The PayPal Mafia Is the Perfect Example Why the Best Teams Don’t Stay Together Long
Research reveals that many of the most successful teams are successful only because they are temporary — they meet for a time and then disband, with some members going to other teams. In the end, having a large network and a tight-knit team isn’t as valuable as having a loose network and temporary teams.
In the summer of 2005, a few friends in the Silicon Valley area got together for a backyard barbecue — one of many that probably happened that day across that region of California and across the country. This barbecue, however, would end up being a milestone event that led to a dramatic change in the history of technology and in the way individuals interact online. During the get-together, Jawed Karim, a then-twenty-six-year-old computer science programmer, showed a website he was working on to Keith Rabois, a man ten years his senior. Rabois was impressed with the website and told another friend, Roelof Botha, who happened to be a partner at the venture capital firm Sequoia Capital.
Botha, also impressed, arranged a meeting with Karim and the other men working on the project. A few months later, Sequoia had invested $3.5 million in the new website. Just a few
weeks after that, the website officially launched for all to use, even though over 8 million people were already visiting it daily.
Post-launch, the website would soar. Within a year of the first investment from Sequoia, the search engine powerhouse Google jumped in and purchased the website for $1.65 billion. The website, YouTube.com, would continue its rocketlike trajectory even after purchase, eventually becoming the second most visited website in the world. From the backyard cookout to the Google buyout, Karim and his friends had taken YouTube from a one-video demo website to a $1.65 billion company in just eighteen months. Needless to say, the investment from Sequoia Capital helped them get there, and it helped Sequoia make a substantial profit. It seems like an amazing fantasy story, a near-fluke, except that YouTube isn’t the only company that has received significant investment based on a small idea. It’s not the only company to go from idea to billion-dollar valuation in less than two years. It’s not even the only company that got its lucky break at a small backyard get-together.
The truth is, those kinds of things happen all the time when the mafia gets together.
No, not that mafia. The PayPal Mafia.
Jawed Karim and his YouTube cofounders, Steve Chen and Chad Hurley, along with friend Keith Rabois and venture capitalist Roelof Bathoa, all worked together at the financial start-up PayPal before it was acquired by eBay for $1.5 billion in 2002. But they aren’t the entire PayPal Mafia, not even a majority. Other members include Peter Thiel, Elon Musk, Reid Hoffman, Andrew McCormack, David Sacks, Ken Howery, Max Levchin, Russell Simmons, and a few hundred more.
The companies the Mafia has started or invested in are renowned, including LinkedIn, Yelp, Yammer, Keva, Palantir, Slide, Flickr, Digg, Mozilla, Tesla, SpaceX, and even Facebook. It’s an incredible story not just of how start-up genius loves company, but of how those individuals who are plugged into a network can have a dramatic effect on not just their own careers but an entire industry.
The PayPal Mafia got its start, of course, at PayPal. Founded by Max Levchin, Luke Nosek, and Peter Thiel, PayPal started to send mobile payments from person to person using Palm Pilots and other personal digital assistants (PDAs). From the beginning, the company focused on recruiting through its founders’ networks and then building a company where everyone felt connected. That meant heavy recruiting from nearby Stanford University (Thiel’s alma mater) and also from the University of Illinois at Urbana-Champaign (Levchin’s alma mater). “We didn’t only hire our friends,” said Thiel. “But we did hire people who we thought we could become really good friends with.”
PayPal grew fast, and was eventually acquired by eBay. While the acquisition worked out well financially for PayPal employees, it didn’t work out as well culturally. PayPal was already a misfit in the Silicon Valley culture of the late 1990s and early 2000s — a time when start-up mythology wasn’t as prominent as it is today. PayPal’s culture was a precursor to the “move fast and break things” ideology that companies in the region would later become known for. At the time it acquired PayPal, eBay was a large company with a team of professional managers — a culture that the PayPal folks found to be a stuffy bureaucracy. From the very beginning of the integration, the PayPal folks were beginning to question how long they would stick around. Eventually, nearly half of PayPal’s 200-something employees had left and gone elsewhere. Just 12 of the first 50 employees at PayPal were still there four years after the acquisition. “With PayPal, you essentially had this mass exodus of highly entrepreneurial people who had learned all these techniques, that were very innovative, that could make a new product explode, at a time when everybody else had given up,” said David Sacks, the former chief operating officer of PayPal.
And making new products explode is exactly what they did.
Almost immediately after cashing out from the sale, Peter Thiel founded the hedge fund Clarium Capital, where he was joined by PayPal veterans Andrew McCormack and Ken Howery. Thiel would also become the first outside investor in a fledgling start-up called Facebook, getting his friend and former PayPal coworker Reid Hoffman involved. It wouldn’t be Reid Hoffman’s only social network either. After his exit, Hoffman and a few others started LinkedIn, which quickly accepted investment money from Keith Rabois and Peter Thiel. Another member of the PayPal Mafia even provided the space for LinkedIn’s first office. Even Elon Musk, who took his earnings from the sale and founded Tesla Motors and SpaceX, still relied on help from the PayPal Mafa for ideas and funding. When Musk’s attempt at building a more cost-efficient space rocket failed three straight times and seriously drained his funding for SpaceX, it was a former colleague from PayPal who invested enough to keep him experimenting.
One reason for their tight-knit circle of new startups was the set of friendships that remained from their PayPal days. But another factor that dramatically strengthened those bonds was the economy. In the early 2000s, when the colleagues went from being eBay employees to free agents, very little money was flowing to consumer-based technology start-ups. “Nobody would fund them,” said Keith Rabois. “Basically, there was just Reid [Hoffman], Peter [Thiel], and a few of us, as well as Sequoia to some extent.” But the PayPal Mafia didn’t just control the money, they also shaped the ideas. Because most of the new companies started by PayPal refugees also featured new members, the philosophy and culture of the PayPal Mafia spread. Even where the Mafia didn’t directly work with a new company but merely invested in it, their influence was still strong. Part of what explains the culture and ethos of Silicon Valley today is the very clear impression the PayPal Mafia left on each new venture they touched. After several billion-dollar companies and tens of billions of dollars in market capitalization, it’s safe to say that impression was positive. In sum, a rogue band of misfits, driven out by eBay, became the central nodes for a strong network of astounding innovation.
But it’s not just the former relationships and their considerable wealth to invest that explain the success of the PayPal Mafia. Recent research into how network connections best interact suggests that it’s the specific way in which the PayPal Mafia collaborated that now explains their success.
Consider how the members of the PayPal Mafia didn’t just form a new company upon exiting eBay. Instead, they dispersed throughout the technology community, found new collaborators,
and benefited from connections to ideas and resources that their old coworkers provided. It wasn’t having a group of tried-and-true technology innovators that mattered as much as their dispersal through the network to form new companies. “The rotation of team personnel is critical to creativity,” Uzzi explained. “Even if it comes at the loss of efficient communication among team members that have come to know each other and their work habits well.”
For the members of the PayPal Mafia, their new situation post-acquisition forced them to find new teams and to rotate around on various projects. In fact, it wasn’t uncommon to see a Mafia member join a team of a few former colleagues and new entrepreneurs, work for a short tour of duty, and then jump ship to yet another project. Many even worked on multiple projects at once, founding one company, investing in another, and serving as an adviser to a third. The arrangements of PayPal Mafia members throughout the network of Silicon Valley looks a lot like the collaborations of scientific researchers.
For individuals, the implications of the PayPal Mafia’s successes are as clear as they are counterintuitive. It’s not enough to merely have a network…it’s the density of that network that matters. If your networkallows you to form teams of new and old connections easily, you have a great blend. If it doesn’t, you are probably working too often with the same old people. At the same time, if every project or opportunity requires new rounds of introductions, then the shape of your network isn’t optimal.
For organizations, the implications are a little more serious. Most companies are built on organizational charts that set up distinct barriers to collaboration — exactly the opposite of what’s needed for effective collaboration. Instead of a hierarchy, most organizations would be better served by an organizational structure built like a network of scientific collaborators, with PayPal Mafia–level density.
The lesson we can learn from the story of the PayPal Mafia is that the best networks allow fluid teams to form. So many of us approach building a network by searching for trusted individuals with whom we’ll work forever. We tend to assume that the best teams are ones that have held fast together for a long time. But the hard research on the nature of teams and networks suggests that the best and most productive teams are only temporary.