How “PayPal Mafia” Influenced Silicon Valley Success

Today we would like to share with you the translation of Conner Forrest ’s article “How the PayPal Mafia Affected the Success of Silicon Valley” - in it the author spoke about the project leaders, the reasons why they had to leave the company after the merger with eBay, as well as how the principles of PayPal influenced the development and future of Silicon Valley.

The publication seemed very interesting and relevant to us, and the ideas expressed by former PayPal leaders prompted the idea of ​​what principles really need to be based on projects, and about the qualities that strong leaders in IT should have in order to continue, despite leaving the company, to develop and achieve no less success.

We hope you enjoy reading this article as much as we do.

The PayPal Mafia is not a mafia at all. This is a diaspora.

“In essence, we were driven out of our native land, and they burned our temple to the ground. So we were scattered on four sides of the globe, and we had to build new homes for ourselves. ”

This was described by David Sacks, a former COO PayPal and CEO of Yammer. The sinister “they” in this story are eBay, and eBay is partially responsible for both PayPal’s success and its creators moving away from it.

It rarely happens that a startup continues to develop until the end of its existence. Even less often, they give about a billion dollars for a startup. And even more unusual is that getting out of business becomes a catalyst for the local economy and a special type of investment.

Despite the enormous difficulties, this is exactly what happened when eBay bought PayPal in the summer of 2002, and the last team members left to create one of the most important startups and make one of the most important strategic investments of all time.

The PayPal Mafia is a term used in Silicon Valley with love and trepidation for the PayPal team from Mountain View before the first public offering of shares to investors (IPO) or before the sale of the company - each founder will give you his own definition. Although these, in principle, are different stages in the life of the company, the time difference between them is only a few months. According to Peter Thiel, former PayPal CEO, PayPal Mafia is about 220 people. It does not include 700 members of the customer service department, which once worked in Nebraska, Omaha.

This group of 220 people created seven separate "unicorn companies." Unicorns are companies valued at more than a billion dollars. Two of these companies were valued at approximately $ 10 billion. These are the following companies:

1. Tesla Motors - with a market capitalization of $ 27.5 billion
2. LinkedIn - with a market capitalization of $ 20.4 billion
3. Palantir - worth $ 9 billion (private company, approximate calculation)
4. SpaceX - worth $ 7 billion (private company, approximate calculation)
5. Yelp - with a market capitalization of $ 5.26 billion
6. YouTube - $ 1.65 billion
7. Yammer - $ 1.2 billion

For comparison, Google managed to work somewhere around 20 or 30 thousand employees. Of these, few created unicorn companies (1-3), and moreover, no one came close to the figure of the company's value of 10 billion dollars.
This means that PayPal was 3.5 times more effective in creating large companies with 1/100 people compared to Google. In other words, PayPal employees were 350 times more successful than Google employees.

What is the secret of PayPal?

First steps

Peter Thiel, Max Levchin and Luke Nozek in late 1998 created the company Confinity (the original name - FieldLink, Inc.). Levchin and Thiel met at Stanford University after Thiel gave a lecture there as an invited guest. They began to work together on the concept of an electronic wallet. At first, the company specialized in mobile payments sent from Palm Pilots and other handheld computers, but then a Confinity employee came up with a way to send money transfers via e-mail. In 1999, this service became known as PayPal.

Having gained some fame and gained initial experience with the eBay platform, Confinity went through the merger with X.com Elon Max and took over the name of the parent company. As a result, the company proved its success and relevance and in the summer of 2001 changed its name to PayPal, Inc.



In the photo - a celebration of the company's IPO. To the right is Peter Thiel, who plays chess with numerous PayPal employees. David Sacks (center) was the only one to beat him.
Photo: David Sacks (PayPal) The

early history of PayPal was in many ways unique, especially thanks to the people behind it.

“When we started, I remember one of the early conversations with Max (Levchin). I told him that I want to build a company where everyone will be good friends, and this friendship will remain, no matter what happens in the future, ”said Peter Thiel, former CEO of PayPal. “It was, in a way, utopia. We accepted not only friends for work, but also people with whom we thought we could make friends. ”

Friendly relations with many of them began at Stanford. Ken Howery, Reid Hoffman, David O. Sachs, Kate Rabois - they all visited Stanford at about the same time and were subsequently hired by Peter Thiel at PayPal. In addition, Max Levchin hired several developers and his former classmates from the University of Illinois at Urbana-Champaign.

The situation was unique in that the majority of the first PayPal employees, and in general members of the PayPal Mafia, were hired not through personnel officers, but thanks to friendly relations. As Sax said, these people were made "from one test." According to him, this explains the powerful entrepreneurial spirit that they had.

However, the first-class team did not save PayPal from problems. In fact, the history of the company and the success of its employees are partly connected with certain problems and how they were solved by the team at an early stage. In particular, the company faced such significant problems as:

• customer acquisition;
• problems with the authorities;
• competition with eBay;
• fraud;
• hostility from Mastercard and Visa.

«Можно сказать, нам пришлось иметь дело со всеми проблемами, на которые обычно натыкаются стартапы, поэтому наши люди получили опыт их решения», — сказал Тиль. «Справиться с ними было не так-то просто, но нам это удалось».

Эти проблемы давили на команду, и ей пришлось ответить на это давление. Команда PayPal не позволила этому давлению сломить ее, но использовала его как стимул к поддержанию «маниакального упорства», как его назвал Кейт Рабуа, бывший исполнительный вице-президент по развитию компании.

«Атмосфера, в которой мы находились, была очень напряженной, так что времени и энергии на раздумья о будущем не оставалось; все силы приходилось направлять на то, чтобы защищать наше «судно» и удерживать его на плаву», — рассказал Рабуа.

Thanks to this pressure, diamonds appeared. According to Sacks, PayPal first introduced many features and capabilities that today are commonplace for new startups. PayPal was one of the first companies to:

1. Implement the tactics of a viral application. When users of PayPal sent money to someone who did not have an account, they were encouraged to create an account in order to receive their money.
2. Used embedded widgets. Users could add a pay button with the PayPal logo on their eBay online auction profile. Later, embedded content became key for YouTube and in many ways stimulated its growth.
3. Used a platform strategy. According to Sachs, PayPal was actually "an eBay-based application."
4. One of the first companies to use an iterative strategy. New functions were implemented as soon as work on them was completed, regardless of the product development phase.
PayPal's corporate culture was also special. Rabua described it as “confrontational” and said that ideas about the development of the company were considered during a reasoned discussion.

Outside executives were rarely accepted into the company. Instead, the existing employees received a promotion, and often the lead employee would stand at the head of the department. For example, all designers were accountable to the leading designer, who was considered the best. Candidates for positions with a newly acquired MBA degree were often rejected because they were not flexible enough to work as part of an iterative strategy (what you really need to be prepared for during such training can be read here ).

“In my opinion, PayPal has become an example for modern startups in Silicon Valley,” said Sacks.

For example, the first, very dubious motto of the developers of the social network Facebook was "be quick and break everything in its path." As you can see, in the future the concept of iterative strategy and maneuverability spread throughout the Silicon Valley and became the norm for startups.
While many of the above practices today seem to be ubiquitous, it is important to remember that 15 years ago, Silicon Valley was completely different. According to Rabua, he often has to communicate with people who believe that Silicon Valley has always been the same as it is now.

“This is important to emphasize, because, it seems to me, many young people and beginners do not understand how far from traditions we were in those days,” said Rabua. “We were a handful of freaks. We were even further from the essence of Silicon Valley than you - culturally, ideologically - no connection. And, what’s really interesting is how we, being initially complete outcasts, in a short period of time became “our own people” in Silicon Valley. ”

In many ways, PayPal is definitely a product of the dot-com bubble. There was a period when the average monthly costs of the company jumped to $ 10 million. However, the way you manage your company and do business at PayPal was something unprecedented for Silicon Valley.

Команда PayPal привыкла делать все по-своему, и это окупилось, когда в конце 2001 ей удалось выйти на первичное публичное размещение акций и закончить его в феврале 2002. Согласно данным с сайта PayPal, в первый же день стоимость акций увеличилась больше чем на 54%, и к окончанию торгов акции продавались по 20.09 долларов.

После этого в июне 2002 года пользователи eBay пришли на пользовательскую конференцию в футболках PayPal, этим продемонстрировав поддержку слияния PayPal и eBay. Через месяц, в июле 2002, компания PayPal дала согласие на продажу контрольного пакета акций компании eBay, и сделка была закрыта в том же году.

«Крещение огнем»

“I remember sitting in a meeting about integrating with eBay,” says Rabua. “And so, we are sitting, trying to decide how to unite the teams and how to prioritize. And then the eBay team appears with a 137-page PowerPoint presentation. And, slide by slide, they started showing it to David Sacks, me and a couple of our colleagues. ”



The Six Founders of PayPal
Photo: Max Levchin

“I remember, as I thought when the meeting started, that it would never work.” David [Sacks] immediately began to leaf through 20-30 slides, and the eBay team felt uncomfortable because someone did not want to listen to their narrative on each slide for three hours. In the history of PayPal there have never been three-hour meetings, and here they started the integration meeting with a three-hour block. ”

“When we left the meeting, David Sacks turned to me and said:“ If we stay here, you will have to create a whole team to work with PowerPoint, because this is the only way to communicate with these people, ”added Rabua.

This was the beginning of corporate relations with eBay, which began intensively and ended with mutual discontent, when almost all members of the PayPal team again went on their own swimming.

According to Sachs, the founders of eBay weren’t particularly trying to keep. The PayPal team from the very beginning felt that eBay liked their product, but they themselves did not need the so-called "losers" from Silicon Valley.

“Before the transaction, PayPal competed with eBay for several years, and we won on their own platform, but it's not so simple,” said Sacks. “We felt able to win for the reason that their decision-making process was too bureaucratic and slow. I think that’s why from the very beginning there was a feeling of a strong discrepancy between corporate cultures. ”

If they understood that this would not work, why did they give the company to eBay?

They sold the company because they felt it needed to be done. As Sacks said, when eBay bought PayPal, about 2/3 of PayPal transactions were made on eBay. PayPal won the battle, but their position was disadvantageous. In part, this prompted the PayPal team to act in a new way.

Thanks to eBay, PayPal was in a difficult position. The appearance of the PayPal product on the eBay platform a few years earlier was a real sensation, and then eBay began to compete with them. PayPal team fought for their lives, because, according to Sacks, eBay always had a better chance of superiority.

PayPal was tested for strength and had to adapt. eBay was big and slow, so PayPal needed to be small and maneuverable. This is where the iterative model came in handy. PayPal team had to show ingenuity, drop idle processes and functions and at the same time look for an approach that really worked. PayPal could not compete with eBay in terms of resources and scale, so I had to bet on speed and maneuverability.

But the company that made PayPal grow has eventually driven out the PayPal mafia.

“I think the main irony in this whole story is that even if eBay weren’t so“ clumsy, ”I’m not sure if PayPal could win,” Sax says. “If the PayPal and eBay cultures coincided perfectly, they could defeat us. If they were as flexible and spontaneous as we are, this would be a big problem. We managed to cope with such a bureaucratized clumsy heavyweight, and it was wonderful, but for the same reason, for many reasons, our people did not want to stay there. ”

If the PayPal mafia had to stay on eBay, it is not known whether they would have the opportunity to create something new. The desire to prove something is good for the entrepreneur, and everyone on the team wanted to prove something, especially after leaving eBay. Sacks compared this experience to "baptism of fire."

“I think baptism of fire tempered steel,” says Sachs. “The fire burned out defects and that very effective approach to startups remained, which could be reproduced more than once later.”

Losers from Silicon Valley

Losers from Silicon Valley managed to crack the success code. They created and developed a product worth $ 1.5 billion, but that was not enough for them.

“There is always a level at which many successful entrepreneurs believe that they can continue to do great things, but they also feel disbelief in people that they are capable of it, and they feel the need to prove it. You simultaneously have a sense of superiority and an inferiority complex, ”Till explained.



Max Levchin and Peter Thiel celebrate a public offering of PayPal shares.
Photo: Max Levchin

Of course, all this crazy fuss with eBay and the challenge of disbelieving PayPal's ability to fully realize its potential as an independent company, partly spurred them. But, in fact, this group of innovators was able to create a successful product, and then lost it. If you were an entrepreneur, what would you do when you were forced to leave what you created?
You would create something else.

“In the case of PayPal, in fact, there was a mass exodus of highly entrepreneurial people who possessed technology, were capable of innovating and creating a new explosive product at a time when everyone else had surrendered,” said Sacks.

The PayPal mafia is often perceived as a “network” of people, but Thiel is not sure that PayPal’s achievements should be attributed to this.
“I prefer the word“ network ”to the word“ friendship ”and I think the key role was played by the deep friendship that existed between us. And this is something that is underestimated in the modern world, ”says Thiel.

PayPal's culture opposed employee relationships to be purely business. By developing and maintaining true friendship, PayPal mafia members were able to remain interested in each other's success and support each other in an effort to change the world.

According to Thiel, to say that everyone was such real friends would be an exaggeration. However, strong ties were formed that led to the creation and development of most unicorn companies after PayPal. In particular, some friendships continued in the new companies:

1. Mark Wolvey and David Sachs, Yammer
2. Russell Simmons and Jeremy Stoppelman, Yelp
3. Steve Chen and Chad Harley, YouTube
4. A number of former PayPal employees, including Reed Hoffman, LinkedIn
5. A number of former PayPal employees, including Peter Thiel, Palantir

“If you look at the companies, startups created after PayPal, you can see that they are based on different ideas,” Sacks says. “Yammer, Yelp, LinkedIn, Youtube and others were all quite different. I think each founder had his own idea of ​​the product in his head, but be that as it may, they learned many techniques and secrets of creating and developing a startup in PayPal, and their self-confidence comes from there. ”

PayPal was one of the rare startups that survived the dot-com crash. The success of the company encouraged its team members to re-create several successful startups, and also helped many members of the PayPal mafia become successful investors. We will name some of them:

1. Peter Thiel, Clarium Capital and the Founders Fund
2. Kate Rabois, Khosla Ventures
3. Reed Hoffman, Greylock Partners
4. Ken Howery, Founders Fund
5. Luke Nozek, Founders Fund
6. Dave McClure, head of 500 startups incubator and angel- investor
7. Rulof Bofa, Sequoia Capital

They owe their success to the fact that they did not abandon consumer technology and the Silicon Valley. Thiel recalls that in 2002-2004, conversations in Silicon Valley came down to the idea that technology had come to an end and that entrepreneurs and investors should focus on something else. This led to “collective amnesia,” as Thiel calls it, when investors began to look again at the old pillars of the economy, such as real estate and banking; what made the technology sector open to other investors. Now, the technology sector is of interest to investors more than ever - here, for example, is a link to the five promising areas in the IT field , which are very popular among venture capitalists.

“If you find yourself somewhere and there is no one else there, this is a good place for you,” says Thiel. As noted by Rabua, then potential entrepreneurs then had little choice.



In 2001, the team had a tradition of having a poker night, as in this photo.
Photo: Max Levchin

“One of the key moments in 2003, when we went into free swimming after the sale of the company, was that practically no one believed in Silicon Valley that a good future would come for consumer technology.

“After the collapse of the dotcoms, people were skeptical about the future of technology, but especially about new ideas in the consumer field,” says Rabua. “Therefore, no one invested money in them, except for Peter [Thiel], Reed [Hoffman] and some of us, as well as some people from Sequoia. But no more venture capital funds funded consumer-oriented startups, except in rare cases. Therefore, the entrepreneur, who believed that a new successful wave of innovation was coming, had nowhere else to go. ”

Members of the PayPal mafia not only invested money in new startups, but also helped with advice. This explains the fact that many companies in Silicon Valley today resemble PayPal fourteen years ago - these people then transmitted their ideas, which are taken today for granted.

Ideas once passed on by PayPal members to start-ups or portfolio companies he cares about are being promoted by new founders who become famous or mentor their own new companies.

Learning the right lessons

In fact, so many factors have contributed to PayPal's success, and it’s hard to single out any of the main ones.

“The issue of motivation is always important,” says Thiel. I believe that great companies have their own mission, and in the case of them there is always a feeling that if you do not do this, then no one else will. And if you do not work on it, it will not appear. Paypal's vision was just that. ”

According to Thiel, in most companies people learn the wrong lessons. For example, if you participated in a startup that failed in the 1990s, you might come to the conclusion that this is not possible and that you should pay attention to something less significant and easier to implement.

On the contrary, if you were part of a company where everything worked perfectly, like in Microsoft or Google, you would come to the conclusion that all this is too simple. And perhaps this is the reason that then these companies did not give rise to other successful companies, as happened with PayPal. Entrepreneurs from these companies underestimate the complexity of creating a company.

“Nowadays, Silicon Valley has become a magnet attracting talents from all over America and around the world. Before that, New York was such a magnet, let’s say, from 1982 to 2007-2008. Now, it seems to me that Silicon Valley is replacing New York as a place where people go in hopes of great achievements, and I think this is a healthy trend, ”said Thiel.

According to Thiel, the United States needs to go back to the future, and perceive the future as something that we are building right now, and not something that will happen anyway.

Silicon Valley now more than ever demonstrates this attempt to head back into the future, return to technology. That's why today the history of PayPal is relevant no less than then in 2007.

Conclusions

David Sacks: “Maybe for me personally the most important lesson was that the product is at the center of everything. I joined PayPal as vice president of strategic development. At that time, my approach was more theoretical and related, first of all, to a high-level strategy. I realized early that if you do not have a good product, then you have nothing; and my whole subsequent career was predetermined by this understanding. ”

Kate Rabois: “My most important advice is to look for people you can learn a lot from in your search for new opportunities.” According to Rabois, he quotes almost every day from what he learned from Thiel.

Peter Thiel: “An important lesson was that creating a new company is not easy, but not impossible, it is somewhere in the middle. It is really difficult, but doable. ”