Why 'The PayPal Mafia' Is Killing It

Last month, local reviews site Yelp filed for an initial public offering. Founded in 2004 by Jeremy Stoppelman and Russel Simmons, Yelp is the latest in a long line of companies started by PayPal alumni to hit it big.

Dubbed the "PayPal Mafia" in an article by Fortune magazine a few years ago, alumni from the payments company have gone on to start or run an amazing roster of companies. Reid Hoffman founded LinkedIn. Chad Hurley, Steve Chen, and Jawed Karim started YouTube. David Sacks founded Yammer. Keith Rabois is the COO of Square. Elon Musk started both SpaceX and Tesla. Premal Shah is the president of Kiva. Max Levchin founded Slide. And Peter Thiel, PayPal's co-founder and the so-called "don" of the PayPal Mafia, funded Facebook, Palantir, Zynga and a host of other startups.

As the old saying goes, once you're lucky, twice you're good. In PayPal's case, there's way too much "good" to be written off as "lucky."

Why are PayPal alumni so successful? Or, to consider the question a different way, what factors turned PayPal into an incubator for so much entrepreneurial talent? As PayPal's first marketing director and now the founder of a startup called CapLinked, I've been privileged to see the entire process firsthand. The answer lies not just in PayPal's hiring practices but also the unique circumstances and vision of the company's founding. Specifically, I'd point to four major factors:

1. Good People, Good Culture

PayPal had great people working within an entrepreneurial organization. When Thiel and Levchin started the company, they drew on their personal connections for many early hires. Thiel pulled his Stanford University contacts (including this author) for business roles, while Levchin roped in engineers he knew from the University of Illinois at Urbana-Champaign. Besides bringing in A-players who would go on to recruit other A-players, management empowered its employees and encouraged them to take ownership of company initiatives. Dissent wasn't just allowed; it was encouraged. As Stoppelman has said: "I was a 22-year-old whippersnapper, and I remember firing off this e-mail that disagreed with the entire executive staff. I didn't get fired -- I got a pat on the back."

2. Solving a Big Problem

PayPal's founders had a monumental vision that encouraged employees to dream big. As currency contagion swept the globe in the late-90s, many countries devalued their currencies, effectively wiping out the savings of their citizens. Thiel extolled PayPal's employees to envision how the online payment system we were building could eventually enable people to keep their savings outside of the reach of corrupt governments who would devalue it. Of course, this meant PayPal had to grow quickly in order to have worldwide reach. In order to turn PayPal into a global, ubiquitous payments network, we attempted to service on top of eBay's network of auction buyers and sellers. To use a sports analogy, PayPal was meant to be a home run -- we weren't going for a single or a double.

3. Enduring Difficult Challenges

To achieve PayPal's big vision, its team had to overcome a series of overwhelming obstacles that would've sunk most startups. The initial business model of making money off the float (i.e. the balance users kept in their PayPal accounts) proved flawed; not only did users typically withdraw their money, but we were having to pay the credit card associations' 3 percent fees on payments funded by credit cards. At the low point in 2000, the startup was bleeding $10 million per month. But a broken business model wasn't PayPal's only threat. eBay proved to be a none-too-gracious host, as Meg Whitman instructed her team to put up road blocks to limit the use of PayPal on their site. Foreign organized crime rings began using PayPal to syphon money out of stolen credit card numbers, exposing us to millions in losses. And government regulators came after us, taking a "punish first, ask questions later" approach to our new payments service. (At one point, PayPal was banned from the state of Louisiana. Enough said.)

4. Prioritizing Execution

Chasing a big vision and facing huge challenges, PayPal's early team had no choice but to relentlessly execute. And the scope of what needed to get done was extensive. In the three months after I joined the startup in December 1999, we pivoted not once but twice, changing both our platform (going from a focus on Palm Pilots to the web) and our market (shifting from person-to-person payments to a focus on online auctions). And even though it was years before Eric Ries would coin the term "lean startup," PayPal had a nimble product development process where we pushed new features live several times a month. The entire team understood that moving quickly mattered more than being perfect.

It was this unique combination of circumstances, talent, and audacity that would make PayPal an incubator for so many successful entrepreneurs. And this is why the alumni of PayPal -- more-so than contemporaries like Google, Yahoo, Amazon or eBay -- have gone on to create an amazing collection of companies.

Eric M. Jackson is the CEO of CapLinked, an online platform that makes investing in private companies easy, secure, and social. He was PayPal's first marketing director and is the author of the award-winning book The PayPal Wars.

 

 

 

Follow Eric M. Jackson on Twitter: www.twitter.com/ericmjackson

Comments

[Alfie Carpio Barretto]

11:32 PM on 01/03/2012

Now I realize it was not only me and my friend who was exploited by this blood sucker Prey Pal. My friend listed his watch for sale at Ebay and had promised to pay me as soon as he gets to sell it. Apparently he did fulfill his promise. As a Prey Pal member too, he sent the money through Prey Pal, using one of the features Prey Pal has to offer that was $530 to be exact. Just minutes later both of us receive an email from them trying to investigate the transaction and was accusing us defrauding them by trying to hide a transaction. I ended up reversing the transaction just to avoid the hassle but it ended up worst. They held the funds after my friend got back the funds from me to his prey pal account and was informed that they hold the money for 6 months and do a further investigation. Can you imagine this the first and only transaction or icebreaker if you want to call it that way. Just in case there would be further claim against my friend at least they some funds to cover the claim. In reality the buyer was very happy with the trasaction and even informed prey pal about this but nothing good. How could you further investigate with only one transaction that occured after all and was a happy buyer, that's it.

[qwertymate]

04:46 AM on 12/12/2011

I have tried to pay with PayPal, but in most cases all my attempts failed. Besides, not all online stores accept PayPal, and that's pity( In my opinion, PayPal has worsened its quality..At least I have terrible problems when making online purchases (http://www.pissedconsumer.com/consumer-reviews/online-shopping.html)

[Scanner54]

01:22 PM on 12/06/2011

I have been avoiding ebay like the plague just because of the PayPal connection. Hate them with a passion. At some point you could not even close your account, and that was the last straw for me. I still get emails prompting me to validate my account or some such nonsense. They go straight into the Spam folder. Given a choice of doing business with Paypal or Bank of America, I'd chose BofA, and that says something.

[Weltregierung]

10:08 PM on 12/04/2011

A long article that eventually just says: Paypal alumni are "killing it" (being successful) because they are so good. That's it? No other lessons, insights, epiphanies? Phew.

At least there are two interesting tidbits: Paypal's original vision was about enabling money-laundering and tax-evasion (great euphemism: "enable people to keep their savings out of reach of corrupt governments"), and Ebay was limiting Paypal's use on its site (which will come as a surprise to everyone who was FORCED by Ebay to use Paypal's services).

As reflected in the comments here with surprising clarity: Paypal has very bad Karma. As a customer, I loathe Paypal, for the unethical and irresponsible business practices. From a business perspective, you guys are certainly to be applauded. You demonstrated time and again that "do no evil" is not the only way to be successful. And there is no doubt that you are smart, ambitious, talented and dedicated entrepreneurs.

[slejames]

02:59 PM on 12/02/2011

It's a shame they've gotten to a point of market dominance given their abuse of customers & the public and their shady & unethical business practices and deplorable customer service.

[BobaFett1234]

01:33 PM on 12/02/2011

I happen to know this "entrepreneur" through a friend of a friend and all I can say is that he exemplifies the typical right wing, pseudo-chrisitan, Club for Growth, Ayn Rand mentality that has poisoned capitalism. Believe me when I say he and PayPal deserved each other.

[Jim Sadler]

08:26 PM on 01/04/2012

Find me a single capitalist nation in all of history. You can't name one. No nation or even tribe has ever had a market free of rules, laws, regulations or taxation. Such a market can never exist. The implication is that somehow some nations can have more capitalism than other nations but that is nonsense. Capitalism can not exist in degrees. Capitalism is a sophism invented by economists to imply that they actually know something. In fact they know nothing.

[Powderfinger]

12:27 PM on 12/02/2011

I guess I don't understand the headline Why "The PayPal Mafia" Is Killing It

That sounds to me like PP is dying a somewhat slow death, caused by this "mafia." But then I read nothing in the article about that...

Maybe they meant "Nailing IT?"

[filtersweep]

12:02 PM on 12/02/2011

Killing it? What a misleading headline.

[PhilipCohen]

04:37 PM on 12/01/2011

The reality is, PreyPal has only gotten to be where it is because of its mandated use on eBay, and the only thing creative about PreyPal has been their founding use of users’ unique email addresses as identifiers for online payment transactions. PreyPal is otherwise no more than a blood-sucking parasite riding on the back of, and in the main cannot function except via, Visa/MasterCard and the banks’ existing payments processing systems.

Regardless, outside of PreyPal’s mandated use on whatever will ultimately be left of the Donahoe-stagnated eBay Marketplace, the unlicensed “bank”, PreyPal (and most other third-party payments processors) will eventually be consigned to the history books by the retail banks/Visa/MasterCard once those “professional” players get their “online” act together. There is nothing surer than the sun will rise in the morning.

And the bank’s online act is about to arrive in the form of Visa’s “V.me”. Goodbye PreyPal, and goodbye eBay. …

And what else can be said about PreyPal that a great many PreyPal merchants don’t already know, to their cost: the probability is that if, as a merchant, you have chosen, or are forced, to use PreyPal you are eventually going to get burned; it’s really only a matter of when and the degree of the burn.

PreyPal Claims that PreyPal Is Not a Payments Processor!
http://forums.auctionbytes.com/vbulletin/showthread.php?t=24148

Enron / eBay / PayPal / Donahoe: Dead Men Walking.

[SitandStay]

12:32 AM on 12/02/2011

Craigslist works great. Especially if you are just a little patient and act quickly there are very excellent bargains.
I feel sure that PreyPal exists only because of some obscure banking and commerce law that was "greased through" congress with legislation that some attorney from an outside entity wrote for our representatives to submit and pretend as if they had written it. What are they even there for?

[Woodn88s]

03:29 PM on 12/02/2011

I just sold 2 things on ebay, Haven't sold anything there in over a yr.
total sales was $269.
unless I bought and printed my shipping labels and paid for my shipping on ebay or paypal , they would hold my money for 21 days. If I did purchase my shipping and labels through 1 of the above they would release my money within 3 days of the buyer receiving the goods.
Ebay used to be really great for 1 time sellers but now it's a ridiculous chore.
They now cater to what they call "stores"
they squeezed out the little guy

[swisskabab]

02:30 PM on 12/01/2011

Perhaps you chose to be unaware of this company's much-despised business practices. I'd suggest you honestly do some due diligence on this subject, before espousing the culture of this company.