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Why 'The PayPal Mafia' Is Killing It

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PAYPAL MAFIA
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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.

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