A mix of ambition, rivalry, smarts and luck made PayPal an early Silicon Valley success story

"Next week marks the 20th anniversary of PayPal's becoming a publicly traded company. The IPO valued the online payments processor at nearly $1 billion -- an eye-opening sum at the time. Back in the day, technology firms marked such occasions with glitzy celebrations. PayPal took a different path. Its youthful employees gathered in the parking lot of their Palo Alto, Calif., office building, where the company's enigmatic chief executive, Peter Thiel, performed a keg stand and then played 10 simultaneous games of speed chess, winning nine of them.

Jimmy Soni tells that story and many others in "The Founders," a gripping account of PayPal's origins and a vivid portrait of the geeks and contrarians who made its meteoric rise possible. His richly reported narrative includes corporate intrigue, workplace hijinks, breakthrough innovation and first-class nerdiness.

PayPal has taken on a mythical status not merely because of its success but also because of what its founders have become. The marquee names include Mr. Thiel, Elon Musk, Max Levchin, Reid Hoffman, Chad Hurley and David Sacks -- a kind of founding generation for our high-tech world. Their post-PayPal ventures include investing in, or launching, transformative companies, such as Facebook, LinkedIn, Palantir, Yelp, YouTube and Tesla. Other pre-IPO staff members, if less-known, are scattered through top technology companies and investment firms.

"PayPal's alumni have built, funded, or counseled nearly every Silicon Valley company of consequence for the last two decades," Mr. Soni writes. "As a group, they constitute one of the most powerful and successful networks ever created." He notes that the group has been branded the PayPal "mafia" but quotes Mr. Sacks, now a venture capitalist, arguing for "diaspora" instead: "We're more like the Jews than, like, the Sicilians."

"The Founders" begins with the early years of Messrs. Levchin, Musk and Thiel. All three arrived in the U.S. as immigrants -- Mr. Levchin from Ukraine, Mr. Musk from Canada (via South Africa), and Mr. Thiel from Germany. While Mr. Musk comes across as a visionary businessman and Mr. Levchin a stereotypical nerd, Mr. Thiel combines elements of both, along with an especially fierce streak of competitiveness. Soon after meeting Mr. Levchin, Mr. Thiel asked him to solve the following: "Take any positive integer. Some have an odd number of unique divisors, and some have an even number of unique divisors. Describe the subset of all z integers that have exactly an even number of divisors." (Mr. Levchin answered correctly.)

PayPal's pre-history amounts to a case study in restless ambition, as Mr. Soni shows. Mr. Levchin founded a company called Confinity in 1998, and he was fixated on enabling PalmPilots to exchange currency and conduct e-commerce. Mr. Thiel was an early investor and then became CEO. In 1999, Mr. Musk founded X.com, which he intended to be a full-service financial-services company. For a brief period, Confinity and X.com had offices above a bakery on the same floor of a building in downtown Palo Alto.

Both companies soon pivoted to focusing on email-based money transfers, seeing that they offered more simplicity. The result was an instant rivalry, since the companies sought to attract many of the same customers -- particularly eBay's buyers and sellers. Mr. Thiel became unsure about Confinity's future, given that X.com was better capitalized, and the two companies began contentious merger discussions. Within months, a merger did happen, though it would take a bit longer to decide on what to call the new entity. Over Mr. Musk's protests, "PayPal" was chosen, partly because of uncertainty about the X.com name: Market research showed that people believed it to be an adult-oriented website.

Integrating the two companies proved challenging in all sorts of ways. Mr. Thiel resigned about a month after the merger when he clashed with the CEO, who had come from X.com and who was himself ousted a week later. Mr. Musk took the helm, but he was himself removed four months later -- while on his honeymoon. "It was a well-executed coup," Mr. Musk tells Mr. Soni. "It's slightly complimentary that they would only do it when I'm not there."

Conflict and turmoil permeate "The Founders." There are extended battles with eBay, which tried to steer its customers to its in-house payments platform. The IPO was delayed for days because of frivolous lawsuits. Fraudsters, for a time, were fleecing the company out of millions of dollars. And a civil war erupted among the engineers over whether PayPal's software architecture should be based on Linux or Microsoft: Linux prevailed, over the objections of Mr. Musk, who thought Microsoft's plug-and-play frameworks were more efficient.

Mr. Soni, whose previous books include one on Claude Shannon, an inventive 20th-century mathematician, keeps the story moving at a brisk pace and captures the quirks and whims of the people involved. Julie Anderson, one of X.com's early employees, dropped the company's California-based telephone customer-service provider and relaunched the service in Nebraska. Why there? Because many of her relatives lived there. Indeed, the general ethos was more maverick and aggressive than measured and deliberative. The focus, ultimately, was on rolling out features that would attract customers -- fixing the bugs would come later. If you "don't have some failures you're learning from," Mr. Hoffman says, "then you're probably not learning at a fast enough speed."

"The Founders" also captures the company's geek culture. The employees entertain themselves by vaporizing potatoes with high-speed PVC guns and competing over who can sit on a basketball the longest without falling off. Confirming a cliche, staffers do spend all night at the office -- sometimes sleeping under their desks, though not always. "There's this massive value that you harness when you're doing an all-nighter," says Mr. Levchin, "when you've gone for presumably seven or eight hours of work, and you're really getting up to a point when something's about to be born -- and then you go for eight more hours! And instead of stopping to go to sleep and letting these ideas dissipate, you actually focus on the findings you've made in the last few hours, and you just go crazy and do some more of that."

Some of that energy was channeled into PayPal's technology. Those annoying CAPTCHA tests -- requiring you to prove your human status by, say, detecting how many palm trees appear in squares on your screen -- were given their first commercial application by PayPal. And the so-called random deposit, which is a staple of modern banking security protocols, was invented by Sanjay Bhargava, an X.com financial-technology expert.

Anyone looking for yet more tales about Mr. Musk won't be disappointed. While driving with Mr. Thiel to a meeting about their merger, Mr. Musk shows off the power of his McLaren F1 -- a $1 million car -- and crashes it on Sand Hill Road in the heart of Silicon Valley. His fabled resolve comes through when he is recruiting Mr. Bhargava. A planned 10-minute meeting starts at 8 p.m. and doesn't end until 4 a.m. -- followed by Mr. Musk instructing Mr. Bhargava to come to the X.com office three hours later to retrieve his official offer.

Why did PayPal thrive when others -- eMoneyMail, PayPlace, C2it -- failed? One key was limiting the losses from fraud. If the company had taken a traditional approach, observes a member of the fraud-analytics team, it "would have hired people who had been building logistic regression models for banks for twenty years but never innovated." Instead it turned to young, open-minded engineers who devised unorthodox methods.

As Mr. Soni's captivating chronicle shows, part of PayPal's achievement came down to luck: launching as the internet and email were arriving at critical mass and securing $100 million in funding just before the markets dried up in the spring of 2000. Good fortune, of course, is a factor for every business that becomes a market leader. But "The Founders" makes crystal-clear that PayPal's human capital -- a potent cocktail of intellect, bravado and competitiveness, complemented by the occasional keg stand -- laid the foundation for success.

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Mr. Rees is editor of Food and Health Facts, founder of Geonomica and senior fellow at the Tuck School of Business." [1]

1. REVIEW --- Books: Making the Future Click --- A mix of ambition, rivalry, smarts and luck made PayPal an early Silicon Valley success story. The geeks and contrarians who got it started went on to remake the modern world.
Rees, Matthew. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 12 Feb 2022: C.7.