The merged company grew very fast. The number of phone calls with customer complaints increased, and so did the complaints coming in through e-mail. “We started off with five people in customer service, and after two months we had 100 000 customers,” Elon said. “So our phone lines exploded.”439 The solution PayPal had to solve these complaints was to ignore them by not answering the phone and by deleting the e-mails. “It took over three weeks to get my money and four calls to their 800 number, waiting an average of 25 minutes each on hold, and five e-mails of which three were answered one week later,” a customer said.189
Harris decided to leave X.com after only a few months and Elon replaced him as CEO. Now it was time for a technological change. While Elon wanted to replace the Unix platform with a Microsoft platform, Levchin preferred the Unix platform. By the summer of 2000, Levchin gave up and surrendered to Elon. “Well, if this is really going to happen, I’m not going to be able to provide much value, because I don’t really know anything about Windows,” Levchin told Elon. The result of this difference in opinion was a battle between the employees from the two old companies.
Most of the original X.com employees would quit. Jeremy Stoppelman was one of them. He worked as an engineer at PayPal, and would later found the company Yelp. “We had been rivals, so it was awkward,” Stoppelman said. “And that awkwardness turned into total dysfunction and warfare. Most X employees ended up leaving or getting fired. The culture was really an intellectual pissing contest, and some people didn’t like that.” But the battle between the former companies ended. PayPal realized it was a better idea to focus on the battle against other companies. eBay had by now developed a similar service called Billpoint. They also needed to win the battle against fraudsters.260
PayPal together with all other similar services had severe problems with fraud. In the beginning, they didn’t know they would need to take fraud into consideration. “Fraud is going to eat you for lunch,” they were told. Now they lost $10 million per month. “It was crazy,” Levchin said. One fraud ring cost them $5.7 million over a four-month period. “We can’t switch to Windows now. This fraud thing is most important to the company. You can’t allow any additional changes,” Levchin told Elon.186
A criminal could buy stolen numbers and open fake PayPal accounts with the help of a computer program. The fraudster could then send payments through these accounts to minimize the traces from the crime. A cardholder who had lost money because of the fraud could contact PayPal and get back the money. It was up to PayPal to minimize the fraud by developing algorithms that judge the risk of each transaction. They also had 30 human investigators that tried to unravel the larger fraud cases and see if PayPal could recover some money or if they had to alert the FBI.186,189
One of these algorithms was IGOR, named after a Russian criminal who claimed it was impossible to catch his fraud attempts. The algorithm could find suspicious accounts and alerted PayPal if it saw money transfers that appeared to be on its way to questionable destinations.393 Another algorithm tracked unusual patterns of behavior, such as small transfers of money to the same account at regular intervals. “If we’re successful, it’s like pre-crime,” Levchin said. “We try to figure out what they’re going to do so we can stop them before or in the act.” IGOR became so good at detecting fraud that the FBI began to use it.185
It was in large part because of these risk-algorithms that PayPal succeeded and their competitors didn’t. While another company had 25 percent fraud, PayPal claimed it had found a way to bring the fraud rate down to less than 0.5 percent.253 And you can say that PayPal exported fraud to their competitors. Because they had so good risk-algorithms, the fraudsters gave up their attempts to fool PayPal and began fooling PayPal’s competitors. “I remember all these companies announcing they were going out of business and they expected PayPal to go out of business soon too, because the fraud numbers were so staggering that they could not see any one handling this sort of thing,” Levchin said.186
Elon went on a two-week trip to meet future investors, though other sources says he travelled to Australia to watch the Sydney Olympic Games, which would be his first vacation in years. “That’s the problem with vacation,” Elon said.260 He might have been doing both. But when he returned, a coupe had occurred, and Elon was forced out of the company. In October 2000, Thiel took his position as CEO.71
Because Elon owned a large share of PayPal and he remained on the board, he decided not to fight back. “Life is too short for long-term grudges,” Elon said. “One has to recognize where one’s strengths lie. It’s more interesting for me in the early stages of running a company, where the concentration is all on developing the product. I’m not really interested in administration.”71,254
It might look like Elon didn’t contribute with much to PayPal. But he was responsible for several of the factors that made the company so successful. According to himself, he came up with the company’s main viral growth mechanism, he recruited several of the key employees, and he came up with the business model of charging fees only to heavy sellers and not to buyers or light sellers. By the time Thiel took over the rudder as CEO, the PayPal product and business model were largely as we know them today.259
Before the owners sold the company to eBay in October 2002, PayPal got $180 million in funding and 20 million users. Thiel quoted the article Earth to Palo Alto in which the author was negative to PayPal. “And so I’d like to send a message back to planet Earth from Palo Alto,” Thiel said. “Life is good here in Palo Alto. We’ve been able to improve on many of the ways you do things. Come to Palo Alto for a visit sometime and learn something. I think you’ll find it’s a much better place than Earth.”189 Elon, who was the largest shareholder, agreed. Life in Palo Alto was good.
As he had once again failed to change the world, Elon was still not satisfied. The large vision behind X.com had just become a small, glorified feature. It was Zip2 all over again. Still in 2012, Elon believed PayPal has the potential to become the world’s largest consumer financial services company. “It has 120 million customers, and there’s a high trust factor. There’s a lot of unleveraged value there,” he said.71
Most key employees left PayPal, and they are today known as the PayPal mafia. You can find a picture of them where they wear mafia suits. Thiel is considered to be the don [the boss] of the mafia group and Levchin the consigliere [the counselor].260 But not everyone is present in the picture. The YouTube founders, Chad Hurley and Steve Chen, were not allowed to participate in the photo because the corporate handlers at Google didn’t want them to be linked to the mafia.
Elon is also missing from the photo, and the reason is simple. He missed the shoot because he received an innovator of the year award in Chicago at the same time as when the photographer took the picture.257 “Peter [Thiel], Max [Levchin], and I are not directly aligned philosophically,” Elon said. “Peter’s philosophy is pretty odd. It’s not normal. He’s a contrarian from an investing standpoint and thinks a lot about the singularity. I’m much less excited about that. I’m pro-human. I’m also an investor in Peter’s hedge fund.”259,260 Levchin agreed that he and Elon were not always aligned. “Elon is obviously really freaking smart,” Levchin said. “He’s one of those guys who can be larger than the room.” Levchin added that larger than the room can be a negative trait.71