Lessons from The PayPal Mafia: The Power of Being Open-Minded and Contrarian
PayPal Mafia is the famous term for a group of former PayPal founders and early employers who brought PayPal into existence and then founded or developed a lot of successful tech companies such as YouTube, Tesla, LinkedIn, Yelp, SpaceX, Palantir Technologies, Yammer, and so on.
Most of the PayPal Mafia members attended Standford University or the University of Illinois at Urbana-Champaign. The imprint these young, successful, and highly-driven people left is remarkable, not only in Silicon Valley but in the whole space of startups and technology.
To give a sense of how successful the PayPal mafia is, I’ll name a few most famous members:
Elon Musk
Peter Thiel
Max Levchin
Reid Hoffman
David O Sacks.
Keith Rabois
Steve Chen, Jawed Karin, and Chad Churley - co-founders of YouTube
The list of these people makes a great impression. But there must be something special that happened in the early days of PayPal that set their members on such a successful path after leaving the origin company. And studying what exactly was behind the PayPal Mafia could have a crucial effect and impact on our lives, not only in terms of careers but as a whole path.
The inspiration for this blog post was one of the tweets that I came across and found highly insightful:
The PayPal mafia is ridiculously understudied. Learning *exactly* what happened there, why, and whether/how we can reliably replicate it seems like it could be the most important meta problem in the world.
I studied the PayPal mafia and took a couple of valuable takeaways and revelations that I think could serve you well.
Additionally, I wholeheartedly recommend Jimmy Soni's book "The Founders". Jimmy went in-depth about the PayPal story, connecting the dots and trying to draw conclusions that made the entrepreneurs who shaped Silicon Valley such successful.
The history of PayPal is the story of the young, most interesting, and greatest minds from the late 1990s who work on new technologies in one place. And the question Jimmy Soni asked himself is:
“What happened if you had an entire company of some of the most interesting, brightest minds from that era that all work in one place? That couldn’t have been an accident. And I wanted to understand what happened there and then also to understand what little imprints did it leave or what are some of the stories that time forgot?“
And the learnings from the PayPal mafia can be applied not only in the startup world but as guides and mental models overriding our thinking patterns and decision-making process in various areas of our lives.
1. Being adaptable and fast learner as the foundations.
“What we had learned from the kind of PayPal experience was a really interesting learning and that you could actually go revolutionize an industry with people who are really smart, working hard, and deploying a technology that people hadn’t seen before“ - Reid Hoffman
Peter Thiel in the conversation with Reid Hoffman, the co-founder of LinkedIn on Startups for Forbes, reminisced the story of PayPal and its crucial success factors. They found common ground and drew a couple of conclusions, especially considering success in the world of technology and startups.
The most fundamental aspect is the ability to learn fast new things and new ways of doing things. They praised that skills to a certain extent, not for the sake of just learning, but as the foundation that allows you to be adaptable, which is crucial in the dynamic and ever-changing world of startups.
“We also realized that assembling a crew of people who are very smart, very fast learners was kind of key to success to a startup as opposed to trying to get someone who had you know if they had ten years experience doing something that’s great, but the more fundamental characteristic is would they learn fast on the new problems and challenges“
They didn’t consider experience as just pure benefit, oppositely to what we are used to seeing in the corporate world. Experience is only as good as it gives you the proper foundations to build on, not as the roof that sets your potential and limits.
In theory experience is a plus, in practice it’s often a bit of a minus because people are less open to learning new things or they’re more set on doing a particular job in the context of a startup, which is always tricky[…] People need to be very flexible about their roles and the role changes as the company gets built
Their perspective on being a fast learner allowed the PayPal crew to survive and succeed while being attacked by external enemies in form of corporates, internet scammers, and the early Internet economy crash.
PayPal Mafia was constantly searching for new ways of doing things, and learning while doing. It allows them to set the standard for internet payments and banking for almost two decades.
For example, they came up with the idea of referral links, which was a huge boost for them, but also an almost the final nail in the coffin, just like the hackers, with whom the PayPal mafia had to fight. And it showed how could they adapt to the dynamic and changing environment.
They knew that technology is non-repetitive and every important moment in technological history only happens once. They pushed their limits and seek deeper to set the bar for that great moment.
There’s a point where things are developed for the first time, and there’s a point when they become normal and standard and not even surprising.
They were constantly searching for what kind of things could be done on the Internet, even in the pre-PayPal mafia time, when Elon worked on the X.com, trying to apply the Internet to payments and push the banks in the modern and Internet-oriented direction. They knew that every important moment happens only once, and then it’s become a standard.
2. Think for Yourself
“I think the ability to think for yourself. At the end of the day, that's what it comes down to. It's on any topic, being able to derive a set of views, independent of what other people around you think. And that's very difficult to do truthfully because everybody's influenced by the five people you spend the most time with. There's lots of studies about this. So, if you're a VC, you're influenced by other VCs.“ - Keith Rabois
Keith Rabois who served as Executive Vice President, Business Development, Public Affairs, and Policy at PayPal, thinks that the ability to think for yourself is a foundational skill to master. He encourages us to follow certain sets of features such as avoiding consensus ideas, deriving a set of views, and thinking independently.
These features were crucial in the PayPal mafia’s success. Keith also gives the example of Peter Thiel, who wrote a book in which these qualities were broken down and labeled as so-called secrets. I wholeheartedly recommend you to read “Zero to One” by Peter Thiel and one of my most in-depth blog posts about Thiel’s principles. And Rabois added:
“Jeff Bezos has a great quote about this. It's easy to be contrarian. It's extremely rare or difficult to be contrarian and right. So the consensus has a lot of truth to it. So you can mint artificially more contrarians, but unless they're seeing things that are insightful on some predictable basis or in some domain, it's not really adding that much value“
The contrarian attitude seems to be what all the PayPal mafia members had in common and are still well-known for it. The real challenge is not to be only a contrarian but both contrarian and right. And the basic principle of being contrarian and finding the right set of features to succeed is about the ability to think for yourself.
One of the questions you could ask yourself to develop this kind of attitude is:
“What are other people just factually wrong about, or what are they going to be blind to?“
Keith also shared a couple of insights and broke down a couple of elements that contributed to the Mafia’s successes:
1) Hiring the right people and great philosophy of recruiting
“Yeah, the number one, credit goes to really Peter and Knox for recruiting. They had a philosophy of hiring and finding the right people. Ultimately sourced a huge fraction of PayPal network through their personal networks. Peter, through his connections at Stanford, and Knox, mostly hired engineers out of either his high school experience in Chicago or the University of Illinois.“
2) Don’t fall into the overhyped philosophy of management and general managers
“We didn't really believe in general managers. So Peter was adamant that we were going to hire people whose skill in life was managing. We were going to promote the best person in each domain and each discipline to lead that discipline. So for example, the best engineer would become VP of Engineering, the best designer would be design team, the best product person would be product team, best finance person would be CFO, and that led to a building of craft”
3) Having a lot of obstacles, external enemies, and overall hardships
It was very challenging. There was a lot of obstacles, a lot of people and enemies that didn't really like us from Visa, MasterCard, to federal and state governments at different times, eBay, et cetera. So it's sort of a trial by fire situation. And I think like the metaphor of war, you definitely bond with people in that kind of environment, and you get to see who's really good under pressure and stress and who actually doesn't thrive under those circumstances.
I think that these overriding principles of being contrarian and believing in the young and fast learning people had a crucial impact on these three elements, which, according to Rabois, translated into the success of PayPal Mafia.
It also allowed them to set the long-lasting innovative path even after the time of PayPal's acquisition by eBay. They were constantly seeking secrets that were far from the general agreement. For instance, the general statement around technology in 2003 and 2004 was that there wouldn't be another impactful wave of consumer innovation. But the members of PayPal Mafia thought differently, and they started investing in new companies.
That’s why the PayPal network became more essential to Silicon Valley, it wasn’t the traditional network, they didn’t blindly follow common sense and weren’t afraid, they still believe in the young entrepreneur and another generation of innovations. And the traditional networks in Silicon Valley weren’t doing interesting thoughts because they were afraid and fearful.
But the PayPal mafia members started working on companies, joining them, or simply writing checks. And the most popular famous example from that time is the first external investment in Facebook made by Peter Thiel for $500,000.
3. Have a fundamental knowledge and be open-minded.
“[Elon] wanted a world revolution in finance and he wanted to take on everybody, Vanguard, Goldman Sachs, bank of everyone. But underneath it is this really nuanced understanding of the code on the mainframes is old and is not serving customers well.“ - Jimmy Soni
In 1999, Elon Musk founded X.com - the online financial service and e-mail payment company that aimed to replace traditional banking, using the power of the Internet. Before X.com, Elon had an episode when he worked at a bank, but he was constantly thinking about the Internet revolution. Where the Internet can be applied and in which direction that revolution will be going.
His thoughts led him to come up with the idea of applying the Internet in the financial sector, which eventually led to the founding of X.com. But this open-minded approach wasn’t enough. Here’s the point where his fundamental technical knowledge came in handy.
“Make sure you understand the fundamental principles of what you’re trying to do before you get into the details. Otherwise you could be building on faulty ground”
He knew that banks and governance were running on the old code, which means that the systems they used were inefficient and expensive, and the databases weren’t secure appropriately, which didn't serve the consumers well.
Combining his fundamental knowledge with being open-minded and thinking forward allowed him to notice the shift in direction happening in the technology. Jimmy Soni in one of the podcasts about Elon and PayPal Mafia said:
“What he is sensing is there’s a technology shift happening and this industry has not kept pace, “but I can push the industry in that direction”“
Before X.com, Elon founded a startup called zip2 in 1995 that provided and licensed online city guide software to newspapers. This year was also remarkable because of the first appearance of the high-class programming language called Java, which Elon immediately started to use, knowing its advantages.
It’s also worth noting that this language was relatively fast compared to the existing competition, but the banks and governance were still far from that of innovation. And funny enough, they still are, because they use COBOL - a programming language, founded in 1959, which Elon criticized in the nineties. So, this technological shift was what he sensed, and took advantage of it a few years later, founding X.com. These financial institutions with banks and governance were not open-minded enough to capture the notion of wide Internet application.
Another proof of his deep understanding of technology is that he has been elected to be a member of the National Academy of Engineering for his breakthroughs in sustainable transportation and energy systems.
The knowledge that these databases weren’t secure, fast, and not serving customers well was very clear and seemed obvious to him. He mentioned and described that moment in one of the interviews, “It’s like saying the sky is blue“
“I don’t spend my time pontificating about high-concept things; I spend my time solving engineering and manufacturing problems.”
It’s worth noting that Elon is a huge enthusiast of first principles thinking, which sometimes is called reasoning from first principles. It’s one of the most effective and useful mental models you can employ for breaking down complicated problems into basic elements and then reassemble them from the ground up.
First Principles Thinking is about seeking the most fundamental truth. And the essence of this reasoning principle is to break down a complicated problem into smaller elements until it comes to the root of the problem. Elon Musk encourage us to use this mental model and he took it from physics, which also shows his impressive range of hard skills.
I think that Elon Musk is a great example of how having the foundational knowledge supported by an open-minded approach and thinking forward can do wonders to our growth. And he was learning it from the early days of his twenties while building great companies from the ground. No wonder it left such an imprint and shaped him to be a great entrepreneur after the zip2, X.com, and then PayPal.
4. Don’t follow the rules blindly.
“Other advice I would give is to not blindly follow trends. Question and challenge the status quo” - Elon Musk
As we mentioned before, it is not hard to be contrarian, but it is rare and hard to be both contrarian and right. And It also applies to non-compliance with the rules. It's easy to derive from rules per se, but it's hard and crucial to know when to derive from them.
It reminds me of Thiel’s approach of seeking the so-called secrets and avoiding the wisdom of crowds, trends, and buzzwords. Keith Rabois, who served executive role at PayPal said:
“The art in most fields is understanding the rule of you do well, precisely, and then knowing when to deviate“
And this approach of not following the trends blindly was one of the great features that contributed to the success of PayPal, even in such a competitive and copycat place like Silicon Valley. This principle seems to continue throughout their lives and works.
In previous chapters, I described Paypal’s principles of hiring people. And it’s worth noting that their management and hiring philosophy was different than the common agreement and good practice in Silicon Valley. They hired people with a different background than was standard in Silicon Valley and managed their promotions differently.
Since we know that it’s important to be able to intentionally and consciously derive from the rules, we also have to know when. So the crucial question remains how to know when to violate the rules. And Keith’s English teacher gave him a timeless lesson he shared in one of the podcasts:
“Well when you master all the rules you get to violate them”
The key is to consciously violate some of the rules, but it should be a very intentional strategy that highlights our unique approach and way of building and managing.
Another rule that fits in the underlying principles of not following the rules blindly is to be skeptical about best practices because often you can end up in the vicious circle of competition, copying, and replication. According to the PayPal mafia you have to find your way that consciously enters into dialogue with existing rules. And here’s why Keith Rabois don’t like the phrase best practices:
“Best practices just lead you to the replication of something else. You can borrow best practices, but you need to know where you're intentionally not following "best practices" or you'll just be in the middle of Doppler which is not the goal.“
An interesting implication of not following the rules blindly is that we focus more on asking the right questions because we are skeptical. And it often turns out that asking the right set of questions, in the spirit of Socrates' dialogues, is more constructive than having a standard conversation. This approach based on multi-questioning allows us to break down complex problems into smaller pieces and capture the source of the problems, which is not that obvious in the standard debate.
The lesson we could take is to be skeptical about consensus things, such as trends, buzzwords, and best practices. What we can do instead of following them blindly is to consciously decide which rules we’re going to violate and which things we can do uniquely. That’s also the hallmark of the previously mentioned book written by Peter Thiel, Zero to One.
5. Impact of being genuinely intellectually curious
There’s a point where things are developed for the first time, and there’s a point when they become normal and standard and not even surprising.
Jimmy Soni, author of the well-received book “The Founders” described the members of the PayPal Mafia as a great example of genuinely and intellectually curious people. For example, according to the writer, Max Levchin's favorite type of vacation was to do puzzles and read Math books.
It is worth noting that they did not learn in a utilitarian way. They have been genuinely curious and have genuinely absorbed vast amounts of interesting information and wisdom that they naturally feel attracted to.
Their approach reminds me of one of the most popular Naval Ravikant’s principles - arm yourself with specific knowledge. And the specific knowledge is often on the edge of classically understood knowledge. We find it by pursuing natural curiosity. And according to Naval, the specific knowledge is:
“knowledge that you cannot be trained for. If society can train you, it can train someone else, and replace you. Specific knowledge is found by pursuing your genuine curiosity and passion rather than whatever is hot right now. Building specific knowledge will feel like play to you but will look like work to others.”
And I think that this above-mentioned quote grasps well how Max Levchin was operating and balancing on the edge of the knowledge of technology and uncharted territory of cryptography and mobile payments. He was going to the nooks and crannies of the knowledge, which allowed him to build a much broader picture of the technology than a lot of specialists.
It seems that this balancing on the edge of knowledge and pursuing natural curiosity was one of the crucial components why he became the CTO of PayPal, and the company he co-founded with Peter Thiel named Confinity. And Confinity which eventually became PayPal by merging with X.com was initially designed as cryptography and a Palm Pilot payments company.
It is worth noting that being genuinely curious about the whole world was a common case among the PayPal mafia members. And lots of them didn’t have a formal engineering background but still had a good sense of the technological shift and direction because of their multidisciplinary approach and willingness of becoming a polymath. Max Levchin once said about Peter Thiel:
“He’s not a computer scientist, but he’s definitely a geek“
Developing the PayPal was a unique period that additionally met with their genuine curiosity and passion that eventually caused a great effect of compound interest, which Einstein presumably described as the most powerful force in the universe. Combining their specific knowledge with the technological shift highlighted the spirit of the revolution and their culture even more.
They were deliberately focused, insanely intellectually curious, but also hyper-focused, competitive, and motivated by their inner drive and bet they made with the world that the technology and banking will be shifting the direction toward the Internet, more open and borderless currencies.
6. Have a strong and clear culture.
“Nothing brings a team together like a common enemy“
What is interesting about PayPal Mafia is that they were mostly engineers. There weren’t MBA and the general managers cult, but somehow, they managed a ton of people to become very productive, and I think it’s the merit of their culture.
PayPal culture was a highly supportive culture that didn’t care about titles and rewarded and celebrated the doers. Additionally, they were skeptical and free from politics, instead, they were focused on building and creating. But there was a kind of libertarian spirit in a sense of Ayn Rand’s philosophy, embracing the individuals, growth, and optimism about bottom-up initiatives, free from regulations.
What is also remarkable about the culture of the PayPal Mafia was their ability to put their pride in their pockets to be united in the name of the common good.
Jimmy Soni said:
“So externally they were facing these difficulties. And in a way, it shaped a culture of a group of people who they always feel like they’re a little bit on edge.“
David O. Sacks, the founding COO and product leader of PayPal described their culture nicely and said that they never thought about titles because they were too focused on valuables things to think about who was the VP of marketing and who was the chief marketing officer.
It’s also worth noting that the number of their external fights minimized the number of their internal fights within the company. That’s why it’s important to have a common ground of agreement and fundamental principles that dictate the culture.
Another feature of their remarkable culture was their approach to persuasion. They didn’t influence simply people by talking with them, in the PayPal culture the common practice was to lead by example with some sort of approach. It also tells us how their culture was building and creation-oriented. And since the culture gets what it celebrates, they formed a lot of building polymaths.
It was also a place with a high bar for the intellect, Max Levchin once said:
“As hire As, Bs hire Cs. So the first B you hire takes the company down”
They shared a quirky love of learning, which I previously mentioned in the positive impact of being genuinely curious and finding specific knowledge. It was a remarkable place to work because they needed the best version of you and they motivate you to be so.
They were constantly pushing themselves to be better and previously mentioned David Sacks was highly rigorous about the product. He would call people to account, didn't suffer any fools, and was there as a kind of propellant who pushed the whole team. Mafia members recalled that he would make them think about the product more deeply.
“I have realised more and more that great companies, founded for a long-term purpose, such as Google or Facebook or SpaceX, may do more good in the world than any other vehicle that we have.“ - Luke Nosek
The other astonishing example of their culture is their long-lasting influence and impact. Most of the PayPal mafia members are currently in their late thirties and early fifties, but they still build and invest in all kinds of innovative technologies. They’re so far from the finish, and being done.
It is also worth noting that the PayPal mafia culture is different from what we used to see in the tech space. Most tech unicorns are one-sided stories told through the lens of extraordinary individuals. When people told the story about Apple or Amazon, they do it through the lens of Steve Jobs or Jeff Bezos's perspective. But PayPal was a whole crew. It was the company that warehoused all of these people, from Levchin to the founders of YouTube.
7. Think forward and reinvent.
“Writing code is about testing and iterations, and I think one of the things we do a lot of is debate and not enough of it is experiment. […] Let’s ship a bunch of features that try to make the world a better place for folks that have been left behind.” - Max Levchin
The story of Max Levchin, a famous engineer had modest beginnings. He started as a Jewish refugee who came to the United States when he was a teenager but had already fallen in love with computers living in the Soviet Union. And Max ended up going to college at the Univesity of Illinois Champaign-Urbana to study computer science.
His interest in cryptography and mobile security allowed him to lay the foundation for the kind of company that PayPal eventually became. He is often described as the engineer’s engineer because of his polymath approach to technology and skills in creating things.
Around the time he studied computer science, there was hype on the Internet, mostly because of Marc Andreessen who built the Mosaic browser and then Netscape, which were very successful endeavors. And it had a positive impact on Max’s mindset.
Additionally, he was very known for his ability to push his mind to the limits and work hard. Jimmy Soni in one of the episodes of the podcast told what Levchin thought about Andreessen’s success:
“Well, yeah, he was in the dorm and in that quad and he was taking that class and he was doing all the same things we were doing. He set the course for what you could do in internet business at that time”
Max gave a broader image of the great success of PayPal and the early Internet days in the interview with Andy Serwer. What struck me in this conversation was how the philosophy around the culture of PayPal was crucial to members' growth. Remarkably, we are still able to sense that culture in their activities.
Max impressed how he’s bullish on any kind of innovations and improvements, especially those regarding current financial space and online payments. He encouraged us to work on any fixing, telling us that there’s still room for new and more innovative solutions, even in such overwhelmed market.
“US credit card outstanding balances right now are about trillion dollars […] And then volume of payments going through the world and now the internet are in many trailers. So there’s always room. You could really use some fixing and it’s inevitably measured in hundreds of millions of dollars“
In the end, he gave a short and motivating comment:
“The opportunities are plentiful and the market is enormous“
The members of the PayPal mafia weren’t prepared in the traditional sense and even a lot of experts didn’t wish them well. Levchin recalled the important conversation with an expert about understanding risk and credit card space:
“She says let me know what’s your chargeback management process and something in my face betrayed the fact I’m like “What are you talking about?“ And she responded: “Oh honey, you’re done. So I think that we were so unprepared and the early successes just emboldened us to serve you know we couldn’t do wrong, we had to keep on trying”
And what is remarkable is the fact that even though they didn’t know the traditional banking, their forward-thinking-oriented approach and ability to push themselves allowed them to continue their endeavors. Every small step emboldened them and gave them confidence and momentum to work further.
This reinvention-oriented attitude is still life in their thinking process, which Max gave proof sharing his observations about the current state of the politics. He noticed that we do a lot of talks and debates but there’s very little constructive work done behind those conversations.
He encourages us to do and experiment even if the things we do are wrong. The learning comes from the practice and iterating on ideas. It can do wonders to our growth, unlikely to just debating and talking.
“Just iterating on good ideas, there’s no shortage of papers and academics and sociologists and economists that all have a really really strong view usually backed up by good data that we then don’t even bother testing“
Do bold moves and bets. Just do stuff.
The astonishing fact about the PayPal Mafia is they chose probably one of the worst times to start a company. Because there was a crush on the early Internet, the public opinion was mad, and the world was rioting Internet businesses off. But they still were able to manage those circumstances.
For more insights, I encourage you to follow me on Twitter and join our community on Discord!
Summary:
The crucial learning the PayPal founders has is that being adaptable and a fast learner is more important than just having experience in the dynamic, and ever-changing world, not only regarding startups.
The ability to think for yourself is crucial. But being contrarian is overrated, but being both contrarian and right is undervalued.
I think that Elon Musk is a great example of how having the foundational knowledge supported by an open-minded approach and thinking forward can do wonders to our growth. And he was learning it from the early days in his twenties while building great companies from the ground.
Be skeptical about the rules and good practices. Instead of following them blindly build a set of challenging questions and know when to consciously and intentionally derivate from rules.
The power of being genuinely intellectually curious is that you build a unique set of knowledge based on the edge, which makes you irreplaceable because you have been in the nooks and crannies invisible to others.
Culture gets what it celebrates. Build a positive-sum environment and share your ideas and passion with builders, thinkers, and creators that try to make the world a better place.
Think forward and reinvent. There’s always room for better and more innovative solutions. The growth comes from iterating your ideas.