By James Pethokoukis and Jimmy Soni

In the late 1990s, wide adoption
of the internet let to an explosion in tech startups, but many of these
companies didn’t survive the dot-com crash. One of the companies that did was
PayPal, and its story has become something of a legend in Silicon Valley. So
what was the secret sauce that allowed PayPal to thrive and inspire a
generation of tech enthusiasts? To answer that question, I’ve brought on Jimmy
Soni, who just wrote the book on the subject.

Jimmy is an award-winning author of three books. His first two, co-authored with Rob Goodman, are Rome’s Last Citizen, a biography of Cato the Younger, and A Mind at Play, a biography of Claude Shannon. His latest is The Founders: The Story of PayPal and the Entrepreneurs Who Shaped Silicon Valley, released earlier this year.

Pethokoukis: What kind of
boss are all those nervous Twitter employees getting?

Soni: Before I even answer the question, the disclaimer that I have to attach to it because it only feels fair is: I never spoke to Elon about social networks. We spoke about money. We spoke about product development. We spoke about PayPal and X.com and his early years and some decisions that he made right in the middle of college and then right after. But the words “Twitter” and “Facebook” never really entered our conversations. I say that because I think it’s important for people doing this kind of work not to speak out of school.

But you asked a more interesting and more applicable question, which is what kind of boss is he? I would offer a couple of observations. One: Twitter engineers, and Twitter employees broadly defined, should be prepared for a boss who is extremely hands on. There is no part of the job at any of his companies that Elon does not have the capacity to do for himself, and then oftentimes just to test himself, he’ll do it. So there are these (maybe apocryphal, but I actually think they’re real) stories about how he’ll go in and want to get really involved in valve design or some really arcane piece of engineering. I saw this when I was looking at his earliest years at Zip2: He was writing the code right at the beginning. So I think they can expect a boss who has a finger-feel for a lot of the things they do, whether that is branding, comms, design, marketing, all the way up to engineering.

The second thing I think—and I’m
not saying anything that anyone hasn’t said elsewhere, but I think it’s important
to reiterate—is that this is a person driven by conviction, not by ambition
about money. And those two things are actually important to get right and in
the right sequence. If you are a typical CEO, you worry about quarterly
returns. You worry about making sure you’ve made your investors, public or
private, very happy. If you’re driven by conviction, you manage and operate
differently. Tesla and SpaceX: These are things that he had been interested in
and wanted to do from his teenage years. And again, those are the years that I
looked at in part. So if he has said that he believes Twitter is a certain kind
of platform that should operate in a certain kind of way, it’s not coming from
a place of believing that he can eek out five percentage points and then
package it up for a sale a year from now. The idea is that he’s going to want
to turn it into whatever he has said he is going to turn it into. I think that
people have this tendency to feel like they have to interpret the tea leaves,
but he has told you exactly what’s on the tea leaves, and he’s done it on
Twitter. So those are my two views. And also, get ready for hard work. There
are very few places I imagine that are as intense as Tesla or SpaceX in terms
of places to work, because he feels like he’s on a mission.

I
guess your advice to Twitter employees is to go look at his Twitter account.

I
think my advice would be to go look at his Twitter account. I’m not really in
the business of advice giving; nobody should take advice from me on this. What
I would say is that what you see is what you get. And what he tweets is what
will happen. And so if he has said that he’s worried about bots, then you’re
going to see a war on bots. If he has said that he believes there should be an
edit button, I think we will see that in short order. I don’t follow these
things every day. I try to spend as little time on that platform as I can.

I won’t hold that against you.

Right,
hopefully he doesn’t either. (I have a six-year-old, and a six-year-old is a
living, breathing Twitter feed. They just say whatever’s going on and they get into
enough little controversies with me that I don’t need the big controversies of
the world in my life.) What I would say is that if he has said that he believes
that Twitter should steer in the direction of more free speech, whatever that
means, that’s where it’s going. So my view would be, go read what he has said
on the subject in the past. Look at his own pattern of usage, and then prepare
for change. Twitter is likely to change because he has expressed a desire to
change it and bought it for that purpose. It seems kind of basic, but it cuts
through a lot of the chatter you hear around this where there’s some, like,
weird grand plan. No. He has said exactly what he’s going to do, and he’s
likely to do it.

Any trepidation or difficulty when it comes to writing a
book about an online payments company? I mean, you could have written a book
about SpaceX or Tesla or any number of companies which might seem more inherently
interesting to people. But you did PayPal. It’s not rockets. It’s not YouTube.
Was it difficult selling that? And what drew you to it?

I know what it’s like to pitch a book and I just imagine
sitting in the office, talking to an agent and saying, “No, no, I’m not
going to do Tesla. I’m going to do PayPal.”

Right, right. So, I think a couple thoughts in response. One is, I think I maybe had the assumption going in that it was going to be like a humdrum story about payments. And it turned into of a Shakespearean-level drama with palace coups and lots of tension and fun combat. It’s sort of like if Billions were nerdier, this is what it would be, right?

I think that’s a great description, yeah.

I
had the good fortune until she passed away of working with Alice Mayhew at
Simon & Schuster. And Alice is this—was this—legendary editor of editors:
super old school, hard-bitten New Yorker, but she also had a soft spot in her
heart for authors who had ideas that they wanted to make swing on the page.
She’s most famous, I think, for working with people like Walter Isaacson or
Doris Kearns Goodwin. Again, I’m admittedly at the kids’ table on a roster like
that, but I pitched it to her and I said, “You have this finishing school for
Silicon Valley. PayPal gave the creators of YouTube and Yelp and LinkedIn, all
these people, their first powerful professional experience. But nobody has
actually gone back and asked what happened in that time.”

She
had done a book with Walter Isaacson and Evan Thomas that explored the 20th
century foreign policy coterie of people that were all working together or in
tension with each other and she got it. She was like, “That’s what this
is.” It’s actually a story about this group of people as opposed to one
individual. So, she understood it.

I
think the other thing is, it would be really hard to write about Tesla and
SpaceX. It’s hard to write about these people. They are busy. They’re very
careful with their words, their language. I think I would’ve aged very rapidly
if I was writing about something they were working on today. It was much, much
easier to be in nostalgia mode and write about something that they were doing
two decades ago.

We know a few of the people here are probably very common
to the listeners: Peter Thiel, Elon Musk. Who are some of the less common people
that were super important? There are a lot of faces on the book cover of founders
and key employees. Who are some of the names that you found particularly
interesting that maybe are less well known to the general public?

Sure.
I interviewed over 250 people for this thing. So, you’re asking me to pick my
favorite kids, which is really, really tough. I kicked the story off with Max
Levchin. If you were in certain zip codes in Palo Alto, and you said that name,
he is a household name. Outside of those zip codes, he maybe isn’t. But I found
him to be just a phenomenally interesting figure. He was one of the co-founders
of PayPal. Today, he’s the CEO of a company called Affirm and he has this
entrepreneurial bug. People have asked him to try to pin down, why do you do
what you do? Why do you build multi-billion-dollar companies? He is like, “That’s
what I do. It’s actually just how I want to spend my time and energy doing this
specific thing.”

I
really took a shine to his story. He has a classic immigrant story. He arrives
when he’s in high school, arrives in Illinois, just outside of Chicago and ends
up at the University of Illinois, and I kind of trace his story through this
whole thing. There are a number of people obviously who are super high profile:
Reid Hoffman, Peter Thiel, Elon Musk. But I kick the story off with Max because
it’s really Max’s work in mobile cryptography that starts the butterfly effect
that leads to PayPal.

So
I wanted people to know him. I think of him as this engineer’s engineer. And in
a way, I don’t know that he wanted that; he actually was really surprised
because he was like, “Wow, that’s a lot of me. I didn’t expect that.”
But I think that he’s probably one of the figures that’s not as well known but
that’s super consequential. And the way he worked really inspired this team of
engineers, even as they went on to do other things.

You called it a finishing school. So what were the skills
imparted in that finishing school? A lot of young people, just out of college,
never worked for probably any kind of company before. So what was the
transformative effect, at least on some of them?

Yeah,
it’s a question that in a funny way I still am wrestling with, even as I get to
the end of the book process because I every day I think about that. I heard so
many different stories and so many different little recollections of lessons
learned, or moments that stood out to people. I’ll highlight a few and I’ll
start with one that I don’t know that many people would expect because I didn’t
expect that going in. You expect you’ll learn how to work in a company, do all
this stuff.

I
interviewed this person and one of the things that she said was like,
“It’s a funny thing that you’re catching me today for our interview.”
I said, “Why is that?” She said, “Because I’m about to buy a
property, a dream home for myself. And I just sold another property.” Something
like that. And what followed from that was actually a half hour of her
meditating on key learning from her PayPal years, which was about individual
personal money management.

One
of the things she said is she’s like, “Very few of us knew what equity or
RSUs, or this sort of stuff was. We didn’t know how you could use tax-advantaged
vehicles to buy equity.” She said, “What I credit PayPal with is I
was in the room with people who were maybe a few paces ahead of me
professionally but were willing to take time to walk me through the finer
points of personal money management.”

I
was so surprised. I just thought to myself, look, all these people are
brainiacs. They go off, they read books, they understand. But actually there
was this group learning how to create wealth. Surely there’s wealth in the
entrepreneurial sense, but actually personal wealth. One of the big things for
all of these people was just learning the lingo, just learning the operating
system of Silicon Valley and how your particular slice of this company becomes
something that is meaningful to you.

More
practically and probably more relevant to our discussion, there is a view from
the outside in about how technology is created. I think there’s some real
misunderstandings about it. I think for this particular group, part of this
finishing school here is the actual nitty-gritty on how a series of pixels on
the internet comes to be valued for $1.5 billion. That particular process is
messy, and it’s gritty, and it has to plow itself under all the time and you
have to move really rapidly. Hierarchy is not a thing. All of those lessons
are, I think, some of the biggest takeaways. I had this great experience where
I interviewed the co-founders of YouTube and one of them mentioned to me,
“We took a lot from our PayPal experience into YouTube because it was the
thing we did basically right after.”

I
said, “Well, get specific.” He said, “We often had this
experience at PayPal that we were always thought of as a bit parasitic. We
would be on a website and some user would want us to be on that website and the
people who own that website hated it because they were like, ‘Oh my God,
there’s another PayPal button.’ The same thing happened between YouTube and
MySpace.” This is taking, you know, the time machine back. MySpace gets
really, really frustrated when the first YouTube videos begin to graffiti-tag
its website.

What
the [YouTube] people did that was a byproduct of their PayPal experience is
they got the MySpace users to complain to MySpace when they shut the YouTube
product down. So, they turned the users against the service. And little things
like that, even about how you embed a YouTube video. A lot of those questions
and their answers came out of how you embed a PayPal button throughout the
internet. So, you have this direct experience of building something and then
watching it scale.

The
last thing I would say is the finishing school had this odd quality. Some
people probably got what you might call fabulously wealthy, to the point that
if they decided they were never going to work again, they wouldn’t have to. But
in point of fact, what people miss about the story is that it’s not that these
people walked away with enough money to sit on a beach. Many of them walked
away with what somebody described to me as down-payment money, but not
retirement money, meaning that they had made enough and had enough success, so
there was a tiny bit of security, but they by virtue of need had to keep doing
other things in the world. It wasn’t like they were going to do this and then
go sail off into the sunset.

If
they had not made any money, you could have learned the lesson that building
technology wasn’t something you should do because it’s not financially
remunerative. And if you had had go-sit-on-the-private-island money, people
might have just checked out. They hit this interesting sweet spot, right in the
middle, where there was this real powerful sense that you can be successful,
but that your last outing maybe wasn’t quite this massive thing that you would
hope for. I heard that from enough people that I took it to be one of the key
features of this particular experience: There was definitely wealth created,
but it was not the kind of wealth that let you go off and let the index funds
passively give you dividends.

There were a lot of companies founded in the late ’90s,
and only a fraction made it to the other side of the internet stock
bubble. Why is PayPal still around?

It’s one of the key questions that I explored because PayPal properly understood is basically created right at the tail end of the dotcom boom, but it really starts to flourish in the middle of the dotcom bust. I interviewed person after person who said, “The most terrifying thing was actually visiting this website f—edcompany.com.”

Yeah, I remember that.

And
I’m sure people who are listening remember it. Basically F—ed Company was
cataloging all of the many, many failures, painful and funny, that were
happening in the middle of the dotcom bust. One of the people I interviewed
said to me, “We woke up every day basically assuming that that was the day
PayPal would end up on F—ed Company. That was the day it was all going to be
done, the racket was all up.”

A
couple key reasons for their survival. One was timing. They closed a nine
figure, hundred-million-dollar round of fundraising in March of 2000. Just
weeks after that round closes is when the NASDAQ really starts its slide. The
timing is eerie. I mean, there were people who described it to me in
theological terms. But that is a big thing. If you have enough money to ride
out a year, year and a half, you’re simply kept alive by virtue of the fact you
have the money to stay alive even if the company is failing. That’s one big
thing.

The
second big thing is this was a team of exceptional problem solvers and many of
the biggest problems that they faced from the cost side, things like fraud etc.,
they were able to solve their way out of or invent their way out of. So you had
a team that they were just very, very good, flexible problem solvers on that
team.

The
third thing is the product took off and they goosed the growth as much as they
could. Part of what they came to understand about payment networks is scale
actually matters a great deal. If you and I join a payment system and everybody
we know is on it, there’s a strong disincentive to not join. It’s sort of like
you’d be the one person still using quill and ink as opposed to sending a text
message.

PayPal
was similar. At a certain point, particularly in this ecosystem where the
product takes off on eBay, it becomes foolish not to be on PayPal. You were a
very odd, eccentric person if you’re not on PayPal at a certain point. Building
that scale is not accidental. They did deliberate things to build the product
to that scale. But then once they’ve achieved it, it’s hard to put that payment
genie back in the bottle. You’ve just got the growth there and you have more
people joining, and the incentives on both sides are really powerful. If you
are an eBay seller, you’re incentivized to use PayPal because all your buyers
are on it. And if you’re a buyer, you’re incentivized to use it, because it’s
an easy system by which to pay.

The
last thing I would say is, they managed to make the business work. So, people
look at this and they assume PayPal would’ve been successful. That is far from
the case. What they had to do was actually figure out, how do you take something
that’s completely free, where we’re actually giving you bonus money to join,
and turn it into something that’s a revenue-generating product? That is the
work of dozens of people pressure testing ideas, putting things out into the
world and slowly taking a massive user base and transitioning them to a paid
product. That is the book I set out to write, the story I set out to tell.

Is there a particular story that you love, that reviewers
often don’t mention in their reviews? That you’re like, “I can’t believe
they didn’t mention that one”?

Yeah. It’s a great question. I think that one of the ones that stood out to me that I wrote and that people haven’t really picked up on, that I would hope that they do is, there’s a young intern whose name is Robert Frezza, Bob Frezza. And Bob was an exceptional mind and was hired at the company for a summer internship. The tragedy of his story is that he passes away while he’s working at PayPal. He has an obituary on the front page of the Stanford Daily. He was a college student at Stanford and he is responsible for some of the signature products that help the company fight fraud. The patent actually for one of the key technologies only has two names on its application. One is Max Levchin, who the world knows. And the other is Robert Frezza.

I
found his story super compelling and I reached out to his family actually and
interviewed them. I interviewed his colleagues, and people said to me, “If
Bob were alive today, we would probably be talking about him the way that we
talk about Steve Jobs today.” That’s from a professor of his at Stanford.
So I found his story interesting. The reason it’s more than interesting, the
reason it’s illuminating, is because somebody who was basically there to do a
summer’s worth of work, ends up creating signature products that make the
company successful, earning equity along the way. Even by the standards of
somebody who might be a prodigy, the level of actually just entertaining his
ideas at this company struck me as remarkable.

It’s
not every day that an intern in McKinsey & Company is going to
fundamentally change how a place like that works. But at a place like PayPal at
that time, there was a real embrace for ideas, no matter where you were in the
organizational hierarchy. It wasn’t just one story like this. I heard a lot,
but I thought his story was particularly emblematic. I think that part of what
happened is that for a group of people, this was also their first experience
with this kind of tragedy. Seeing a colleague walk around the office and then
having him not be there really left an impression on all of these people.

Thanks for picking that story out. As you were hearing
stories about Elon Musk and Peter Thiel, at any point did you think, “Yeah,
I understand how they got to where they are now.” Or were you like,
“I’m really surprised that the Peter Thiel I heard about then is the one I
see now, or the Elon Musk then is the guy I see now”? Which way was it? Were
you able to easily connect the dots or where you like, “I’m surprised that’s
the turn that their careers and their lives took”?

It’s
definitely the former. It is very funny to me that there’s this attempt to
understand who Elon is and there’s a cottage industry around defining what he’s
trying to say when he’s sort of flatly telling you exactly what he wants to do.
I’ll tell you a story to illustrate the point.

To
their credit, no one in this story asked for an advanced copy or asked for
script approval. I wouldn’t have given it to them anyway, but I appreciate that
they had some level of professional courtesy. It actually made it a little
easier because I knew this wasn’t going to be subject to Max Levchin’s red pen.

It
also enabled me to have integrity about the project. Nobody saw this or asked
for a thumb on the scale. I sent Max a copy of the galley, and this just
illustrates that I think he is the same person fundamentally, and that a lot of
these people are the same person fundamentally that they were back in the day.
Max is really interested in puzzles and math, cryptography, problem solving of
that kind. That’s his idea of a good time: solving that kind of stuff. The
company coalesced around these puzzles too.

As
a way of honoring that (I don’t know, I must have lost my mind writing this) I
built a multi-hundred-page puzzle, a secret code that I baked into the book. I
had this view that I just thought this was funny and I thought it was a bit of
an homage to the spirit of the place. I sent Max a copy of the book and I wrote
about his grandmother and I wrote about his family and I wrote about his
professional experience. I’m a little nervous about what he’s going to say and
what he’s going to make of it. I poured heart and soul into this, but it’s his
story. He lived it, and he’s still alive. And the thing that engaged him most
was my secret code, and he was the first person to crack the secret code.

I’m
sitting here thinking to myself, “I mean, look, mad respect that you took the
time to do this. But don’t you have other things you’re supposed to be doing?
And what did you think about what I wrote about your grandmother? Isn’t it more
relevant for you?” It struck me that actually the love of science and of space
technology that Elon had when he was in his teens has carried forward. The love
of this kind of generalized puzzle solving that this team had, has carried
forward. A lot of these people have changed in different ways to be sure. But I
do think there’s actually a fundamental characterological soundness, that who
they are back then not only is who they are today but actually explains quite a
bit of the success and the ambition and the desire to build these things in the
world. That was what I found by studying who they were essentially from their
teen years to their late 20s or early 30s.

What did you learn about how innovation happens and how to
build innovation ecosystems?

Yeah,
my answer’s going to be very similar to what I said earlier. I think I’m still
coming up with my conclusions on this, even after having done this work. But I
would offer a few interesting observations. The first is that there is this
tendency to think of the term “innovation” in an abstract way. But what I
discovered in diving into the layers of the PayPal story, in this context at least,
was about solving problems for real people. It wasn’t even necessarily about
solving the problems of the people who created the company. They sort of
started that way. They set out to solve their own problem, but they ended up
actually solving problems for this whole group of eBay users, despite not
really being eBay users themselves.

There’s
this great quote in the middle of the book when Elon’s asked about innovation,
and he says, “It’s a process of recursive self-improvement and you always
have to ask yourself the question, ‘Am I adding value for other people?’
Because that is what a company is supposed to do.” It can sound vaguely
hokey, except that you ask yourself, “How many things are created that don’t
add any value?”

And
then you get to a good place where you’re like, “Huh, I wonder if the
thing that I’m doing is a fanciful technology, or am I actually adding value in
the lives of real people?” So I found this brass-tacks innovation to be much
more of a process of discrete problem solving, where you’re trying to fix
something specific for one person or a group of people. And that group can be
small and it can be very large, but it doesn’t require you to have experienced
the problem yourself because a lot of the people who help make PayPal
successful on eBay were never buying and selling on eBay until PayPal started
to take off there. That’s one thing.

The
second is, this was a very hard period with a lot of disagreement. I think of
that as something we tend to paper over in these discussions about innovation: both
the level of difficulty, but also the level of, call it “righteousness,” that
people feel. We want our innovators to both create great things and be really,
really, really nice people. I get that, and I’m sure that there’s a place and a
time for that. But there are a bunch of personalities at the heart of this
story who were in deep disagreement with one another.

One
of the best meditations on that came from Max Levchin himself. He said,
“When we were shouting at each other, it’s actually because we’re trying
to get to the truth. We’re trying to get to, what is the truth of the product?
Or what is the truth of this fraud fighting problem? Or what is the truth of
this thing we’re trying to figure out?” It’s passion, it’s not anger. It’s
actually this kind of, “We are so frustrated that we’re not there yet, and
we’re going to take out our frustrations on each other.”

We
actually tend to think of that as a bug, not a feature, but I actually think of
it now as a feature, not a bug. You are going to have some amount of
organizational discord in a place that is trying to go against odds and go
against opponents and all of that. I think of it now as actually what Max
Levchin says in this quote. He says, “It’s actually a sign of a healthy culture.
People sniping at each other behind each other’s backs is worse than people
yelling at each other to their face.” So, that was the second thing.

The
third interesting thing to me is we have maybe a cast of mind about the kind of
person that does technological innovation. Let’s call them young nerds, who may
or may not be college dropouts. I think we need to retire that archetype. And
there have been a bunch of people who’ve tried to do this, and there have been
studies and things, but I interviewed people who were high school dropouts, and
I interviewed people who are Marshall scholars. I interviewed people who had
two decades in the industry, and I interviewed people who just left school to
join this company on a lark because a buddy introduced them. So to me, there
were men, there were women, there were real seasoned vets with marquis names on
their resumes and also people who had no clue what they were doing.

I
think the storytelling of that tends to focus a lot on people like Max Levchin.
We tend to miss stories of people like Sanjay Bhargava, who helped to create
one of PayPal’s most interesting innovations and had had years in the trenches
of financial services. Part of the reason that he could think about the
financial services realm differently is because he had that experience.

I
think we need to have probably a slightly wider aperture of storytelling, just
so we don’t think of innovation as something that’s like explicitly for 15 to
25 year olds who may or may not drop out of college. I think that’s a narrative
we need to start to move away from, because it also becomes limiting. There’s a
way in which it actually holds us back and I think we need to dispense with it.

Jimmy, great point. Great conversation, great book. Thanks
for coming on the podcast.

Thank you so much for having me.

James Pethokoukis is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog and hosts a weekly podcast, “Political Economy with James Pethokoukis.” Jimmy Soni is the award-winning author of The Founders: The Story of PayPal and the Entrepreneurs Who Shaped Silicon Valley.

The post What Can PayPal Teach Us About Entrepreneurship and Innovation? My Long-Read Q&A with Jimmy Soni appeared first on American Enterprise Institute – AEI.