by Ashlee Vance
While pursuing this project, Musk stumbled upon what seemed like an obvious business opportunity. The United States had tried to help reduce the debt burden of a number of developing countries through so-called Brady bonds, in which the U.S. government basically backstopped the debt of countries like Brazil and Argentina. Musk noticed an arbitrage play. “I calculated the backstop value, and it was something like fifty cents on the dollar, while the actual debt was trading at twenty-five cents,” Musk said. “This was like the biggest opportunity ever, and nobody seemed to realize it.” Musk tried to remain cool and calm as he rang Goldman Sachs, one of the main traders in this market, and probed around about what he had seen. He inquired as to how much Brazilian debt might be available at the 25-cents price. “The guy said, ‘How much do you want?’ and I came up with some ridiculous number like ten billion dollars,” Musk said. When the trader confirmed that was doable, Musk hung up the phone. “I was thinking that they had to be fucking crazy because you could double your money. Everything was backed by Uncle Sam. It was a no-brainer.”
Musk had spent the summer earning about fourteen dollars an hour and getting chewed out for using the executive coffee machine, among other status infractions, and figured his moment to shine and make a big bonus had arrived. He sprinted up to his boss’s office and pitched the opportunity of a lifetime. “You can make billions of dollars for free,” he said. His boss told Musk to write up a report, which soon got passed up to the bank’s CEO, who promptly rejected the proposal, saying the bank had been burned on Brazilian and Argentinian debt before and didn’t want to mess with it again. “I tried to tell them that’s not the point,” Musk said. “The point is that it’s fucking backed by Uncle Sam. It doesn’t matter what the South Americans do. You cannot lose unless you think the U.S. Treasury is going to default. But they still didn’t do it, and I was stunned. Later in life, as I competed against the banks, I would think back to this moment, and it gave me confidence. All the bankers did was copy what everyone else did. If everyone else ran off a bloody cliff, they’d run right off a cliff with them. If there was a giant pile of gold sitting in the middle of the room and nobody was picking it up, they wouldn’t pick it up, either.”
In the years that followed, Musk considered starting an Internet bank and discussed it openly during his internship at Pinnacle Research in 1995. The youthful Musk lectured the scientists about the inevitable transition coming in finance toward online systems, but they tried to talk him down, saying that it would takes ages for Web security to be good enough to win over consumers. Musk, though, remained convinced that the finance industry could do with a major upgrade and that he could have a big influence on banking with a relatively small investment. “Money is low bandwidth,” he said, during a speech at Stanford University in 2003, to describe his thinking. “You don’t need some sort of big infrastructure improvement to do things with it. It’s really just an entry in a database.”
The actual plan that Musk concocted was beyond grandiose. As the researchers at Pinnacle had pointed out, people were barely comfortable buying books online. They might take their chances entering a credit card number but exposing just their bank accounts to the Web was out of the question to many. Pah. So what? Musk wanted to build a full-service financial institution online: a company that would have savings and checking accounts as well as brokerage services and insurance. The technology to build such a service was possible, but navigating the regulatory hell of creating an online bank from scratch looked like an intractable problem to optimists and an impossibility to more level heads. This was not dishing out directions to a pizzeria or putting up a house listing. It was dealing with people’s finances, and there would be real repercussions if the service did not work as billed.
Undaunted, Musk kicked this new plan into action before Zip2 had even been sold. He chatted up some of the best engineers at the company to get a feel for who might be willing to join him in another venture. Musk also bounced his ideas off some contacts he’d made at the bank in Canada. In January 1999, with Zip2’s board seeking a buyer, Musk began to formalize his banking plan. The deal with Compaq was announced the next month. And in March, Musk incorporated X.com, a finance start-up with a pornographic-sounding name.
It had taken Musk less than a decade to go from being a Canadian backpacker to becoming a multimillionaire at the age of twenty-seven. With his $22 million, he moved from sharing an apartment with three roommates to buying an 1,800-square-foot condo and renovating it. He also bought a $1 million McLaren F1 sports car and a small prop plane and learned to fly. Musk embraced the newfound celebrity that he’d earned as part of the dot-com millionaire set. He let CNN show up at his apartment at 7 A.M. to film the delivery of the car. A black eighteen-wheeler pulled up in front of Musk’s place and then lowered the sleek, sliver vehicle onto the street, while Musk stood slack-jawed with his arms folded. “There are sixty-two McLarens in the world, and I will own one of them,” he told CNN. “Wow, I can’t believe it’s actually here. That’s pretty wild, man.”
CNN interspersed video of the car delivery with interviews with Musk. The whole time he looked like a caricature of an engineer who had made it big. Musk’s hair had started thinning, and he had a closely cropped cut that accentuated his boyish face. He wore an all-too-big brown sport coat and checked his cell phone from his lavish car, sitting next to his gorgeous girlfriend, Justine, and he seemed spellbound by his life. Musk rolled out one laughable rich-guy line after another, talking first about the Zip2 deal—“Receiving cash is cash. I mean, those are just a large number of Ben Franklins”—next about the awesomeness of his life—“There it is, gentlemen, the fastest car in the world”—and then about his prodigious ambition—“I could go and buy one of the islands in the Bahamas and turn it into my personal fiefdom, but I am much more interested in trying to build and create a new company.” The camera crew followed Musk to the X.com offices, where his cocksure delivery led to another round of cringe-worthy statements: “I do not fit the picture of a banker,” “Raising fifty million dollars is a matter of making a series of phone calls, and the money is there,” “I think X.com could absolutely be a multibillion-dollar bonanza.”
Musk purchased the McLaren from a seller in Florida, snatching the car away from Ralph Lauren, who had also inquired about buying it. Even very wealthy people like Lauren would tend to reserve something like a McLaren for special events or the occasional Sunday drive. Not Musk. He drove it all around Silicon Valley and parked it on the street by the X.com offices. His friends were horrified to see such a work of art covered with bird droppings or in the parking lot of a Safeway. One day, Musk e-mailed fellow McLaren owner Larry Ellison, the billionaire cofounder of the software maker Oracle, out of the blue to see if he wanted to go race cars around a track for fun. Jim Clark, another billionaire who liked fast things, caught wind of the proposal and told a friend that he needed to rush over to the local Ferrari dealership to buy something that could compete. Musk had joined the big boys’ club. “Elon was super-excited about all of this,” said George Zachary, a venture capitalist and close friend of Musk’s. “He showed me the correspondence with Larry.” The next year, while driving down Sand Hill Road to meet with an investor, Musk turned to a friend in the car and said, “Watch this.” He floored the car, did a lane change, spun out, and hit an embankment, which started the car spinning in midair like a Frisbee. The windows and wheels were blown to smithereens, and the body of the car damaged. Musk again turned to his companion and said, “The funny part is it wasn’t insured.” The two of them then thumbed a ride to the venture capitalist’s office.
To his credit, Musk did not fully buy in to this playboy persona. He actually plowed the majority of the money he made from Zip2 into X.com. There were practical reasons for this decision. Investors catch a break under the tax law if they roll a windfall into a new venture within a couple of months. But even by Silicon Valley’s high-risk standards, it was shocking to put so much of one’s newfound w
ealth into something as iffy as an online bank. All told, Musk invested about $12 million into X.com, leaving him, after taxes, with $4 million or so for personal use. “That’s part of what separates Elon from mere mortals,” said Ed Ho, the former Zip2 executive, who went on to cofound X.com. “He’s willing to take an insane amount of personal risk. When you do a deal like that, it either pays off or you end up in a bus shelter somewhere.”
Musk’s decision to invest so much money in X.com looks even more unusual in hindsight. Much of the point of being a dot-com success in 1999 was to prove yourself once, stash away your millions, and then use your credentials to talk other people into betting their money on your next venture. Musk would certainly go on to rely on outside investors, but he put major skin in the game as well. So while Musk could be found on television talking like the rest of the self-absorbed dot-com schmucks, he behaved more like a throwback to Silicon Valley’s earlier days, when the founders of companies like Intel were willing to take huge gambles on themselves.
Where Zip2 had been a neat, useful idea, X.com held the promise of fomenting a major revolution. Musk, for the first time, would be confronting a deep-pocketed, entrenched industry head-on with the hopes of upending all of the incumbents. Musk also began to hone his trademark style of entering an ultracomplex business and not letting the fact that he knew very little about the industry’s nuances bother him in the slightest. He had an inkling that the bankers were doing finance all wrong and that he could run the business better than everyone else. Musk’s ego and confidence had started heading toward the levels that would inspire some and leave others thinking of him as pompous and unscrupulous. The creation of X.com would ultimately reveal a great deal about Musk’s creativity, relentless drive, confrontational style, and foibles as a leader. Musk would also get another taste of being pushed aside at his own company and the pain that accompanies a grand vision left unfulfilled.
Musk assembled what looked like an all-star crew to start X.com. Ho had worked at SGI and Zip2 as an engineer, and his peers marveled at his coding and team-management skills. They were joined by a pair of Canadians with finance experience—Harris Fricker and Christopher Payne. Musk had met Fricker during his time as an intern at the Bank of Nova Scotia, and the two really hit it off. A Rhodes scholar, Fricker brought the knowledge of the banking world’s mechanics that X.com would need. Payne was Fricker’s friend from the Canadian finance community. All four men were considered cofounders of the company, while Musk emerged as the largest shareholder thanks to his hefty up-front investment. X.com began, like so many Silicon Valley operations, at a house where the cofounders began brainstorming, and then moved to more formal offices at 394 University Avenue in Palo Alto.
The cofounders were aligned philosophically around the idea that the banking industry had fallen behind the times. Visiting a branch bank to speak with a teller seemed pretty archaic now that the Internet had arrived. The rhetoric sounded good, and the four men were enthused. The only thing stopping them was reality. Musk had a modicum of banking experience and had resorted to buying a book on the industry to help understand its inner workings. The more the cofounders thought about their plan of attack, the more they realized the regulatory issues blocking the creation of an online bank were insurmountable. “As four and five months went by, the onion just kept unwrapping,” said Ho.*
From the outset, there were personality clashes as well. Musk had become a budding superstar in Silicon Valley and had the press fawning over him. This didn’t sit that well with Fricker, who’d moved from Canada and pegged X.com as his chance to make a mark on the world as a banking whiz. Fricker, according to numerous people, wanted to run X.com and do so in a more conventional manner. He found Musk’s visionary statements to the press about rethinking the entire banking industry silly since the company was struggling to build much of anything. “We were out promising the sun, moon, and the stars to the media,” Fricker said. “Elon would say that this is not a normal business environment, and you have to suspend normal business thinking. He said, ‘There is a happy-gas factory up on the hill, and it’s pumping stuff into the Valley.’” Fricker would not be the last person to accuse Musk of overhyping products and playing the public, although whether this is a flaw or one of Musk’s great talents as a businessman is up for debate.
The squabble between Fricker and Musk came to a quick, nasty end. Just five months after X.com had started, Fricker initiated a coup. “He said either he takes over as CEO or he’s just going to take everyone from the company and create his own company,” Musk said. “I don’t do well with blackmail. I said, ‘You should go do that.’ So he did.” Musk tried to talk Ho and some of the other key engineers into staying, but they sided with Fricker and left. Musk ended up with a shell of a company and a handful of loyal employees. “After all that went down, I remember sitting with Elon in his office,” said Julie Ankenbrandt, an early X.com employee who stayed. “There were a million laws in place to block something like X.com from happening, but Elon didn’t care. He just looked at me and said, ‘I guess we should hire some more people.’”*
Musk had been trying to raise funding for X.com and had been forced to go to venture capitalists and confess that there wasn’t much in the way of a company left. Mike Moritz, a famed investor from Sequoia Capital, backed the company nonetheless, making a bet on Musk and little else. Musk hit the streets of Silicon Valley once again and managed to attract engineers with his rah-rah speeches about the future of Internet banking. Scott Anderson, a young computer scientist, started on August 1, 1999, just a few days after the exodus, and bought right into the vision. “You look back, and it was total insanity,” Anderson said. “We had what amounted to a Hollywood movie set of a website. It barely got past the VCs.”
Week by week, more engineers arrived and the vision became more real. The company secured a banking license and a mutual fund license and formed a partnership with Barclays. By November, X.com’s small software team had created one of the world’s first online banks complete with FDIC insurance to back the bank accounts and three mutual funds for investors to choose. Musk gave the engineers $100,000 of his own money to conduct their testing. On the night before Thanksgiving in 1999, X.com went live to the public. “I was there until two A.M.,” Anderson said. “Then, I went home to cook Thanksgiving dinner. Elon called me a few hours later and asked me to come into the office to relieve some of the other engineers. Elon stayed there forty-eight straight hours, making sure things worked.”
Under Musk’s direction, X.com tried out some radical banking concepts. Customers received a $20 cash card just for signing up to use the service and a $10 card for every person they referred. Musk did away with niggling fees and overdraft penalties. In a very modern twist, X.com also built a person-to-person payment system in which you could send someone money just by plugging their e-mail address into the site. The whole idea was to shift away from slow-moving banks with their mainframes taking days to process payments and to create a kind of agile bank account where you could move money around with a couple of clicks on a mouse or an e-mail. This was revolutionary stuff, and more than 200,000 people bought into it and signed up for X.com within the first couple of months of operation.
Soon enough, X.com had a major competitor. A couple of brainy kids named Max Levchin and Peter Thiel had been working on a payment system of their own at their start-up called Confinity. The duo actually rented their office space—a glorified broom closet—from X.com and were trying to make it possible for owners of Palm Pilot handhelds to swap money via the infrared ports on the devices. Between X.com and Confinity, the small office on University Avenue had turned into the frenzied epicenter of the Internet finance revolution. “It was this mass of adolescent men that worked so hard,” Ankenbrandt said. “It stunk so badly in there. I can still smell it—leftover pizza, body odor, and sweat.”
The pleasantries between X.com and Confinity came to an abrupt end. The Confinity founders moved to an office down the stre
et and, like X.com, began focusing their attention on Web and e-mail-based payments with their service known as PayPal. The companies became locked in a heated battle to match each other’s features and attract more users, knowing that whoever got bigger faster would win. Tens of millions of dollars were spent on promotions, while millions more were lost battling hackers who had seized upon the services as new playgrounds for fraud. “It was like the Internet version of making it rain at a strip club,” said Jeremy Stoppelman, an X.com engineer who went on to become the CEO of Yelp. “You gave away money as fast as you could.”
The race to win Internet payments gave Musk a chance to show off his quick thinking and work ethic. He kept devising plans to counter the advantage PayPal had established on auction sites like eBay. And he rallied the X.com employees to implement the tactics as fast as possible using brute-force appeals to their competitive natures. “There really wasn’t anything suave about him,” Ankenbrandt said. “We all worked twenty hours a day, and he worked twenty-three hours.”
In March 2000, X.com and Confinity finally decided to stop trying to spend each other into oblivion and to join forces. Confinity had what looked like the hottest product in PayPal but was paying out $100,000 a day in awards to new customers and didn’t have the cash reserves to keep going. X.com, by contrast, still had plenty of cash reserves and the more sophisticated banking products. It took the lead in setting the merger terms, leaving Musk as the largest shareholder of the combined company, which would be called X.com. Shortly after the deal closed, X.com raised $100 million from backers including Deutsche Bank and Goldman Sachs and boasted that it had more than one million customers.*