Thiel found the idea intriguing enough to continue the discussion over several weeks, and the two became fast friends, challenging each other for hours on end with brain-twisting puzzles, competing to see who could finish first. Eventually Thiel recommended that Levchin start the business and promised his hedge fund would invest a couple of hundred thousand dollars in seed money. But Levchin knew hardly anyone in the Bay area and couldn’t find anyone to act as CEO. With no one to run the company, Levchin told Thiel that he might as well start coding and recruit a few programmers from Champaign.
“Maybe I could be your CEO,” Thiel said.
“That’s a really good idea,” Levchin replied.
It was decided. Thiel would run the business and Levchin would act as chief technical officer.
[ FALSE STARTS ]
They named their fledgling enterprise Fieldlink. In the meantime Levchin’s initial idea had been taking on decidedly different contours. After starting work on the crypto library, he learned there was no inherent demand for this level of security, hence no one would create applications. He then proposed that he code the software, package and sell it, but found no takers. Companies saw no compelling need for it. By now Levchin had built much of the underlying technology, which offered the capability to secure almost anything on a handheld device. What, though, could they protect that had value? Changing course again, they chose to address the consumer market and create a digital wallet to enable a user to stash private data like passwords and credit card numbers. But this, they realized, didn’t offer a powerful enough value proposition.
That’s when Thiel suggested the idea of storing money. This sent Levchin on a mission to create cryptographically secure IOU notes that could be beamed from user to user via the Palm’s built-in infrared ports. The basic premise was to turn that Silicon Valley staple, the PDA, into an electronic wallet to securely store and transfer money, and unlike cash, if you lost your PDA you wouldn’t risk a dime. Thiel figured that by backing these IOUs, it would be possible to make money on the float—that is, the interest accruing between the time money was deposited and spent. The idea was similar to the way traveler’s check companies profited, by skimming interest from customer accounts between the time checks were purchased and cashed. He suspected most users would keep some money in these Palm accounts instead of directing it immediately into checking accounts or to their credit cards to make it easier to pay people.
In the physical world, gaining access to cash had been getting increasingly easy over the years. By 1999 there were roughly 300,000 ATMs in the United States handling almost 1 billion transactions (compared to 40,000 ATMs in 1983 and fewer than 1,000 a decade earlier). Meanwhile the Web had been co-opted by e-commerce, with virtual stores of all stripes setting up shop, accepting Visa, MasterCard and American Express. The only way to settle a debt with a nonmerchant, however, was to snail-mail a check or money order, which ran counter to what the Internet was all about: instantaneous communication and convenience. That’s where their mobile cash concept came in: it filled a void that technology had created but had not yet filled. They named their new venture Confinity, a combination of “confidence” and “infinity,” reflecting the brand they aimed to foster.*
To Thiel, however, Confinity was far more than a business opportunity; it was an extension of his entire philosophy. Beginning in the seventeenth century certain enlightened thinkers had been gradually pulling the world away from humans’ nature-bound existence toward a new virtual realm where people conquered nature. Value, Thiel believed, existed not merely in manufactured goods but also in imaginary concepts such as relationships between humans. That was, after all, what money was—an agreed-upon transactional medium between people. In a physical sense it had no value. Money was simply paper or digits in an electronic bank account. It made little sense to exchange molecules for digits.
For neocons like Thiel, the Internet was greeted as a promised land that promoted freedom in human relations, business, and laws and was an escape from arbitrary national boundaries. It revealed a world of free trade and laissez-faire expansion, a hedge against corrupt governments. He believed the ability to circumvent currency controls and move funds anywhere in the world at any time equaled no less than liberation from government and multinational conglomerate tyranny. As Thiel and Levinch laid the foundation for Confinity, Neal Stephenson’s cyberpunk novel Cryptonomicon was published, and in their fantasies they hoped that life would imitate art, that their concept could one day blossom into its own currency system, reminiscent of Stephenson’s hero programmers who deploy encryption to set up an offshore data haven to foil governmental control.
Quaint by today’s standards, Levchin’s prototype quickly generated buzz in Silicon Valley with its legions of PDA-toting professionals. Imagine: three geeks sitting around a table, beaming one another IOUs for $10 to settle their lunch tabs. But to rely on one company—even one like Palm that had carved a respectable market share—would have doomed Confinity to failure. Silicon Valley might be Palm Central, but what about the rest of the country, which was slower to adopt new technologies? What if someone didn’t own a Palm? Thiel and Levchin bandied about, then discarded, the idea of creating a platform to run across all mobile phones. For that Levchin would need a minimum of two years to develop it and cell phone makers would have to redesign their equipment to accommodate the beaming function, something the Palm already had. That’s when Levchin remarked that a user wouldn’t necessarily need a Palm. He could sync the software with email and the Web and use it that way, too. With or without a Palm, a user could transfer money.
[ BEAMING MONEY ]
They called the product PayPal and on the strength of this futuristic vision Thiel raised $4.5 million in first-round financing from Nokia Ventures and Deutsche Bank. As Levchin readied the product for development, Confinity scheduled a splashy press event for July 22, 1999, when Nokia’s $3 million portion of the investment would be beamed to Thiel’s Palm organizer. A week before the beaming at Buck’s of Woodside, a diner popular with the venture capitalist set, the code wasn’t finished and Levchin realized they weren’t going to make it. Sure, he could go all Hollywood and fake it for the cameras. “Beep! Transaction complete.” But if anyone found out, he swore he would commit seppuku. So Levchin did what he always did when his back was against the wall. Forgoing sleep, he and two other programmers coded five days straight. With crypto, precision is key; off the tiniest bit, nothing works. They crunched the last string of code around midnight, ten hours before the press conference was set to start, and began testing. They fixed some bugs, tried again, and fixed some more. Long after night dissolved into dawn, Levchin was satisfied the path the money followed was secure. But there were memory leaks, enough to crash the software at just the wrong time. Levchin tuned up a stack of PalmPilots to stand by in case he needed to make a switch, jumped in a car, and with minutes to spare arrived at Buck’s, where Thiel waited anxiously.
Before a handful of journalists and TV cameras, Peter Buhl, a partner at Nokia Ventures, inputted $3 million in the amount box, tapped Pay, and pointed his Palm at Thiel, who sat nearby—not that any of the diners sipping coffee, their forks poised over scrambled eggs and toast, could see anything. Seconds later, the words Would you like to accept the money? popped up on Thiel’s screen. He tapped Yes. “Of course, that’s an understatement,” Thiel said. “It should say, ‘Yes, yes, yes!’”
A group of journalists staggered in five minutes late and asked Thiel to repeat the demonstration. Levchin told them the whole point of security is you can’t replicate the transaction because the money has already been transferred. The whole point of a press conference, the journalists countered, is to accommodate the press. So Thiel pretended to receive the $3 million all over again but hid his screen from the camera since it warned against transmitting the same funds twice. Although it didn’t make for good TV, Levchin viewed it as a personal triumph. Then things got hazy for the exhausted programmer. A reporter int
erviewing him left for the restroom and a waiter brought him breakfast. The next thing Levchin knew his head was resting on the table and he was staring sideways at his omelet. Everyone was gone. They had left him to sleep.
Over the next few months Confinity rented office space—the real estate market for office space was so tight that Levchin had to promise shares in the company to his Palo Alto landlord—and went on a hiring binge. Because Thiel’s ultimate plan was to create a Web-based currency to undermine government tax structures, which would require taking on powerful interests like commercial banking, the cofounders sought people a lot like them: hypercompetitive, well-read, multilingual workaholics who had, above all, a proficiency in math and an aversion to authority. At first they hired from within their own “concentric circles,” as Thiel described it. Thiel tapped his network at Stanford, including those who had worked at the Stanford Review, and Levchin reached out to friends at the University of Illinois. They valued talent over experience and would bring in someone to fill a role with which he had no experience. An accountant became a marketing chief. A former journalist ran customer service.
While Google was also known for pursuing Mensa-like minds, there was a distinct difference: Thiel and Levin didn’t care a whit about a piece of paper. As Roelof Botha, PayPal’s former chief financial officer, told Fortune: “Google wanted to hire Ph.D.s, and PayPal wanted to hire the people who got into Ph.D. programs and dropped out.” Levchin defined a “great hire” as someone who was introverted, “just as geeky” as he was, willing to sleep under his desk, and didn’t “get laid very often.” Among those who were unwelcome were jocks, MBAs, and women. Levchin told a story about asking a potential hire what he did for fun. The guy said he liked playing hoops, and Levchin refused to hire him because everyone he knew in college who played basketball “was an idiot.” Levchin’s game of choice was Ping-Pong, which he used to gauge a candidate’s competitive fire. When a female applicant for an engineering position played poorly, Levchin had to be coerced into hiring her. She quit six months later.
For his part the thirty-two-year-old Thiel ruled like one might expect a wonky numbers libertarian to rule. Informal even by Silicon Valley standards, Confinity resembled a college dorm. Almost everyone was in his twenties, wearing the uniform of youth—jeans and T-shirts—the expected detritus of pizza boxes and board games spilling over the floor and furniture. New staff found no desks or computers waiting for them. Sometimes they didn’t even know what position they would be assigned. Not all of Thiel’s hires were neocons. He appointed a close friend, Reid Hoffman, whom he had met in philosophy class at Stanford, to Confinity’s board and, and Hoffman was as liberal as Thiel was conservative. “Take his position, you make a sophisticated negation of it and you get my position, and vice versa,” Hoffman says.
Confinity prided itself on being a meritocracy. Underlings were expected to snark it out with superiors, the belief being that the strongest argument would win. Jeremy Stoppelman, who would climb the ranks to become the company’s vice president of technology, recalled being a twenty-two-year-old engineer who flamed the entire executive staff in an email. Instead of being fired for insubordination, he “got a pat on the back.” Meetings were discouraged. Instead, employees were expected to solve problems themselves. The exception was when Thiel called an all-hands open-book session where he would document the company’s progress—revenue, burn rate, fraud, rate of sign-ups. When Thiel called on someone, he had better have data to support his point. People may lie, numbers don’t.
[ VIRAL SPREAD ]
From the beginning Thiel was counting on PayPal to grow virally in the vein of Hotmail, ICQ, and Napster. He focused on viral distribution for both practical and philosophical reasons. First, he wasn’t convinced that traditional advertising or business development would work, and he was well versed in the mathematical formulae that explain infectious growth. Then the key wouldn’t be the number of people they started with; all that would matter was the rate it spread. Second, Thiel subscribed to a theory of human behavior known as “mimetic desire,” propounded by French historian and philosopher René Girard, who believed that people were essentially sheep who, without much reflection, borrowed their desires from others. This theory has been applied to describe financial bubbles and panics, when investors blindly act as a flock and follow what others are doing even if it flies in the face of economic logic, and to war and violence, which arise when two individuals vie for the same possession, leading to antagonism and strife. Pretty soon the object of desire is forgotten and all you’re left with is the antipathy.
With PayPal, Thiel was confident that customers would be sufficiently self-similar, and one of the predictable ways they would act would be to spread the technology to other people. Naturally this ran counter to Thiel’s entire libertarian worldview, that the individual should reign supreme. In a sense he was about to capitalize on an aspect of human nature he wished to wipe away. And the money he would use came, in part, from his hedge fund, which was backed by conservatives whose values matched his own. Then again, no one was forcing people to act in a mass, predictable manner. Thiel, it seemed, could live with this apparent renunciation of his core beliefs if he could build a company to take over the world, which became PayPal’s rallying cry. In fact, Luke Nosek, one of Levchin’s first hires, had a counter on his PC monitor labeled World Domination Index to tally the ever-growing number of sign-ups.
The riddle that Thiel and his management team had to solve was how to ensure that people would spread the product. As originally conceived, PayPal was a person-to-person payment system. Quickly an idea took shape that a user should be able to send someone money even if the recipient didn’t have an account. The easiest way to do it would be to set up one for him. Instead of two forms of ID, the user could simply use his email address as a unique identifier to claim the funds. Hoffman recalls that Nosek came up with the idea of a financial inducement to juice Pay-Pal’s virality. Each sign-up would receive a $10 deposit in his PayPal account just for registering and providing a credit card number, and for every new user he referred, he would get another $10 bounty. Although $20 a head may seem like a lot of money, Thiel and his management team calculated it was a modest amount to spend on customer acquisition for a company with no marketing costs. This was, after all, a time of Silicon Valley excess, when new companies bleeding red on their balance sheets spent millions on advertising, branding, and marketing, upwards of several hundred dollars per person for customer acquisition.
Stories of waste were legendary. Seventeen dot-coms forked over $2 million each for a thirty-second spot in Super Bowl XXXIV in January 2000. CMGI, a dot-com investment firm, contracted to pay $7.5 million to own exclusive naming rights to the New England Patriots home stadium for fifteen years. The Industry Standard, a magazine that covered the tech business, burned through $200 million in just a few years. Dot-coms of all sorts spent lavishly on employee perks—the Web business that took its entire workforce to California’s wine country for the weekend, the online ad agency that hired Tito Puente to play its Christmas party, CyberNet’s collection of fine wine, valued at $108,000. Clearly, none of these wasteful branding schemes generated any measurable return on investment. By contrast, if Confinity spent $2 million on inducements, it could count on two hundred thousand registrants and be on its way to unleashing a network effect.
Confinity launched PayPal for the Palm in November 1999, with its twenty-four employees seeding it by sending email to friends and family with the subject box “PayPal User Beamed You Money” and the message holding a Hotmail-inspired link to the PayPal website. Almost as an afterthought Levchin slapped a website demo online so users could download the software and, if they chose, do everything there they could do on the Palm. He put almost no effort in the look and feel of the site, which was there to promote the Palm application. Much to his surprise people began using the website for transactions. It grew on the order of 5 to 7 percent a day, while the Palm application dre
w merely three hundred new users daily. Eventually Confinity would discontinue the Palm applications, the concept on which their original idea rested, to concentrate solely on the Web. After parsing the data, Thiel and everyone else was surprised to learn that the lion’s share of users weren’t the young, affluent, tech-savvy early adopters they had been targeting. They were middle American auctiongoers on eBay, the sort who trafficked in tchotchkes like Beanie Babies, Pez dispensers, and vintage Tupperware.
Hoffman recalls the general response as, “What the hell? This isn’t designed for eBay.”
[ STACKING PAYPAL OVER EBAY ]
Actually it made perfect sense: eBay sellers needed a better way to complete transactions online. Most couldn’t process credit cards and waiting for a money order or personal check in the mail took time, not to mention the inconvenience of cashing a money order at a bank or waiting for an out-of-state check to clear. The process for becoming a credit card merchant took several weeks and required several fees—the application fee, the 1 to 4 percent fee that covered every transaction, the monthly premium that could run hundreds of dollars for maintaining a merchant account, the additional 20 to 30 cents per transaction the merchant bank would slice off the top. Then there was the threat of fraud, with the merchant often held culpable for processing a stolen card. Most eBay sellers believed credit cards weren’t worth the hassle or expense. But PayPal was free and didn’t lay responsibility for fraud on its users.
As eBay sellers embraced it, the bulletin boards lit up with discussions. Can it be trusted? What if the company goes out of business? Does it really pay $10 for each referral? David Sacks, a Confinity vice president, received an email query from an eBay seller requesting permission to display PayPal’s logo. On his auction he had embedded an advertisement for the payment service, which he linked to PayPal’s home page. Good for him, since he collected a fee for every buyer he referred, and good for PayPal—a win-win all around. But he wasn’t the only one on eBay marketing Pay-Pal. Several thousand auctioneers had embraced it, adding clickable links to the home page or writing detailed descriptions of the service so buyers could sign up. By the end of December, less than two months after the initial email seeding, Confinity tallied twelve thousand PayPal accounts. With 10 million registered users on eBay and more than tripling each year, the virtual mega–garage sale site offered almost limitless possibilities.
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