How PayPal Mafia Affects Silicon Valley Success

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



The publication seemed very interesting and relevant to us, and the ideas expressed by the former leaders of PayPal suggested the idea on which principles the projects should be based, and on what qualities strong IT leaders should possess in order to continue develop and achieve no less success.

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



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



“In essence, we were expelled from 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 houses for ourselves. ”



So it was described by David Sacks, the former COO PayPal and CEO of Yammer. The sinister “they” in this story is eBay, and eBay is partly responsible for both the success of PayPal and the fact that its creators have moved away from it.



It rarely happens that a startup continues to evolve to the end of its existence. More rarely, a startup is worth about a billion dollars. And even more unusual is that going 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.



PayPal Mafia, a term used in Silicon Valley with love and awe 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 are, in principle, different stages in the life of the company, however, the time difference between them is only a few months. According to Peter Thiel, the former CEO of PayPal, PayPal Mafia is about 220 people. It does not include 700 people in customer service who worked at Omaha at the time in Nebraska.



This group of 220 people created seven separate "unicorn companies." Unicorns are companies that are valued at more than a billion dollars. Two of these companies were valued at about $ 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 20 or 30 thousand employees. Of these, few have created unicorns (1-3), and even more so no one has come close to the figure of the company's value of 10 billion dollars.

This means that PayPal was 3.5 times more efficient in creating large companies with 1/100 people in comparison with Google. In other words, PayPal employees were 350 times more successful than Google employees.



What is the secret of PayPal?



The first steps



Peter Thil, Max Levchin and Luc Nozek created Confinity at the end of 1998 (the original name was FieldLink, Inc.). Levchin and Til met at Stanford University after Till gave a lecture there as a guest 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 the Confinity employee came up with a way to send money transfers via email. In 1999, this service was called PayPal.



Having gained some fame and gained initial experience with the eBay platform, Confinity went through a process of merging Elon Max with X.com 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 about the company's IPO. On the right is Peter Thiel, who plays chess with numerous PayPal employees. David Sacks (center) was the only one who beat him.

Photo: David Sacks (PayPal)



PayPal’s early history was unique in many ways, especially because of 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 with the company, ”said Peter Thiel, the former CEO of PayPal. “It was, in some ways, utopia. We accepted not only friends for work, but also people with whom, as it seemed to us, we could make friends. ”



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



The situation was unique in that most of the first employees of PayPal, and in general the members of PayPal Mafia, were hired not through HR professionals, but through friendly ties. As Sacks said, these people were made "of 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 related to 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.



“We can say we had to deal with all the problems that startups usually come across, so our people got the experience to solve them,” said Thiel. “It was not so easy to cope with them, but we succeeded.”



These problems put pressure on the team, and she had to respond to this pressure. The PayPal team did not allow this pressure to break it, but used it as an incentive to maintain “manic persistence”, as Kate Rabua, the former executive vice president of development for the company, called it.



“The atmosphere we were in was very tense, so there was no time and energy to think about the future; all forces had to be directed towards protecting our “vessel” and keeping it afloat, ”Rabua said.



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



1. Implemented the tactics of a viral application. When PayPal users sent money to someone who did not have an account, they were thus stimulated to start an account in order to receive their money.

2. Used embedded whip. Users could add a payment button with a PayPal logo on their eBay online auction profile. Later, embedded content became key for YouTube and in many ways stimulated its growth.

3. Used the platform strategy. According to Sacks, 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 phase of product development.

PayPal's corporate culture was also special. Raboua described it as “confrontational” and said that ideas about the development of the company were considered in the course of a reasoned discussion.



Leaders are rarely accepted into the company. Instead, the existing employees received promotion, and often the head of the department got up. For example, all designers were accountable to the lead designer, who was considered the best. Candidates for posts with a newly acquired MBA degree were often rejected because they were not flexible enough to work within an iterative strategy (what you really need to be prepared for during such training can be read here ).



“I believe, in many ways, 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 Facebook social network was "be quick and break everything in your path." As can be seen, the concept of iterative strategy and maneuverability spread throughout Silicon Valley and became the norm for startups.

While many of the practices described above seem ubiquitous today, 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.



“It is important to emphasize this because, I think, many young people and newcomers do not understand how far from the traditions we were in those times,” Rabua said. “We were a handful of freaks. We were further away from the core of Silicon Valley than you - culturally, ideologically - no connection. And what is really interesting is how we, being originally utterly outcasts, in a short period of time became “our own” in Silicon Valley. ”



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



The PayPal team got used to doing things their own way, and it paid off when, at the end of 2001, she managed to go to the initial public offering of shares and finish it in February 2002. According to data from the PayPal site, on the very first day the stock price increased by more than 54% , and by the end of trading shares were sold at 20.09 dollars.



After that, in June 2002, eBay users came to a user conference in PayPal T-shirts, thereby demonstrating support for the merger of PayPal and eBay. A month later, in July 2002, PayPal agreed to sell a controlling stake in eBay, and the transaction was closed that same year.



"Baptism by Fire"



“I remember sitting in a meeting about integration with eBay,” says Rabua. “And now, we are sitting, trying to decide how to unite the teams and how to prioritize. And here comes the eBay team with a 137-page PowerPoint presentation. And slide by slide, they began to show it to David Sax, me and a couple of our colleagues. ”







Six PayPal Founders

Photo: Max Levchin



"I remember thinking when the meeting started, that this would never work." David [Sacks] immediately began scrolling forward through 20-30 slides, and the members of the eBay team felt uncomfortable due to the fact that someone did not want to listen to their narrative on each slide for three hours. In the history of PayPal, there have never been a three-hour meeting, and here they began an integration meeting from 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 for working with PowerPoint, because this is the only way to communicate with these people, ”Rabua added.



This was the beginning of a corporate relationship with eBay, which began intensely and ended in mutual discontent when almost all members of the PayPal team again went on an independent voyage.



According to Sacks, in eBay, the founders didn’t particularly try to hold on. The PayPal team from the very beginning felt that eBay liked their product, but they themselves, the so-called “losers” from Silicon Valley, did not need.



“Before the deal, PayPal competed with eBay for several years, and we won them on their own platform, and this is not so easy,” said Sax. “We felt we could win because their decision-making process was too bureaucratic and slow. I think that is why from the very beginning there was a feeling of a strong discrepancy between corporate cultures. ”



If they understood that it would not work, why did they put the company in the hands of eBay at all?



They sold the company because they felt they had to do it. As Sax said, when eBay bought PayPal, about 2/3 of PayPal transactions were made on eBay. The battle was won by PayPal, but their position was unprofitable. In part, this prompted the PayPal team to act in a new way.



Thanks to eBay, PayPal is 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. The PayPal team has fought for their lives, because, according to Sax, eBay has always had a better chance of primacy.



PayPal was tested for durability and had to adapt. eBay was big and slow, so PayPal needed to be small and manoeuvrable. This is where the iterative model came in. The PayPal team had to show ingenuity, discard non-working 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 rely on speed and maneuverability.



But the company that made PayPal evolve, eventually drove out the PayPal mafia.



“I think the basic irony in this whole story is that even if eBay were not so cumbersome, I’m not sure that PayPal could win,” says Sax. “If PayPal and eBay were a perfect match, they could beat us.” If they were as flexible and spontaneous as we, it would be a big problem. We managed to cope with such a bureaucratic, unwieldy heavyweight, and it was great, but for much of the same reason, our people did not want to stay there. ”



If the mafia PayPal had to remain in eBay, it is unknown whether they would have had the opportunity to create something new. The desire to prove something good for an entrepreneur, and everyone in the team wanted to prove something, especially after leaving eBay. Sacks compared this experience with the “baptism of fire”.



“I think the baptism of fire hardened steel,” says Sax. “The fire burned out the defects and remained the very effective approach to start-ups, which could later be reproduced more than once.”



Silicon Valley Losers



The losers from Silicon Valley managed to crack the success code. They created and developed a product worth 1.5 billion dollars, but this was not enough for them.



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







Max Levchin and Peter Thiel celebrate PayPal's public offering.

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 on. But, in essence, 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 had to leave what you created?

You would create something else.



“In the case of PayPal, in fact, there was a massive exodus of highly enterprising people who owned the technology, were able to innovate and create a new explosive product at a time when everyone else had already surrendered,” said Sax.



PayPal Mafia is often perceived as a “network” of people, but Til is not sure that PayPal’s achievements should be attributed to this.

“I prefer the word“ network ”to the word“ friendship ”and I think that 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 culture has resisted to ensure that relations between employees were 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 their desire to change the world.



According to Thiel, to say that everyone was such true 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 friendly relations continued in new companies:



1. Mark Woolway and David Sachs, Yammer

2. Russell Simmons and Jeremy Stoppelman, Yelp

3. Steve Chen and Chad Harley, YouTube Company

4. A number of former PayPal employees, including Reed Hoffman, LinkedIn

5. A number of former PayPal employees, including Peter Thiel, Palantir



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