PayPal: The Greatest Startup Story of All Time

[00:00:15] Welcome folks to Great Business Stories and today's episode is called PayPal, The Greatest Startup Story of All Time.

[00:00:23] And hands down it has been one of my favourite stories to cover because you have such big characters who are now very much sitting at the top of the table business wise. We're talking Elon Musk, Peter Thiel, Reid Hoffman, David Sacks and many more.

[00:00:41] It's fascinating to recall how these guys started out and nearly didn't make it. There's also so much drama with Boredom Cous, Russian fraudsters, Musk being forced into a merger against his will, the dot com bubble bursting. I just loved it.

[00:01:01] And just to let you know at the start of the podcast we mentioned our main sources. Now there's a link at the bottom of this podcast that brings you to our blog where the main sources are highlighted at the top of the article.

[00:01:13] And there's also links there to some really great photos that are relevant to this story. Enjoy it, it's a cracking episode. Morning Keith. Morning Kamin, how are you? Not too bad, not too bad. See you all ready for the PayPal Founder Story. I am in danger.

[00:01:32] I think it's been a fascinating read. The book I read was brilliant, but I'm curious what drew you to the topic. This is your one. What drew me to it was I remember the article from Fortune in 2007 where I first came across the name the PayPal Mafia.

[00:01:50] And it wasn't the story. It was the photograph that was with us. It was this photo shoot of 13 of the PayPal alumni. Now Elon Musk wasn't there. He was asking an award ceremony somewhere he could make it.

[00:02:03] And the three YouTube guys who were also PayPal alumni, they weren't there because Google had bought YouTube and you Google with their whole, you know, don't do evil shit. Thought that the gangster connotation wouldn't sit well with the radio. I didn't know that. Yeah.

[00:02:19] So but you have this photo shoot with 13 of them like Peter Peele, Reed Hoffman, David Sacks, Max Levchin and dressed up in kind of soprano type of tire tracksuit leather jackets sitting in this mafia like hangout with whiskies and cigars. And it was such a ludicrous photo shoot.

[00:02:37] I've never seen top business people, you know, do that. And also I just talked to not fair juice them because it was a real piece take kind of photo. And that photo is always stuck with me.

[00:02:49] And the story itself within that fortune article was really, really interesting because it's the story. Not so much of the founders of PayPal and how PayPal was founded, which is the story we're covering and was releasing in its own rights.

[00:03:02] But it was also what they went down to do after people just why they've built up this huge reputation and does this big aura around the PayPal mafia? Yeah, I think for me, I missed that article completely.

[00:03:17] But having a background in dot com and then moving into social media, Peter Peele was a big figure, Reed Hoffman's a big figure. So I was more aware of the individuals after this particular event.

[00:03:34] So to go back and see those foundational moments and send them moments is a fascinating story. It is. And your source, I believe, was Jimmy Sonny's book The Founders. Yeah, really good book. Really entertaining, full of fantastic anecdotes, really. Yeah, I read that as well.

[00:03:53] A lot of fun holidays and Founders fantastic. But I also got to give a shout out to that fortune magazine article which was written by Geoffrey O'Brien. And those two, I had a load of other sources, but two sources in particular that were very interesting.

[00:04:05] Guy Ross, how I built this had a two-parter with Max Levchin who was the founder of PayPal and was their CTO. And that was a very, very interesting two-parter. And then there was this podcast called Crucible Moments which is the podcast of Sequoia Capital.

[00:04:22] And Rolalf Bota who won the PayPal CFO and is now the managing partner of Sequoia Capital. He moderated this episode of Crucible Moments and Max Levchin was honest, Jimmy Sonny was honest, and Michael Moritz who was the guy in Sequoia Capital who funded Elon Musk's.com originally.

[00:04:42] So they're my sources. But look, it's a fantastic story so I suppose we'll get into this. So I suppose with any good story maybe start to, let's start at the beginning. So we're talking about and maybe people aren't even aware of this. There was two competing concepts.

[00:05:00] There was, there was two competing companies although initially they weren't competing. This is the really funny part of the whole story how it almost happened by accident. You had the first company which is PayPal and PayPal was founded by, you got to start off with Max Levchin.

[00:05:16] He was a Ukrainian born computer whiz who, while he was in Ukraine had very limited time on his mother's computer because she used it for work and so he was right out of all the code by hand.

[00:05:29] He could maximize the time on the computer and his family moved to the US when he was 16 and then he went down to the University of Illinois because that was really the hot bit for computer science back then.

[00:05:43] But he was at the college, Mark Anderson and his friends. Mozilla Netscape and... Yes they were in the process of creating this and Levchin was there why they were doing that.

[00:05:54] We actually covered that in a browser war episode which we still have to release which is a very interesting story in itself. So why that college, Levchin does a few site hustles, he's very entrepreneurial. But they're all just little earners, nothing much comes of it.

[00:06:08] But in 1997 after he graduates he goes to Palo Alto which in 1997 if you're in the tech business and you're entrepreneur and you want to raise money this really is ground zero because this was the height of the internet.

[00:06:26] And so he moves there and a friend of his called Luke Nosek who goes on to be a founder of PayPal recommends that he meets Peter Thiel who would actually put some money into Nosek's company. You mentioned Thiel, Thiel is an interesting character.

[00:06:42] Yeah he is isn't he? The fascinating. Yeah hard to warm to though isn't he? You know I mean like a computer hour. Some of our listeners will be aware of him even if you're not into business you'll probably be aware of him from a political standpoint

[00:06:56] because he was a big fundraiser for JD Vance who this right-wing Republican author and senator. Peter Thiel was one of the first backers in Silicon Valley of Donald Trump back in 2015, 2016. Yeah so he considers himself a libertarian seems like an arched conservator to me really.

[00:07:16] I think he's just a confrarian that's the impression I get from him and he comes across in the podcast and I say listen to this very analytical, very cold, very humorless.

[00:07:28] Now having said that the likes of Levchin and the people who get to know him say that he once he backs you he fills you with this kind of confidence.

[00:07:36] He really empowers you and he gets you to achieve amazing things by the confidence that he put into you. So there is that aspect to him but then you also look at see his history with Garker,

[00:07:48] the media company that had to hold down because Thiel funded Hulk Hogan's libel against Garker which led to the company closing down and the staff of Garker might say that he's a vindictive prick. So he's a hand devoid though but anyway Levchin meets Thiel

[00:08:06] and he pitches this idea that he has for mobile security software for the Pampitis which is this new handheld device back in 2017. Thiel has a small sort of investment firm hasn't he?

[00:08:20] He does, yeah I should have said. Thiel started off in law and he has his whole career mapped out see one of these guys that's very analytical and very current he's his whole career mapped out that he's going to be you know a big time lawyer

[00:08:34] and part of his stepping stone on this career was to get a third chip roll into Supreme Court just highly competitive only 36 people a year get in there

[00:08:44] and when he didn't, when he applied and he was rejected, he himself admits he had a bit of a midlife crisis at the age of 25 and decides to quit law, goes into finance, becomes a derivative trader's credit suise in New York for a few years

[00:08:59] and then he sees the tech boom happening he's really into technology he raises Ike at the figure I got is he raised a million dollars from Stamson family moves back to California and while he's looking for ventures to invest in

[00:09:12] he's also teaching the small class in Stanford in currency investment and that's where Levchin meets him and Levchin spins him or pitches him this idea he has for mobile security software for Pampuy Thiel loves the idea straight away commits a hundred thousand dollars to us

[00:09:30] the company's first fall called Fieldlink I'm just going to leave it at PayPal because it goes from Fieldlink to Ponfinity and then to Paypal Boy confusion, they form PayPal and the original founders are Thiel, Max Levchin, Luke Nosek, Russ Simmons, U-Pan and Ken Howry

[00:09:47] so that's the foundation of PayPal and their first aim is to raise 500,000 so they go to in the book it says they go to over 100 VCs and investors and get turned down by all of them

[00:09:58] which could have been an indication that maybe their idea wasn't great because this was during the dot com boom where money was being drawn around the right center

[00:10:07] so because they didn't raise investment, Thiel puts in 240,000 from his own fund and they raised the rest from friends and family and one of the people who's involved in this early stage is not working with the company but he comes in as a board member is Reid Hoffman

[00:10:24] another fascinating character and he's a friend of Thiel's from Stanford they're chalk and cheese in terms of their political views, in terms of nearly all their views people talk about how he's very empathetic, how he's very strategic and smart

[00:10:43] but totally different from Thiel but apparently in Stanford they really got along because they appreciated Thiel's honesty and intellect so they get along in that capacity and coincidentally I read an article by Hoffman this morning before we had this call

[00:10:58] in Rich he's calling out a recent event organized by David Saxon, it also popped up in this book which was a gathering and fundraising exercise for Donald Trump so what's interesting here is you see all of these on a personal level

[00:11:16] these different political views and yet everybody from a professional perspective gels and worked well together that's one of the things that comes out of the story is that they are an awful lot of their friends from college

[00:11:30] and they don't agree with each other but they manage to have what they call these honest and lively and boisterous debates that never get personal, it's all very on the intellect level now as we'll see later some of the X.com people dispute this harmony, but anyway

[00:11:46] so Hoffman anyway is at this stage a board member of PayPal and he starts questioning the idea that they have and a bit of research makes them realize that this software idea for the panpile it just isn't going to fly there's no market for us

[00:12:01] so Hoffman is kind of better so is that, that's a security or is that a payment between, oh right okay no initially they started off with just a security to stop people from hacking into panpiles and they soon realized that nobody was really interested in hacking into panpiles

[00:12:19] so Hoffman started bouncing ideas with Louchin and Thiel and said we need to have something that can add value that people value and this morphed into the idea of why can't people beam money to each other using their panpiles

[00:12:35] and the only use case they could come up with this was that you've got four people maybe having lunch and they want to split the bill and so they can beam money to each other

[00:12:44] now even then we're not talking about beaming it in the way that we might revoloke money it was even more convoluted than that because you had to beam a 10 app and then you had to take a panpile at home hook it up to your computer

[00:12:56] and then the app would deduct it from your bank account that's right or you had to perfectly align the two panpiles I think because the infrared core was on them

[00:13:05] that was another way so if you perfectly aligned them and the two were perfectly level and pointed directly towards each other you could theoretically beam money between yeah what I love about this idea or the fact that they thought this was a good idea

[00:13:22] was that it shows that how even some of the best minds in Silicon Valley back then thought that this was a good idea but I think it also shows which is probably true for nearly every company that starts

[00:13:34] the original idea isn't the one that you continue with it generally tends to morph into something else but while they were discussing this as well Hoffman then posited what happens if somebody doesn't have their panpile

[00:13:46] and left went well that's easy we just set up an email money transfer for them and money transfer had been around forever but with the answer to the internet and with email

[00:13:57] you could now transfer money via email but nobody had really done this but it was a real simple idea and left in just said he said it up in a matter of days and it was such a simple idea

[00:14:06] that he didn't really think much of us it was just a side task even though as he admits in one of the interviews I listen to that he and his friends started using this email money transfer feature straight after developing it

[00:14:17] they still didn't think much of it because it was so easy to develop so maybe with funding you'll own sexy as well you know maybe the idea of pointing a device at another device and sending the money is a little bit sexier or futuristic than an email

[00:14:33] it is and for these tech nerds you know it's like oh that's so cool that's a cool thing and money transfer feature that was too easy to be cool but anyway with this pamphilist beaming money idea they went again around looking for to raise more money

[00:14:48] and they came across Nokia Ventures which was the venture arm of Nokia mobiles and a guy called John Malloy was the director there and he's one of the unsung heroes I think Jimmy Sonny describes him

[00:15:00] of the PayPal story and Malloy wasn't really convinced by the pamphilist beaming money idea but he was impressed with Thiel and Levchin and then he did some due diligence and some really prominent professors in mobile technology from the University of Illinois

[00:15:16] gave Malloy really good feedback on Levchin and said this guy is good so on the back of that really Malloy and Nokia Ventures invested 4.5 million in PayPal but there's more on the individual wouldn't you wonder though at the same time

[00:15:32] Nokia given their strength and dominance in the handset market at that point would they have entertained a conversation with the guys if they didn't have the pamphilist slash mobile device pangal in the first place so maybe it's a case of just look or...

[00:15:52] I think the idea that they had that it was involved in mobile technology was definitely yes and I thought maybe Malloy was under the... his idea was okay maybe this mobile idea might be great

[00:16:03] but Levchin was a whiz in mobile technology and he thought we give them this money and he come up with something to do with the mobile word that will be a basket here I think that was his original idea so now they have some money

[00:16:17] they start hiring people Thiel hires mainly from Stanford, Levchin hires mainly from University of Illinois because they're hiring friends they really build up this culture within PayPal where they can have these lively debates without falling out

[00:16:32] because they're not hiring strangers they know each other well so they're able to argue they're able to shout at each other about what's the right way to put apparently they say it never really gets personal and this helps build the culture of PayPal

[00:16:43] but why they're doing all this anyway we gotta move to the next part of the story because the parallel track give you like the parallel track and this is Elon Musk so Musk as most people know born in South Africa moved to Canada in 1989

[00:17:01] got a science degree in Borkham University was about to go into Stanford as an undergrad but he was just looking at the internet boom happening and Musk with his huge belief in himself looked at it and thought you know what I can do something here

[00:17:16] and he goes on to form a company called Zip2 which was his brother and an investor and the idea behind Zip2 is this directory software which they then sell to media companies and the media companies then use this to sell local advertising

[00:17:31] and unlike an awful lot of other companies back in the internet era this was actually a profitable company but Musk had this idea of building it into this huge directory bigger than Yahoo is what he wanted and he started developing it with this in mind

[00:17:46] but he also started getting into trouble with his backers because of the feedback they were getting from the staff in Zip2 the managerial style and yes, coming in sleep deprived changing the code without even asking the person who wrote the codes

[00:18:06] chewing out staff in front of other staff and now Musk himself will admit that he was very inexperienced back then but when you look at his track record even up to the present day he's usually doing it

[00:18:19] Yeah, I was about to say he didn't learn a lesson there really, did he? No, and the backers demoted him from his position as CEO and because he was demoted he didn't have much say over the strategy and direction of the company

[00:18:30] and while he wants to build it into this big Yahoo competitor the board are looking at what they were doing and how we're doing very well here we're going to focus on the core product that we're selling to million companies

[00:18:42] which they did, they became a very profitable company and they sold it to Compac in 1999 for 307 million and Musk got 21 million from us so there he is trying to analyze what Compac out there were doubts to do with it but anyway, so Musk is minted

[00:19:01] Musk is minted but unfulfilled Keith, he's not fulfilled because he had this, Musk always talks about this is one thing that really comes across in the story I know I am not a fan of Musk on a personal level

[00:19:12] his dog whistling on social media, his infantile sexist jokes the way he freaks, staff I'm just not a fan of him but on a business level what comes out of this story is this big vision that Musk always has

[00:19:26] he always wants something that will have a great impact on humanity now that sounds a bit lofty but it is true, it's what this grand vision is his superpower so he's rich and unfulfilled because he didn't get to have this huge impact that he always wants

[00:19:42] and so he's looking for a new sector to get involved in and he decides to go with the financial services sector and he's some of the bouser to us and say the mentor in the space the mentor in Canada, yeah he worked for Canadian Bank during some internship

[00:19:59] he was in college in Canada and this internship showed to him that banks were our cake that there was very little innovation that consumers would be charged left, right and centre small fees, big fees all over the place for things that they didn't really understand

[00:20:13] so he cost, there's a great opportunity for disruption and his idea was as he called it himself he wanted to create the Amazon of financial services he wanted you to do your banking, your mortgage your insurance, your shares everything under the one roof that was his idea

[00:20:32] and so he took 12.5 million of his fortune which is a big chunk of his personal fortune and put it into a new company that he called X.com now the reason why he put in so much was twofold first of all, and mainly he wanted control

[00:20:45] he didn't want anybody to get in the way of his vision this time and secondly it really helped with recruitment because back then in the middle of the dot-com bubble the second good staff was really hard and people could see, ok well here's a young successful

[00:20:59] entrepreneur who's putting enough out of his fortune in here it helped him recruit good engineers and he bought the URL X.com which I don't know, I mean he seems to have this irrational love affair for that URL because it does, yeah

[00:21:15] the guys who sold him turned down a million dollar cash offer from him and the ultimate price isn't known other than it was a mixture of cash and 1.5 million shares in X.com that's what they got paid for

[00:21:27] and I couldn't for life make you find out eventually how much they cashed out yeah but I'm guessing it would have been definitely and I would say somewhere in the 5 to 10 million I know those shares would have been diluted but I'm guessing it would be somewhere around there

[00:21:41] you thought they would have cashed out so what's the... nice payday nice payday so, Musk, farms X.com with a few founders one of the most high-profile founders a guy called Harris Fricker from Canada he was a well-known young banker

[00:21:56] who left his 1 million dollar a year salary job to join Musk because he really was sold by Musk's big vision but of course, pretty soon after he joined they were just button heads yeah because he came from a banking background he knew all about banking regulations

[00:22:11] and he wanted them to make sure it sticks by the regulations join all the dots whereas Musk was just bulldozing towards this huge division very much I suppose a precursor to Zuckerberg's move fast and breaking and him and Fricker were just button heads

[00:22:28] I've got a quote here from one of the co-founders he said that in open quotes Elon is very good at pointing to the future and saying, the object is over there and I know it's over there and we should all go over their close quotes

[00:22:40] which is fine now he's just made his bones but back then he hadn't got this reputation he was successful but this grand vision thing that is his hallmark now the MO wasn't known back then so it's very hard for these other young co-founders to rally in behind him

[00:22:57] go yeah let's just steamroll over all the regulations and let's just build this fast and worry about the bugs later so they just button head and Harris Fricker and the other two co-founders left they've not been a pretty marked contrast from his previous history

[00:23:12] and the horizon must have been very difficult to adjust from highly regulated to ignoring regulations what do you mean? Jarrah I would say so and Musk's personality he just is very impatient it's my way or the highway as clear way with Musk so that all that infighting slow

[00:23:33] X-star calm down considerably but after the other co-founders left Musk went out and he raised a bit of money from Sikuya capsule Moritz raised five million he didn't really need the money but he thought it was important from a signal point of view

[00:23:45] in other words to tell the valley that Michael Moritz who is this legendary venture capitalist that he backs me so that was important and then together with Moritz the hired Bill Harris as the CEO he came from interest interest yeah yeah yeah

[00:24:00] Musk wanted to focus more on the product so and then as well as this while he's building up all these products and all these projects to make X-star calm this financial powerhouse they developed the email money transfer idea as just an after toss

[00:24:16] as Musk said he had pissed off and he started showing all the suite of products to banks and investors and everything and an awful awesome would say oh that email money transfer features really cool and he'd be pissed off because as far as he was concerned

[00:24:28] that was the least of all the products that they were developing so this is where we we have two companies that both kind of stumble across this email money transfer idea reluctantly reluctantly and still both started to have it off to the side

[00:24:43] it's not anything to do with their core products at all and not only that ski but they also share the same building for a brief yeah yeah that was fascinating it was and they actually knew each other before they became competitors

[00:24:56] they knew each other and they both thought yeah you know we know what you do but we think your idea is crap and it was the sense that some people might connect outside of a smoke break or having conversations in chat

[00:25:08] yeah maybe end up in the same coffee boats or something which is kind of interesting you wonder was it entirely coincidental did the stars just align at that point in time in that particular geography or well that's the thing about the PayPal story

[00:25:23] when you look back at it there was a confluence of events that are just pretty amazing in terms of how they their paths crossed how they both came across this idea around about the same time how both and really didn't think much of this idea either

[00:25:38] even though both of them had this idea which other people then thought was amazing so it's a very strange and fascinating story but of course the key difference between both companies at that time was that x.com had this huge vision and more focused on any one product

[00:25:53] PayPal more focused on one product and it was this Pamp pilot money-beating idea and because they were focused on it people within PayPal were kind of going I don't know is this product really any good and Hoffman started raising questions about the viability of the product

[00:26:11] but one of the key players in the story who now comes into us who really started raising questions about the Pamp pilot idea was a guy called David Sax a real product guy, a died in the world product guy focus and a focused product guy

[00:26:27] very smart, very tough again like Thiel not a guy I can warm to on a personal level but on a business level everybody says this guy really got them in shape in terms of the product and he was with McKinsey at the time

[00:26:42] he was a friend of Thiel from Stanford and Thiel wanted to recruit him but Sax said the only way I'm going to join PayPal is if you just focus on the female money feature idea because the Pamp pilot idea is chaste and Thiel kind of fudged

[00:26:56] said yeah we'll focus on the email money feature but when Sax joined they put a bit more focus on the email one but they were still focused on the Pamp pilot idea and Sax really rubbed up an awful lot of people

[00:27:08] the wrong way because he was so dismissive of the Pamp pilot idea but what changed everything for them and what proved Sax right really was that eBay came into the picture and eBay is the third player you have PayPal, VX.com

[00:27:26] and the third major company in this whole story is eBay and eBay itself is a fascinating story because when you look at it now it's such a forgotten company and it's a nothing now really you know players back then it was the darling of the internet

[00:27:43] it was the hottest company back then yeah so they certainly tell us all right but what we're seeing is sort of a huge market both for individuals started off by a guy who just wanted to sell was it a laser pointer or something that was broken

[00:27:58] and you know maybe I could make a business out of this yeah I did four years it was a big dollar company yeah fascinating back then PayPal or rather eBay mixed up with all the companies back then eBay was making loads of money

[00:28:16] but it didn't really get involved in the payment side let its buyers and it was an auction site and it had this huge amount of sellers and buyers and the only way that they could pay was by check or by money transfer so this would delay the order

[00:28:32] by days and sometimes even a week or two and eBay wasn't really interested in getting involved in the payment side because setting up a payment company as PayPal and VX.com were finding out was really really difficult with all the regulation and everything and so the eBay community

[00:28:48] were always on the lookout for something that would help them on this side of it and they came across the PayPal money feature and there were really tight community in eBay and once a few of the early adopters started using it

[00:29:01] they put it up on the community boards and then other eBay sellers started using and it started spreading but all of this was happening unbeknownst to VX.com and PayPal and the first they heard about this was in PayPal an eBay seller rang them

[00:29:16] and asked them could they change the PayPal logo or resize it for her so that she could put it on her eBay and they were like okay yeah we can do that for you but Saks and another employee hopped onto the computer

[00:29:30] and went onto eBay and searched for PayPal and all of a sudden they saw that there was thousands of eBay sellers using PayPal and Saks said it was a real holy shit moment this product that I can't believe but that nobody else

[00:29:44] really is taking off like wildfire on eBay I was really funny Keith I don't know if it was in Jimmy Sonny's book or if it was one of the podcasts I listened to Max Levchin was so put out by the fact that

[00:29:56] the email money feature was taken off on eBay that he even considered blocking the eBay URL from PayPal servers because he didn't want to distract from the core products which was the path of the entire site at money feature Yeah so all of a sudden they saw

[00:30:15] jeez we've got a really viable product here and so whether they liked it or not and Max didn't like it either because he wanted X.com to be this huge financial powerhouse where most of the money was coming from these customers

[00:30:28] who were going to put all their banking all their savings and do all their financial services on his X.com which he might be making sense of little small transactions but this is what was happening I guess what's interesting from the benefit of hindsight

[00:30:46] and just to go off for a moment Yeah but when you think about the vision for X.com and it's pure as four it's not that dissimilar to some of the services we would see today like Revolute so maybe it was the case of the idea was right

[00:31:02] but the timing was wrong and who knows if the timing was wrong that's the one unknown if Mosque had gotten his way given his record of bringing like huge businesses like a car business, space exploration business being able to get these huge businesses

[00:31:20] and actually make money from them and get them to be profitable maybe he might have who knows, Evie but he didn't get a chance because the Evie community took this email money feature and just to give an idea of how fast it grew

[00:31:35] in November 1999 PayPal had a thousand customers by December, a month later they had 10,000 customers by February 2000 just two months later they had 100,000 customers so they were growing at a massive 10x raise over the course of the few months and X.com were similar numbers

[00:31:54] and just to make it sorry, just one thing made for listeners who aren't familiar with this is essentially allowed a buyer and seller to exchange money between them between each other via email it was that simple and that's what I'm saying

[00:32:14] like both Mosque and Anleicen were so dismissible because it was so easy to set up Mosque said that it took them 48 hours to get their email money service transfer set up it was such an after-toss so anybody really could have done this the technology behind this

[00:32:30] wasn't that great now as you can see there was more technology when you actually kept money there was a whole security side to it that's an element that comes into mind but all of a sudden these companies that knew each other that were doing their own thing

[00:32:46] and that didn't have more competition all of a sudden they were in competition and this started this fierce battle between them because to win customers both companies set up this very expensive incentive program whereby for PayPal they paid $10 for each new PayPal customer

[00:33:03] and $10 for each referral that that customer gave and X.com gave $20 for each new customer and a $10 for each referral and so this setup and Jimmy Sonny in his book gives a really good blow-by-blow account of how the following weeks had a big impact on both teams

[00:33:23] as they burned through money to try and be here and get as many customers as they could and it's fascinating but of course wiser heads in both companies realised you know we're gonna we're gonna run out of cash here we can't keep doing this

[00:33:38] we gotta have a merger that's the word we need to be Barling Lumiere there's a good quote from Bill Harris the CEO of X.com open quotes would there have been a single winner? yes but it would have taken a lot longer and a huge amount of resources

[00:33:56] and it's not clear which side would have won close quotes so the pragmatic thing to do was to merge with the company Thiel pushed it from the PayPal site Harris pushed it from the X.com site but Musk was dead set against this

[00:34:09] and again this goes back to his big vision thing when you have this big vision like Musk has he wasn't concerned about market trends user growth, burn race the competitive landscape none of that bogged him down in the same way that it did the PayPal guy

[00:34:24] who was so focused on just one product he had loads of products this was only one side of his and his vision was far bigger so he was against this so initially when they did propose the merger he put down a 90% to 10% space in X.com

[00:34:38] Leveskin and Thiel of course said no way they went off and continued to build their customer base and that improved their negotiation position so eventually when they agreed to a merger it was 55% 45% in X.com's favour but before the deal was signed yeah, meeting

[00:34:56] Musk let slip that he cost PayPal was in his own words getting a fucking deal and Leveskin went nuts because he realised that Musk would always see PayPal as being the junior partner and Leveskin really demonstrating his steeliness here he said right

[00:35:12] deal's off and he called off the deal and Harris the CEO yes, went around his apartment and talked him into us and said if I can get you a 50-50 deal will you do us a deal and Leveskin said yeah 50-50 equal partners I'll do the deal

[00:35:28] and so Harris went back to Musk who remember didn't want to do the deal at all and now all of a sudden he was looking at a 50-50 partner and Harris said if you don't do the deal I'm out of here

[00:35:40] and they were in the middle of a fundraising round and Musk knew that if Harris left in the middle of fundraising round that they would be detrimental to their fundraising so Musk felt really that Harris had put a gun to his head and he had to agree

[00:35:52] to what he really resented Harris as we were doing that merger went ahead Harris's card was marked from that day on then I guess the clock was ticking on Harris as the CEO definitely from then on so the merger happened in early 2000s

[00:36:08] and on the back and it was called x.com the new company and on the back of that raised 100 million now as Musk said there was no problem raising 100 million back then this was still the height of the internet bubble it was actually at

[00:36:20] the very peak because it's still rightly surmised at the time we've got to get this money in really quickly because the bubble is about to burst and not only raise the money but pull the money in and he was dead right other people

[00:36:32] thought that he should hold out for a higher population but he was proven right because as soon as they got their money in the bubble burst and there was 2.5 trillion written off the market and it really had a long term impact on tech stocks for many years after

[00:36:48] because many VCs and investors got so burnt from the internet bubble of course that played into PayPal alumni hand because they were the only one who invested in the years after the bubble burst which we'll talk about quickly boss

[00:37:02] and raise the money and that was it they were merged and in one way it was great because now there was only one big company in the internet money transfer market because an awful lot of their competitors were gone after the bubble burst so they

[00:37:16] you'd have X.com only clear in the markets but there was a lot of problems Yeah including a fundamentally different tech stack so one one technology stack and platform is built on Microsoft the other is based on open source line up and the thoughts being reasonably familiar with

[00:37:38] the technology world of aligning those two platforms is stuff a nightmare well I going to get into that now because that happens in a few weeks time because what happens first there was a lot of internal conflict first of all because they had 2 different websites

[00:37:56] they hadn't really decided on the strategy of the company they hadn't decided on what to call the PayPal product Musk wanted to call it X-PayPal to fit in with all the other X products like X-Finance the PayPal people kicked back about

[00:38:08] getting back there was also duplication of roles there was a huge crash of cultures in Jimmy Salli's book he does pay the picture of it was all happy happy yeah lively debates heated debates but you know didn't we all get along and in fairness

[00:38:22] in PayPal he did have very much an open book management style and he allowed for full visibility of revenue plans, burn rates and it did lead to these very open heated but honest to be that didn't gel well with the X.com people I have a quote here

[00:38:38] from Jeremy Stockleman who came from X.com and he went down to found Yelp and this is what he said I think this was from the Fortune magazine article he said the class of cultures turned into total dysfunction and warfare most ex-employees ended up leaving or getting fired

[00:38:54] the culture was really an intellectual pissing contest some people didn't bite this so you have this huge class of cultures you also have a problem on the leadership because Harris remains a CEO I think Musk is co-CEO but is focused on product development and you have Thiel

[00:39:14] and he's executive vice president of finance you've left him as CTO and as we see must start putting his nose in there which caused them to get into that but Thiel isn't happy with Harris' leadership nor are the other people Thiel leaves the company

[00:39:28] and Musk and Saks and Levchin start to take action against Harris because Harris has no weird tech experience and they also feel that he's filling the company with suits at the expense of product development and so they organized what came to be known as the nut house coup

[00:39:44] in reference to a bar that they did this planning after Thiel left Musk, Saks, Levchin got together and just thought we got to get rid of Harris he's not taking the company in the direction we want to be taking in the culture is being diluted the e-cars, everything

[00:40:00] wasn't working and so they presented the board with a mass resignation trust if Harris doesn't go we're all resigning so of course the board signed with them Harris goes and now Musk becomes the CEO and this defeats even more trouble

[00:40:16] and we're talking about trouble but we're also talking about the company is massively successful in terms of its growth rate here they're getting over 10,000 signups a day they've got over 2 million accounts now about 1.7 million of those are making the ebay money transfer

[00:40:30] and about 300,000 are connected to the X.com finance the bank they're tending about 40% of ebay transactions but it's putting a huge strain on their servers as you mentioned about the Microsoft Linux issue this is where it comes from their servers are crashing an awful lot

[00:40:48] because of the strain and Musk's plan is to rewrite the whole paypal code and he insists on doing it on Microsoft his reasoning is that Microsoft is faster, it's easier there's better support but Levechin and the PayPal people and even some of the X.com people

[00:41:08] for sometimes for tech snobbery reasons but I think there was also good technology reasons believe that Linux is a Linux or Linux yeah it's made of some other elements whatever works here really they believe Linux I know I can go with you because you don't take more

[00:41:26] they say Linux is better I mean you read the book and the tests I think prove that the Microsoft technology wasn't soosh but for PayPal isn't that right yeah I think there's other issues Microsoft is comparatively more expensive it's attractive

[00:41:42] you know it's like a nice sort of warm bath and so far as there's open frameworks available to accelerate development both are quite restrictive and it didn't really keep pace with the community-led development of Linux Linux would have become in the gap of time between X.com

[00:42:04] originally selecting Microsoft and then at that crossroads on which direction to travel Linux and then it accelerated and matured massively yeah it wasn't the same decision to be made and most decision to focus on Microsoft didn't really take into account just how far Linux had moved

[00:42:26] forward in intervening periods and it was essentially the underpinning technology of all of the web innovation so it was the right decision for X at that time it was the wrong decision for the merge density really that's the bottom line and that's how it kind of worked out

[00:42:48] because this really was a black mark against the most because the Microsoft rewrite wasn't working they wasted a lot of time and resources on this there was also push back against the X.com name because market research and so on that's the public

[00:43:04] just didn't like that you already had the presence of a porn website and people within PayPal or within the merged company at the time thought that Musk was blessing his personal preference to out his judgment because he did have this

[00:43:18] irrational log of fear with the X.com URL and also you have to realize where the different founders were coming from Musk by this stage had created a company sold it successfully made a lot of money relatively a lot of money founders Levchin, Thiel

[00:43:36] Hoffman they never done that so they were looking at it from a different perspective and they just wanted to build this one product company and make a success of it so they were coming out from different angles and also at this stage they were in trouble financially

[00:43:50] they had about 60 or 65 million left in the bank they were burning through about 10 million a month they were running out of roadway and they were thinking you know we got to be a bit more pragmatic here and that's where we got to focus

[00:44:04] so strategically there was a big big divide between Musk and the rest of the team so when Musk went off on a particular belated honeymoon although he also admitted that he was using this honeymoon to raise some money so how very romantic of him

[00:44:20] but he goes off to Australia and while he's off in this honeymoon the rest of the company he's going to be a bit more optimistic about the future of the company and while he's off in this honeymoon the rest of the team including Saks

[00:44:34] and Roleth Wota who was a a Musk hire and he was their CFO an awful lot of Musk allies did come around thinking that we got to be more pragmatic here and so they organised to against Musk why he was away on this honeymoon

[00:44:48] at the board screen with them and Musk was sacked as CEO effectively you can imagine the the optics of this it's like two CEOs and what was it like four months or something Musk only lasted four months himself also he was very I thought he was very underhanded

[00:45:08] I mean I'm not a fan of Musk but I thought he was very sneaky wait till he goes away on his honeymoon to sack him but apparently I think that's because he was such a strong character that it would be hard for them to convince the board

[00:45:20] if Musk had been there to argue with this side so strategically it probably made sense but he had a Musk rose after he got sacked was surprisingly gracious where he wished the team the very best where he praised Thiel and asked the team to back Thiel it was

[00:45:40] it's not what I'm expecting yeah I probably took a less generous view of that I thought it was a pragmatic decision to protect his sulk and investments but it wasn't able to abstract his emotional reaction to his financial interest but it wasn't completely

[00:46:02] altruistic he was thinking about how best to protect his investments I know I suppose I'd be coming out of it from more from an emotional point of view in that if it happened to me I wouldn't have written an email like that I'd have been spitting

[00:46:20] anyway so Thiel then becomes CEO now it must be said this wasn't a power play by Thiel because everything I read and researched so that Thiel was the most reluctant CEO in the history of 75 I really don't think Thiel is CEO material

[00:46:34] and I don't think he enjoys the CEO role but anyway so Musk on Thiel in charge they started to strategize the first thing they need to do was say ok enough of this x.com big banking vision on one product the PayPal product were renamed company PayPal

[00:46:54] that's our focus and the second main thing they had to tackle was fraud because fraud was a huge part of this story and they were losing millions to fraud to such a degree that if they didn't tackle the fraud question they were going to be out of business

[00:47:08] within a few months so it was as they said an existential crisis it was all hands on deck and Jimmy Sonny's book again paints a great picture of how these Russian hackers used to taunt Lechyn and the PayPal team they'd send them emails every time Lechyn made some

[00:47:24] updates going you know nice update but this is how we got around it there was one particular name wasn't it Igor Igor Igor yeah he was a really chargered Lechyn yeah and Lechyn was relentless this is one of his superpowers he was going to the chat forums

[00:47:44] because Lechyn came from Ukraine he could speak Russian and he'd go into the Russian chat rooms and forums he'd be following these hackers seeing what they were doing and eventually they came up with patented software that is still in use today that saved the company big time

[00:48:00] one of them was the money deposit oh yeah so they make a tiny test transaction of a random number of cents in your exactly they do two of them so say they put 12 cent in your account they put 22 cent in your account

[00:48:16] and then the 12, 22 were the four digits that you would use to blow up your account they got a snatch they didn't come up with capture but they were the first company to successfully scale capture and all these things not only reduced fraud massively

[00:48:32] but also transformed the company to more than just a money transfer company now they were risk management anti-fraud company as well and so they really grew and in September 2001 Thiel announced that they were going to close they were going to go for an IPO which was pretty risky

[00:48:52] and balls he moved back then because they had the dark column burst year beforehand you then had 9-11 it just happened the markets were tanking the press at the time were stale in a paypal they painted them as a company that had to

[00:49:06] pay to get customers that had lost over 200 million dollars and that wasn't showing a profit but they went ahead anyway with the floatation having said that couple of false dons or false starts along the way as well wasn't there? first of all there was eBay

[00:49:24] eBay were threatening to muddy the waters here because May Quickman who was in charge at that time owned that she mice let it be known to the markets that eBay would kick paypal off their platform and of course they were getting the majority of their revenue

[00:49:38] from eBay now this raised a few questions you kind of think why didn't eBay kick them off the platform way before this stage there's two main reasons first of all eBay did get into the money payment system when they bought a company called Billpoint Billpoint just

[00:49:54] didn't work because paypal were streets ahead of them the paypal team just worked night and day to make sure that their product was always better and the eBay community voted with their feast they used paypal and they didn't use Billpoint and another reason why eBay

[00:50:11] didn't kick them off is because of this community for some reason the community in eBay had this real sense of entitlement and ownership over the site and if eBay made any changes without their inputs they would kick off and go nuts and so eBay were very

[00:50:27] holding their community and they knew if they kicked paypal off that they'll just be uproar so that's why now that's not to say that eBay didn't try and do anything in their power to disrupt paypal they bought in a buy it now button that didn't allow paypal

[00:50:41] to be involved in certain options but that particular feature was a disaster and so forth they had to withdraw that they'd send legal letters and threats and that was an interesting part that's where Reid Hoffman really came into zone yeah he's fascinating he's behind the scenes sort of

[00:50:59] eBay Sherpa really he's soft balling not always soft either but back channel politically nuanced approach to setting down that relationship yeah he called him their chief firefighter and that's exactly as you said he was their diplomat because every now and then when the legal threats might come in

[00:51:21] from eBay he come back with his own legal threat saying that you know there could be an antitrust issue he admits himself readily that there was no real water to that even the way he counters he said I'm worried this might be perceived as this is class

[00:51:37] but it also shows their aggression towards the very platform where they're making all their money that they are prepared to start a levy known we could do this and they actually had somebody within paypal who was working full time on creating this antitrust case

[00:51:51] just in case they needed this but anyway and as you said there was also a few other flies in the argument the IPO I wasn't aware of this issue with parasitic companies that would come to the fore whenever yeah whenever there's an idea

[00:52:05] somebody goes I've got a patent exactly yeah and that's already a sleeping vehicle to change and try and get a settlement yeah and what would happen is for listeners something I wasn't aware if you're going to flawed your company right if you announce this

[00:52:21] and it takes you maybe about six months to flawed but some companies do is a week or two before you flaws that serve you with some legal papers saying you're infringing my paid room or you're infringing this contract that we have there'll be no basis really

[00:52:35] to it they're just parasites really but what they're hoping is that you'll settle before you go to IPO because if you don't settle then you have to rewrite your IPO papers which you call the delay and you also have to put this loss use in your IPO page

[00:52:49] which doesn't look good as a risk yeah it's a really horrible thing to do and if you're making your money that way you know good luck to you but it's just wrong but anyway and PayPal had three of these to contend with despite all these

[00:53:03] issues that were going on they went ahead oh and actually yeah the eBay mudding the waters issue Hoffman came up with a strategy to head that off at the past he re-entered negotiations with eBay because eBay had made offers to PayPal in the past

[00:53:17] but he said why don't we enter negotiations with eBay before we go to IPO because if we do that eBay then can talk negatively about us because they will with their fiduciary duties it'll be illegal for them to talk about it that was a master show so he

[00:53:33] boxed them in then and kept them quiet yes kept them quiet while they went to IPO now did he come back wouldn't offer it yeah he could call the company from $50 million rate Hoffman said he'd be able to take the company off the table for a billion

[00:53:45] he was authorized to negotiate but it was strategic he did it so that he would stop eBay from talking and in the year 1850 million offer PayPal were attempted because it was so it was a big price and it was close to what they floated for but anyway

[00:53:59] they went with the floatation they floated in February 2002 opened us $13 closed the day as $20 and Lefkin says it was the happiest day of his life it was a huge success it valued the company at a billion and they drew a cake party to celebrate the IPO

[00:54:17] and are you seeing it go on the thoughts of deal doing the I know in half drunk he took on 10 employees on a speed chess game and he beat nine of them except for David Sacks and there's a great picture David Sacks celebrating

[00:54:35] having beaten Peter Thiel in that chess game furious he can't enjoy the nine victory yes furious about the one lost he must be great crack all together you know well you know what out of all of them and Lefkin comes across as really nice

[00:54:51] but out of all them I think Hoffman definitely seems like a guy that would be able to have a beer with and have a good crack with the rest of them look they're grand so the IPO happens but they're still then after the IPO fighting eBay they're all

[00:55:09] they're all tired and they're very open to selling when eBay come back to them four months later they've put a price on it now because they flow said their macro valuation is there for everyone to know and so eBay buy them in July 2002 for 1.4

[00:55:23] billion as a result of this Musk has 11.7% he gets 176 million dollars Thiel has 3.7% he gets 55 million dollars Lefkin gets 34 million dollars and not without the senior management they all made those pretty well but what's interesting is then that comes out of this

[00:55:43] we won't have the time to get into it but just when you look at some of the alumni kids you chat early and two other they've had alumni set up youtube Lee Hoffman sets up LinkedIn the Stoplerman sets up Yelp Saks gets involved with a company called Yammer

[00:55:59] which I never heard of they were like social media and messaging they told to Microsoft I think Lefkin set up a firm and then of course you have Musk with his outside division work his need to create an impact he uses his money to create Tesla and space

[00:56:19] and he buys back x.com in 2017 from PayPal for an understow and based on what he said when he bought Twitter I think he still has this idea running around in his head create some sort of financial power he does and he also wants to create the

[00:56:35] everything app so a bit like the Asian WeChat type app and he has one app to do it all basically yeah let's watch that space I think but before we just surmise it wasn't just those companies Keith because of the dot-com bubble

[00:56:53] and they started to invest in tech stock PayPal and Sequia were the only people really who were willing to invest and they invested in 646 companies over the course of 15 years and some of them are Airbnb Palinter, Stripe Uber, Square, Pinterest but the most notable is probably Thiel

[00:57:11] Peter Thiel was the first investor in Facebook he put in $500,000 for a 10% stake which he sold mostly in 2014 for $1 billion so a nice markup what if he had held onto them today that $1 billion would now be worth $127 billion and not only was he an investor

[00:57:33] he was an advisor and mentor and he was a Zuckerberg yeah and Zuckerberg and Reid Hoffman but they're Hoffman investors now I can say but he would have certainly facilitated by Thiel had conversations and given Mark Zuckerberg advice around the concept of the network effect

[00:57:55] quite an interesting one I think yeah I mean I know there's so many facts and other interesting side stories that we weren't able to get into I would definitely recommend people getting the Jimmy Sonny book it's a very very good read

[00:58:11] but yeah how do you think of the story overall I really enjoyed the story as I was saying to you it's very close to my heart it's not bedtime reading it's almost too exciting and too interesting to turn your brain off it turns your brain on

[00:58:25] so I would sit up at night reading the book and really getting into it and some of the names are so familiar to you I guess it's interesting to understand them as much as you can on a personal level I think Thiel still remains enigmatic

[00:58:41] you don't have the same sense of who he is or what he really stands for in the way that you would say with Hoffman yeah I think as you said Hoffman seems like a decent sort of person you don't have any real sense of who Thiel is

[00:59:01] and that made some all the more intriguing you know I think there's an episode to be done on Thiel I think at some point that's what I loved about this there's probably five episodes that you could do as an off-chuse between eBay which is I think

[00:59:17] a great story in itself Thiel as you say then of course Musk is probably you can do a few different episodes on Musk but I loved it because getting back to what you said there and for our listeners who might be aware

[00:59:29] myself and Keith were involved in the dot-com era and on much much smaller scale in iron but we did get funding from a company it all blew up in our faces but I have nothing but fond memories for that era it was a really exciting time

[00:59:43] to be starting a company there was something yeah we had that giant Bret division as well I do think I would say I'm gonna claim I said it at the time but of course the US in general and California in particular was where it was happening

[00:59:59] and I think we were to a certain extent maybe boxed in by our local geography to a certain extent we couldn't do a lot of better than that but I think in looking back at us through the lens of time I suppose it would be interesting

[01:00:15] to wonder how things might have been different if we had of up-sick removed California definitely probably didn't didn't and it was ground zero Paloal still where they were starting a company that would have been the place at the time to start

[01:00:35] yeah and I've been there a couple of times quite undamorous actually I would say I don't know what I expected I expected this rich technology sort of haven and now it's just a regular place where the lay lines meet technology but it's not a glamorous place

[01:00:55] the story itself anyway what I loved about it was that you had these two companies with a lot of great minds and yet they kind of stumbled across this product and then even reluctantly took it on but then once they decided on the product they really focused

[01:01:13] on it and they fought to a nail almost as if their lives depended on it and I really liked that aspect of the story so yeah it was hard work it was look it was pragmatism yeah it was a lot of those sort of factors

[01:01:27] and the raw challenge and the right for grouping process that the right group of people that can together want it's a fantastic great story well listen good to talk Keith and I look forward to your suggestion for next month yeah let me scratch my head and double

[01:01:43] alright take care thanks bye