, you tend to learn the lesson that it’s impossible. At PayPal we were sort of intermediate. We weren’t as successful as some of the great successes of Silicon Valley, but I think people sort of calibrated it and learned the best lesson—that it’s hard, but doable.”
• Several employees half-jokingly referred to “PayPal PTSD”—the psychological toll of working round the clock in a company on the brink and with colleagues who could be intimidatingly intelligent.
• The idea of having meetings where people really liked one another seemed great. That was folly. The mistake was to conflate anger with a lack of respect. People who are smart and energetic are often angry. Not at each other, usually. Rather, they’re angry that we’re ‘not there yet,’ i.e., that they have to solve x when they should be working on some greater problem. Disharmony at PayPal was actually a side effect of very healthy dynamics.
• Sacks observed that PayPal’s culture of tension was also a culture of truth. “It was ‘truth-seeking’… there was a lot of friction. We all respected each other and that’s why it worked. There was a lot of yelling, and we just cared about getting to the right answer,” he said.
• Because luck was at the heart of the story, PayPal alumni are quick to puncture any myths about inevitable success. “When you become famous in the Valley, you could be the ultimate outsider, but the Valley just co-opts you,” Malloy said. “You become the fiction. The fiction takes over… We’re all so damn good at spinning our own yarn. We lose sight of the humanity of it… who gets successful and who’s not, boy, it’s a thin razor’s edge.” That PayPal found the edge’s fortunate side left some alumni with a commitment to expanding its breadth. “It’s made me reflect on how we build this ability to dream in others,” said Amy Rowe Klement.
• “Those that bring the big ideas into hard, unpredictable reality are the practitioners, the high-leverage ones, and I admire them almost without reservation,” Max Levchin wrote on a personal blog, years after PayPal. “One key ingredient of being this kind of a person is an almost irrational lack of fear of failure and irrational optimism, but there is a more tactical side there too: they manage to not get caught up in all the little details… while being remarkably aware of the really important ones.” By that point in his life, Max Levchin had ushered several ideas into “hard, unpredictable reality.” And yet, he ended with an earnest request for advice: “There must be many more essential ingredients to being high-leverage. I’d love to understand this type of person better… so I can maximize my own leverage. Have any tips?”
• attaching the word mafia highlighted a similar sentiment and ambition: Could one seed group of talent nourish an ecosystem?
• Both Chris and Stephen live life with a rare sense of urgency—an urgency that comes from a keen awareness of life’s preciousness.
• Chris was honest about the role of luck—meeting Stephen when he did and, of course, finding a merciful judge—but he was also clear about the importance of individual effort. He set specific goals and stuck to them with religious conviction. He visualized and journaled about his Master Plan every day for years, and he lived to cross items off the list. Affixed to his cell wall, the single-spaced sheet of paper was one of the first two things he saw when he woke up and one of the last two things he saw before going to bed.
• And, of course, they talked about the money, contrasting it with examples of wealth their audience knew well. “If you thought you should follow a drug dealer, because a drug dealer—at risk to his life, with violence, guns, assault, incarceration, and death, and all that stuff—the most he’s going to make is a million dollars. Let’s be real. And that’s after you’ve come through hell and back,” Stephen said. “And then let me show you the opposite: guys who made billions without any of that stuff. What baffles the guys who heard the PayPal story was why no one had ever told them that was even an option.”
  • [[Night at the Museum]]
• The story of PayPal isn’t just about people banding together to shape a product—it’s about how banding together shaped the people themselves. The founders and earliest employees of the company pushed and prodded and demanded better of one other.