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- [00:00]
Guy Raz
Wondery subscribers can listen to How I built this early and ad free right now. Join Wondery in the Wondery app or on Apple Podcasts. Imagine getting a message from your favorite brand that feels like it was created just for you. Chances are they're using Attentive, the SMS and email marketing platform designed to help brands build and connect with their ideal audience. Attentive helps marketers create unique messages for every subscriber, transforming the consumer shopping experience and maximizing marketing marketing performance. But how does it work? Attentive's AI learns what subscribers actually want based on their real time interactions with your brand. That means it customizes the content, tone and timing of every message so they always resonate, ready to take customers on a journey created just for them? Visit attentive.combilt to learn more. We've all got our own professional goals. Maybe to impress an investor or show off your next big creative idea. Canva can help achieve your goals with the power of visual communication. We spend a lot of our lives at work, so it's time to find ways to enjoy it. Canva lets you jazz up your documents with images and charts from their massive media library or add animations to make your presentations pop. And I just love how easy it is to make designs. So whether you work at a small or a big company, in a team of two or two thousand, Canva empowers workplaces everywhere to design compelling content, save time and be more productive together. Love your work@canva.com with Amazon one medical pay per visit, you can access transparent, upfront and affordable healthcare to treat common concerns like ED and hair loss and prescription solutions for beauty and skincare right from the comfort of your own home. 100% online. Amazon One medical pay per visit offers customers a one time flat fee per visit with no insurance necessary. Connect with a provider quickly 24 7. No need to schedule a visit and Amazon Pharmacy will provide fast free delivery if medication is needed. Get care and meds for less with Amazon. Head to Amazon.com bilton that's Amazon.com b u I l T O M to learn more. A provider determines eligibility Prices may vary hey everyone, it's Guy here. So this week we're bringing you a potentially topical episode from the Vault. It's my conversation with Max Levchin, one of the founders of PayPal. And of course another one of those founders who founded a company called X, which then merged with PayPal has been in the news a lot and his name of course is Elon Musk. And you will hear some fascinating stories about many of the founders involved with PayPal, including some about Elon Musk. Anyway, our conversation covered so much ground that we couldn't fit it all into one episode, so this is just part one for part two. Just go back to your podcast feed and type in Max Levchinor affirm and you can listen to that one after.
- [03:21]
Max Levchin
Okay, enjoy the show.
- [03:26]
Elon Musk
2001 for me was largely a year of trying to scale this thing, as it was just blowing the doors off with its growth. Every week the growth would just be so much more than the systems could handle. Every Monday when ebay auctions would settle, the system would just go down for multiple hours. And at some point our head of database scalability, who was also a very accomplished blues singer and guitarist, brought his guitars to the office and would play the Monday blues because we all knew.
- [03:55]
Peter Thiel
The site would crash.
- [04:03]
Guy Raz
Welcome to How I Built this, a show about innovators, entrepreneurs, idealists, and the.
- [04:09]
Max Levchin
Stories behind the movements they built. I'm Guy Raz and on the show.
- [04:16]
Guy Raz
Today, how Max Levchin took an idea nobody cared about and transformed it into PayPal, a brand that embodied startup culture. With its rapid rise, hairpin turns, and world famous founders, there are just a few companies in tech whose overall impact.
- [04:38]
Max Levchin
Went a lot further than just the products they produced.
- [04:42]
Guy Raz
Hewlett Packard is a classic example. It's not the computers or printers they made that matter, but the fact that David Packard and Bill Hewlett were pioneers who laid the foundation for what is now known as Silicon Valley. Atari is another one. Sure, Nolan Bushnell's video games and consoles were cool, but what matters more is how Atari ushered in the video game revolution that's now a massive force in global entertainment. And then there's a company called PayPal. Yes, it may be convenient to pay someone using PayPal, but its products aren't nearly as important as the legacy that came out of it. The group of people who helped launch PayPal back in the late 1990s would go on to either found or fund companies including YouTube, Tesla, Facebook, Yelp, Flickr, LinkedIn, Mozilla, Palantir, and many more. You may have heard the phrase PayPal mafia, a term popularized by Fortune magazine in an article that came out in 2007. The PayPal story is full of public drama and private intrigue, and not surprisingly, has focused on its three best known Peter Thiel, Reid Hoffman, and Elon Musk. But the guy who actually had the earliest idea for PayPal is Max Levchin. Max is a gifted computer scientist and coder who founded his first companies as a student at the University of Illinois. In 1998, he launched a tiny cryptography company with Peter Thiel that would evolve into PayPal. Max would eventually go on to help start several other companies, including Affirma, payment platform that lets you pay for things in installments. Max's story is so rich, so full of anecdotes of the now famous founders he once worked with, and so full of lessons for anyone hoping to launch anything of value, that as the two of us were talking, I kept wondering how we were going to keep it all to a single episode. So we decided not to try. Instead, we're going to tell Max's story in two parts. In this episode, part one, you'll hear about his early years, the launch and growth of PayPal and its eventual sale to ebay. Max Levchin was born in the mid-1970s in Ukraine, when it was still under Soviet rule. As a Jewish family, the older generation of the Levchin clan faced a lot of hardship.
- [07:16]
Peter Thiel
Both my grandmother and grandfather come from fairly large Jewish families. My grandfather came from a family that was largely incarcerated by the Soviet state during the 1930s. Persecution of Jews and other intellectuals all throughout the sort of first half of 20th century. My grandfather's family found its various members in the gulags. And so by the time I met my grandfather, he had already lost most of his brothers and sisters. And the reason he and my grandmother survived, they were both physicists and they were both involved in some defense related.
- [08:02]
Elon Musk
Work for the state.
- [08:03]
Peter Thiel
So as the Germans approached Kiev, they're both sent very far off into Siberia to help the war effort from far away from the front lines.
- [08:14]
Max Levchin
And from what I understand, when you were growing up, your mom was also a physicist, right?
- [08:21]
Peter Thiel
Yeah, she was employed at the Food Sciences Research Institute, which sounds very boring, but she had a really cool job. She was measuring foods for radioactive contamination. And before Chernobyl, that was the very boring job. And then after Chernobyl became a very.
- [08:39]
Elon Musk
Exciting job, not in a good way.
- [08:41]
Max Levchin
So your mom worked for the state and was a scientist, and your dad was a.
- [08:48]
Peter Thiel
He was a writer, although he too had a chemistry degree, as a matter of fact. But his calling was fine arts.
- [08:56]
Max Levchin
And did you speak Russian at home or did you speak a Ukrainian dialect?
- [09:00]
Peter Thiel
We spoke Russian and my grandparents who lived with us spoke Yiddish to have an encrypted channel from the young ones.
- [09:08]
Max Levchin
Was your family at all religious? Did you have any Jewish identity? Or did they sort of stay away from it because it was. You'd be persecuted in The Soviet Union, if you practiced religion or Judaism. Right.
- [09:23]
Peter Thiel
I definitely identified as Jewish, but had zero understanding of the religious identity or really the historic identity. So I knew nothing of Jewish holidays. But amusingly enough, one of the things that happened. So first of all, I guess I was in the tracked program most of my life. So I would get into this math and science special track. And inevitably, because at least Soviet Jews were so obsessed with education, I would get to this new class and it would be like half Jewish. And one time a teacher made a joke, and it was very much an anti Semitic slur. And all of us kind of were a little stunned because, like, normally it came from other kids, didn't come from teachers, but it also just happened all around us. So it wasn't like that huge of a deal. And then after class, some kind of a spontaneous movement began. We were like, you know what? We shouldn't put up with this. This isn't okay. And so we somehow talked ourselves into submitting a formal complaint to the school about anti Semitism at the time. Seems just completely misguided because maybe we'd still get kicked out of school. But I think both the school and the teacher were so shocked by all these preteen early teen Jewish kids getting worked up about being called the equivalent of unprintable word in class that they ultimately censured the teacher and were like, yeah, you can't really teach this class anymore. Which, in retrospect, I think my parents were like, what are you doing? You're gonna get kicked out. Like, this is gonna jeopardize your chance of getting into a good university. And in retrospect, they're like, yay me. That was cool.
- [11:02]
Max Levchin
Okay, so I've read that as a kid in Ukraine, you were already getting into computers, right?
- [11:09]
Guy Raz
Like, you were already learning about.
- [11:12]
Max Levchin
About programming, right?
- [11:13]
Peter Thiel
Yeah, it's a whole collection of really lucky coincidences. So as my mom joined this food science research institute, the state gave her an order to learn how to program. And she wrote me into it and basically said, look, I'm not really sure I understand how this stuff works. Help me out. And so that was my first kind of rabbit hole into programming. And within a few months, I was a better programmer than my mom and then better programmer than her colleagues. And I was just gorging myself on all the knowledge that I could get from bootleg translations of various computer science books. And so by the time I got to the US I was completely hooked on the idea of writing software. And I knew that I wanted to be A software engineer. I knew I wanted to go somewhere sort of beg, borrow and steal, get my way to a keyboard in the Monitor.
- [12:00]
Max Levchin
Soviet union collapses in 1991, officially in Ukraine would become an independent state. And today we're seeing the long tail of that story. Your parents decide to emigrate to the United States. First of all, what did they. I mean, what were they going to do when they got to the. What was their plan when they got.
- [12:22]
Peter Thiel
To the us I'm pretty sure they had no plan, but they just knew.
- [12:26]
Max Levchin
What they wanted to get out.
- [12:26]
Peter Thiel
So a couple of things led to it. So my grandfather in particular, but also my grandmother, were generally speaking, apparently quite dissident in their views. And I wouldn't know it even though.
- [12:39]
Elon Musk
They lived with us.
- [12:40]
Peter Thiel
So my grandfather, he and my grandmother have been scheming to get out of the country since maybe the 70s, certainly all through the 80s. And two things happened. In 1986, my grandfather died quite suddenly and my grandmother retired and she completely disappeared from the spotlight. She was an internationally known astrophysicist. And actually one of the coolest things I found after I came to the US is my grandmother's research papers in the Harvard Library, which was like a. Wow, I did not know this was the thing.
- [13:17]
Max Levchin
You're physics royalty.
- [13:19]
Peter Thiel
Well, I'm a physics royalty adjacent. But she was an amazing woman and it's completely appropriate that she has papers in the Harvard Library.
- [13:29]
Elon Musk
But.
- [13:30]
Peter Thiel
But my grandmother decided that she would get us out, the entire family. And so she engineered this mass exodus of the Levchin clan while basically dying. She had breast cancer that was fairly aggressive all throughout this process. And she just sort of said, you know what? Screw this, we're getting out. And so I don't think they had a plan, they just had an opening where they realized that Soviet state was falling apart. She had to bribe a Soviet official to give her a new birth certificate. And suddenly we found ourselves on a plane to New York.
- [14:06]
Max Levchin
Wow. So you were let out and you land in Chicago in 1991.
- [14:13]
Guy Raz
So what did your parents do for.
- [14:15]
Max Levchin
A living when they got there?
- [14:16]
Peter Thiel
My father, a man of arts, spent a bit of time painting signs for shops on Devaughan street, which is kind of a main drag in north side of Chicago. And my mom babysat for the first, I think, 10 years of our life.
- [14:33]
Max Levchin
In the U.S. and did they speak English?
- [14:36]
Peter Thiel
My mom spoke decent English and my dad did not.
- [14:39]
Max Levchin
You were a 16 year old kid. Did you speak English?
- [14:42]
Peter Thiel
Yes. They started me on it at 2. I think there are tapes of me Trying to speak English as a 2 year old.
- [14:49]
Max Levchin
Wow. All right, so you could integrate into the school system. Your brother, you're a junior in high school, basically. And was it hard for you when you got to school?
- [14:58]
Peter Thiel
So academically it was not. I definitely had my fair share of you're not from around here type conversations, but I was fortunate in the sense that I went to a very normal inner city public high school in Chicago. It was something like 30% black, 30% Asian, 30% everything else, 10% people you didn't know existed. Just some sort of a very, very, very integrated mix of anyone and everyone. And so this was not a, oh, wow, you're not from around here. It was more of a. Oh, you're one more of these people who speaks with a funny accent and does math really well and plays clarinet. Okay, we have three of you over.
- [15:41]
Elon Musk
There in the corner.
- [15:42]
Peter Thiel
Yeah, I fit every stereotype.
- [15:46]
Max Levchin
So I read a story that you knew about MIT and that was your dream to go to mit, and you talked to your school counselor about it, but you were steered in a different direction not to mit.
- [16:00]
Peter Thiel
Yes, this is one of these you laugh, you cry, you end up in a different university stories. So I don't remember actually whether this was the way it was formally translated or the way I translated it, but in my from English to Russian back to English translation of mit, it became mti.
- [16:19]
Max Levchin
So you talked to your counselor and said you wanted to go to mti?
- [16:22]
Peter Thiel
Yes, I was barrying system. I really wanted to go to mti. And she said, well, I just don't.
- [16:27]
Guy Raz
Think I know the school who's heard of mti.
- [16:30]
Max Levchin
The Montana Technical Institute.
- [16:32]
Peter Thiel
I think my counselor may not have heard of that one either. But she basically said, you've never taken an act, you've never taken an satisfaction. You're as fresh off the boat as they come. Just get your bearings and then you'll.
- [16:45]
Elon Musk
Get to the right university.
- [16:46]
Peter Thiel
And so I was quite discouraged. But fortunately I met this great guy named Eric who is still one of my very closest friends. And I said, all right, I really want to go do computer stuff. Where do I go? And he said, the brightest kids from this school get into University of Illinois, Urbana Champaign. And that's where I'm going to try to get into. If you want, I'll show you how to get the paperwork. And that's how I ended up at U of I.
- [17:10]
Max Levchin
All right, so you get to school and you are determined from the day you get there to what to become a software engineer when you graduate. Or to start your own software company, or both. I mean, from what I've read, it sounds like you kind of knew what you wanted to do when you got there. Is that true?
- [17:30]
Peter Thiel
A little bit after I got there. So I got there, I was still very much under the spell of my grandmother, who was with us. She actually managed to survive long enough to see the family move to Chicago. And so on my way to college, she was quite ill. Like, really, really ill by that point. And she basically said, look, I think you should probably consider being a professor. And that was my plan when I entered ui. But midway through sophomore year, I ran into a couple of guys that were starting their first company, and they sort of infected me with the entrepreneurial wanderlust. And that's when I knew I just needed to write code and build companies and products and businesses.
- [18:10]
Max Levchin
I mean, this was kind of a heady time at the University of Illinois. I think Netscape was. Marc Andreessen came out of there. Right. And so it wasn't mit, it wasn't Stanford, but it was not far behind in terms of the innovators that would come out of there. But it's still the mid-90s. It's still like early Internet days, but you probably had access to see or to be exposed to technology that maybe ordinary people weren't exposed to yet. Even as a computer science student.
- [18:48]
Peter Thiel
Yeah, that's exactly what happened. And so. So all of us were kind of realizing that we're in the middle of this maelstrom of innovation and we couldn't know and didn't really know exactly what was happening. But suddenly there was lots of attention to this Mosaic project that Marc Andreessen started at national center for Supercomputing Applications. And there were all these people visiting campus and looking. And the graphical browser mosaic v1 launched in 93 when I entered Canvas. And so I was thrust into this. The future is being made right here. Nobody knows what it looks like, but it's definitely being created right in front of you.
- [19:27]
Max Levchin
By the way, do you remember getting on that browser for the first time? Oh, yeah, absolutely. Because I remember it just seemed like something totally. What is this?
- [19:35]
Peter Thiel
Pennsylvania Avenue Residences hall computer lab, downstairs to the left. Second computer from first row. Yeah, that's where I was when I saw my first copy of Mosaic. And I actually remember thinking, well, this isn't that big of a deal. Except the embedded images are crazy cool. Like, this is just like all these other text sort of hyperlink navigating things that I've seen before. But the Images right alongside the text.
- [20:01]
Elon Musk
Is just like a completely different experience.
- [20:03]
Peter Thiel
It's like reading a book. And that was pretty amazing.
- [20:07]
Max Levchin
While you were in college, you. You already started to connect with other students just to start businesses, right?
- [20:17]
Peter Thiel
So I think a lot of the immediate reaction to two things, the launch of Mosaic and kind of the like, oh, my God, this is different and important, and everything will change now. Plus, wow. Mark and five other people just upped and left campus and went to Palo Alto, California, which seemed like going to the Mars to start a company. And that construct was so cool and so inexplicably desirable. I ran into these people who were kind of hanging around the same computer science circles, and they're like, hey, we're gonna start a company. You should join us. Because you're one of these guys who doesn't sleep, doesn't. He just writes code. And I was like, that sounds great. I don't really know what we're gonna do. And, yeah, we don't know it either, but we're just gonna go start a company. It doesn't matter what it's gonna do. And what we kept on trying to do is answer the question, okay, so the world today looks like this. Now, ad Web. So Advertising exists on TV. It exists when you drive Highway 57 from Chicago to Champaign. What happens to advertising when everyone has a web browser? We should build a company around that.
- [21:19]
Max Levchin
And I know you started a number of companies around this period which didn't quite work, but what were some of the ideas that you came up with?
- [21:28]
Peter Thiel
So the first one was in fact a web advertising. I think may have been the very first web advertising company failed miserably for lack of funding and lack of understanding of how advertising industry really worked. Next one was an attempt to reimagine classifieds. So I looked at a back of a newspaper. I was like, oh, classifieds in a newspaper. How about classifieds plus the web? That was actually kind of vaguely successful.
- [21:53]
Max Levchin
It's a great idea.
- [21:54]
Peter Thiel
I thought.
- [21:54]
Max Levchin
So successful in which way people were paying money for it?
- [21:59]
Peter Thiel
Yeah, my friend and I started that. And he would literally call small regional newspapers, like an Upper Peninsula Michigan newspaper with circulation of 200, and would say, do you guys have a website? And they'd say, yeah, we just got on the web ourselves. We have a website. It's like, great. You need to classify its package, because right now you make money by selling classified space in the back of the newspaper. Surely you will want to sell some classified space on your website. And so we would actually charge them SaaS fees like $1,200 a year, I think.
- [22:28]
Max Levchin
But none of these companies that you started really went anywhere though, right? Like, you didn't walk out of college with a big chunk of cash in your wallet.
- [22:36]
Peter Thiel
No, I walked out with student loans.
- [22:39]
Max Levchin
Right, got it. Okay. But you walked out of college, clearly fired up to start something.
- [22:48]
Peter Thiel
Yeah. The very seminal moment of sort of like, this is what I'm going to do with for the rest of my life was when the very first company failed. We drove up to Chicago, the four of us, to try to raise money and were rejected. It was the advertising web business. We actually went to, I think Leo Burnett, one of the large advertising agencies at the time, and they were sort of like, yeah, you guys have no idea what you're talking about. It's not going to hunt. And so this was our last ditch attempt to save the company. So we were driving back to Champagne completely silent, the four of us in one car and just kind of like, this is it. Like, end of the road, we're dead. And all I could think about was, what is the next company I'm going to start? Like, I could not even like I was trying to convince myself that's like, this is the moment of grief. You need to feel bad about the death of your first company. But I'm not. I just can't wait to figure out what the next one is going to do. And so when I left college, I was just sort of on this kick of like, well, number one, number two, number three, number four, they both failed, but surely number five will succeed. And I just couldn't wait to get started.
- [23:56]
Max Levchin
When we come back in just a.
- [23:58]
Guy Raz
Moment, how Max moves out to Silicon Valley, meets an up and coming small.
- [24:04]
Max Levchin
Time investor named Peter Thiel, and starts a brand new business that initially goes absolutely nowhere. Stay with us. I'm Guy Raz and you're listening to.
- [24:16]
Guy Raz
How I built this. This message comes from Schwab. With Schwab Investing Themes. It's easy to invest in ideas you believe in, like online music and videos, artificial intelligence, electric vehicles and more. Schwab's research uncovers emerging trends. Then their technology curates relevant stocks into over 40 themes to choose from. Schwab Investing Themes is not intended to be investment advice or a recommendation of any stock or investment strategy. Visit schwab.com thematicinvesting what makes a leader? Well, a true leader leads by example. And a true leader takes risks too. They plunge into life with determination. For those who approach life with a palpable passion, there's the Range Rover Sport. Sophisticated refinement meets visceral power in the Range Rover Sport, a new dimension of sporting luxury. With its adaptive off road cruise control, you can monitor ground conditions and acclimate to the present terrain. Plus, adaptive dynamics reduces unwanted body movements to deliver smooth and composed handling. Build your Range Rover sport@land roverusa.com One of the hardest parts about B2B marketing is reaching the right audience. I constantly get aggressive emails from people offering me marketing services I just couldn't possibly need. So when you want to reach the right professionals, use LinkedIn ads. LinkedIn has grown to a network of over 1 billion professionals, and that's where it stands, apart from other ad buys you can target by job title, industry, company role, seniority, skills, company revenue, whatever you're looking for. Which means you can find all the professionals you need to reach in one place. Stop wasting budget on the wrong audience and start targeting the right professionals only on LinkedIn ads. LinkedIn will even give you a $100 credit on your next campaign. So you can try it yourself. Just go to LinkedIn.com builtthis that's LinkedIn.com builtthis Terms and conditions apply only on LinkedIn AD. Hey, welcome back to How I Built this.
- [26:46]
Max Levchin
I'm Guy raz.
- [26:47]
Guy Raz
So it's 1997, and Max Levchin has just graduated from the University of Illinois.
- [26:53]
Max Levchin
With a bachelor's degree in computer science.
- [26:56]
Guy Raz
He's already walked away from a few businesses that he couldn't raise money for, and now his former co founders are telling him to go west.
- [27:06]
Peter Thiel
My co founders number one and two upped and left for Palo Alto because they knew you had to go there because that's where the action was. We failed to raise money. Silicon Valley was chock full of venture capitalists that were interested in giving money to people like us. And so they said, you know what? This college thing is overrated. We can drop out and go. And because these two guys, Scott and Luke, moved to Palo Alto, I knew we all kept in touch and I had gotten nonstop stream of oh my God, it's Mecca for startups here and you're riding away in champagne Urbana. Get out here as soon as you can.
- [27:41]
Max Levchin
This is Luke Nosek and Scott Bannister, right?
- [27:43]
Peter Thiel
Yep.
- [27:44]
Max Levchin
They'd come back into your Life well in 1998 because you move out there to kind of hang out with them.
- [27:50]
Peter Thiel
Yep, exactly. 469 Grant Avenue, apartment queue. I was crashing on Scott's floor and Luke was in apartment P across the hallway.
- [27:59]
Max Levchin
And when you Got there. What did you do?
- [28:02]
Peter Thiel
I sort of. Because I was hanging out with Scott, I promptly became his brainstorming partner. I knew programming and I thought myself a pretty great software engineer. But I knew that most of my failures as a startup CEO, cto, whatever I thought I was, were because I would build things that I thought were good and easy to use and then I would show them to someone like the classified software. And people are like, this is really great, but I have no idea how to make it work. It's so complicated. So I decided that my next sort of development phase in life would go hang out with people who are really good at product design. And Scott happens to be just a genius product designer type thinker. And so I sort of attached myself to him and would just roam around wherever he would go and say, all right, I have a product idea. And he would tell me, all right, tell me a product idea. And I'd tell him.
- [28:48]
Elon Musk
And he'd rip it apart and show.
- [28:49]
Peter Thiel
Me why it's a stupid idea and all the things that are wrong with it. And it was my crash course, education in product design.
- [28:56]
Max Levchin
So you were kind of trying to come up with different ideas and I guess In August of 98, a fateful and certainly fortunate encounter. We went to a lecture at Stanford by Peter Thiel. We know who Peter Thiel is today. He was at the time presumably just a kid. I think he went to Stanford and law school and worked in finance and left finance. And at that point he had raised some money to start a hedge fund. I don't think it was a huge hedge fund. I think it was relatively small.
- [29:27]
Peter Thiel
It was $10 million.
- [29:28]
Elon Musk
It was very small, yeah.
- [29:29]
Max Levchin
Comparatively to what it would be today. Why did you go to that? What was the lecture? And you were not a student at Stanford, but I think it took place on the campus.
- [29:42]
Peter Thiel
It's a funny story. So Scott's apartment had no air conditioning, as many apartments in Palo Alto do not. But it had a heater which would turn on based on some magic incantations and rules that I couldn't understand, but that it was mostly on somehow. And nighty, it was unbelievably hot. And so as much as I could, I would go find an air conditioned room to just like not be drenched in my own sweat. And Stanford has all these wonderful classes during the summer and they don't really check IDs, they just kind of roam. At least back in the 1998 time frame. Yeah, at the time I would just kind of wander into a room any Room and sleep on the back. If the lecture was big enough, nobody cared. I was sort of half conscious of this guy named Peter Thiel because Luke told me that this young hedge funder, Peter Thiel, he thought was really brilliant because, among other things, he was this super crazy libertarian. And so as I was roaming through Stanford looking for a lecture to crash and sleep, I saw Peter's name. I was like, oh, all right. Well, if the lecture is boring, I can sleep. And if the lecture is interesting, I could listen and see who this Peter Thiel person is.
- [30:55]
Max Levchin
What did he talk about?
- [30:57]
Peter Thiel
He talked about currency trading, which was fascinating because I never even knew that whole genre of business existed. And more than anything, I just thought he was really bright. He was obviously a very, very smart person.
- [31:11]
Max Levchin
From everything I've read about you, you were a little bit awkward. Maybe you still are today a little bit, which is okay.
- [31:19]
Elon Musk
I suspect that hasn't changed.
- [31:20]
Max Levchin
No shame there. But you did have some and the courage to go talk to him. By the way, was it a packed lecture hall? Was it like hundreds of people?
- [31:28]
Peter Thiel
No, actually, the reason I didn't sleep was because it was literally six people in a tiny little room. It was about as big as a broom closet. My first reaction, I remember very vividly going like, oh, my God, I can't walk out. I can't even sleep because lecturer, this Peter guy will see me and probably mock me or something. So I just kind of sat there and listened. He had another person who came up to him afterwards, and you could tell from the look on his face that he was not enjoying the conversation. He just looked absolutely miserable while he was being sort of interrogated, talked at by some random person. And so I sort of decided that my move would be to free him from the grasp of this person who was interrogating him. So I sort of came up and said, hi, Peter, I'm Max. I'm Luke's friend. And I think he probably didn't necessarily know which Luke I'm talking about, but he was like, oh, Max, yes, great, great. I'm so sorry. I have to talk to this person. So he just kind of abandoned the guy who was torturing him and started talking to me.
- [32:26]
Max Levchin
And what did you talk to him about? Do you remember? Do you say, oh, I liked your lecture?
- [32:30]
Peter Thiel
I became my awkward self and basically said, well, I'm Max. I just moved here from champagne. So it was a weird kind of a zero content conversation. And then he asked me what I'm up to, and I said, I'm definitely going to start a company again. And he said, oh, that's cool. We should definitely talk about that. Let's meet for breakfast. Okay. And he said, how about tomorrow? Which is very indicative of how Peter Thiel generally does things that Peter Thiel does.
- [32:57]
Max Levchin
So next day you guys meet for breakfast. Where was it?
- [32:59]
Peter Thiel
Was it Hobee's on Embarcadero and El Camino Rail?
- [33:04]
Max Levchin
Yeah. All right, so you go for breakfast at Hobee's legendary Silicon Valley Diner Cafe and you're like 22, 23. He's probably close to 30. So he's like the. You're probably thinking, wow, this guy knows where it's at. He says, what are your ideas? And what'd you tell him?
- [33:26]
Peter Thiel
I came prepared. I had two ideas. One was based on a consulting gig I did while I was in Champaign. There was this company in Chicago. They would gather everything from short clips of commercials, from TV and photographs, or ripped out pages from magazines advertising, typically consumer packaged goods. And they would gather this whole thing up into a database which I would code for them, and then they would sell that database to major brands. This was a legal way of gathering competitive intelligence. And nothing like this existed on the web. There are all these companies now that were marketing things on the web. And I thought this should be a competitive intelligence company for the web. So that was my idea, number one. And I pitched that to Peter and he was sort of like, okay. And I could tell he just was not impressed. I thought it was the coolest idea in the world. And then he asked me like, all right, so what's your other idea? He said he had two. And before I fully, fully decided that I wasn't going to get a master's or a doctorate, I was very hard at work on cryptography. So the idea of secret codes and breaking and making codes, and that's what I wanted to do if I were to go get a PhD. And I had this sort of half formed idea that the world eventually would have small devices. Everybody would have a small device in their pocket. And this is long, long, long pre iPhone. But this is right around the time of the heyday of the PalmPilot.
- [34:56]
Max Levchin
The PalmPilot? Yes.
- [34:58]
Peter Thiel
And then I looked at the security design of the Palm and was sort of flabbergasted to know that there was no way to encrypt anything. You could communicate with other palmpilots, but people could sniff the communication and just steal your secrets. And so I had the second idea called Secure Pilot, which was going to be cryptographic software for PalmPilots. And I was very reluctant to share this because this is a niche within a niche, like crypto security. Most people don't care about this stuff. And Palm Pilots are still in their infancy. There's maybe 1 million of them, soldiers. And so I kind of blurred that one out. And Peter was super excited about it. This is the greatest thing ever. Like, you should absolutely start this company. And I would like to invest. And I was like, the exact opposite of what I expected in every dimension. But, sure, I'll take your money.
- [35:39]
Max Levchin
This was because with Palm Pilots, you could, like, exchange addresses through infrared. Right. You'd point them at each other, and that basically, if you knew how to. Or it was relatively easy to just suck information from 2. Someone else's palm Pilot.
- [35:55]
Peter Thiel
Yes.
- [35:56]
Max Levchin
And you were like, this is a security flaw. We should develop the technology. And. All right. So he says, I like this idea. I think we can maybe fund. Invest in this.
- [36:05]
Peter Thiel
Yeah. He literally offered to invest on the spot. It was actually, like, the amount of time it took him to go from, that's a cool idea. And I'd like to invest was like, fewer than a sip of his smoothie. It was like nanoseconds. I was actually startled and was like, okay, well, I guess I'm starting this company because I have an investor. Which, by the way, this was the very first investor interaction I've ever had in my life. That wasn't, get out. This isn't going to work.
- [36:30]
Max Levchin
And what did you know about. Did he say, I'm going to give you $100,000? How much money was he willing to give you?
- [36:38]
Peter Thiel
He asked me how much money I thought I needed to get this off the ground. And I said, I think I need about a half a million dollars. He said, Great, I'll invest 300,000.
- [36:45]
Max Levchin
Wow. Okay. It's pretty great. And a fortuitous meeting for Peter Thiel as well, because he was. He had a $10 million fund at that point. I mean, not bad, but it's not great. Not necessarily guaranteed to make money.
- [37:00]
Elon Musk
Yes.
- [37:01]
Max Levchin
What was it about? I don't know. Peter Thiel. I only read a lot about him, and obviously his reputation precedes him, and some of that may be caricature and some might not, but even as a student at Stanford, he was a bit of a lightning rod. Why did you trust him? Because, you know, it could have gone really badly, and he could have. You had no experience dealing with venture capital investments. Like, you didn't probably know how to structure the terms or your equity. What Was it about him that connected with you?
- [37:37]
Peter Thiel
I think the sort of the pragmatic answer had absolutely nothing to lose. There was nothing to take from me. And so in terms of risk reward, it was sort of like the worst that can possibly happen is I'll go from nothing to nothing. So there's just very little downside. The thing about Peter that I think most people who don't know him just can't fully relate to. He has this amazing ability to see what you are great at. And he gets so excited on your behalf to be your best self, as the kids will call it these days, that you can't just not get infected. You become this ball of energy. Because this guy Peter Thiel, you barely met, is just so excited about how talented you are in this one area and you will change the world. And he wants to be a part of it and he wants to be an investor in it. He wants to be a partner and your friend. And he's clearly genuine in it and kind of go, like, I didn't even know I am that good. And this guy is telling me he can see it and he's doing it with his entire body. He's that excited. And I was still knee deep in my various imposter complexes at the time. I was this immigrant kid. I wasn't quite sure if I dropped my accent fully. And it was supposed to be a PhD in computer science, but I just got a bachelor's and ran away. And he was just so genuinely excited to build this thing and to help me build it. And I think that it's his superpower, is that he enables you to be your very best self. Wow.
- [39:13]
Max Levchin
So what was the next step? I mean, with a $300,000 investment. Did he say, go and raise the other 200? Did he say, go, start working on this? Did he say, go hire somebody? What did you do?
- [39:26]
Peter Thiel
I think he originally thought that I kind of had a plan and he would just sort of write me a $300,000 check and then off you go. And he did say, look, you need to go line up the rest of the money because this isn't going to be enough. You just told me you need at least a half a million dollars. And so I sort of immediately owned up to the fact that this is my first and only successful fundraise. And so I probably could use some advice on how to do it. Said, okay, well, maybe I'll help you out. And he had this guy that worked for him in Teal Capital Management, his second in command, named Kenny Kenhowery and Kenny will help you. Kenny's very good at fundraising. He helped me. And so Kenny got to work and made me a pitch deck. And then I went in to pitch some randomly selected venture capitalists, and they were all one by one telling me how this will never work. It's a stupid idea. And it was just like rejection upon rejection. So at some point I went back to Peter and said, all right, something's not working. You bought this and can you help me with the deck? But it's just not landing with anyone. What do I do? And so he said, fine, I'll help you. And so he started coming with me on these venture capital pitches.
- [40:33]
Max Levchin
So basically it wasn't the content of the pitch, it was you. You just sucked at it. You weren't good at it.
- [40:39]
Peter Thiel
I think it may have been me.
- [40:41]
Max Levchin
Yeah. And he was charismatic and more confident than you.
- [40:45]
Peter Thiel
Yeah, I was very awkward. And this totally did not work in venture capital where I would show up with a disheveled hair and a T shirt that said Microsoft sucks or something like that. And people were like, all right, this is not a serious person.
- [40:58]
Max Levchin
At that time. At that time. Well, that would change, of course. But at that time it was like. Because probably venture capitalists were used to people with MBAs pitching them.
- [41:08]
Peter Thiel
Yes. I think they very much wanted to hear from someone who went to a top tier school and could speak financial language and definitely had shoes on instead of flip flops.
- [41:19]
Max Levchin
Right. But even if your pitch skills weren't great, I'm still skeptical. I'm also skeptical about this idea. I would not invest in that idea. It doesn't seem that promising to me. So I guess, I mean, if Peter Thiel was behind you and he already had some connections, maybe that gave other investors confidence. But what were they investing in?
- [41:44]
Peter Thiel
I am not sure. I think that's the honest answer. I think more than anything. First of all, just to give you a sense for the success rate of these pitches, we ran out of venture capital, the Sandhill Road classic blue chip venture capitalist community, very quickly. I think we were roundly rejected by 100% of those pitches. We drove up and down Sand Hill Road and got absolutely nothing. And then we started pitching people kind of in the outskirts of the broader Silicon Valley. I remember driving to a place called, I think it was called Red Roof Ventures or something, Red rather. And it was a very long drive. And Peter, of course, drove me around because I didn't have a car. And this was a particularly memorable meeting because these people basically threw us Out. They're like, this is a stupid idea. We don't understand anything about it. We know we have another 15 minutes in the clock, but you're wasting your time and ours too, so please leave. And so we were not successful, even with Peter's cachet. And so we pretty quickly shifted into these friends and family, wealthy people Peter knew and maybe raised money for his hedge fund. So this was definitely not a professionally sourced seed capital, nothing like today.
- [42:55]
Max Levchin
All right, and this company that you launched, was this the company that you called Fieldlink?
- [43:01]
Peter Thiel
The very original name was Fieldlink, because the idea was you would have all these salespeople in. In the field, and they would have secrets on their palm pilots, and you.
- [43:09]
Elon Musk
Would have to encrypt those secrets.
- [43:11]
Peter Thiel
That was the encrypted field link. And then it was kind of an awful name, even by my unsophisticated measure. And so I decided I wanted to give it a new name. So I spent a lot of time thinking about it and came up with Confinity, which was confidence and infinity combined. And I was very proud of this. And then I pitched Peter, and he was like, sure, whatever. Like, we have bigger problems. We need to raise money, Peter. And then I told someone else, and they were like, oh, like a long con. Like, okay, you're gonna sell me security software by company with the word con in it? That's terrible. And so we kind of knew from day zero that Confinity wasn't gonna last. But that was the placeholder name for a while.
- [43:48]
Max Levchin
But I think in any case, you at this time, do get some funding from friends and family, and I think you managed to hire your friend from the University of Illinois, Luke Nosek. Right. Like to come out and help you.
- [44:01]
Elon Musk
Yep.
- [44:02]
Max Levchin
And did you get office space? Did you, like, get rent a place and, you know, put computers in and get a fast T1 line in and start, you know, clamoring at the keys on your computer.
- [44:15]
Peter Thiel
Basically, we got our first office for this newly renamed Confinity on University Avenue, which Peter actually placed at the time, a lot of significance on, like, having a cool address. Like, you don't want to be in some random, crappy, off the grid office. You want to be on University Avenue because that signals that you're important, you're in the mix. So we got that 394 University Suite 2. And we had a bunch of IKEA furniture that we self assembled, and we started typing.
- [44:48]
Max Levchin
And at some point, I think pretty soon after Peter Thiel, he became the CEO of this company that you started. Did you ask him to be the CEO or did he sort of say, you know, I should probably be the face of this thing because I'm a little bit better at presenting.
- [45:07]
Peter Thiel
It was very much my effort. I remember talking to him towards the end of 98, I think I was paying off a parking ticket. He made me get a car because he was tired of driving me around. So I had to buy a car and Luke had to be my co signer because I had no credit. And so I promptly got my first parking ticket. And so I had to go to the courthouse in Palo Alto, I think, or City hall or something like that to pay off my ticket. I was standing on the steps of City hall, basically telling him about yet another failed attempt at fundraising and the fact that I really should just be writing code. And he was telling me like, no, no, no, you really should be recruiting your friends from college. Like, this will not work out if it's just you writing code all the time. You must know some smart engineers.
- [45:53]
Elon Musk
Go get some.
- [45:54]
Peter Thiel
As we talked, I was sort of like, you clearly know what we should be doing as a company and I just want to build this thing. Like, maybe you should be the CEO. And I sort of said it out loud and he was like, no, that's a terrible idea. Like, I don't want to do this. I have this fund, it's doing really well. And I sort of like, no, no, no, that's exactly what you need to start wanting to do. And so I went into this mode of must persuade Peter Thiel to be the CEO of this company.
- [46:17]
Max Levchin
So Peter is a CEO and you are presumably the head of technology and you're trying to develop this crypto software that will encrypt data between palm pilots. But at some point, clearly this shifted to a completely different business. So tell me about how you came to the realization that maybe that wasn't the right thing to focus on.
- [46:43]
Peter Thiel
So the sort of backdrop, Peter and I and Kenny and Luke are all kind of roaming around Silicon Valley trying to see if there's demand for the software that we're building. And it's becoming clearer and clearer that there really isn't. And there's no nicer way to put it, that no one really cares. I remember talking to Jeff Hawkins, who created PalmPilot, and his executive team, and they're like, uh huh, yeah, you know, security. Like we totally thought about it. It'll get on a roadmap one day. But it's a consumer product right now it's like address books and like, nobody's clever enough to steal things through these IR beams. But I can show you a demo where I can do that. Yeah, but you're like a weird kid who wants to steal things from IR beams. And so it just wasn't really of value to the market. And we basically shifted kind of back to the brainstorm mode, where Scott Bannister and Luke and Peter and Reid Hoffman.
- [47:40]
Elon Musk
Who was Peter's friend from Stanford and.
- [47:43]
Peter Thiel
A handful of others would just stay up really late at night and brainstorm, what else can we do with this tech before we call it a day? And Reid was one of the more prescient brains who was sort of like, hey, you can secure other things. Maybe you can secure invoices or secure IOUs or, you know, secure something that kind of is valuable in and of itself. And that kind of pushed us close enough to this idea of an electronic wallet. And then there was a very short throw from that to, well, what if we just secured money?
- [48:16]
Elon Musk
And that.
- [48:16]
Peter Thiel
That's kind of the starting point of PayPal.
- [48:18]
Max Levchin
Reid Hoffman, who's been on the show, was on the show a few years ago and. And if you want to hear a story, you should go back and, and check out that episode. He went to found LinkedIn. Was he kind of just hanging out as a friend or was he. Did Peter, like bring him on as an employee of this company?
- [48:38]
Peter Thiel
He was a board member of ours and he was running this company called Social Net, I think it was called, and it was failing. I actually remember visiting Reid at his company and it was like one of these stark kind of visuals. Like, I'd already failed four times, so I was perfectly comfortable with failing companies, but I'd never seen a large scale failing company. And I walked into this office and it was dark, it was middle of the day, and it was just like, no people there at all, lots of desks. And I was like, wow, this is so depressing. And that's when Peter sort of said, look, you should join our board and maybe you should join our company. And so eventually Reid, of course, joined PayPal as a full time employee, but at the time he was a board member. And so he was mostly hanging out with us and brainstorming.
- [49:16]
Max Levchin
And so you begin to kind of pivot into this idea that maybe you should focus on encrypting money transfers. Is it a year before you make that pivot or is it faster?
- [49:29]
Peter Thiel
Faster? I think by mid spring, late spring 99, we were full steam ahead on.
- [49:37]
Max Levchin
We'Re getting crypt money and you Changed the name to PayPal at that point.
- [49:42]
Peter Thiel
Yep. Well, we started the name change process. It took a couple of months to get there.
- [49:47]
Max Levchin
All right, at that time, and this is 1999, your PayPal. It's not yet PayPal that we would know of as PayPal. It's still, the concept is still like, if I were just, I don't know, if I was just meeting you at a party somewhere and I was not a tech person, I'd say, all right, well, what are you working on? Explain this thing. How's it going to work from the consumer perspective? What would you have said in 1999?
- [50:12]
Peter Thiel
First of all, you would have walked away thinking, wow, that guy's a nerd. He cannot explain what he works on and boy, is he awkward. So I'll try to do a better job. I'm not going to channel my 23 year old self, otherwise it'll just be long and boring and awkward. But the story I would use is like, hey, so imagine you and your best friend are going out to dinner and who anyway carries cash these days? Cash sucks. Nobody has cash. Nobody wants to have cash.
- [50:40]
Max Levchin
Everybody carries cash. This is 1999. We're all carrying cash, of course.
- [50:44]
Peter Thiel
And yes, I frequently would get called out, like, what are you talking about? I have cash in my pocket. Do you not have cash in your pocket? I say, well, what if you don't have cash? What if you forgot? What if you need to split the bill? What if it's a business dinner? It's like three people. It's complicated. So what you need is an IOU. But IOUs are super awkward. You're not going to write them down. But if you have a Palm Pilot and they have a PalmPilot, you can just beam them essentially a promissory note that compels you to pay them back if they cover dinner.
- [51:15]
Max Levchin
And the promissory note would be tied to your bank account.
- [51:18]
Peter Thiel
It would be a cryptographically secure message that you could later on connect your PalmPilot to a computer. The message would automatically get processed and then it would go against your bank account or your credit card.
- [51:31]
Max Levchin
Oh, wow, okay, I like that. That's cool.
- [51:33]
Peter Thiel
You're very generous.
- [51:34]
Max Levchin
No, I like it. I like it because, you know, I like it because I know that there's still people out there, probably owe me at least 100 bucks who are like, I'll pay you back next week. You know, you'd pay for somebody's movie or something.
- [51:44]
Guy Raz
I'll hit you up later.
- [51:45]
Max Levchin
But I don't remember And I'm sure.
- [51:47]
Guy Raz
I owe people like 100, 200 bucks too, so that would have been great.
- [51:50]
Peter Thiel
There you go.
- [51:51]
Max Levchin
And presumably the business model would be around taking a fee every time the money got transferred. Okay. But at that time there were other products out there. There was something called Digicash, I think, right? Oh, yeah. So there were companies that were focused on ways to transact and send money back and forth in an encrypted way. So didn't they already solve the problem that you were trying to solve?
- [52:17]
Peter Thiel
I think they thought they did. But actually, funny enough, one of my more memorable Silicon Valley inaugural moments, I went to the digicash shutdown party. They started this company, it was really well funded. It was supposed to be the digital currency and it just completely died and like it didn't succeed in the market. So I actually went to the party where they wounded down. It was on Stanford campus of old places, kind of outdoors, around this picnic table. And they asked me like, who are you and what are you doing here? And I was like, oh yeah, this idea of like moving money through ether with digital signature sounds so cool. And they're like, that's a terrible idea. We just failed at a company doing this. But the reason all the prior experiments failed is really easy to summarize. They were just entirely user owned friendly. They were awfully difficult to use as a consumer. And if it's not easy, it's just not going to work with money. Money works pretty well when it's in paper form and it works really well when it's a card form. So if you're trying to push it into an application or into a mobile device, it better be easier and quicker than the existing systems.
- [53:22]
Max Levchin
So how are you guys going to solve that problem? How are you going to make this? You were going to basically make it so easy that you could just beam a digital promissory note to someone else at the dinner table and then that would be it. They connected to their computer and then it would connect to their bank account and then they would get the money deposited in their account.
- [53:40]
Peter Thiel
Yeah, I remember literally drawing buttons, like special on screen buttons for the PalmPilot app that we built to be more bubbly buttons that look like they had 3D to them to make them friendlier, to make them look like it's easy and inviting to tap the amount of dollars you get a beam to your friend. Because I wanted it to be friendly and easy to trust and consume.
- [54:05]
Max Levchin
But what I'm trying to figure out is it doesn't. I Mean, it's still. There is still friction there. Like, you gotta beam the thing, then dock your device and then probably connect to the. Like, it doesn't sound like it was a seam. It was gonna be a seamless process.
- [54:19]
Peter Thiel
This is maybe why you have not most likely used the PayPal on your palm Pilot. The simplest user interface always wins.
- [54:30]
Max Levchin
So November 99, PayPal sort of begins operations. What, as a consumer at that time, what did that mean? Was it a website or was it still focused on doing it through PalmPilots?
- [54:44]
Peter Thiel
So it was primarily focused on a PalmPilot. So you would go to the PayPal website and you would see that you can download this application compiled for your PalmPilot. And because not everybody had a Palm Pilot just yet, you could do cool things like, hey, I will promise you to pay for my PalmPilot. But you don't actually have to have a PalmPilot. It'll just reach you via email. And then you would sign up, create an account. So we kind of made it cross compatible. Palm to Web, Palm to Palm. And as a footnote, we had a web to Web, very much a demo quality product that I threw together to just show how this works. If you just don't happen to have any Palm Pilots around. And it's that demo that took off like crazy.
- [55:28]
Max Levchin
So initially the idea was it was peer to peer, like, I send you money, you send me money. Promissory note. And by the way, I imagine that we know E commerce really took a long time for E commerce to take off, for people to trust it, you know, seven or eight years. So it still, when you launched it, it must have been a tiny number of people who were like, yep. I mean, it must have been really like early adopters who were confident and felt secure with this.
- [55:54]
Peter Thiel
Yeah. One of our very first engineers, Russ, made a screensaver that was just floating this number on a screen that showed how many users we had in total who had ever signed up. And it was like, 17.
- [56:09]
Elon Musk
17.
- [56:10]
Peter Thiel
Like, he'd go home, come back the next morning, still 17. So it was growing about that fast.
- [56:17]
Guy Raz
When we come back, how in the space of a year, PayPal goes from 17 users to hundreds of thousands, and how in the space of three years.
- [56:28]
Max Levchin
It goes through merger, a management shakeup, an acquisition, and an ipo. Stay with us. I'm Guy Raz, and you're listening to.
- [56:37]
Guy Raz
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- [58:53]
Max Levchin
I'm Guy raz. So it's 1999 and Max and his.
- [58:58]
Guy Raz
Partners have built a new peer to peer payment system soon to be called PayPal. And almost right away the service starts to attract one very important user, people who use eBay.
- [59:12]
Peter Thiel
Back in 99 there really isn't a way to take a credit card payment online. If you are trying to sell things for a business. There are a couple of companies that kind of provided that service. But if you were like a normal person just trying to sell something on ebay, it was not a thing. Like you could not sign up for a business account and process credit cards. And PayPal was this peer to peer system that had a web only interface which we made as a demo and you could just tell someone hey, type in your credit card number and I will charge your card as many dollars as we agreed. And it had an effect of a minor explosion in the ebay community and.
- [59:52]
Max Levchin
I think we should be clear here which Is you'd mostly created this thing to be used on palm pilots. Right. But where the explosion was happening was on the web.
- [60:04]
Guy Raz
Right.
- [60:05]
Max Levchin
So the web version that you'd originally launched almost as an afterthought, I think that ended up being adopted by 100,000 users in January of 2000.
- [60:17]
Peter Thiel
Yeah, that's true.
- [60:17]
Max Levchin
I think by March of that year.
- [60:19]
Guy Raz
Something like a million people were using paypal. So how did it grow so quickly?
- [60:25]
Max Levchin
This is not a time where there's social media marketing. Were you advertising or was it just people discovering it?
- [60:31]
Peter Thiel
Two things happened. The ebay seller community was unbelievably self observing. So anyone able to sell things on ebay would constantly optimize for selling things more and faster. People are starting to make careers out of it. And so the second a seller would see it on someone else's site, they'd say, what is this paypal button? Oh, you click on this and it asks for a credit card number. Like, amazing. And so that was a very important growth vector. And then Luke came up with the original viral marketing idea where he had said, hey, what if we gave every new user who signed up 20 bucks? But not just 20 bucks for signing up, but 20 bucks to the person who invited them. College students in particular were, I think, going on these absolute benders of inviting their friends and getting us to give them $20. But the eBay growth was entirely natural, and it was really based on just sellers spotting other sellers using it.
- [61:28]
Max Levchin
I know you were focused on the technical side, but you were probably clued in to all parts of the business. How you guys convince the credit card companies and the banks to cooperate, Some.
- [61:42]
Peter Thiel
Combination of asking forgiveness versus permission, and just the overall naivete and headiness of the time where we showed up and said, hey, we're going to do this and we promise nothing really bad will happen. We'll do just enough KYC to make sure there's no money laundering and bad people doing things. And. And they sort of said, okay, well, I guess commerce is good, credit card processing is good, we like it. But keep in mind, this is pre 9 11, and the world is very, very innocent relative to today. Back then, this is before patriot act, before extreme focus on things like money laundering and terrorist financing, et cetera, et cetera.
- [62:25]
Max Levchin
But one of the biggest challenges you guys faced at the beginning, once you launched, was fraud. Right. I mean, the company was like losing millions of dollars a month from fraudsters who were trying to figure out how to outwit the system.
- [62:41]
Elon Musk
Yeah, we started noticing kind of all These maybe illegitimate transactions, maybe people kind of buying things from themselves and then taking the money out of the system. And then we'd realize that, oh, the credit card they used was actually not theirs, it was stolen. And then it just hit very, very hard. Sometime In April of 2000, we saw just these enormous attacks, primarily from my former homeland or the general region, all the sort of the Eastern bloc countries basically realizing that this is a very loosely secured financial system. And at the time, the sort of idea of securing private information, things like payment credentials and what's now called pii, personally identifiable information, was really in its infancy. And so by mid June, I think I was starting to sort of become aware of the fact that we're probably losing tens of millions of dollars to these fraudulent activities per quarter.
- [63:40]
Max Levchin
Wow. All right. So as you start to see more and more people adopt this thing, and I don't quite understand this part of the story and what was going on, but. But there was another, I guess, competing company that was founded around the Same time called X.com by Elon Musk. We all know who he is. He was trying to do, I guess, a similar kind of thing. And I know this because Jeremy Stoppelman, who went on to found Yelp, and we'll get to that later. Jeremy's been on the show in the past. He was working with Elon, and to him, PayPal, you guys were like the enemy. It was a battle to the death. But the two companies merge in March of 2000. How did that marriage happen? What do you remember about that?
- [64:33]
Peter Thiel
It's definitely a long and winding story. The very short version is not only is X.com extremely concurrent to PayPal, it's also literally in the same exact building we were 394. University Suite 2. They were Suite 1, which we did not know about. And we realized that our number one competitor was literally our next door neighbor and that had this super charismatic guy, Elon Musk, running it. He'd already sold Zip2, and so he was both successful and wealthy. And he had succeeded in pitching Sequoia Capital. And they came at payments a little bit after we did, but they had some really good ideas that we didn't have. So very quickly we started just looking at each other and going, oh, that's a good idea, we'll copy that, and vice versa. And we were in the market just beating each other up as hard as we could, primarily by way of offering more aggressive incentives to ebay sellers and buyers to join. That's when the intensity really goes up. In late April, early May 2000, as this happens, Elon hires this guy, Bill Harris, to run X. And he was one of these guys who could sort of see one plus one equals three. Obviously, these companies need to merge instead of beating the crap out of each other in the market. And so he was kind of the primary force behind that merger.
- [65:50]
Max Levchin
You guys are mortal enemies, and all of a sudden you become x.com and PayPal are the same company. Do you remember just thinking, wait a minute, this is crazy. Do you remember how you felt about that?
- [66:06]
Elon Musk
It was definitely a little bit of an adjustment, if you will, in terms of. By then, we knew some of the main characters, and I'm sure they knew us, and so we'd sort of appropriately demonized them and made ourselves to hate them. So we had to kind of get to know these people that we merged with and adjust our thinking from one of us will die to actually, we need to make it work now. It wasn't without tension. Definitely some interesting, very loud debates between engineering teams on religious matters, between Windows and unix. But actually, I remember it kind of feeling initially very awkward and then not feeling very awkward very quickly.
- [66:50]
Max Levchin
Was there kind of relief about that, in a sense, instead of competing against people like Elon and his team, that you were now all kind of harnessing your collective power?
- [67:01]
Elon Musk
I think so. My main concern at the time, I think Peters as well, was this notion that it was just so completely irrational for these two companies to try to kill each other while the opportunity was so vast. And there were plenty of other competitors, including huge banks that were saying, hey, you know what? We're going to get into payments online, too. And just the ability to tell capital markets, hey, there's only one bet you need to make. There's only one company you need to consider funding, et cetera.
- [67:31]
Max Levchin
That was extremely productive when the two companies merged. This is around sort of mid 2000. Do you remember how many employees total? Now, this merged company had, I would.
- [67:43]
Elon Musk
Say, on the order of a couple of hundred in aggregate, maybe less than 200, but not a lot. You could definitely know aggregate, everyone.
- [67:49]
Max Levchin
Okay, so you knew everyone. And then pretty soon after the merger, Elon. Elon becomes a CEO, and you're in the number two position as cto. So how did you find working with him at the time?
- [68:06]
Elon Musk
Sort of combination of amazing and infuriating. He is very smart. He can be extremely charming and loves debate. He has an engineer's mindset. So for an engineer, which I certainly am, it's a great person to agree or disagree with, because it's always rational. It is never. Well, you know what? I have a. I've made a decision, and now we're going to go left, which I think a lot of engineers find extremely difficult to work with. He and I disagreed on about a million different things, but the debate was always intellectual and civilized.
- [68:47]
Max Levchin
Did. I mean, you were younger. You're younger than Elon and Peter. And did you. Were you comfortable with sort of him, you know, kind of running the show? And from what. Everything I've read about, and there's a new book of course, about PayPal and all the people who came out of it, was that he really kind of saw this as X.com was the sort of the senior partner in this relationship and he was the boss.
- [69:11]
Elon Musk
You know, if I'm entirely honest, it was never entirely the perfect arrangement for me. Up until that point, I'd never actually worked for anyone in my life. That said, you know, I had never felt a moment of disrespect or resentment towards Elon in a sense that I'd always found him to be incredibly impressive and intellectually honest. And so I didn't enjoy the now, do what I say, but I did not question the capabilities of the person saying it.
- [69:47]
Max Levchin
I mean, clearly there were tensions growing within PayPal. I mean, Peter was out of the picture, kind of. You were still there. October of 2000, Elon Musk becomes the CEO. By the end of that calendar year, the board ousted him. They fired him. What do you remember about that? This was not a personal thing. Maybe it was, but from what I understand, it was really just a fundamental difference in how to operate the company.
- [70:21]
Elon Musk
Yeah, yeah, I remember plenty. Since I was very intimately involved. It's fairly hard to unpack, I think, to the sort of uninitiated, I guess, on the one hand, there's all these raging emotions and you hate each other, and then you merge, and it's a 5050 merger, which means just no one knows who won. And that's, by the way, the root of all complexity@paypalx.com story is that because we sort of settled on this, well, there's not really a senior partner. Equities just split evenly. There was no sense of, well, who gets to pack up and go home, basically. And so as this sort of thing unfolded and unfolded and unfolded, the emotions ran very high and people were meeting clandestinely in coffee shops. But it was certainly not personal. In fact, one of the sort of most telling things about Elon is that after the Bort coup essentially left him without the CEO job. He wanted to meet one on one and sort of. He and I met at the parking lot of PayPal and he sort of sat on the curb. I didn't doubt the validity of what just transpired, but I felt incredibly sad for him. And all he said, like, why did you do this? It just seemed like the correct thing to do for the company and I'm really sorry the way it all went down. So, like, I understand, but I don't understand. And then we didn't speak for a few years except for formal interactions in the board. He stayed on the board and it was extremely awkward to be in board meetings with Elon where he would sort of sometimes glare at me as I would say things. Oh, Peter. And then PayPal went public and he took me out to this extremely nice dinner and I was sort of like, where's the grudge, man? It's like, what's the point of holding grudges? It ended well for all of us. It's all good.
- [72:16]
Max Levchin
Well, I'm curious, Max, what was your lifestyle like during that time? It seems like it was such an intense period. I've read about how you would sleep in your office under your desk or in a sleeping bag, by the way. Did you do that often or was it sort of off and on again?
- [72:37]
Elon Musk
I did it quite a bit. I will have to admit to this. I had a very strange lifestyle, which in retrospect, probably took a few years off my expected lifespan, but certainly slept in the office. There was a restaurant downstairs from our second office, and I knew that it would close at 10pm and so the nine, 15, 50, eight and a half minutes, I would sprint down the steps to just get under the door of this restaurant and get my first meal.
- [73:09]
Peter Thiel
Of the day and so on.
- [73:12]
Elon Musk
This was definitely extremely unhealthy lifestyle, but I needed the time to work.
- [73:18]
Max Levchin
Tell me a little bit about the. I mean, I think one of the benefits of early success, but also downsides is you get quoted when you're young. And I, you know, I have some of that myself. But so, so, you know, I've read quotes or articles about this time at, you know, PayPal, and it sounds, I don't want to caricature, but it sounds like a little bit of a frat culture, you know, And I know that you didn't. One of the things that you did not want, I think specifically were quote, unquote, frat boys. But there was a kind of a, a confrontational style and, and this expectation to just fully like, live this thing all the time, or is that not accurate?
- [74:02]
Elon Musk
I think there's some truth to it and some misunderstanding.
- [74:06]
Peter Thiel
So you're totally right.
- [74:07]
Elon Musk
One of the interesting accusations that sometimes is leveled against the early PayPal crew is that it was this idea of a frat culture. It's actually quite the opposite, if anything. We were screening against this idea of sort of a self righteous, privileged person who would come in and assume their right. We wanted to have extremely honest intellectual debate over everything. Like one of the things that was really telling about the PayPal culture. We would sometimes slow down a release or a feature or even a decision because we wanted more debate. That said, it did lead to some extremely intense personalities and blowout arguments and people shouting at each other. The thing that's really, I guess, important to understand is there were, in my memory at least basically zero personalizations of these debates. Somehow we all respected one another enough to never say, and therefore you're stupid.
- [75:12]
Max Levchin
How did PayPal survive the dot com crash of 2000, 2001?
- [75:17]
Elon Musk
That squarely goes to the brilliance of Peter Thiel in his nose, who became.
- [75:22]
Max Levchin
The CEO, I should say, after Elon was ousted.
- [75:25]
Elon Musk
That's right. So Peter has this unbelievable ability to sniff market crashes in the air as they approach. And I remember him telling me, it's all going to get very ugly for startups. Like we're going to have to raise money, we're going to have to be prepared financially. And he went on this sort of a quest of fundraising, but it was very rough. One of the more stark visuals I have from those days, the cafe where Peter and I would hang out and some of our more important recruiting pitches took place there and some important negotiations took place there. It was suddenly closed, it was boarded up. And then all these other shops in Palo Alto were closing up because the startup ecosystem wasn't really around anymore to support them.
- [76:11]
Max Levchin
Wow. So you guys had cash on hand because Peter had raised that money, which enabled you to survive it. Now Elon is out, it's 2001, Peter Thiel is CEO again. PayPal is growing. You're doing fine. Despite the collapsing tech world around you, it felt okay. Within PayPal, there was no of nervousness or panic.
- [76:40]
Elon Musk
You know, I think we were too busy to be scared. I, I would love to tell stories of existential dread, but I think my primary concerns were can we keep the site up? I mean, 2001 for me was largely a year of trying to scale this thing as it was just blowing the doors off with its growth. Every week, the growth would just be so much more than the systems could handle. Every Monday when ebay auctions would settle, the system would just go down for multiple hours. And at some point, our head of database scalability, who was also a very accomplished blues singer and guitarist, brought his guitars to the office and would play the Monday blues because we all knew the site would crash and it was this surreal thing.
- [77:28]
Peter Thiel
And then it would come back up.
- [77:30]
Elon Musk
And we would sent an apology, and CNN would write a story about how PayPal goes down again. And it was just this thing that would repeat itself. And so as the world was burning in terms of startup in 2001, I was just trying to keep the thing going.
- [77:44]
Max Levchin
The company went public in February of 2002, and I think on day one, the shares were up like 55%. It was an amazing debut on the NASDAQ did when it went public, you were a CTO. Peter was CEO, I believe. Did you envision your future? I mean, you were still 26, 27. I mean, you know, you were very young. Did you think that this was the beginning of the end for you, like you were now sort of mentally moving on to something else? Or did you still see PayPal as your career?
- [78:19]
Elon Musk
I was definitely not thinking any of those thoughts. I was still very much in the execution mode.
- [78:26]
Peter Thiel
I remember sitting down and thinking, okay.
- [78:28]
Elon Musk
So now I'm at least on paper, very wealthy, but I'm still working just as hard. I fell asleep in my car right before driving home and then woke up four hours later trying to figure out where I was. So nothing's changed, except we're now publicly traded. How weird is that? I knew that something was going to change, but I also just was so busy and the war with all the various competitors, and ebay was trying to shut us down while also trying to sort of cooperate with us because their seller ecosystem depended on us so much. But the thing that I started registering is that the team was very tired. And kind of the reason ultimately ebay was able to acquire us is because the team was so overloaded over the four years of previous life.
- [79:16]
Max Levchin
All right, we know that ebay would acquire you just a few months after you went public, but. But what you just said is also just unbelievable, which is ebay was trying.
- [79:27]
Guy Raz
To shut you down.
- [79:29]
Max Levchin
Explain that.
- [79:30]
Guy Raz
Why?
- [79:32]
Elon Musk
I don't remember who came up with this metaphor, but it's a good line. So someone, I think from eBay said PayPal is throwing a party in ebay's backyard and charging attendance. And I think that's pretty accurate in A sense that we're providing a service to a million plus eBay sellers, helping them collect credit cards online and charging them what we thought was a fair price for it.
- [79:58]
Peter Thiel
Ebay did not have a revenue share.
- [79:59]
Elon Musk
Arrangement or just a service available to.
- [80:01]
Peter Thiel
Ebay sellers and buyers, except they had.
- [80:03]
Elon Musk
Their own service that they had fully acquired or acquired and then built up, called billpoint, right around the same time as paypal was founded. They had tried and tried and tried. They did all sorts of really kind of obvious things like, hey, if you use billpoint, it's free for six months, and then you have to turn off paypal. And Reid would send a note to the general counsel saying, hey, I just received this disturbing email in my inbox. This seems to be prime for antitrust investigation. Just saying.
- [80:35]
Peter Thiel
And so it was kind of a.
- [80:36]
Elon Musk
Race, which they should have absolutely won because they had a product that was supposed to do what we did, that.
- [80:43]
Peter Thiel
They owned, that could be built in.
- [80:45]
Elon Musk
That could be promoted much, much, much better than we could.
- [80:49]
Max Levchin
So they could have completely crushed your model. They could have said, we can only use billpoint on ebay.
- [80:54]
Peter Thiel
That's right.
- [80:55]
Elon Musk
And they tried at various times. And PayPal fans in the seller base basically protested. And ebay was always very, very careful not to step on their sellers toast too much, because that's where all the revenue came from. And I think at the time, they were very concerned that if PayPal were to get turned off, commerce would slow down and ebay would make a lot less money.
- [81:19]
Max Levchin
So even after you went public, you kind of depended on ebay. You needed ebay, you needed to keep them happy, but you also knew they didn't like you. And presumably you had to start thinking about diversifying your revenue streams because you were so dependent on ebay, and you're a public company, and your share price would have tanked if ebay kicked you off. So what did you.
- [81:40]
Guy Raz
I mean, what were you guys doing.
- [81:41]
Max Levchin
To prepare for that possibility?
- [81:43]
Elon Musk
That was the great unspoken or maybe spoken in the paypal halls concern. So we were diversifying very rapidly. We were going international. We were trying to figure out what PayPal offline looks like. So maybe you go into a best buy and you use PayPal to buy things from the shelves instead of from the virtual ones and signing up all these partners outside of ebay. And yet ebay itself was growing so quickly. All of our attempts to diversify away from the dependency on ebay volume are kind of futile. Imagine you have a company that's just growing 100% year on year and you're providing payments, you better find something that grows even faster. And there wasn't a whole lot like that going on.
- [82:25]
Peter Thiel
Yeah, I think one of the things.
- [82:27]
Elon Musk
That sort of prepares me for life as an entrepreneur after was this multi year period where on any given day we expected ebay to call us and say, okay, you're done, get off. We don't mind losing all the volume because we're ready. And we had all these double secret and triple secret plans of what we'd do then. But in reality we all knew that.
- [82:48]
Peter Thiel
This would be pretty catastrophic.
- [82:49]
Elon Musk
And so brace for impact proactively.
- [82:52]
Max Levchin
I mean, what an incredible opportunity that you had at such a young age to experience that kind of uncertainty and volatility because that was going to serve, that obviously would serve you well as you, as you advanced in your life and career. But I mean, it's almost like a, you know, business school class, except the consequences are a little different. You're not going to get a bad grade, you're going to lose all your money.
- [83:14]
Elon Musk
Yeah, I think the backdrop of coming to the US with nothing, just trying to survive as a multi time startup failure. Once you get some barnacles of good life on you, that's when you start getting scared until you have something to lose. It's not that scary to be in this permanent concern state. I certainly remember being really scared, but not so scared that I would go.
- [83:41]
Peter Thiel
Hide or something like that.
- [83:45]
Max Levchin
In 2002 when eBay announced that it was acquiring PayPal, clearly you were clued in on this because you were part of the leadership team at PayPal. Was that surprising when they said, hey, maybe we should just acquire you?
- [84:04]
Elon Musk
No, actually it was the opposite of a surprise. In fact, it was becoming very, very clear that they were completely dependent on us at this point. And every move they would make was just another point of proof that we were succeeding in their own internal systems. Was not. And sure enough, this is well before the ipo, they came to us and said, hey, how about we just buy you guys? And so of course initially we just said no, we're doing fine, thank you very much. Then they came back again and the sort of dance began. And right as we filed to go public, they came in and said, hey.
- [84:41]
Peter Thiel
We'Ll buy you, don't go public.
- [84:43]
Elon Musk
And we said no. And Peter said, I think this is the last time. I really don't think that they're going to come back after we go public. By the way, PayPal had an amazing betting culture. We would bet each other all Sorts of things all the time. But I bet Peter a dollar that they would come back in less than six months, and I think twice the amount or something like that. And I won one half of that bet. It took longer than six months, but the valuation was, in fact, dictated by the market. So it was better than 2X.
- [85:13]
Max Levchin
Yeah. They paid $1.5 billion to acquire PayPal. They acquired PayPal in October of 2002. You're 27. You walk away with, on paper, something reportedly about $30 million.
- [85:27]
Guy Raz
You're set.
- [85:28]
Elon Musk
Yeah, and I left a few months after the acquisition.
- [85:33]
Max Levchin
But I. I read that there's an article that was written in the Times about you in 2007, and you've been quoted in that article saying that the year after eBay purchased PayPal was the worst year of your life.
- [85:45]
Elon Musk
Yeah.
- [85:46]
Max Levchin
Which sounds nuts, right? Because you got all this money and you're young and you can do whatever you want. I think you had a girlfriend at the time who's now your wife.
- [85:56]
Elon Musk
Indeed.
- [85:58]
Max Levchin
And I'm not asking this with a sense of judgment. I'm just curious. Can you explain how that became the worst year of your life?
- [86:06]
Elon Musk
I think it was the first time when I had no clear purpose, which quickly became no clear sense of direction. And I would literally wake up in the morning and sit in the PJs that I slept on my newly acquired couch. I would flip open a laptop and stare at it and think, I'm going.
- [86:29]
Peter Thiel
To start a company.
- [86:29]
Elon Musk
Company. That's the only thing I know. That's the only thing I want to do. And then I would just sort of sit there, and my girlfriend would go to work, and then she would come back and she would find me in the same place. And it went on for a long time. And it was sort of a. You know, I'm not sure that qualifies for depression. And I have a lot of empathy for people who actually do suffer real mental health issues, but that's about as close as I came to just spinning out. Entirely mentally out of control. And that was a long year.
- [86:59]
Max Levchin
Why didn't you go? I mean, a lot of the folks that you worked with went into investing. I mean, obviously, Peter Thiel famously. Most famously. Did you try that at all?
- [87:11]
Elon Musk
I did this part of the story. I don't know if I've ever told anybody. So Roloff, who is now, of course, a.
- [87:19]
Peter Thiel
He's the mistress of going capital at this point.
- [87:21]
Elon Musk
He's kind of the front man of the band there, invited me to spend some number of months, maybe more.
- [87:27]
Peter Thiel
At Sequoia Capital.
- [87:29]
Max Levchin
Roelof was your. He was your head of finance, right? At PayPal?
- [87:33]
Elon Musk
Yeah, he was our CFO. And so I started going to Sequoia every day and it was great. I started sitting in on pitches so I would meet entrepreneurs that were kind of like me, but you know, four years prior. And then I started noticing that I was really good at ripping into people's ideas. They would bring in this really cool concept and of course it was half baked. It was just some bright eyed kid freshly out of college thinking about, here's what they're going to build. And I would immediately explain to them why I would fail. And I'd gotten so good at stabbing them in the heart that one day I went home and told Nelly, my now wife, I don't think I can do this. I've become so cynical. I'm now taking out my anger about not being in a startup on other startup founders.
- [88:19]
Max Levchin
You were quoted at the time, and I'm sorry to read this quote to you because again, if I was quoted when I was 27, I was probably said some stupid things, I would be embarrassed. But you said to the times I took this perverse pleasure in seeing if I could make someone cry, which does sound a little bit mean.
- [88:34]
Elon Musk
Yeah, I am not sure I was very nice at all at that time.
- [88:38]
Max Levchin
And you think that came from this place of like, I need to be doing this. Why am I not doing this?
- [88:44]
Elon Musk
In retrospect, it was probably just envy. I wanted to be defending my idea against all enemies, foreign and domestic. I wanted to be them.
- [88:57]
Guy Raz
That's PayPal co founder Max Levchin. You can find part two of our conversation in your podcast feed, where you can hear all about the businesses that Max built after leaving PayPal.
- [89:09]
Peter Thiel
That was sort of this moment of.
- [89:10]
Elon Musk
Truth where I was like, oh, I know the class of companies I'm going to start. And then I showed it to Nelly.
- [89:16]
Peter Thiel
And she said, you finally figured yourself out.
- [89:19]
Elon Musk
Just give yourself permission to go build something that's like another PayPal but better.
- [89:25]
Guy Raz
Hey, thanks so much for listening to the show this week. Please make sure to click the Follow button on your podcast app so you never miss a new episode of the show. And if you're interested in new ideas, insights and lessons from some of the world's greatest entrepreneurs, sign up for my newsletter@guyraz.com or on substack. This episode was produced by Alex Chung with music composed by Ramtin Arablouei. It was edited by Neva Grant with research help from Claire Murashima. Our production staff also includes Carla estevez, Casey Herman, J.C. howard, John Isabella, Chris Masini, Sam Paulson, Kerry Thompson, and Elizabeth Lane Coates.
- [90:00]
Max Levchin
I'm Guy Raz and you've been listening.
- [90:02]
Guy Raz
To How I Built this. If you like How I Built this, you can listen early and ad free right now by joining Wondery plus in the Wondery app or on Apple Podcasts. Prime members can listen ad free on Amazon Music. Before you go, tell us about yourself by filling out a short survey@wondery.com survey it takes a lot to grow your business. You've got to attract audiences, score leads, manage all the channels. It's a lot of long days and late nights, but with Breeze HubSpot's new AI tools, it's never been easier to be a marketer and crush your goals fast. Which means pretty soon your company will have a lot to celebrate, like 110% more leads in just 12 months. Visit HubSpot.com marketers to learn more.