Episode Transcript
[00:00:01] Speaker A: And welcome to the 256th episode of objectively speaking. I'm Jag, CEO of the Atlas Society. Apologies, no fancy podcast set. Today I am on the road here in Austin. It is the eve of our Galt Gulch student conference here in Austin, Texas. Very excited to have Jimmy Soni join us today to talk about his book, the Founders The Story of PayPal and the Entrepreneurs who Shaped Silicon Valley, which explores PayPal's turbulent early days and the stories of the countless individuals who were left out of the front page features and banner headlines, but who were central to PayPal's success. So, Jimmy, thanks for joining us.
[00:00:49] Speaker B: Well, thank you so much for having me for reaching out and putting up the image of the book. And this is, this is great. This is like the royal treatment.
[00:00:58] Speaker A: So I really thoroughly enjoyed the book and I can also recommend the audiobook.
And in preparing for this interview, however, I learned that you practiced a kind of extreme immersion in your subject. Sometimes going as long as 48 hours without speaking to another. So soul, what you've described as the book widow phase. So what's the funniest or most extreme book widow moment you have experienced?
[00:01:28] Speaker B: Yeah, I, you know, I probably provide some context for some of that, that lunatic behavior.
And actually, I would say my friend actually had a really good description of it. She, she called it.
She's like, you know, there are method actors. You're like a method writer. You know, I, I would say, look, that the logic behind full immersion is. And really taking these projects seriously is, you know, books are, books are hard projects on the best of days. And when you are trying to faithfully recreate something that happened more than 20 years ago, I think it's important to try to like, really throw yourself into it. So a good example is, yeah, again, this is like, like, don't try this at home, kids.
A good example would be I, I actually had a period where all I was doing was reading the news from that era. So for those who don't know, PayPal was created really formally in 1999. And I'm kind of writing about 1998 to 2002, the dawn of the early Internet. So for a while, just to make sure I wasn't kind of like polluting my writing or my thinking, I was only reading news that happened during those years. So I would wake up and I had this like, blog that I'd printed out and I would just read the headlines from that blog every day just to put myself in that mindset. And I think the reason is I really Wanted readers to feel like they were immersed in that world. Like, we take so much of the Internet for granted. I mean, this is that the era of dial up Internet, right? So this is like practically ancient. And for me to do that, I had to throw myself into it somewhat, you know, fully and madly.
But I think it's important and it produced, I hope, a better book that is just a more faithful recreation of that era and the tenor and the tone and the feel and the texture. So for those who were alive during Y2K, you kind of lived through that. You'll live through a few other things as well, but that's the logic behind it.
[00:03:24] Speaker A: What are some other methods that you use when you're researching and writing?
[00:03:29] Speaker B: Yeah, I'll give you another one that really helped is I actually avoided most contemporary news about the people I was writing about. So an example is one of the central figures in this story is a gentleman named Elon Musk. And he's basically round the clock in the news, especially during the period in which I was working on the book.
And I made it a habit to basically avoid all writing about him. So when he appeared on snl, for example, friends texted me and I had no idea. But I thought that was a good strategy to avoid, again, contaminating what I'm writing about, which is a really specific period of his life.
I would say the other. The other couple tips or tricks that work for me. I do four rounds of editing, at least with. With all of my books, but four different styles of editing. One edit is on the computer. You're just sort of looking at the text. Another is I actually edit on my phone. So I'll read all chapters on my phone, which I find sort of enforces a certain word economy and pith.
I read all my chapters aloud. So you're actually hearing like, what the version of the audiobook might be. And you catch everything. You catch all your mistakes then. And then I print it out and I actually take it and I'll go somewhere with no Internet connection and kind of really read it and just look at the words and not get distracted. And so there is just a seriousness, I think. And again, some of these tricks are borrowed from other writers and author friends. But I think the methods are sometimes as important as the end products. I'm happy to nerd out on that or answer more questions if people have them.
[00:05:00] Speaker A: Interesting. Well, you know, speaking of Elon Musk, of course, most everyone has heard that he stepped away from Doge. He wasn't fired. He didn't Quit. He was always planning to step away at this time because, you know, June, it's his busiest time of year, Father's Day, so. So definitely we'll be having schedule completely booked, lots of family time. Now you've written that you tend to want to choose your book topics because these are books you want to read but you can't find them. Now PayPal has been written about by others. So what kind of answers were you seeking about the company and its founders that you couldn't find in other accounts?
[00:05:47] Speaker B: Yeah, you know, just to take a step back, PayPal, you know, it is a well known company because people use its services. The people who created it are well known because they went on to do all these other things. Right. So you have the people who created YouTube and Yelp, Palantir, LinkedIn, SpaceX, Tesla, the earliest investors in, well, basically every startup since 2003.
People who are household names, Elon Musk, Peter Thiel, Reid Hoffman, and then lesser known figures who are still consequential. They've started more public companies during, since that time. And what I found is that, you know, there were books like Zero to One that Peter wrote that covered some, you know, business principles. There were books that Reid Hoffman had written that were about startup entrepreneurship broadly. There was one memoir that was written by an employee who worked at PayPal, but in fact nobody had gone back and really done a detailed, call it like a 360 degree accounting of what, how did, how did these group, how did this group of people come together? Like where did they come from? How did they find each other? What, what made this company tick? Why was this company successful when others weren't? And I mean, this is, the truth is I went on Amazon to basically try to buy this book and I couldn't find what I was looking for. And so when I get bothered by something like that, the first place it goes is a Google Doc that is literally called Books I want to write.
And then I just kind of get bothered by it and I just keep pursuing it and keep pursuing it until somebody tells me no. And in this case nobody told me no. And it took six years and 300 interviews and a bunch of travel and other kind of crazy adventures. But I had it in my head that there was still a spot on the shelf that was empty regarding this story at this time.
Even though people had written, some of the alumni had written books, they hadn't really gone in depth on this particular period of their own history.
And that was, you know, that was confirmed, confirmed for me. By none other than Peter Thiel, who actually jokingly said to me at one point in his life he had actually wanted to write this exact book and then decided not to.
[00:07:49] Speaker A: Well, even if somebody had told you no, of course, there's the famous line from the Fountainhead. The question isn't who is going to let me, it's who is going to stop me? And nobody was going to stop you.
Now, I also thought it was interesting how the founders grew out of your earlier book, A Mind at Play. What connects those two?
[00:08:09] Speaker B: Yeah, it's a. It's a good question. I wrote a book called A Mind At Play that was all about a gentleman named Dr. Claude Shannon. And Shannon, for those who don't know, he's the founder of this field called information theory.
He's. He's most famous for the bit, the idea of, like, ones and zeros being used to transmit information.
And he worked at a place called Bell Laboratories. Now, Bell Labs is an institution that many more people know, and it was this extraordinary hub of American innovation in the 20th century. It's actually arguably the preeminent hub of American innovation. They win six Nobel Prizes, they invent the transistor. Most of modern life, really, you'd have a hard time having modern life without many of the innovations that took place at Bell Laboratories. And so Bell Labs is this incredible concentration of talent. So what I did was I just started thinking after I finished that book, I said to myself, you know, what are the other clusters of talent? Not an individual, but. But a kind of team. And there are a few in the kind of annals of American technological history, there's Xerox parc, there's Fairchild Semiconductor, there's a few other pockets. But then there's this. That was. That was my daughter calling, where we're on the eve of Father's Day and her birthday. So she's making sure I know exactly what's on the list.
So. So my apologies for that.
So what happened is I started to think like, well, the other cluster is PayPal. But no one had done the book. And they go off and do all these other remarkable things in the world. And so I kind of had this view that, like, well, there had to be something in the water. Like, this wasn't an accident, right? It wasn't just sort of like, oh, these people emerged and then they went on to do all these other things. There had to be a series of things that brought them together, convulsions, all that. And I. I didn't even know the half of it. And so I was thinking about Bell Labs and clusters of American talent and innovation, and that led me to a few others where there were already decent books, but nobody had done that. Really kind of, you know, ripping good read on PayPal.
[00:10:10] Speaker A: Yeah, I mean, in some ways it kind of reads as, as, as fiction. It's a, it's a page turner.
[00:10:15] Speaker B: That's, that's the highest compliment you could give me, honestly. Because the thing is, it's a payment service. It's a story about a payment services company. Right. And so I really like, you got to work to make these things actually have some narrative arc, intention and still stay true to the facts. You know, that's, that's the other piece of this. I didn't make anything in the book up. Right. I interviewed all the key players, I interviewed board members, I went into old board minutes, I went through gigabytes of email that somebody shared with me. And so that, that's a, that's, that's high praise because I try to find that spot on the Venn diagram with my books where you're not just making stuff up, but then you're also not making, you're not force marching the reader through things. This is not. Reading this should not feel like doing your homework. It should feel more enjoyable than that.
[00:10:59] Speaker A: Well, I found when I was reading it, I was having like minor anxiety thinking, oh my God, oh my God, does the company, you know, is it going to survive? What's going to happen?
But so, you know, you referred to a team, like the team at Bell Labs. Let's talk about the term PayPal mafia. On its face, it's pretty derogatory, referring to organized criminals who practice extortion. Yet somehow the term works. How did the founders themselves feel about the term and how is it seen by others?
[00:11:34] Speaker B: Yeah, it's an interesting term. So, you know, the PayPal mafia doesn't become a term until 2007, much after like many of these people have left their, you know, their posts at PayPal. And basically what happens is you have these, these individuals who are at the heart of this story. They start to invest in and nurture the ecosystem that becomes contemporary Silicon Valley. And so I think it's 2007, there's a, there's a Fortune magazine cover with all the so 20 or so people dressed in mafioso garb. And the PayPal mafia moniker is not one of the, the labels that the team itself chooses. They actually, in fact, David Sachs preferred the PayPal diaspora. But there was one article about the PayPal diaspora and the One that went really viral and took off and had the COVID was the PayPal mafia. And so the label, the label sticks. And, you know, it's, it's, it's like sometimes you, you, you create a brand unintentionally or you get kind of a brand unintentionally. There are people who love the term. They think it's kind of cool and subversive and sort of funny.
And then there are people who really don't like it because it has some negative connotations. Right. Or because it doesn't quite capture, like, what they, what they thought of as the experience. I think it's important to say and important to sort of add the disclaimer. There's no, like, you know, nefarious activity at the heart of the PayPal story. There are some places where they have to make some, you know, decisions that all startups have to make about how far up to the line you push. But I think that's that term.
It's still hotly debated. Like there are people who love it, people who don't like it, and people who think nothing of it.
I think that from the perspective that I was coming into, it emphasizes the team dynamic and the group dynamic that's at the heart of the story. And I think there is something about the kind of renegade quality of Silicon Valley, Silicon Valley's ability to kind of put people like this into productive economic life and really make something of their talent.
I'm part partial to the term in some ways, and I also think it's actually just remarkable that as a group, this particular mafia, quote unquote, has served as a template for so many others around the world. And so part of what's happened is you have all these startups that go public around the world and then they start to want to refer to themselves as a mafia. And so I think it's had this interesting international resonance as well.
[00:14:01] Speaker A: So one of the things I most enjoyed about your book was the early biographical detail of many of the main founders. Elon Musk, Peter Thiel, Max Levchin.
Those stories shines through not only their genius, but also their competitiveness and their outside the box inventiveness. One particularly charming story was how Levchin, upon missing the deadline to apply to college, found a loophole where he could apply as an international students and the lengths that he went to preserve that roots. Could you share that with us?
[00:14:38] Speaker B: Yeah. So there's this.
You really carefully read the book. There's this moment early in Max Levchin's history, and so for those who don't know, Max Levchin is one of the co founders of the company today. He is the CEO of a company called Affirm. He's been in technological entrepreneurship basically since the time that I'm writing about him. So when he's in his teen years, the.
There's this, this quirk where he, he has to. He lives in Illinois. He's applying to the University of Illinois and he realizes he's sort of like missed the deadline and he tries to just. He sort of is like beating his head about what to do because he. Illinois has an exceptional engineering program and he's missed the deadline. He's very, you know, he's, he's a young person. He's freaked out about what his options are going to be in the future.
And so he actually ends up applying as an international student and gets in and then has to, has to pretend, has to have this elaborate fiction that he creates where he, he has to, like, he gets to the campus early because he lives in Illinois. So he drives down, but he goes to the airport when they're going to have like the arrival for the international students so they can come collect him. So he goes from the campus to the airport, back to the campus. Right. And eventually he makes this. Right. And he kind of files the necessary paperwork. But it was a really, you know, you could about put yourself in issues. You're, you're whatever years old, 18, 19 years old, and you think you're going to get found out and kicked out of this university. Right.
But he was always, he was always inventive, he was always creative. And this was one of his more audacious acts of creativity as a young person.
[00:16:05] Speaker A: Well, as my mom says, fake it till you make it.
[00:16:08] Speaker B: Oh, yeah. It's a great example, I would say, also of, you know, he really does push the limits, as do all of these people. I mean, this is, this is kind of an extraordinary example, but it is still an example of it.
[00:16:21] Speaker A: So the early detail on Musk also showed how he came to his conviction that banks were allergic to innovation very early.
How did his internship at Scotiabank contribute to that conviction?
[00:16:36] Speaker B: Yeah, this is one of my favorite ingredients in the story. A place I actually went quite deep in my research.
For those who don't know, there was a time when Elon Musk wasn't who he is today. We tend to forget this, actually with public figures, we have this view that they're sort of like encased in whatever amber they're in today. And then we ignore the fact that they were, you know, at one point like younger people doing what young people do. And in this case Elon was an intern. One of his first professional experiences was an internship at Scotiabank. And he had this mentor who was like a non banker banker, this guy Peter, who was very, very bright, a kind of scientist and then joined banking after a career in politics.
Elon's words about it were he's a giant brain, super smart. And what this gentleman does is he gives Elon a lot of authority to just go and explore concepts. They kind of are part of this small little internal consulting group within the company.
And one of the things that Elon does is he proposes this plan to buy a bunch of bad debt from other countries that the banks should take on this like bad debt because it's going to be repriced. This is during the era of like Brady bonds and countries potentially defaulting and the US having to do this sort of bailout stuff. And he says, well these bonds are going to end up being more valuable than they are today. The bank should just sort of back the truck up and buy as many as it can. And the bank says no.
Elon's plan though, mathematically right, was a little bit more risk than the bank could bear at the time. And he from this takes the view that banks are basically these sort of risk averse, stodgy enterprises. They aren't going to innovate, they aren't going to try to improve the financial system. They're really just in it to kind of like eke out whatever percentage points they can off their customers. And he carries this with him through his first startup experience and then it shapes what he wants to do with his second startup experience. And again, for people who are coming to this story for the first time, the PayPal, you know, is the fusion of two companies. One of those companies was founded by Elon and it was called at the time X.com and his idea was that it was going to be the center for all things financial services.
That vision comes to him in part as a result of his experiences at Scotiabank as an intern.
[00:18:58] Speaker A: Yeah, so let's get to that because this is kind of at the heart of the story. The fact that PayPal was, was formed by the merger of two startups. Confinity, PayPal, annex.com, what were, who were the players on each team? Main players and what were the similarities and what were the differences between those two startups?
[00:19:19] Speaker B: Yeah, so you have, and it's fun to see some of these comments rolling and I'm really happy to be able to answer some of these questions.
So, you know, if you were sort of to take the time machine back to 1999, you have a young Elon Musk fresh off the sale of his company, Zip2.
And Zip2 was a kind of at the time, a yellow pages for the Internet. He sells it to compact computer for $300 million. There's a lot of drama in that company as well. But he walks away with a, with a healthy return. And he pours it all right back into his next. His next venture, which is going to be X.com the financial services powerhouse of the Internet. It's going to defeat all the banks. It's going to do mortgages and loans and credit lines and everything else.
Down the street, literally down the street, just a few blocks away, is another company. That company's name starts out as Field Link and then it becomes Confinity, which is a concatenation of confidence and infinity. And Confinity has a product called PayPal. And what PayPal is originally is its this software that allows you to beam money between Palm Pilots. There's probably a handful of people listening who have no idea what a Palm Pilot is. I had a Palm Pilot at one point, and so maybe that just shows my age. But at the time, the Palm the 3Com, the company that did the Palm Pilot, it was sort of like an early iPhone. And they had put these little infrared ports in the corner, like what you'd find on a remote control. And they released this feature, but it didn't have a purpose. It was basically like they put the infrared port in and they really couldn't define what you were going to do with it.
And kind of into that void steps Max Levchin, Peter Thiel, and a group of other people who say, you know what you could do with that infrared port is you could beam money. Like, wouldn't it be so cool if you were at a restaurant and if there was a bill that needed to be split five ways and we all had Palm Pilots, we could all beam money to each other and make these transactions cryptograph cryptographically secure. And this is a pretty big technical challenge to solve. And they do solve it. And that is that product, the money beaming product is PayPal.
Very quickly, thanks in part to the insistence of David Sacks, they realized that this product has a very low ceiling on its success. But what has a much higher ceiling is emailing money. So at the time, emailing email is large and growing, not quite as saturated as it is today, but there's no real simple mechanism for emailing money. These are still pretty fragmented services.
And PayPal, the company confinity, discovers that if you, if we make it easy and seamless for people to email money to each other, that could be a potentially killer app. It could be a product that really takes off. So they have this product down the street. At X.com, elon thinks of emailing money as basically a foregone conclusion, like, of course we should have that. It's just one feature of many. And so both of these companies have these two emailing money products.
And the reason they come into furious competition is because they, they both take root on a website called ebay and they become very hot on ebay. And the better part of late 1999 and early 2000 is spent in a fight to the death between the two companies.
[00:22:28] Speaker A: Wow. So you mentioned the audience question and we're going to dive into those in a moment. I just wanted to ask one more thing about the differences between confinity, PayPal and X dot com. You note that the former was more uniformly young men in their 20s, while X's what Musk's, X.com was more diverse. To what do you attribute that difference?
[00:22:56] Speaker B: Yeah, I mean, I think again, this is not like, you know, I would say some of it is accidental, some of it is deliberate.
A couple things. You know, Elon has a reputation within Silicon Valley by this point. He has a lot more capital. So. So he's had a successful exit. He's been written up. He's getting press for both for like this very expensive car. He buys a McLaren as well as for his technological successes.
You know, at the time, Peter Thiel is not known to anybody and neither is Max Levchin. These are unknowns. They have barely any capital. They have to find a kind of far off venture capital firm to give them a little bit of money.
And so they have to hire whoever they can. There's nobody who really wants to. There's nobody who's chomping at the bit to work for Confinity and to make, make money beaming between palm pilots. A thing. Like people really did not think it was going to be a thing. So they kind of have to hire whoever they can. Now who do these young people know? Well, they know their friends for Peter from Stanford and for Max from the University of Illinois. So they hire a bunch of their friends who are all 20something men.
And so the team kind of gels. It has this network quality to it where everyone's kind of hiring Their friend on that side. Elon has the ability to use recruiting firms because he has more capital. He, he raises more money from Sequoia Capital. He has contacts. And part of what he is trying to do also is different than what PayPal is trying to do. What X.com is trying to do is take on the biggest institutions in the world, the JP Morgans, the Bank of America. He at one point says, I'm going to provide lower cost brokerage options than Vanguard.
And so he's hiring industry veterans in part because that gives you gravitas when you're walking into certain rooms. He also has a more expansive product vision and product portfolio.
And so there's, there are those differences and eventually when the two companies merge, you know, they have to figure out who stays and who goes. But those are, that explains some of the difference. I think part of it is just, and this is something that like, you know, you really have to go deep into the history to understand the people on the call. It sort of like the Peter and Max side of the house, the PayPal community side of the house, they have not had a big success yet, so they have not had an exit. You know, this is like when Internet millionaires being minted overnight companies are going public. This is like the Pets.com Super bowl ad era.
They don't have a success. Elon has had an eight figure success and like a nine figure exit with an eight figure windfall for himself. And so he's in a slightly different place than these other individuals. And so it's understandable that their, their composition of their teams would look a little different.
[00:25:30] Speaker A: So we can dive into these questions. I can, I usually pick them for you, but maybe you want to.
[00:25:35] Speaker B: I'm happy to, to do whatever is necessary. I just like seeing the level of activity. It's hard not to get distracted because some of these questions are enticing a great audience.
[00:25:43] Speaker A: All right, well, my modern Gault is here in the house as usual and he asks, is there a certain quality or qualities that helped the PayPal mafia go on to dominate so many areas of tech?
[00:25:57] Speaker B: Yeah. So, you know, sort of welcome to part of the reason I wrote the book. So I'll give you the abridged answer to the extent I can. But you know, if you buy the book and just want that answer, just read the conclusion. I do my best to sort of, you know, condense it there.
But what I would say is it's a, it's, it's like anything, like you asked a big question that, that has A multi part answer. So I'll sort of give you the bullet points and then I can dive into one or another of those, those bullet points if you'd like. I would say one critical thing is timing.
PayPal is created in 1999. It survives the bursting of the dot com bubble and, and it emerges in 2002 having gone public and then being sold to eBay for $1.5 billion. Why does that timeline matter? Because during this period, prominent media organizations, prominent people are saying, well, this Internet thing is just a fad. Like, like the bubble burst and all these companies tanked and Amazon stock is trading for a dollar. And you know, all of these things like this. There was a Barron's, a Baron's cover story was like Amazon bomb, right?
And boy, what I wouldn't go back to like try to buy some stock in Amazon from that era.
But because there are so many people who are naysayers about the Internet, one of the things that happens is you have a group of alumni in this PayPal mafia group who emerge having seen that you can build a company, build a product or service that takes off among a group of people, figure out how to make revenue from that product or service, and, and then take the company public. Like you can build a real entity online and have it be successful. As opposed to so many people who learn the wrong lesson from those failures, which is like, oh, the Internet is just a fad. So you have one, a group of people who emerged from the wreckage of the dot com bubble having seen success. The second thing is, this is a line that was given to me by somebody who was there. Somebody said, you know, a lot of us made down payment money, but not retirement money. So we had to go on and do other things. Like we couldn't just like escape to an island. Some of them could, in fact, some of them couldn't. They chose not to. But there were many people who made down payment money, not retirement money. So what do you do? Well, you take on new roles. And where do you look for that new role after PayPal, you call your friends you worked at PayPal with. So there is this whole roster of people, for example, who are early YouTube employees because the three co founders of YouTube worked at PayPal. They hired their friends who worked at PayPal. And so you have like a cluster of people who are still looking for their next win, their next achievement, their next professional mark. And so you have that. The third thing is you have capital.
So the first check into Yelp came from Max Levchin. It went to two of his PayPal colleagues, Jeremy Stoppelman and Russ Simmons, who are the co founders of Yelp. And so you have a group of people who have a little bit of capital to put into new ventures at a time when many people are suspicious about whether the Internet, again, is just a fad. I actually found this remarkable email from Reid Hoffman to one of his colleagues where he was soliciting investment into what became LinkedIn. And it's this extraordinary thing he liked. He, like, sort of writes out what the bullets of LinkedIn could be. And as. Yeah, I know very early, and these ideas are still being figured out, but here's what I'm thinking about a professional social network, and here's what I think it could be. And it was the most extraordinary thing. This is 2003, or, yeah, 2003. He sends that note. And I remember looking at it and just being gobsmacked, like, oh, wow, this is like the text of LinkedIn. And he's raising money, but again, he is raising from somebody, a PayPal colleague who has a little bit of money to put into such ventures.
The most famous example of this, by the way, is the first check that goes to a very young Mark Zuckerberg, and it's the first seed capital that goes to Facebook. And it comes from Peter Thiel, an investment that some regard is like the most lucrative investment in Silicon Valley history. I don't know if that's true. I haven't run the math. But suffice it to say that that hopefully provides a little bit of the answer to your question about why they go on to dominate so many areas of technology.
They have an experience of it succeeding.
They have to go do it, do other things, and they have a little bit of capital with which to do those other things. And again, there's a lot more to that answer, but hopefully that allows us to address your question and also answer others.
[00:30:07] Speaker A: All right. Alan Turner asks, is the Silicon Valley of today the same as 30 years ago?
[00:30:14] Speaker B: Oh, I mean, no. I mean, the fast Lance, or the easy answer is absolutely not. I mean, if only because, you know, Internet is faster today.
But that's, That's. I'm just. I'm kind of half joking there. What I would say is the biggest change, it's professionalized. Back then, if you went and worked in Silicon Valley, you were still regarded as a bit of a weirdo, right? It was still a bit of a. You know, it's just on the cusp of becoming something that's professionally acceptable to do, something you could tell your parents about, and they'd be okay with it, right?
But it's still the domain of hackers and these, these figures who are at the fringes, right? Tech is mainstream today, but we have to transport ourselves back. Like the, the hot industry that you went into after business school in 1995, 96, 97, maybe some people are going to Internet companies, but those are still, at the time, like, it's still a. It's still a decision that somebody could look at you askance if you've, if you've done that today. Like, if you go to Google, it's like going to McKinsey, right? Like, it's, it's, it's like they're, it's like going to Goldman Sachs. Like, there's not, there's not that kind of like, oh, you're going to Google. That's a little bit of a risk.
So I would say that's one big change, is that tech has become professionalized. The second thing is this actually was. Was explained to me by David Sacks. He said, you know, when we were doing a lot of the things we were doing at PayPal, there weren't playbooks for doing all of this stuff. One very simple but illustrative example is PayPal is a company that transitions from a free product to a paid product, right? So as a user of PayPal, you could use it for free. But if you were on the receiving end of money As a business, PayPal was one of the first companies to have to figure out, well, how do we actually, like, charge our customers who are businesses for using this thing that we've built? Like, we need to make money somehow we're going have to figure this out. And today, you know, that idea of being a freemium product of having, like, Playbooks for kind of graduating people into paid, like, paid versions of your product. Those are very well established. I mean, there's code that's available on places like GitHub to do things like that. That none of that was there. The idea was of virality, of network effects, all these things. This, this entire language, the entire ecosystem was so much in its infancy. So PayPal is figuring out a lot of these things for the first time, I would say. The other thing is there is, you know, there's still a kind of like, there's still so much.
When I was writing about this period, I had the feeling, maybe because I was so immersed in it, of just still feeling like it was a little bit like the Wild West. Like, you really didn't know what was going to emerge, you know, from this tiny little geographic area. You didn't know what was going to happen.
And there is some of that, I think, you know, just from a, you, you don't, you don't really have this, you have a bit of the same flavor and feel, I think, around AI but there was a little bit of just like these people felt like explorers to me. Right. They felt like they were, they were doing something a little daring. Right. That, that this wasn't the conventional path. And there, that I think is, is it doesn't, it doesn't feel quite like that to me. And I, I, that's a healthy debate and one I'm happy to have. But there's something about it. There's a, it is a little less organized, professional, you know, a little less coloring in the lines back then.
[00:33:33] Speaker A: All right, well, speaking of the wild, wild west, lock, stock and barrel asks the big question, where might the next Silicon Valley show up? Starship Texas?
[00:33:44] Speaker B: I mean, I think you're already sort of seeing pockets in different places. I mean, you said you're in Austin, Texas. There's a thriving ecosystem there.
You know, people talk about.
One of the places I think he surprisingly embraced the book was what's called Silicon Slopes in Utah. There's a ecosystem of, you know, tech entrepreneurs there. My book has been wildly popular in India. There's an entire, particularly in Bangalore. Like, I'm told that they're just sort of like pirated and bootleg copies of the book all over the place.
And so I think you're going to have it come from different places. Now the other interesting thing that's happened is AI has really been kind of a San Francisco based, the biggest companies in that space are based in San Francisco, to my knowledge. I'm not as careful an observer of these contemporary tech pockets, but I would say I still think it's going to be the United States for a number of reasons.
But I do think that you're going to see Austin, California, New York to a lesser extent. Some of these other places.
There's, there is still something to that. And I think there are more. There are observers who have made really good cases for why California will continue to be an epicenter.
But I, you know, that's kind of a bad answer to that question. I am. If you had, if you had to ask me to bet my money though, it would be, it would be Texas.
I think it's going to be Texas.
[00:35:05] Speaker A: All right, well, we've got plenty of Atlas Society Texans, so I think they'll like that answer. Now, we talked about these two different companies and there were different visions. Of course. They both then gravitated towards this payment platform.
Let's talk about the timing of the merger which allowed them to raise $100 million round of investment right before the dot com bust. Why, how did. How did the merger come apart, come together? And why was the timing so pivotal?
[00:35:41] Speaker B: Yeah, this is one of the seminal moments in this story, is kind of call it February, March of 2000.
So you have these two companies as I described. You have Confinity with its product, PayPal, and you have x.com and they are in a bitter, bitter fight over market share on ebay at the time. Ebay, people know it, and it is still today the world's online auction house. And the one thing they hadn't figured out back then was payments. So if I bought something from you, we would actually have to reconcile our payments on our own. I would have to figure out, do I mail you a check? Do I send you cash? Is it money order? Is it a wire transfer? What is it? And so what PayPal, Confinity, PayPal and X.com did is say, well, you could use our emailing money product. And this sets them on a course to fight for every user they can get on ebay. And they are burning through money to try to win this fight because they use referral bonuses and referral incentives to try to get more users.
At some point, people on both sides sort of figure out, okay, this is going to be ruinous like this. There's just no way for us to have this fight, and nobody's going to emerge from this better off. Right? And in fact, Peter thinks, oh, like, if we go down this road, we're going to lose. Elon's going to win, and it'll be because he has more money than we do. Like, there's just simply no way for us to make this work. And so they start to have this discussion about, well, what does a merger look like now? This is like, this is a very fraught process. And I described the kind of big personalities that are involved. There are plenty of people who do not want to do the merger.
But then, you know, by hook and crook, they managed to complete the merger. They also, part of the rationale for the merger is they can raise a big round of funding to keep the joint company alive. This matters more than you think, because they closed the merger. And about three or four days after they closed the merger is when the first cracks appear in the stock market in early 2000. And these cracks eventually lead to. I think I remember it was like 86% of the value of the NASDAQ was wiped out in the year 2000. And it becomes impossible for companies to fundraise. And so there is almost this kind of providential quality to this, like, $100 million round of financing that these joint companies raise, because it gives them the Runway to survive for at least six to seven months and figure out how to make the company work. And if they had not had that round of funding, I mean, it is not much of an exaggeration to say you don't have SpaceX, you don't have Tesla, you might not have linked. I mean, you might not have any number of the companies that emerged from this ecosystem because the timing of that round was so crucial.
[00:38:17] Speaker A: So Peter Thiel had a striking vision at that time. He believed that the tech bubble was really only beginning to burst. And he proposed that they take the $100 million that they just raised from investors and transfer it to his hedge fund to short public markets. Ultimately, the rest of the team rejected that strategy in doing so. What did they leave on the table?
[00:38:45] Speaker B: Yeah, this is one of the funnier moments in the story because Peter is nothing if not foresighted.
There's this remarkable moment. Elon's the CEO of the company, and they walk into a board meeting and he says, peter has an idea he would like to present. He does it kind of sheepishly, and Peter basically says, listen, the sky is falling.
This is when the markets have declined a little, but they haven't quite cratered yet. And he said, we just raised this big round of financing, and I propose that the company give the hundred million dollars to my hedge fund, will short the market, and we'll make tons of money because everything's going to fall apart. And, you know, the bloodletting is about to start. And the board is, like, aghast at this. They were like, you know, because obviously these are not the reason. You can't. You can't use the funds you raised for that purpose. And there's this big kind of like, no, we're never going to do that. And when, you know, and Peter's very upset by this. Now. The interesting thing is, obviously, in hindsight, Peter was right that the market did collapse and that there was a lot of money to be made by shorting the market. And there's this board member who says, you know, I haven't quite run the math, but I suspect that if we had done that, we might have made more Money than we made off of PayPal.
I think of it as a funny moment. I also think of it as.
It's indicative of something that is at the heart of the people who make this company work and who also, you know, again, shape modern Silicon Valley.
There is a, there's a willingness to present counterintuitive, unorthodox, out of the box. Call it whatever you want, ideas regardless of what people are going to think. Because if you say those things, you could actually hit on something that's really important and valuable.
And I think that is something that I really enjoyed about writing this book is just seeing these people's minds at work, seeing them push the limit on, on just about everything.
And, and in that case, it didn't quite work out. Even if he was, he was right in theory. Would have been difficult in practice.
[00:40:43] Speaker A: So what were some of the growing pains post merger?
[00:40:48] Speaker B: Oh boy. I mean, it was basically an endless series of growing pains. So there's this, there's this great line from this gentleman, Luke Nosek, where he says, we discovered that a merger isn't the joining of two companies. It's really hiring 50 people sight unseen, right?
And so you have basically duplicate people in every role, right? You have duplicate people in, you have two CFOs, you have multiple CEOs, you have all these people that like, you have to figure out how to rationalize all this. And so there are what, three palace coups, you know, there, there's all kinds of convulsions. There's people being, you know, let go really quickly. There are good departures, bad departures. And so there's a lot of work to be done joining these two companies. There's also importantly a lot of work to be done just figuring out what the company is going to be about, what is it going to be? Because on the one side you have Elon and his co workers and teammates from X.com saying, well, we went into this to really try to build like the financial ecosystem of the future. He actually at one point says, like, I want to be like the Federal Reserve. Like, I want to be where all money is, right?
On the other side of it, you have these people in Peter and Max and their compatriots who are saying, well, that's, that's a wonderful vision. We have this really active and successful product which we use to email money to one another. And we, that's got to be given primacy like we have to. This thing requires tending to. And we're dealing with firm fraud and we have user Complaints, and we have all these things we need to do. That's a big enough problem to tackle. It's gonna. You could build a whole company around that. And there is, There is a collision in September, and in a moment that became famous in Silicon Valley history, as Elon leaves for his honeymoon, a group of people oust him from the company that he helped to create.
He remains on the board, but they organize a coup and he is thrown out of the company unceremoniously.
And, you know, there's sort of like, there's a whole sort of afterlife about that and about how that turned out to be the best thing, because it gave him time to work on Tesla and then on SpaceX. At the moment, at the time, it was a very painful thing for him. I mean, remember, he, he hired so many people, worked at this company. He cared a lot about this company's future. This was not an easy thing. In spite of, again, the fact that he made some money, still served on the board. This was very painful. Even when I was interviewing him about it, actually, he got a little emotional about it.
[00:43:21] Speaker A: Wow. Well, he also said something that you recount when he was asked by a reporter if PayPal was a difficult company to start. And he said PayPal was easy to start, it was hard to keep alive. What were some of the chief threats to PayPal's survival at the time?
[00:43:39] Speaker B: Yeah, it's funny, I actually think it's sort of like what wasn't a threat.
So one of the things that happens is that, you know, if you create a payment system for the Internet, your biggest challenge is not actually making the plumbing of that system work. Your biggest challenge is that people will use that system for. Toward bad ends. Right. So PayPal at one point, is burning. During the summer of 2000, they are burning, depending on whose estimates you look at, somewhere between 11 and 15 million dollars a month on fraud. And this is, there's sort of, there's like, there's a whole spectrum of fraud. There's, there's, there's garden, excuse me, garden variety fraud, like college kids creating fake PayPal accounts for beer money. And then there are like, foreign fraudsters using the PayPal ecosystem to pull off really elaborate, you know, deceptions and, and kind of fake products and names and addresses and all kinds of stuff. And so they're burning a lot of money in fraud. So that's sort of like big problem one.
Big problem two is this is not a company that ever thought it would be successful at this scale. So you have to design, you know, Things like customer service, to service these millions of people. And you're dealing with the most sensitive thing in their lives, their money, these transactions. You have this other problem, it's kind of a funny problem, which is you built the cash registers in someone else's store, right? So, so imagine you walk into, I don't know, a Target and, and some other company. Walmart runs the cash registers inside of Target. PayPal is running the cash registers within ebay. And so they are perpetually facing like this threat from eBay. EBay will do games to try to like shut them down and take them down and like block various IP things. And so there's that. And then the last thing I would say is there is this, there is this challenge of the government moves too slowly for innovation. And so a lot of the laws that would govern things like cybercrime or going after fraudsters or dealing even with the basic mechanics of payments, the government is not equipped to deal with this.
And so a lot of what PayPal is having to do is educate the government on how to deal and do this. And then I would say just if all that weren't enough, right, 911 happens in the middle of this story. And so in the aftermath of 9 11, some of the people listening may know that there are all these new laws around the movement of money. Like I think some of the earliest KYC laws came after 911 to track terrorist financing around the world. And so you have basically like a regulatory architecture and infrastructure that changes overnight. And this company is at the, at the beating heart of it. You know, they are, they are doing digital payments. So you have to figure out who's, who's good actors, who's bad actors. You need to make sure truly bad actors in the form of international terrorist organizations are not using PayPal to move money around. And so it was, it was basically a four year story of getting the company to stay alive. In fact, somebody, when I was interviewing them, this, I don't know if this is in the book or not, but he actually said to me, he said, you know, if you are planning to write this as a story of success, I will not agree to be interviewed because this is basically just a story of going from failure to failure.
[00:46:54] Speaker A: Well, yeah, there's a little bit of that, but the fact of the fraud and how sophisticated it was really stuck with me. Can you maybe talk a little bit about Max Levchin's role in confronting that?
[00:47:10] Speaker B: Yeah, this is one of the lasting legacies of this company.
And just to give people at least some kind of context around it.
PayPal was described to me in this way. They said, look, you have this thing that many of us know, which is the PayPal ecosystem itself, the way that we send and receive money.
But what PayPal actually has under that tiny tip of the iceberg is this massive iceberg of fraud fighting and fraud detection. Because what the team builds are some of the most remarkable and still in use today, tools to fight online, you know, financial deception. And so let's like brass tacks, all of us. I suspect it'd be really weird if you were joining us and you hadn't have at one point or another use the captcha. The, the, you know, you have to find some fire hydrants, you have to look at some garbled text or you have to press a little button and whatever. The first commercial application of the Captcha happened to PayPal and it was one of the ways that the company devised systems the company devised to defeat fraudsters. And it was really effective. But again, they, they built and released that in the year 2000.
Another example is what's known as random deposit. So random deposit, many of you may have had the experience of, if you're trying to connect your bank to like a website, the bank may send that, that website may send you like let's say 2 cents and 5 cents. And those two payments are a code. 0205. 2 cents, 5 cents. 0205. Kind of like an ATM code. PayPal was where that idea was first created and put into practice and on and on. Many of the technologies that actually that power Palantir like emerged as ideas during the years at PayPal when this company was trying to figure out how to visualize fraud fighting. And so you have this like extraordinary architecture of fraud fighting. You also have human fraud analysts. So you, you mix technology and people and you get this really potent vehicle for addressing bad behavior online. And so PayPal is one of the first companies to have to deal with this at scale. They're one of the first companies to have to address this at scale. And they do it successfully. And the truth is, like, if you really look at what the company is, it is an exceptional fraud fighting organization with a side dish of payments. It just happens that what payments did is it bought them all the data they ever would need to fight fraud and then gave them urgency around doing it because they were going to lose their shirts if they didn't.
[00:49:38] Speaker A: So let's talk about the sale of PayPal to eBay. They had a long and contentious courtship. They walked down the aisle many times. What finally got them to tie the knot.
[00:49:55] Speaker B: Yeah. So this is, you know, one of, again, one of these sort of historic moments, at least in the history of Silicon Valley, and in many of the things, the, you know, the tools that came and companies that came out of this group after the company goes public in February of 2002.
And what has happened basically, since PayPal's creation is that ebay has always had this very complicated relationship with this entity, because on the one hand, PayPal is solving a really, really, really important problem, like, for its users. They're figuring out how you can pay for things once you have bought them on ebay. This is like a vitally important problem. But ebay doesn't run PayPal. And so there are, at different moments, little steps made, like, little overtures made to see, oh, maybe we could buy PayPal, maybe we could do something. Like, maybe there's, you know, there's something that can be done here.
But the deals never really come about. And one of the reasons they don't is, as anybody who has tried to value a private company knows, these companies are notoriously difficult to value. Right. Like, they're actually valuing private companies is very hard. Once the company goes public, there is a mark. Like, there's a mark, there's a price, and you can pay. Now, eBay can pay a premium atop that price for the company. That's one reason why the deal happens when it does, which is July of 2002, so a few months after PayPal goes public. The other reason, and this is actually a big driving factor, and it's something I write a bit about, is the team is exhausted. Right?
You can be exhausted just listening to the things I just said. In terms of the difficulties that they had to overcome to make the company successful, the team is wiped out. They've been fighting a war for four years. They've been fighting actions against the government. They have attorneys general attacking them. They have the government, they have ebay, they have their own users. They have all this stuff they're dealing with, and the team is just fried. And so there's a little bit of, well, how can we continue to fight these battles in any way that can actually advance innovation or do anything that we actually want to do? So that's kind of reason two. Reason three is there, Is there?
Even though it's a complicated acquisition in a way, if you think about the later history in particular, ebay kind of allowed PayPal to be its payment. Skunks works for four years right now, they didn't make that job easy. But by the time they acquire PayPal, they're acquiring a relatively mature company. The company has gone public. Right. So it's subject to SEC rules and regs. It's a little bit. It's still run by people who are, you know, unconventional thinkers and are going to push the limit, but it's still. Now it has to color within the lines because it's subject to the law. They have a big user base. That user base overlaps perfectly with ebay. And so in a way, there's kind of this, like, well, this is the right time to acquire them. They've proven their model and let's like, stop fighting them and just figure out the right price and get it done. So there are a number of things that contribute to the sale of PayPal to eBay. I would say the biggest effect, the biggest effect after is that, you know, PayPal has, I'm sorry, eBay really has no interest in keeping a lot of these characters around. Like, it does not want many of these people to be in executive positions. And ebay already has a full, full, well established executive roster. And so they're more than happy that many of the people who are at the very top of the PayPal executive hierarchy are going to go on and do other things. Peter. Peter leaves almost right away.
And actually in a moment, that becomes a bit of. A bit of a thing for him because he really doesn't let his team onto the fact that he's about to bail. And then he bails and he's like, I probably should have told you guys I'm leaving.
And I'm leaving rather abruptly.
[00:53:35] Speaker A: Yeah. All right. Kingfisher21 says, what are your thoughts on the recent split between PayPal and eBay? 20 years after they merged?
[00:53:47] Speaker B: Yeah, this is, you know, does this person mean the going public, like, after? So there is that.
[00:53:57] Speaker A: What, the spin off.
[00:54:00] Speaker B: Right. So the spin off is interesting because it actually, again, like, if you, you know, you can't. You couldn't have known this in, in. In at the time, but a few people did.
So I interviewed at least two people who told me, they said, you know, we ran models in 2002 and 2003 showing that if eBay allowed PayPal to grow beyond just servicing kind of ebay buyers and sellers in a few other markets, if we allowed PayPal to grow, PayPal could be bigger than the mothership, meaning this payment startup could become bigger in value than ebay itself. And, like, what do you know? That's exactly what happened.
PayPal was, it was a wholly owned and operated subsidiary of ebay for a while, but ebay did allow it to find other footholds, other markets, and then eventually it was spun out. And there is, there's one blog post or like piece of accounting that actually their reflection on it is that the genius here is meg Whitman, the CEO of eBay. Because this is like by one, by one model, it's like the most successful acquisition in Silicon Valley history because of how big PayPal is relative to eBay today. That because eBay acquired PayPal, then spun it out, I guess all the shareholders did quite well. I didn't go quite, quite that deep into the math to know if that's, that's a verified claim. I'm happily nerd out on it with somebody if they want to email me. But the point is that this, that the, the, the, the people who worked on PayPal had an instinct that if PayPal was allowed to grow, it was going to be bigger than ebay itself. And at the time, you know, they were laughed at, but they, they were proven right.
[00:55:44] Speaker A: All right, well, let this be one of the closing questions from Alan Turner. What was the, the most surprising thing to learn during your research that most people don't talk about?
[00:55:55] Speaker B: Oh, boy. I mean, you know, with any luck, the book is full of surprises. I had this author tell me that, like, one of the challenges of writing a book like this or one of the standards you should set for yourself is something surprising on almost every page. So I hope that I achieved at least something close.
I would say, oh, the most surprising thing.
Oh, boy. I mean, that's, it's a little. I would say the most surprising thing is that if you didn't know this story well, you would think that they knew they were going to be successful and that success was foreordained for this company. That's partly because PayPal is still alive today. Twenty plus years later, they own Venmo. Right. Like, there are all these reasons why, like, you would just assume, like, oh, this is all going to work out. These people are super smart. These things called PayPal. This is just near death experience after near death experience. I would say that was one big category of surprising things. I would say a smaller surprise just to sort of have a little bit of a palate cleanser is I didn't know that Elon and Peter and Reid Hoffman all ran for student government.
I went pretty deep on the history and I tracked down Elon's student government platform from the University of Pennsylvania. And this Took a lot of time and a lot of legwork. But I found his little, his little campaign platform and I published all three campaign platforms in the book itself.
And it just was funny because in fact each of the campaign platforms was, was remarkably on brand for each of them.
[00:57:26] Speaker A: Well, it is a remarkable book. Again, I want to urge those in the audience to go out and download your audio version of the Founders or go out and buy the book. It really, as I said, was very kind of suspense filled. So Jimmy, what are you thinking about now? What, what is the next book that you want to read but you can't find?
[00:57:50] Speaker B: Yeah, I'm actually in the middle, you know, it's. I roam. I kind of wander intellectually and it's, it's one of the great sort of joys of doing a book is you, you feel like you basically get to be like in a, in college for a chunk of time. Like, like I get, I get to be a nerd very intensely for, you know, let's say three to six years about one subject. And I get to put something out into the world that's like this compressed volume of what I found and then I move on to the next subject. My next subject is Kobe Bryant, actually.
Kobe Bryant has he, you know, people know him because obviously they know he is. Because he's a basketball player. He had a very rich, non basketball life. And I am attempting to capture some of the elements of that life. A book, it's still a project that I'm kind of nurturing and playing around with, but I found him to be a hugely interesting figure, not just for what he did on the court, but for what he did in other domains in his life. And I'm kind of taking some collected writings and interviews and other stuff and stitching it together. And then I also launched a book publisher.
I've kind of decided that it wasn't enough to like do books on my own.
There were some interesting.
There are just some interesting forces in the industry. I think we need to broaden the aperture in the industry. And so I decided to launch a publisher called Infinite Books. And I'm finding new and interesting voices to help them bring their projects to life. And hopefully being author led gives us a little bit more, a little bit more appreciation for what authors have to go through when they do these projects. And so that's another fun and exciting venture.
[00:59:19] Speaker A: I love it. So you don't just write about entrepreneurs, you are one yourself.
[00:59:24] Speaker B: It was an unexpected role and honestly it's one of those situations where I'm like, I still want to stay true to my author self. Like, I'm there and as an author. But I do think that one of the big lessons I took away from the PayPal story and doing it, maybe this is a good place to end. It is. One of the most powerful forces of the world is where someone sees something that doesn't exist and simply decides that it must exist. And I would say that as an author, for me, every single book I've written was an exercise in going to Amazon and not finding the book that I wanted to read and then just having to just go and do it and just being bothered, so bothered that something didn't exist that I had to go create it. And I sort of felt the same way about publishers. I was like, you know, I would want a different kind of publishing. And so I said, well, that doesn't exist, so I'm going to go out and create it. And I think that's.
I think that's an instinct that, you know, hopefully doesn't lead me astray. But, you know, talk to me in six months. We'll see.
[01:00:17] Speaker A: All right, well, we look forward to having you back on to talk about your next book and maybe some of your authors as well.
So thanks very much and I want to thank everybody else for joining us today.
Again, make sure to join us next week when author Brian Doherty talks about his new book, Modern Libertarianism, A Brief History of Classical Liberalism in the United States.
Signing off, Galt's Gulch is next. We will see you next week.
