PayPal Startup Lessons: Smart Management Is Good, But Money Is Even Better

Did PayPal (s ebay) discover some sort of magic recipe that allowed so many of its former executives and other staff to create a raft of successful mega-startups like YouTube (s goog), LinkedIn and Yelp — not to mention today’s big IPO star, electric car maker Tesla Motors (s tsla)? That’s what someone asked recently on Quora, the Q&A service that just opened to the public last week. But instead of poorly informed speculation from outsiders, this particular question got some in-depth comments from former PayPal insiders such as Slide executive and angel investor Keith Rabois, as summarized in a post by Vincent Chan at the Primitus blog.

Rabois, who was the VP of business development at PayPal from 2000 until 2002 and now holds almost the exact same position at Slide (which was started by PayPal co-founder Max Levchin), argued that the success of former executives from the payment company is due to a number of factors, including:

  • Talent: Rabois says that Levchin and co-founder Peter Thiel “assembled an unusual critical mass of entrepreneurial talent, primarily due to their ability to recognize young people with extraordinary ability,” noting that the median age of executives was 30. He also noted, however, that the poor economy allowed PayPal to bring on many of these talented workers, since “virtually nobody other than eBay and (in part) Google was hiring.”
  • Culture: Thiel and Levchin had “very strong beliefs in the type of culture that would fuel an entrepreneurial enterprise,” says Rabois, adding that many of these views “were unorthodox.” He lists some of them in a separate answer.
  • eBay: “Anyone with talent hated working at eBay,” writes Rabois says, so after the acquisition of PayPal in 2002, most of the founding members quickly left, which “enabled us to start new things instead of treading water in a large company.”
  • Scarcity: In 2003 and 2004, according to Rabois, “virtually nobody believed that there was going to be a new wave of innovation online.” And apart from Sequoia Capital, the PayPal co-founders were “virtually the only ones writing substantial checks to finance ‘crazy’ new ventures,” he says.
  • Pressure: Rabois argues that PayPal was a very difficult business with “many major issues to solve,” and therefore the staff worked under pressure and learned who they could trust, which made them more effective once they left.

The so-called “PayPal mafia” has certainly achieved a phenomenal amount for a relatively small group — one which includes Thiel (who has become a powerful investor through Clarium Capital and The Founders Fund), Levchin, Reid Hoffman of LinkedIn, Tesla founder and CEO Elon Musk, Sequoia partner Roelof Botha, YouTube’s co-founders (Jawed Karim, Steve Chen and Chad Hurley), Yelp co-founders Russel Simmons and Jeremy Stoppelman, Premal Shah of Kiva, and angel investors such as Dave McClure and Keith Rabois. In 2007, Forbes estimated that the group had started or was running companies worth more than $30 billion.

But while Rabois’s list of benefits has the ring of truth — particularly the young and talented staff and their rapid exodus from eBay — the single most important factor is likely No. 4 on the list: namely, the scarcity of other financial entities who were willing to fund risky web startups in 2003. That, combined with the amount of money that Thiel, Levchin and others came out of the $1.5 billion acquisition with, provided a huge jump-start for companies such as LinkedIn and Yelp, and even YouTube and Facebook. And that’s not counting the connections and introductions and other networking effects that the PayPal mafia was able to offer to startups.

This is not to downplay the talent of PayPal’s executives or staff at all — clearly many of them were talented enough to spot opportunities like Slide and LinkedIn when they presented themselves, and to see where the web was going. And it should be noted that the answers to a similar Quora question about Google are somewhat less impressive: None of the startups founded by former staffers at the search engine are household names or multibillion-dollar entities (unless you include Twitter, and founder Ev Williams was only briefly a Google employee after it bought Blogger). So maybe there’s something to the idea of that famous PayPal magic dust after all.

Embedded below is a video interview that we did with Keith Rabois about angel investing.

Post and thumbnails courtesy of Flickr user seeveeaar