What he didn’t have any problems with was to reinvent Wall Street with an entrepreneurial company. “Something about the culture of startups, at least at this point in my life, seems inevitable,” Elon said. “It’s more fun, the atmosphere is more creative, and I think more gets accomplished.”265
Elon founded X.com in March 1999. He was not yet thirty years old. Their website answered the question why they had chosen the name, “Why not? X is simple, straightforward, and lacking in pretense and fluff – exactly like our approach to financial services.”394
Elon was the CEO, but took the position as chairman of the board after the former Intuit CEO, Bill Harris, became the CEO in late 1999. In an article in the newspaper The Wall Street Journal, Harris explained how he had received offers from more than 100 startups, but he chose X.com because he saw it as a blank canvas upon which he could write new rules on the delivery of financial services.189
This was at the height of the dot.com bubble, but Elon knew it was a bubble, so he wasn’t nervous. “Any change this profound is bound to set off speculative frenzy, and people need to do their homework, and not blindly buy into companies that aren’t well put together,” Elon said. “There are a lot of Potemkin villages out there built on flimsy foundations and many, many will fail. There’s going to be a lot of weeding out in the future. This is the longest peacetime expansion in history, and for young people who’ve never really seen a serious recession – and anyone who’s studied history knows they happen – a downturn will be a rough experience. [But] the radical cost advantages the net brings are real and viable long-term.”265
After the burst of the dot.com bubble, those who knew Elon had founded an Internet company asked his wife, “So are you guys all right?” They had obviously not noticed that Elon’s McLaren F1 was still parked in their garage, so she assured them they were doing okay.142
Elon’s ambitious vision was that X.com would become a financial supermarket. This supermarket included an online bank, a mortgage broker, an insurance vendor, and a mutual fund company. “The huge brick-and-mortar financial institutions, the Bank of Americas, the Chase Manhattans, the Citibanks, all have gigantic investments in existing assets, which include thousands of branches, millions of tonnes of concrete, steel and glass, legacy information systems, and organizational boundaries between service divisions,” Elon said. “From a consumer standpoint these make the coordination of different services into a unified package expensive, complicated and confusing. A really well-done, pure Internet-based service, without all that overhead baggage, could pass along enormous savings to consumers in the form of discounts.”265
The only real experience Elon had from the finance industry was a short internship at the Bank of Nova Scotia and a tiny detour as an amateur stock trader in South Africa.56 So Elon used the same strategy as when he founded Zip2: read books and learn by doing. Now he could also use his experience from Zip2. “I guess my expertise is that I know how to build a killer Internet company with a solid foundation,” Elon said. “I didn’t know anything about the media business when starting Zip2, but figured it out along the way.”263
Compared with the birth of Zip2, the largest difference now was that a venture capitalist had from the beginning invested in X.com. At the time, it was a mystery who had invested in the company, but it was later revealed that Sequoia Capital had invested $25 million. The venture capital firm was founded in 1972, and are famous for their investments in companies like Apple, Google, and YouTube.
With money comes the luxury of having a decent office. No water leaks. No futon sofas. No drilled holes in the floor just to get an Internet connection. And, above all, no low-cost fast-food restaurants as X.com’s office was above a bakery close to the Stanford University in California.
X.com developed the main product where their customers could see all their bank accounts, insurances, and everything else they could need. This was an easy task, but it still took a long time to develop the product. “Money is just an entry in a database,” Elon said.354 They also got some attention in the industry with a no-fee S&P 500 index fund – the first of its kind. The purpose of the fund was to attract new users who could pay for their other products.189
With the main product ready, they developed a smaller feature as a complement to the main product. It took a day to develop the smaller feature, and it was a way to e-mail money from one e-mail address to another. It didn’t have to be an e-mail address, you could use any unique identifier. It was also possible to transfer stocks, mutual funds, and similar assets. If the recipient didn’t have an X.com account, the system automatically sent an e-mail where the recipient was asked to register for an account.
When X.com demonstrated these two features, they realized the smaller feature was more popular. “Whenever we’d show the system off, we’d show the hard part, the conglomeration of financial services, which is difficult to put together, nobody was interested,” Elon said. “Then we showed people e-mail payments, which was easy to put together, and everyone was interested. So, it’s important to take feedback from your environment. You want to be as closed-loop as possible.”63
Because of this new insight, X.com decided to focus on e-mail payments. To succeed with e-mail payments, and because of Metcalfe’s Law, growth of users would become the most important task. Robert Metcalfe came up with the law and it says that the value of a network equals the square of its users. A network with twice as many users as a competitor is four times as valuable. So to crush the competitors, X.com needed to achieve a so-called network effect which says that a large established network is valuable to enter and costly to leave. If many people used X.com, it would be difficult for competitors to attract new customers because everyone is already using X.com. They wanted to lock in their members to prevent competitors from growing. This is why it’s difficult for Google+ to attract users from Facebook.189
To achieve this network effect, Elon came up with a clever way to attract new customers. X.com offered $20 to anyone who opened an account, and members who referred new customers were awarded $10 for each referral. “X.com is really a perfect case example of viral marketing where one customer act as a salesperson for you for bringing in other customers,” Elon said. “So you had this exponential growth. It was like bacteria in a petri dish. We didn’t have a sales force. We didn’t spend any money on advertising.”364
Within two months, X.com had 100 000 customers. This number can be compared with the then largest web-based bank, Etrade Telebank, that had 130 000 customers. But X.com wasn’t the only company in the payments industry. X.com’s office had shared common space with a company called Confinity before they needed a larger office.
The Ukrainian born Max Levchin had early learned how to program on whatever he could find. When his family moved to US in 1991, he went through dumpsters to find things to rebuild while he taught himself English by watching television. A degree in Computer Science from the University of Illinois taught him how to create and break codes.261 “These crooks are intelligent, but they leave clues. I’m the Sherlock Holmes of the Internet underground,” Levchin said.185
In the summer of 1998, at the same time as when Elon fought for the future of Zip2, Levchin didn’t really know what to do with his life. What he knew was that he wanted to start a company within his passion: cryptography. To come up with new ideas, he took a random lecture at the Stanford University. The subject was “The link between market globalization and political freedom,” and the guest lecturer Peter Thiel gave the lesson.393