How David Sacks and the PayPal Mafia became the most dominant collection of entrepreneurs in Silicon Valley.
David Sacks is a Silicon Valley legend, former COO of PayPal, Co-Founder of Yammer, and Managing Partner of Craft Ventures. We spoke with David on our 60th podcast episode about what he learned in his 20s.
Actionable Insights
- It’s about the idea, not the trend. To David Sacks, too many founders follow trends to find a “minimally viable idea” that is only good enough to get something going but not great enough to build a lasting company.
- It’s never too early to start doing something entrepreneurial. To Sacks, managing PayPal was not that dissimilar to managing his college paper or his high school yearbook. You learn a lot from the early experiences running these creative enterprises.
- Don’t always follow the societal consensus. When Sacks left consulting to build PayPal it was seen by many as incredibly risky. If he had followed the well traveled path then there may never be a PayPal.
Nowadays, adorned with plain black t-shirts and Patagonia vests, building and working at a startup is cool and sexy. But it wasn’t always that way, especially in the 90s, when David Sacks and his pals Elon Musk, Peter Thiel and others were building PayPal. Where today, the journey towards entrepreneurship is met with exuberance, for David Sacks and company, it was met with doubt. Back then, professional lives were much more tracked. If one was lucky to get in a good enough school, they were ultimately destined to work in medicine, law, consulting, banking, or something of the like. After graduating from Stanford, David Sacks followed the predetermined path for individuals with only a vague understanding of what the wanted to do professionally — law school.
After wrapping up law school, Sacks knew that he wanted to do something entrepreneurial, but with the internet still in its nascent stage and with far fewer resources available than today he took up a job with McKinsey as a consultant to orientate himself in the world of business.
The Dawn of PayPal
As luck would have it, during his first year at McKinsey, his Stanford buddy Peter Thiel had an idea for a company called Confinity that would develop a way to beam money from one Palm Pilot to another. David Sacks thought the idea was dumb.
For those uninitiated, a Palm Pilot was a wildly popular 90s era handheld computer that was pretty much the predecessor of the smartphone.
The medium for money transfer then shifted from Palm Pilots to Email. Sacks thought this would be killer idea. So much that he told Thiel if they pursued it, he would leave McKinsey and join Confinity.
Upon arriving at Confinity, Sacks quickly realized that he needed to unlearn many things he was taught at McKinsey and adapt to the chaotic world of startups. One of those being the prioritization of strategy over everything. He realized that even if Confinity possessed the right theoretical strategy, the product itself was lacking. He saw a mix of business development people making deals and engineers building features that they personally thought were cool but had no focus on building a product that was simple and easy to use. A few months into his time at Confinity, Sacks jumped into a role that would now be called a product manager or Head of Product.
Sacks realized that if they didn’t get the product right then they had nothing. He became obsessed with every detail of it which ultimately lead him to become COO of PayPal which formed after Confinity merged with a similar digital payments company — Elon Musk’s X.com. During our interview, Sacks spoke about the importance of becoming obsessed with a passion in your 20s.
The PayPal Mafia
The PayPal Mafia is the nickname given to PayPal’s early employees. In addition to Musk, Sacks, and Thiel, members include the founders of LinkedIn, Youtube, and Yelp as well of other high ranking tech executives.
To most, the PayPal Mafia is an exclusive Dream Team of startup all-stars.
To David Sacks and the others who were there, PayPal was made up of a rag tag group misfits and outcasts. The truth is that PayPal was largely made up of the friends of founders Max Levchin and Peter Tiel. This reliance on friendship networks wasn’t due to anything other than the fact that it was too hard to recruit anyone else. Sacks himself joined PayPal this way. When he left McKinsey, this was seen to many as a serious risk to his career respectability. To this day it irks Sacks when people portray PayPal as an elitist club. He maintains that many dozens could have became “members of the PayPal Mafia” but nobody never accepted their job offers or even agreed to interview with them.
So for those who did become members of “The Mafia” and go on to do such great things, what the heck was in the water at PayPal?
To Sacks, it was a few things.
- The People
- The Timing
- The Playbook
The People involved were all entrepreneurial inclined and inspired to build startups at a time when others weren’t.
The Timing of PayPal’s founding and IPO coalesced with the startup boom and bust of the late 90s and early 2000s. Over the course of time from about 2000 to 2004 Silicon Valley was decaying. PayPal and its employees persevered through the crash and became better as a result of the adversity placed by the dot com bust. Many people who came to startups for the boom left after the bust. Following the company’s sale and inspired by the success many former PayPal employees were ready to start companies of their own.
“In the early 2000s, B2B mean’t back to banking and B2C meant back to consulting.”
The Playbook of lessons learned from PayPal including distribution tricks and understanding virality and product development gave former employees like Sacks proprietary knowledge on building startups.
