PayPal: The Greatest Startup Story of All Time

Note: the following article is based on extensive research that I undertook prior to the recording of our episode on PayPal (June 2024). A complete list of sources is linked underneath the article- but the following photos'/links are well worth looking at and are the ones that we reference at the start of the episode. All other sources are linked at the bottom of the article and we are grateful to all of our sources.

Link to the photo & article of the PayPal Mafia from Fortune Magazine 200

7 Link to the photo of of The Keg Party after the PayPal IPO where a half drunk Peter Thiel (standing with crown) played 10 people in speed chess, beating all except David Sacks who is celebrating in this photo (Max Levchin is seated with crown)

Photo of Peter Thiel and Elon Musk when PayPal and X.com merged

Photo of the founding members of Paypal

Book: The Founders by Jimmy Soni

Spotify link to Guy Roz Interview with Max Levchin

Spotify link to Crucible Moments Podcast

What first drew me to this story was the article titled The PayPal Mafia from Fortune magazine in 2007. I’m not sure if Fortune was the first publication to call this group of massively successful entrepreneurs the Paypal mafia but it was the first time I had come across it and it wasn’t the name that grabbed me, it was the iconic photograph that drew me in.

The photo depicts 13 PayPal alumni, including Peter Thiel, Max Levchin, David Sacks, Reid Hoffman, dressed in Soprano-style attire, tracksuits, leather jackets, gold chains, lounging in a mafia-like hangout with glasses of whisky and cigars.

Elon Musk wasn’t able to make the shoot due to some award ceremony while the 3 founders of YouTube, who are also PayPal alumni were advised against taking part by Google (who had bought YouTube). The humourless Google felt that the mafia connotations didn’t fit with their ethos- remember- Don’t be evil.

As an avid reader of business magazines, I’d never come across such a ludicrous and fanciful photoshoot of prominent business people- here were some of the most successful leaders in the tech world, the biggest nerds in Silicon Valley, posing as gangsters- it was ludicrous, hilarious and I loved it.

The story of the founding of Paypal is in itself and fascinating story and is covered brilliantly in Jimmy Soni’s book “The Founders”.

But the true success of Paypal is what its founders and alumni went on to achieve through the companies they founded and the startups they invested in.

We’re talking Youtube, LinkedIn, Yelp, Tesla, Space X, Facebook, Palanitir, Airbnb, Stripe to name just a few.

Unlike Apple, Facebook, Amazon and other breakthrough companies whose stories are centred around the founder, PayPal's story is one of many individuals who, despite, or maybe because of the internal friction, the pressures, the external battles, the relentless hard work, and eventual success, went on to have an outsized impact on the tech industry.

The story of PayPal begins with Max Levchin, a Ukrainian-born computer whiz who first accessed computers through his mother's limited weekly use. Levchin would write code by hand to maximise his computer time.

He moved to the US with his family in 1991 and went on to study computer science at the University of Illinois- and he was actually there when Marc Andreeson and friends were creating Mosaic, the world first internet browser in 1994.

So these were exciting times to be a techie with a bent for entrepreneurship, and while Levchin launched a few small businesses in college, they were small side hustles.

Levchin comes across as a thoroughly decent tech nerd: honest, level headed, with no sense of ego but you underestimate him at your peril -he is super smart, competitive and relentless with a work ethic on a par with even Musk.

After graduating in 1997, Levchin moved to California during the internet boom, a prime time for tech-inclined entrepreneurs seeking funding. Levchin's friend, Luke Nosek, suggested he meet Peter Thiel, who was teaching a small class in currency investment at Stanford.

Thiel is a divisive character and people who follow American politics will know of his involvement in funding the author and Republican senator JD Vance’s campaign as well as being one of the first in Silicon Valley to support Trump in 2016.

He’s an avowed libertarian and whenever I’ve come across him in interviews and podcasts, he comes across as humourless, rigid and combative. When combined with his divisive political views, he’s hard to like.

But at the same time Levchin and others who know Thiel personally, talk about how Thiel inspires you with the confidence he has in you, he becomes this enthusiastic cheer leader empowering the people he backs. So behind this heartless, calculating facade, people who know him talk about his decency, although I'm pretty sure the staff of Gawker, a media company that had to close down after Thiel funded Hulk Hogan's libel case against them would have a different opinion.

Previously, Thiel worked in law, striving to become a Supreme Court clerk, a highly competitive position. Failing to secure the role, Thiel had a midlife crisis of sorts at the age of 25. He left law, briefly worked as a derivatives trader in New York, and then moved back to California, taught at Stanford, raised $1 million from family and friends and began looking for startups to invest in.

Impressed by Thiel, Levchin discussed his ideas, and they agreed to meet the next day.

Though not a coder, Thiel was interested in technology and liked Levchin's idea to develop mobile security software for the newly released Palm Pilot hand-held devices, which had launched in 1997 and by 1998 had sold over 1 million units. Thiel immediately invested $100,000.

Initially Levhin’s company was called Fieldlink, it later changed to Confinity, and finally, PayPal. To avoid confusion, I’m going to stick with PayPal for the rest of the article. The original founders of PayPal were Peter Thiel, Max Levchin, Luke Nosek, Russ Simmons, Yu Pan, and Ken Howery.

Thiel and the team set about raising $500,000, but after pitching to over 100 VCs and individual investors, they got no takers, so Thiel had to put in $240,000 from his fund, and the remainder was raised through friends, family, and friends of friends.

They quickly realised that the original idea of securing data transmitted to Palm Pilots didn't have much of a market, no one was interested in hacking into the devices, so they had to come up with a new idea.

Enter Reid Hoffman, a friend of Thiel's from Stanford. Although they disagreed on almost everything, Thiel and Hoffman appreciated each other's intellect and honesty.

Unlike Thiel who comes across as cold and calculating, Hoffman is open and warm with a very sharp, strategic mind and these characteristics play a significant role in PayPal’s survival and success.

In 1998, Hoffman was being sidelined from the company he had founded, a social network idea that had managed to raise $40 million. Initially, Hoffman served on PayPal's board, but after leaving his startup, Thiel convinced him to become PayPal's COO.

Hoffman, still just a board member when PayPal realised they had to pivot, suggested developing software for the Palm Pilot that would secure something of value, like invoices or IOUs. This resulted in the idea to develop an application that would allow Palm Pilot owners to beam money to each other. To illustrate a potential use case for this feature (and this was the only use case that was ever mentioned), they envisioned a scenario where four people out for lunch could easily split the bill using their Palm Pilots.

The original concept was far from straightforward: an app that transmitted a cryptographically secure IOU, which would be processed and deducted from the user's bank account when the Palm Pilot connected to a computer.

It’s pretty amazing to think that some of the most brilliant minds of the era believed this convoluted concept was worth pursuing. However, it also highlights the fact that most businesses begin with an imperfect idea, and the true skill lies in the ability to continuously adapt and evolve.

Hoffman then asked what would happen if someone at that lunch didn't have their Palm Pilot, and Levchin proposed developing a program that allowed money to be transferred via email.

Money transfer wasn’t a new idea, but the emergence of the internet, combined with the increased usage of email, meant that the way in which money could be transferred via email was now easier than ever.

Developing the system to transfer money via email was a relatively straightforward process and Levchin completed it within a matter of days. However, the simplicity of the concept and the ease of its development, combined with their focus on the Palm Pilot app, led Levchin and his colleagues to overlook the potential of the email money transfer feature, even though they started using it themselves as soon as it was developed.

With their new idea of beaming money between Palm Pilots, Thiel and Levchin sought funding. While they didn't have much success with standard VCs, Nokia Ventures, the investment arm of Nokia, saw potential, but not necessarily in the Palm Pilot money beaming feature.

John Molloy, a director of Nokia Ventures, was impressed with Thiel and Levchin. After conducting due diligence and receiving recommendations from two respected mobile technology professors at the University of Illinois about Levchin's exceptional talent, Molloy and Nokia Ventures invested $4.5 million in PayPal and Molloy became a board member.

Levchin and Thiel recruited selectively, mainly from their own circles, with Levchin recruiting friends from the University of Illinois and Thiel from Stanford. They were meticulous in their hiring process.

As the core of PayPal was going to be coding, and bad coder could set the company back weeks if unchecked. Levchin had a saying: "A players hire A players, B players hire C players, so the first B player you hire can take the whole company down."

While PayPal was figuring out how to turn the Palm Pilot money-beaming concept into a business, Elon Musk was busy creating something much bigger that would eventually pit him against Thiel and Levchin.

South African-born Musk moved to Canada in 1989, then went to college in the USA, earning a science degree from Wharton University. In 1995, he was due to enroll as an undergrad at Stanford, but the internet boom was happening, and Musk wanted to be part of it so he set up his own company, Zip2, with his brother and an investor.

Zip2 was a city guide with maps, directories, and a yellow pages service sold to media companies for local advertising on their websites. Musk envisioned Zip2 becoming bigger than Yahoo, which was the largest directory on the internet in the mid-90s.

Musk was impatient, often sleep-deprived, setting unreasonable deadlines, changing code without even asking the person who had written the original code, and chewing out staff in front of others.

As a result, he was demoted from his CEO position by his backers and had less say in the company’s strategy.

So while Musk developed the platform to evolve into his ambition of becoming a directory that would eclipse Yahoo, his investors focused solely on the very profitable directory product their main media customers used.

Zip2 was sold to Compaq for $307 million in 1999 and Musk's 7% shareholding earned him just over $21 million. Although he must have gotten satisfaction from the success and cash, Musk was disappointed with the overall result. He wanted to build something huge that would have a lasting impact- and even at this early stage of his career, it’s clear it’s Musk's outsized vision that separates him from his contemporaries.

And just to be clear- I’m not a fan of Musk: his dog-whistling social media comments, his treatment of Twitter staff and people in general, his tasteless jokes- they don’t mesh with my values so when I think of Musk the person, I think asshole.

However, when viewed purely through the prism of business, the story of PayPal shows the emerging brilliance of Musk the businessman and central to this brilliance is his vision, it’s his superpower.

After the sale of Zip2, Musk, though rich, was unfulfilled. Drawing from his brief experience working in a Canadian bank during college, he realised that the financial sector was ripe for change- it was slow-moving and archaic, it charged fees for a whole host of services that most consumers didn’t understand. It was (and still is) a sector crying out for innovation and disruption.

Inspired by Amazon, Musk envisioned building a single website housing all of a person's financial needs, making it faster, cheaper, and better for the consumer. He even pitched the concept as "the Amazon of financial services."

Musk invested $12.5 million of his own money to start X.com, a url that he continues to have an almost childlike attachment to- he simply thinks it’s the coolest URL on the planet.

The two men who sold it to him refused a cash offer of over $1 million, instead agreeing to sell it for cash and 1.5 million company shares.

Musk loved the URL's sound, he liked that "X marks the spot" is used when referring to the location of money. He also correctly predicted that we were going to increasingly do more of our business on mobile devices, and X.com is one of the easiest URLs to type.

Investing over half of his fortune into the startup was risky, but Musk did it to maintain control, avoiding being sidelined by bigger investors as happened with Zip2. It also helped with recruitment during the competitive dot-com era, as interviewees were impressed by Musk's personal investment.

X.com had three other co-founders, the most high-profile being Harris Fricker, a Canadian bank executive who left his $1 million-a-year job to join Musk. However, Fricker found it impossible to work with Musk due to their differing approaches. Fricker wanted a regulated and productized build, while Musk's vision was to build everything quickly, less concerned with regulation.

Fricker, with a background in banking, understood the importance of regulation, but Musk's grand vision allowed him to push ahead without worrying about what he considered to be minor details. Musk was very much of the time when internet companies built quickly and then worried about the bugs and repercussions later, a precursor to Zuckerberg's famous saying, "Move fast and break things."

As one of X.com’s co-founders who subsequently left said, "Elon is very good at pointing to the future and saying the objective is over there, and I know it's over there, and we should all go over there." However, for those trying to work with Musk before he had proven himself as this successful business visionary, it must have been frustrating, as it was for Fricker and the other two co-founders who eventually left.

The infighting slowed X.com down, but with Musk now in sole charge, things started to improve. He raised $5 million from the legendary Michael Moritz of Sequoia Capital, who had previously invested $1 million in Yahoo for 25% (which was worth over $110 billion by 1999). Musk didn't need the money but realised the importance of having VC of Sequoia’s stature on board for signalling purposes.

Musk also wanted a CEO, as he was more focused on leading product development. Moritz suggested Bill Harris, the former CEO of Intuit, and Musk agreed.

Within just four months of the three other founders jumping ship, Musk had completely turned the company around.

He was right there in the thick of it, working side by side with his team. In the words of 1 employee, "Elon was like, 'We're in the trenches together, let's do this.' It was very powerful to work with him because of that."

Musk expected his team to burn the midnight oil throughout the week, including Friday nights and then show up bright and early on Saturday mornings. He even sent a scathing email to employees who didn't work on a Thanksgiving weekend, making it clear that he demanded nothing less than total dedication from his team.

Around the same time that PayPal had casually released their email money transfer feature, X.com also introduced the same feature to their suite of banking offerings. For Musk, it was no big deal – he said that it was so easy to develop, taking his team only about 48 hours. Just like the PayPal crew, he didn't think much of it, as he was laser-focused on launching a financial powerhouse, and this was just a tiny piece of the jigsaw.

So you've got two companies, X.com and PayPal, both having developed the same email money transfer feature, and neither of them even considers it an important part of their business models. To make things even more interesting, both companies actually shared space in the same office building for a while.

They were well aware of each other's existence and what they were up to. At this point, they weren't competing with each other, and both believed that their business was superior to the other.

The key difference between the two companies was that PayPal was focused on a single product – they needed their Palm Pilot idea to take off. On the other hand, Musk had his sights set on building an online financial services company, and his team was juggling a whole bunch of different products and projects.

Because PayPal was focusing on a single product, some people within the company started to have doubts about whether there was a big enough market for their Palm Pilot idea – Hoffman was one of them. But a big and crucial hire by Thiel put a lot more weight behind the email money concept.

David Sacks, a friend of Thiel's from their Stanford days, had done a stint at McKinsey after college before Thiel recruited him to PayPal.

Sacks is another one of these big and very divisive characters in the PayPal story- he’s become a very wealthy investor, he advised Musk when he bought Twitter and even invested in it, he funded and praised Ron De Santis for his handling of the Covid crisis and he’s one of the hosts of the popular All In podcast. From a business perspective, he’s smart, strategic, contrarian and tough but I find it hard to warm to him or agree with him on a lot of issues.

Sacks made it clear that he would only join PayPal if the email money transfer product was going to be the top priority – he was convinced that it was the killer concept and had zero regard for the Palm Pilot money beaming app product. Thiel assured him that the email product was going to be the main focus, but he was kind of fudging the truth.

For a while after Sacks came on board, both products were given equal attention, and Sacks initially ruffled a lot of feathers by being very vocal about what he thought of the Palm Pilot idea.

Even though Thiel got a lot of pushback from others about bringing Sacks on, Thiel hired him because he knew that Sacks wasn't afraid to go against the grain and would always speak his mind.

Sacks quickly earned a reputation for being tough and no-nonsense, but he was also credited with getting the team to zero in on the product.

While Sacks, Hoffman and others were doing their best to push the email money transfer feature to the forefront, it was eBay that changed the trajectory of both PayPal and X.com. Back in 1999, eBay was one of the hottest companies in the world and one of the very few online companies making significant profits.

The eBay story itself is fascinating, founded in 1995 by Pierre Omidyar as a side hobby. He put up stuff he didn't want, including a broken laser pointer that he listed for $14. When someone actually bought it, he thought he might have a little earner. Within four years, it was a billion-dollar company.

The first mention of eBay in PayPal's history is a memo that Thiel wrote to investors, where the idea of eBay as a potential partner/customer is brought up, but Thiel didn't follow through on it. In later interviews, Thiel admitted that he didn't have much regard for eBay, seeing it as a grubby auction site where people sold bits and pieces for small sums.

Musk was similarly dismissive of eBay. He didn't want X.com to become the payment service for low-dollar person-to-person payments on an auction website. Musk wanted customers who would use X.com's checking and brokerage services, where the real profits would be made.

But regardless of what they thought of eBay, the fact is that the eBay community were the early adopters of the email money transfer feature.

eBay had a big payment problem, or at least their community of buyers and sellers did. eBay itself didn't initially get involved in payments; they were making enough money and didn't need all the hassles that came with setting up a payment feature, leaving it up to the buyers to collect payment by check or bank transfers, and this would add days or even a week or two to the whole transaction.

eBay's community was very tight so when the early adopters started using PayPal and could see how it helped speed up the whole payment process, they shared this with the community and the feature quickly gained traction, as did X.com’s email product when it launched a few weeks after PayPals.

But initially, all of this was happening unbeknownst to PayPal and X.com. PayPal first became aware that eBay sellers were using their service when one seller contacted them asking if they would resize their logo for her.

This prompted Sacks and another team member to go onto eBay, and when they searched for PayPal, they found thousands of sellers were using their service. According to Sacks, it was one of those "holy shit" moments – they knew they were onto something.

Despite this aha moment, Levchin still didn't want to abandon the Palm Pilot idea. Indeed, he admits that he was tempted to block the eBay URL from PayPal's servers.

X.com was equally reluctant to chase the eBay market, but, like Levchin, they didn't have much of a choice.

The growth was rapid: in November 1999, PayPal had just 1,000 customers. One month later, in December 1999, they had 10,000 customers, and by February 2000, they had 100,000 customers. X.com wasn’t far behind.

Realising that the email money transfer feature was a viable product with huge potential, for the first time both companies were pitted against each other, and to win this battle, they each rolled out expensive incentive schemes to recruit customers.

PayPal offered people $10 to sign up and an additional $10 for a referral. X.com offered $20 to sign up and $10 for a referral. The competition was intense and exhausting, and over the following weeks both teams were out under immense pressure as they battled and burned through their cash reserves to gain supremacy.

It soon became apparent to the wiser heads in both companies that this couldn't continue, and a merger was the pragmatic and right move. As Harris, X.com’s CEO later commented, "Would there have been a single winner? Yes, but it would have taken a lot longer and a huge amount of resources, and it's not clear which side would have won."

Thiel pushed the merger from the PayPal side, while Bill Harris pushed in from the X.com side.

Musk was dead set against it.

He was convinced that X.com could come out on top. In his mind, X.com had what it took to win through sheer determination and talent. Musk's confidence stemmed from his superpower: with his massive vision driving him, Musk didn't let concerns about market trends, user growth, burn rate, or the competitive landscape bog him down as much as they did the PayPal people, who were laser-focused on trying to make a single product successful.

And so, when negotiations initially started, X.com proposed a 90%-10% split in their favour.

Levchin and Thiel wouldn't agree to this split, so PayPal continued to push their product and increase their customer base, thereby improving their negotiating position.

Eventually, they agreed on a 55%-45% split in X.com's favor, but in a meeting before the deal was signed, Musk let slip that he believed PayPal was getting, as he put it, a "fucking deal." Levchin fumed, realising that Musk would always view PayPal as the junior partner, so he called off the deal.

Harris talked him around by promising Levchin that he'd get a 50/50 deal. He achieved this by threatening Musk that he'd resign as CEO unless Musk agreed. X.com was in the middle of a fundraising round – if Harris left, it would be disastrous for the company. Musk reluctantly agreed but wasn't happy with the way Harris pressured him into the merger.

On the same day that they announced their merger, in early 2000, the merged company, now called X.com, also announced a $100 million Series C round of financing and were getting a lot of interest. Why wouldn't they? This was still at the height of the dot-com bubble, and PayPal had over 1 million customers by now. As Musk recalled, they had investors trying to smash down the door to give them money.

Thiel, sensing that the dot com bubble was about to burst, insisted they close the round quickly, despite some within the company pushing to hold out for more money and a higher valuation.

Thiel was right. Within days of X.com closing its $100 million round, the markets entered a downward slide that ultimately wiped out $2.5 trillion in market capitalization and turned investors off tech and internet stocks for a long time.

There's a great anecdote of Thiel proposing to the PayPal board that they use the $100 million to short the market. Of course, legally, they couldn't – the money was raised for the company, not for gambling on the market, but if they had shorted the market, they would have netted a fortune dwarfing anything they made from PayPal

The merger was both a huge success and a huge headache. It was a success because now you had just one company that was the dominant player in the online money transfer market. Many of their competitors had fallen victim to the dot com bubble and were out of business.

It was a headache in that both companies had done very little preparation for the merger, and many of the finer but vital details had yet to be agreed upon. There was also a lot of duplication of roles as well as a huge clash of cultures between both workforces.

In PayPal, Thiel was praised for his open book management style, where everyone had full visibility of revenue, plans, burn rate, and everything was open for discussion leading to heated and lively debates that helped make the company what it was. But this culture that served Paypal so well, didn’t gel with many of the X.com team.

In the words of Jeremy Stoppelman, who came from X.com, this clash of cultures "turned into total dysfunction and warfare. Most X employees ended up leaving or getting fired. The culture was really an intellectual pissing contest, and some people didn't like that."

Following the merger, Bill Harris remained in his position as CEO alongside Elon Musk, who preferred to focus on the technical aspects rather than administrative tasks.

Peter Thiel, who was PayPal's CEO, became Executive Vice President of Finance, reporting to both Harris and Musk, while Max Levchin stayed on as CTO.

While the company was now called X.com, there were two different websites, there was conflict over what business model they should adopt and there was no agreement on the name for the money transfer product, which was of course the PayPal team's main focus. Musk wanted to call it X-PayPal, in the same way that other products within the X.com company were prefaced with "X," such as X-Finance. But the PayPal people felt that their product was being subjugated.

There was also fierce infighting between the technical teams- while Max Levchin was officially the CTO, Musk started interfering in Levchin's sphere.

For the majority of the employees, these internal rivalries were soon forgotten as the company found itself facing massive external challenges. This "us against the world" mentality ended up shaping and strengthening them as a team. It's the same story you hear time and time again in sports when great teams reflect on what made them so successful – often, it's this sense that everyone else is against them, and they've got to band together to come out on top.

However, at the leadership level, there was a growing dissatisfaction with Harris as CEO. Harris didn't have a very strong technical background, and both Musk and Sacks felt that he was too corporate, recruiting suits at the expense of product development. Musk, of course, also harboured a resentment over the way in which Harris forced him into the merger.

Soon after the merger, Thiel resigned mainly as a result of his dissatisfaction with Harris. Musk, Sacks, and Levchin organised a coup against Harris, which became known as the "Nuthouse Coup" – a reference to the local bar where the planning was organised. They threatened the board with mass resignation unless Harris was removed. The board sided with Musk and Sacks, and after Harris left, Thiel returned becoming chairman of the board while Musk took over as the sole CEO.

Over the coming months, PayPal's growth was off the charts. In April 2000, 20% of eBay auctions were using PayPal, by June, it was 40%. Meanwhile, eBay's own payment company, Billpoint, was struggling to keep up with a measly 9% share.

During that summer of 2000, PayPal was adding more than 10,000 new accounts to their books every single day. They had 2 million accounts in total – 1.73 million using the PayPal transfer feature and another 270,000 on X.com's finance platform. But with all this rapid growth came some serious growing pains. The huge demand was pushing their service to the brink, and crashes were becoming all too common. To make matters worse, customer complaints were piling up.

Musk had an idea: rewrite the entire PayPal codebase from scratch using Microsoft's platform. Levchin, on the other hand, had built PayPal on Linux. Musk argued that Linux was too complicated, with little to no support available. Microsoft's platform, he reasoned, would let them work faster with a smaller team.

But Levchin and his crew had some pretty compelling reasons to stick with Linux. Sure, there was a bit of techie snobbery involved, but they also had some solid technical arguments on their side. And when they started testing Musk's Microsoft version, those arguments proved to be correct. Even some of the X.com engineers who were loyal to Musk had to admit that Linux was the better choice for what they needed.

The whole code rewrite ended up being a massive drain on their resources and time – time that could have been spent pushing out much-needed upgrades to their product. The backlash against Musk for trying to force through this change, coupled with the lacklustre results it produced, only added to his mounting troubles.

Many in PayPal also resented Musk pushing the X.com name. Research undertaken by the company had shown that X.com wasn't well received. People surveyed thought it was too sinister, and had porn connotations. The PayPal team believed that Musk was letting his personal preference cloud his decision.

Another looming and much more significant issue was the fact that the company had $65 million left in the bank and a burn rate of over $10 million a month.

The dotcom bubble had burst and there was very little hope of raising additional funds. This led to questions being raised on the strategy and direction of the company: should they drop Musk's big vision of creating an Amazon for the financial sector and put all of their energies and resources into the money transfer feature that was growing at a phenomenal rate?

Tied into this was the fact that out of all of the young founders in PayPal, Musk was the only one who had already built and sold a company. He didn't want to do that again – whereas the other founders were on a different trajectory.

Just four months into his term as CEO, the leadership of PayPal, including key allies like Roelof Botha, the CFO and fellow-South African who had been hired by Musk, and David Sacks (while a friend of Thiel, he had become a key ally of Musk's), now organised a second coup while Musk was on his honeymoon (although to be precise, it was a belated honeymoon that Musk was combining with some fundraising- how romantic).

The board voted to oust Musk.

Despite the underhanded nature of the whole affair, Musk's response was surprisingly gracious and big-hearted. He sent out an email to everyone at PayPal, pledging to continue supporting the company in whatever way he could. He even went so far as to sing Thiel's praises and urge everyone to rally behind him. While he was no longer CEO, Musk stayed on as a member of the board.

After Musk's departure, PayPal's leadership team gathered to devise a new strategy. Their top priority was to concentrate exclusively on the PayPal product, which was their primary revenue driver and so the company name changed from X.com to PayPal. This decision effectively marked the end of Musk's ambitious plan to create an Amazon-like platform for the financial industry. However, it would also be the last time anyone would stand in the way of Musk's vision.

The team's second crucial task was tackling the escalating issue of fraud, which had become so severe that it threatened the company's survival. Sophisticated fraudsters, primarily based in Russia, were inflicting millions of dollars in losses each month. If left unchecked, these losses would deplete PayPal's funds within just three months.

This was a moment of survival – all hands on deck, with every engineer thrown at solving the problem.

It was surreptitious in a way that when Musk had sidelined Levchin, it gave Levchin more time to focus on defeating the fraudsters.

Levchin was relentless. He went into Russian chat rooms and forums, communicated directly with the fraudsters, and slept in the office working on solutions, which eventually paid off.

As a result of these efforts, PayPal went on to develop patented recognition tools to prevent fraud and laundering operations. One of their inventions was the random deposit, a breakthrough whereby Paypal deposited 2 small amounts into a bank account (i.e. 0.12 cents and 0.35 cents), and these 2 amounts were then used as a 4 digit pin code to authenticate the account.

And while they didn't invent the CAPTCHA system, the PayPal version was the first to scale it and, in doing so, they managed to drastically reduce fraud.

PayPal turned fraud from an existential threat to one of the company's defining triumphs that not only saved itself from closure, but transformed itself into a risk management company.

Another big issue for the company as it grew so quickly was customer complaints. They had a backlog of 100,000 emails. Again, by acting quickly, they turned this into a positive. Julie Anderson, one of X.com's early employees, dropped the company's California-based telephone customer service provider and relaunched the service in Nebraska where many of her relatives lived. Anderson recruited her family, neighbours and friends and trained them up. Within a few months, they had not only brought the huge number of complaints under control but had also turned their customer service into a positive. PayPal's customer service was so impressive that eBay users would rave about it to eBay.

In September 2001, by which time they had over 10 million customers, PayPal declared their intent to go public. This was a risky and ballsy move for many different reasons.

First of all, you had the dot-com implosion, followed by 9/11 – the market had tanked, and investors weren't keen on internet stocks. The media was also sceptical and scathing of PayPal- portraying it as a company that was paying customers to join, had burned through almost $200 million, and had yet to make a profit.

Also, there was the threat of eBay. Would they stifle PayPal's attempt to go public? Up to now, PayPal and eBay had been at loggerheads, and yet at the same time, eBay had made several approaches to buy PayPal, but always at a price that PayPal felt was well below their worth.

It was pretty obvious why eBay disliked PayPal so much. The metaphor used at the time was that PayPal was throwing a party in eBay's backyard, charging attendance, and not paying any rent. Not only that, but some of eBay's biggest merchants, known as power sellers, were leaving the platform to start their own websites, and PayPal was facilitating their move and actively encouraging it.

PayPal realised that they were too reliant on eBay, and they were constantly looking for ways to diversify. And they did diversify. By October 2000, PayPal became available to customers in 26 countries, and by the end of 2001, international transactions accounted for almost 15% of the company's total revenue.

But regardless of how much PayPal attempted to diversify, the continued rapid growth of eBay meant that PayPal's diversification wasn't having a significant impact.

Why didn't eBay just kick PayPal off the platform and use Billpoint, the payment company they had bought?

There were two main reasons. First of all, Billpoint simply wasn't as good as PayPal.

PayPal was a totally different beast to the buttoned-up, bureaucratic eBay under the stewardship of Meg Whitman. PayPal was manned by hyper-intelligent, extremely competitive, and mostly young employees who thought nothing of pulling all-nighters to ensure that their product was continuously improved. They had the best product by far, and the eBay community of buyers and sellers voted with their feet.

The second reason as to why eBay didn’t kick PayPal off the platform is linked to the first one, and this was the power that eBay's community had. Unusually, eBay was beholden to its community, and its sellers had a very real sense of entitlement and ownership over the platform. This attitude had its origins in eBay’s foundation and helped it build such a passionate community that laid the foundation for eBay's success but it had its drawbacks.

If any changes were made to the site without the community’s knowledge or input, there would be an outcry and of course this played into PayPal's hands, as eBay knew if they ever tried to kick PayPal off the site, there would be uproar from their users.

However, that's not to say that eBay didn't try to get rid of PayPal. Over the three years that PayPal had been on their platform, eBay did everything in its power to disrupt PayPal. They'd change code and make updates without notifying PayPal, they launched a "Buy it Now" button that cut PayPal out of the payment process for certain auctions (note: the feature sucked and was withdrawn), and they would send legal notices and menacing emails to PayPal.

But Levchin and his team at PayPal simply worked their asses off to counteract all of the product threats, while Reid Hoffman worked the backchannels to neutralise any legal threats with a mixture of diplomacy and legal threats of his own by implying that eBay could face antitrust issues if they kicked PayPal off the platform. It should be noted that Hoffman readily admits that the antitrust threat held little weight, but it is indicative of the aggressive, never-lie-down attitude of PayPal.

With PayPal's plans to go public, there was a significant risk that eBay might muddy the waters by suggesting to the markets they were considering kicking PayPal off their platform – a move that would undoubtedly spook potential investors because most of PayPal’s revenue came from eBay customers. To mitigate this threat, Hoffman devised a clever plan to keep eBay from stirring up trouble while they geared up for the IPO.

Hoffman's strategy was to restart negotiations with eBay. This tactic effectively silenced eBay, as they were unable to make any public statements about PayPal that might harm the IPO process. If eBay were to comment on PayPal during ongoing negotiations, they would be breaching their fiduciary duties.

Hoffman maintained to eBay that he had a mandate to sell for $1 billion. eBay came back with a final offer of $850 million. Hoffman said he'd take it to the board but stressed that only $1 billion would buy the company.

eBay was frustrated that PayPal wasn't willing to negotiate but they didn't realise that the negotiation was really a tactic to keep them quiet.

While the $850 million bid did cause a dilemma for PayPal, as it was temptingly close to their asking price, the desire to go public won out. They liked the prospect of doing an IPO, something alluring. Of course, there were other good reasons to go public:

It gives them credibility
It gives them access to money
It gives them a clear market valuation

As with nearly every aspect of the Paypal story, their path towards an IPO is filled with tension and obstacles including 3 separate lawsuits brought forward by parasitic companies just a few weeks before the IPO.

Such lawsuits have become a common feature in the IPO process whereby flimsy and opportunistic cases are filed in the hope that the company going for the IPO will settle because if the lawsuits aren't settled, then the IPO paperwork has to be refiled, which causes delays, and the lawsuits also have to be included in the IPO files – something that could spook investors.

Despite these and other obstacles, PayPal went public on February 15th, 2002. They put 5.4 million shares up for sale at $13 and closed at $20.

Levchin remembers it as the happiest day of his life. The PayPal team celebrated by having a keg party in the car park of their headquarters, and a half-drunk Thiel took on 10 players in quick succession in games of speed chess, beating 9 and losing to a delighted Sacks.

But after four years of working tirelessly, fighting fraudsters, battling eBay, and battling each other, employees and the leadership were exhausted, and they were open to selling to eBay when they came knocking just 4 months after the IPO.

The benefit of having undergone the IPO was that they now had a market cap, so it was quite easy for both parties to agree on a price. And on July 8th, 2002, the news of the deal was made public, with eBay agreeing to buy PayPal for $1.4 billion.

Musk was the largest individual investor with 11.72%, cashing out with $176 million. Peter Thiel had 3.7%, worth $55 million, while Max Levchin got $34 million. A lot of the other senior management made a pretty penny.

The remarkable thing is that over the next few years, it was those guys, the so-called PayPal Mafia, who invested in and guided some of the biggest and most well-known internet companies. Reid Hoffman founded LinkedIn. Yelp was started by Jeremy Stoppelman and Russ Simmons, two PayPal alumni, while YouTube was founded by three former PayPal employees.

David Sacks founded and sold Yammer to Microsoft for $1.2 billion, he also founded Geni.com and was the producer behind the 2005 film "Thank You for Smoking" – in which Musk, Thiel, and Levchin are credited as executive producers. Max Levchin went on to create another payments firm called Affirm.

And Musk, with his irrational big visions, his self-belief, his workaholic nature, and his need to create something that has a huge impact, did just that. With the money he made from PayPal he started Tesla and SpaceX. He even bought the X.com URL back off PayPal in 2017 for an undisclosed sum, and based on previous statements when he bought Twitter, he may yet be looking at doing what he always wanted to do with X.com – create an Amazon for the financial sector.

The PayPal impact isn’t just about the ventures started directly by PayPal alumni. After the dot-com bubble had burst, venture capital firms were unwilling to fund consumer-oriented startups, with only a few individuals, such as Hoffman, Thiel, Levchin, Sacks and Sequoia Capital, still investing in this area. As a result, entrepreneurs who believed in the next wave of consumer technology innovation had limited options for securing investment, making the PayPal alumni a crucial source of support for these ventures.

Case in point: Peter Thiel was the first outside investor in Facebook, investing $500,000 for a 10% stake, which he mostly sold in 2014 for $1 billion. That’s a remarkable ROI although it has to be pointed out that had he held onto that equity, his 10% would be now worth $127 billion.

Other companies that the PayPal alumni invested in include: AirBnb, Palantir, Uber, Square, Pinterest, Stripe.

There are many reasons why I just loved this story. Some of it is due to the fact that both myself and Keith, my cohost on the podcast, had been caught up in the dot-com era. We had a company that received investment and imploded when the bubble burst. It was a thrilling time to be in business, and while we never reached the highs and level of success of PayPal, I have nothing but fond memories of that era.

I love the fact that they hadn't figured it out and stumbled across their product almost by accident. This serves as a reminder that sometimes the most valuable ideas can be right under our noses, waiting to be recognized and developed. But once they had a product that was worth fighting for, they fought tooth and nail to make it successful, almost as if their lives depended on it.

The story also illustrates the thin line separating success and failure. While it's easy to look back and assume that PayPal's success was inevitable, given the business superstars it had in its ranks, the truth is that they weren't superstars at the time, and the company nearly failed. John Molloy, of Nokia Ventures, who was there from the very beginning, emphasised that none of this was predetermined and that luck played a significant role. He clarifies that he doesn't mean luck in the sense of a coin toss; PayPal undoubtedly had exceptional staff and leaders who worked tirelessly. However, luck did play it’s part:

Lucky to raise money during the dot com bubble when it was possible to get $100 million very easily
Lucky that the dot com bubble burst so soon after that funding round, thereby decimating many competitors
Lucky that Bill Harris was the CEO at the time of the merger and he was tough enough to force Musk into agreeing to the merger
Lucky to have eBay
Lucky that eBay were so inept at developing their own payment system– you always need a bit of luck.

What really sets this story apart is the insight it offers into the world of startups and the people who create them. Through the lens of PayPal, we see the importance of vision, the necessity of adaptability, the power of teamwork, and the resilience required to weather the inevitable storms. We also see the human side of the equation – the passion, the ego, the conflict, and the camaraderie that fueled the PayPal rocket ship.

Sources

https://fortune.com/2007/11/13/paypal-mafia/

https://www.thestreet.com/technology/history-of-paypal-15062744

https://fintechmagazine.com/digital-payments/story-paypal-worlds-most-valuable-fintech-firm

https://www.telegraph.co.uk/technology/11106473/The-PayPal-Mafia-Who-are-they-and-where-are-Silicon-Valleys-richest-group-of-men-now.html

https://www.nytimes.com/2015/04/02/business/dealbook/the-paypal-mafias-golden-touch.html

https://www.mentorist.app/books/the-founders-the-story-of-paypal-and-the-entrepreneurs-who-shaped-silicon-valley/#:~:text=A%20Tale%20of%20Two%20Start%2DUps&text=In%201998%2C%20Confinity%20

https://www.nytimes.com/2022/02/20/books/review-founders-paypal-jimmy-soni.html

https://www.wsj.com/articles/the-founders-book-review-paypal-making-the-future-click-silicon-valley-history-11644598794

https://www.youtube.com/watch?v=vCK2NeR-QBY

https://www.youtube.com/watch?v=vpsW23u7r08

https://open.spotify.com/episode/6FOoUzB4DnOOnQ49GGsfnV?si=EQCtpSreT6uhUTvCY_ORbQ