By Shane Tews

When we
think about today’s tech leaders in Silicon Valley, PayPal is probably not the
first name that comes to mind. But PayPal’s founders and earliest employees
have gone on to create, found, and advise companies like Facebook, LinkedIn,
Palantir, SpaceX, Tesla, Yelp, and YouTube. What happened in PayPal’s early
days to set these individuals and future companies up for success?

On the
latest episode of Explain to Shane, I
was joined by Jimmy Soni,
author of The Founders: The Story of PayPal and the Entrepreneurs Who
Shaped Silicon Valley—a tale that was largely untold before Jimmy
chronicled it. In our interview, Jimmy shared his intentions behind the book
and what it can teach us about Silicon Valley, tech industry competition, and
the innovation landscape today.

Below is an edited and abridged transcript of our talk. You can listen to this and other episodes of Explain to Shane on AEI.org and subscribe via your preferred listening platform. You can also read the full transcript of our discussion here. If you enjoyed this episode, leave us a review, and tell your friends and colleagues to tune in.

Shane Tews: Walk us through the early years
of PayPal in which Elon Musk and Peter Thiel had slightly different startup
ideas but eventually converged to create the company.

Jimmy Soni:
For context, the modern PayPal is the offspring of two companies that joined
together. Musk created a company called X.com, and Peter Thiel and Max Levchin
co-founded a company called Confinity. Musk’s part at X.com shows you how little
people change. He had vast ambitions to reconfigure the entire financial system
to take advantage of the internet. It was strange to him that there were so
many fees and so much delay in the banking system given that the internet made
information transfer possible at hyper speed. X.com was supposed to be the one
place for everything financial—banking, brokerage, and all financial services.

People
forget Musk had a .com success even before PayPal called Zip2. So he was a part
of this early generation of internet entrepreneurs. This was his second act,
and he didn’t want it to be small. He wanted it to change the financial system
forever.

Confinity was slightly different. Peter Thiel and Max Levchin had a more modest ambition for their platform. Initially, they wanted to make it possible for people with PalmPilots to beam real money across their devices. These are encrypted transactions, but exactly how many people are going to want to do that instead of just taking $10 out of their wallet and handing it to you to split a lunch tab?

That product
evolves to become emailing money because emailing money has a use case, is pretty
convenient, and did not have a clear technological champion in that era. At the
same time, emailing money was also a part of X.com’s vast portfolio of
financial products. Those products took off at the same time, the two companies
ended up competing against one other, then there was a hasty, shotgun wedding–style
merger that brought them together.

Talk to us about the whole Maxcode versus
Microsoft situation.

It’s good to talk with someone who lived this
and has familiarity with the texture of it, because I had to bring it to life for
readers who were generally accustomed to more open-source platforms—rather than
the challenges of having to unite servers together to build space as a website
grows. Today, you just use the cloud. You rent space from Amazon or whoever.

Levchin essentially wanted a Linux-based
architecture for PayPal based on his experience, the predilections of people he
hired, and a general belief that it could scale more rapidly. Musk’s side was
committed to using a Microsoft-based architecture for their system design. It
was based on the idea that if you have a rapidly expanding product suite and introduce
new products, there are off-the-shelf things Microsoft does that can be done
faster and more capably, and you can just keep building.

There are
merits to both sides of the argument. I actually went back into the message
boards and saw the little sniping the Microsoft people would do with the Linux
people. It gets into a deeper division that David Sacks described regarding
strategic orientation about where the company was going. For Max and company,
there was a belief that payment services—which people today use PayPal for—were
going to be the winning product for Musk. The belief was that the company
should do everything financial because that’s how they were going to change the
system.

So there is
some squabbling and fighting that leads to Musk’s departure from the company.
But the more interesting and intellectually meaty stuff is this difference between
strategic vision and what happens when a startup has that at the very top. How
do you also reconcile the big thing a company wants to do with the reality of
what your customers are using the product for?

eBay also had its own system at the time
that it was looking to preference, but the users just seemed to like PayPal
more. This is interesting because we’re now hearing a lot about
self-preferencing in an antitrust context. 

It’s one of
the more interesting parts of the story to me. PayPal indeed built a better
product, but part of what they did so well was building loyalty and trust with
this group of users. You describe it pitch perfectly. A big group of eBay users
suddenly glom onto Confinity’s PayPal product and X.com’s emailing money
product, and eventually they unite and change the name to PayPal. eBay had figured
out every part of the auction ecosystem but didn’t necessarily want to regulate
or touch payments. They thought it was thorny, impossibly fraud-ridden,
difficult, and complex. They acquired a payments company called Billpoint but
failed to institute it as the only viable option for payments.

Into that
opening comes a really aggressive group of startup founders: Reid Hoffman, Elon
Musk, Max Levchin, David Sacks, Peter Thiel, and their team of 200-plus. They
think this is a market eBay should have cornered but didn’t, so they now try to
make themselves more trusted than eBay’s homegrown product.

It was also interesting how Reid Hoffman
thought the Department of Justice (DOJ) would go after eBay for antitrust
violations, so he’d call them and ask, “Do you really want the DOJ up your
tail?” I love that you brought that tactic into the conversation because nobody
wants the Federal Trade Commission or DOJ coming in to ask questions.

I would
emphasize that “tactic” is the correct word for it. I had this fantastic series
of interviews and email discussions with Jeff Jordan who today is, I believe, a
general partner at Andreessen Horowitz. At the time he was head of eBay’s North
American operations. So the bee in his bonnet was PayPal; it was his problem to
fix.

He said
PayPal would make these veiled references to antitrust based on headlines
related to the Microsoft–Netscape issue, the DOJ investigating Microsoft, and
Bill Gates having to testify. It sent a chill up the spine of all of these
different technology CEOs and eBay wasn’t immune to that, meaning they
definitely didn’t want to be in the DOJ’s crosshairs. Nobody does. 

I also
interviewed Rob Chestnut, the attorney at eBay who was held responsible for
part of this. His line was, “I’m a former federal prosecutor. I’ve had people
threaten to shoot me before. You’re not going to scare me with antitrust.” So
in his view, antitrust wasn’t the thing that drove eBay’s decision-making or
response, but it was definitely in the air at the time. When PayPal came and
made these faints and gestures about antitrust, it was scary. eBay didn’t want
to then be in the position of hitting that “off” switch on a certain product or
strategy because if they did, maybe it wasn’t an antitrust violation, but it
certainly wouldn’t look good.

eBay is one
of the success stories of that era. You’re not going to risk it based on PayPal
calling you out for antitrust, which is why eBay was hesitant to shut down
other payment service options and leave the door open for PayPal. In the summer
of 2002, this eventually resulted in the acquisition of PayPal by eBay, which
is roughly the conclusion of my story.

So what is next on your horizon?

I am taking a
well-deserved breather. I don’t quite know what book I’ll do next. But I like
people who are intentioned with their environment, much like the Silicon Valley
innovation set who were in a time and place. I’m exploring everything from 20th-century
education reform to Venice and Renaissance thinkers; I’m all over the place.

At the
moment, I am just trying to get the world to appreciate this founding group.
Because as you said, they are not done. They are still making waves today. I
think it’s worth looking at their origins because you see, as you did, that
they’re kind of the same people in some ways. They are a lot more powerful and
a lot wealthier, but a lot of how they approached the world was shaped during
this .com boom era.

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