The Founders: The Story of Paypal and the Entrepreneurs Who Shaped Silicon Valley

The Founders: The Story of Paypal and the Entrepreneurs Who Shaped Silicon Valley

by Jimmy Soni

The Founders is a gripping account of PayPal’s origins and a vivid portrait of the entrepreneurs behind its meteoric rise. The book delves into the turbulent early days of the company, drawing on hundreds of interviews and unparalleled access to thousands of pages of internal material. Through this, the author showcases how the seeds of many of the groundbreaking concepts that shape our world today, such as fast-scaling digital start-ups, cashless currency, and mobile money transfer, were planted years ago. The book also reveals the stories of countless individuals who played a crucial role in PayPal's success.

Summary Notes

A Tale of Two Start-Ups

The PayPal we know today resulted from the fusion of two companies. In 1998, Confinity (initially named Fieldlink) was founded by Max Levchin and Peter Thiel. As the company searched for its identity, it developed a service called "PayPal," which linked money to email and quickly gained popularity among eBay's auction website users.

At about the same time, Elon Musk founded X.com, which also helped users email money. However, Musk had bigger ambitions for his startup. He believed that the financial system needed to be disrupted and that his company was the ideal platform to achieve that goal. Musk’s ultimate vision was to make X.com the one-stop shop for all online financial services.

During the spring and early summer of 1999, the two companies occupied adjoining office suites, but they were neither competitors nor collaborators. Confinity pursued mobile money transfer and cryptography, while X.com focused on building its financial services superstore.

The teams were friendly, and while each had a vague sense of the other’s work, they didn’t think much of it. Each felt confident that the other was pursuing the wrong strategy. Little did they know that a merger between them was not only imminent but inevitable.

Actions to take

Fierce Competition

X.com and Confinity spent the turn of the 21st century locked in a fierce battle for customer growth. The contest consumed both companies from the end of 1999 through early 2000, driving employees and leaders alike to the brink and leaving lasting scars.

As the two companies approached an email payments strategy, the competition intensified. Confinity had strategically built its customer base by incentivizing eBay sellers to sign up and refer their friends for a cash reward. X.com, on the other hand, doubled the offer and launched an aggressive campaign to win customers on eBay. This sparked one of the most intense and unusual battles in Internet history.

The weeks that followed were remembered by both sides as a period of desperation, with incredibly high stakes and sleepless nights spent in sleeping bags under their desks. Each team kept a close eye on its nemesis and made strategic moves accordingly. It was during this time that Elon Musk developed a newfound respect for Max Levchin and Peter Thiel for being as driven as he was— something he rarely encountered in his competitors.

Actions to take

The Merger

X.com and Confinity eventually realized that competing fiercely against each other would do them more harm than good in the long term. As a result, they began negotiating a deal in which X.com would acquire Confinity, enabling the combined companies to dominate the email payments market by leveraging both their technologies.

However, Elon Musk saw the acquisition as a surrender in a winnable war. He thought that the idea of putting Confinity on an equal footing with his company was unacceptable, particularly considering X.com's lead in non-eBay accounts. He wasn’t overly worried about market trends, user growth, burn rate, or the competitive landscape. To him, X.com could’ve won through will and skill.

Eventually, the two parties came to an even more surprising compromise. A 50-50 equal partnership — a merger rather than an acquisition. This was made possible by the insistence and perseverance of some key players and negotiators on both sides, particularly Bill Harris, the then-CEO of X.com, who was willing to jeopardize his relationship with Musk to make the deal happen.

Actions to take

PayPal is Born!

During negotiations, both companies reached an agreement that the post-merger entity would be named 'X.com' and that the brand name 'Confinity' would be retired. However, they did not come to a formal agreement on what would happen to Confinity's email payment system, known as "PayPal."

One proposal was to call it “X-PayPal”— a prefix that spoke to Musk’s vision of X.com as a hub for financial products and services of all kinds. But for the Confinity contingent, the hyphen separating X and PayPal perpetuated fears of being relegated to a junior partner position.

Two weeks after the restructuring announcement, however, X.com launched a redesigned PayPal website, recognizing the power of the product as the number one sales driver for the combined company. This power would eventually pull the entire company into branding itself around the product.

Actions to take

Office Politics

Following the merger between X.com and Confinity, Bill Harris remained in his position as CEO alongside Elon Musk, who preferred to focus on the technical aspects rather than administrative tasks. Peter Thiel, who was Confinity’s CEO, became Executive Vice President of Finance, reporting to both Harris and Musk, while Max Levchin stayed on as CTO.

Over time, the merged company grew increasingly dissatisfied with Harris, who lacked technical experience, and began shifting the company culture towards a more corporate American style. This prompted Thiel’s resignation as EVP. Musk responded by leading a coup to remove Harris and take on the role of CEO. Thiel then returned as chairman of the board of directors.

But this move didn’t seem to serve Musk well in the end, as his executive team also grew frustrated with him as CEO due to his incessant push to meet unrealistic milestones. They subsequently hatched a coup against him as CEO, a position that was later filled by Thiel.

As messy as it was, Musk’s ouster from X.com gave him creative breathing room. He returned to his earliest passions of space exploration and electrical energy. On September 28, 2008, almost eight years after his departure, his ‘Falcon 1’ became the first privately developed liquid fuel rocket to orbit the earth!

Actions to take

Overcoming the Most Difficult Problem

“The bigger the company grew, the more sophisticated its fraudsters became.”

PayPal’s real troubles began when it became the target of international hackers. The boldest fraudsters entered into a cat-and-mouse game with Max Levchin, the CTO, and his engineering team. They’d find a loophole, the engineers would patch it, and the fraudsters would try again.

In response, Levchin and his team dove into more sophisticated patterns, such as suspicious zip codes, IP addresses, and accounts exceeding transaction limits. They created a visual representation of the company's money flows, much like an echocardiogram.

Over time, a mix of product leads and engineers helped iterate on the original designs, building tools for fraud investigators to see concerning activity at scale. Suddenly, with the click of a button, they could view a web of thousands of accounts that were likely connected to the same fraud ring. The team devised complex and specific tactics to combat the issue, including implementing the ubiquitous CAPTCHA system we use today.

PayPal turned fraud from an existential threat to one of the company’s defeating triumphs. It also had the unexpected benefit of thinning out the competition. Thieves forced to work ever harder to fleece PayPal customers moved on to easier prey, allowing the company room to grow and dominate the market.

Actions to take

Achieving World Domination

As eBay expanded globally, PayPal identified an opportunity for itself to provide payment services for auction sellers abroad. The team chose to use its international expansion to pursue two major goals: growth and fundraising. Therefore, they embarked on this endeavor with their signature approach of taking quick action, iterating as needed, and maintaining faith in their abilities.

On October 31, 2000, just one year after its US arrival, PayPal became available to customers in 26 countries. While these accounts had certain limitations, such as only allowing transactions in US dollars and sending money domestically or to the US, they still generated revenue for the company. This was achieved through a $0.30 levy and a 2.6% charge on each payment.

By the end of 2001, international transactions accounted for almost 15% of the company’s total revenue, and the team saw steady growth in foreign users and transactions. As dollar-based transactions shifted to multi-currency ones, that growth accelerated, paving the way for a global expansion that led to PayPal operating in 200 countries and 25 currencies.

Actions to take

Don’t just read. Act.
Read comprehensive summaries and discover carefully compiled action lists for active learning
Phone