In The founders, JImmy Soni explores the fascinating history of PayPal’s founders and early employees. This detailed and candid account shows how social capital fuels start-up growth and should offer insights that will aid industry and policy efforts to better mitigate the exclusionary trends of Silicon Valley’s tech strongholds, writes Robyn Klingler Vidra.

The Founders: The story of PayPal and the entrepreneurs who shaped Silicon Valley. Jimmy Soni. Simon and Schuster. 2022.

Online payments giant PayPal, which now has a market cap of more than US$100 billion, is important in two ways. First, because of the formative role he played in the late 1990s in setting up the infrastructure for making payments over the Internet, particularly in the United States. Second, because its founders and investors – the so-called “PayPal Mafia” – went on to found and invest in some of the biggest tech companies that underpin much of life today (including LinkedIn, Tesla and YouTube ).

At Jimmy Soni’s The founders reports on the founders – and early employees – of PayPal. The book is told as a story of this incredible cast of characters, their big personalities, their epic battles (including the merger of Confinity and, which together formed PayPal), and their intense work culture. The writing is compelling, sort of an actual HBO version Silicon Valleybased on Soni’s interviews with the Founders and his forensic analysis of 20 years of interviews and speeches they gave.

Key characters (whom you have a love-hate relationship with throughout the book!) include Elon Musk and Peter Thiel. You meet them in their formative years. For this researcher, the book offers a wonderfully rich insight into how universities act as fertile ground for high-performing technology companies. The story revolves around how the founders met while studying in college together, specifically at Stanford University (in the case of Thiel and Ken Howery) and the University from Illinois to Urbana-Champaign (UIUC) (in the case of Marc Andreesen, Max Levchin, Luke Nosek and Scott Banister).

Ceiling panel showing the PayPal logo

Image Credit: ‘PayPal Booth. Photo by @francois for LeWeb12 Conference, Paris’ by OFFICIAL LEWEB PHOTOS under CC BY 2.0 license

We often hear about certain schools that adorn the background of the founders of the most successful technology companies. Stanford professor Ilya Strebulaev and his venture capital initiative found that Harvard, Stanford, and Wharton are the top three unicorn-producing business schools. Such results confirm our impression that certain places have a kind of magic in their ability to produce world-class companies.

But what happens in these universities? Is it the classroom interactions and curriculum that dust the unicorn dust? Or is it the attendance at parties and clubs that fosters the ability to found and build high-growth businesses? Are universities serving a Kool-Aid steeped in entrepreneurship, stimulating entrepreneurial intentions?

The founders details the academic education and training – which social scientists call “human capital” – that fosters the abilities of these performers. Gary S. Becker Human capital, for example, delineates the resource as including “general” and “specific” human capital. General capital refers to transferable skills, applicable to a number of industrial contexts. Specific human capital, on the other hand, is sector-specific.

In the case of the “PayPal Mafia”, there is a remarkable concentration of specific human capital, including computer training. The founders is adorned with the life stories of longtime computer programmers (e.g. Levchin), supplemented by a smaller number of those with a background in the social sciences (notably Thiel who studied philosophy and then completed law school) .

The human capital that PayPal’s founders created through their formal college education is certainly part of their history. But the book does relate how it was social capital – distinct from human capital – that played the central role. This aligns with basic research in sociology (see Pierre Bourdieu (1986) and James S. Coleman (1988)) which similarly argues that human and social capital are distinct, albeit very closely related, sets of resources.

Social capital is understood as a fundamentally relational resource, which includes social networks that help people access finance, jobs, and other opportunities. Major works on social capital include that of Mark Granovetter on the “strength of weak ties”. He argues that it is the “weak ties”, rather than the “strong ties” of family or close friends, that can help create job opportunities. These ties foster social trust, which acts as a “sociological super cement” for transactions and relationships.

The story of The founders is part of social interactions. It was these, rather than what they were learning in the classroom, that led to key hires that helped PayPal’s performance. Clubs and Labs – such as the Association for Computing Machinery (ACM) in UIUC’s “Digital Computer Lab” (9) and the co-founding of the Stanford review – established lasting relationships. For example, Nosek, Levchin and Banister met at the ACM office at UIUC. Banister and Nosek would later leave together for Silicon Valley and co-found a start-up. Levin then recruited Simmons, whom he had also met “while working on ACM projects” (66). Spending long hours in clubs and college labs fostered the formation of “strong bonds”—they knew each other’s abilities and work ethic.

These deep relationships have informed networking hiring practices for years. Soni remarks that “Nosek, Pan and Simmons were friends from Illinois; other early employees came through this network and Thiel’s contacts at Stanford” (72). The “PayPal mafia” relied on these trusted relationships when hiring for its growing business at both Confinity and, the predecessor companies that eventually merged to form PayPal. The book re-enacts a conversation between Thiel and Levchin, where Thiel pushes Levchin to recruit into his network by saying, “You just graduated from one of the best computer science programs in the country. Don’t know anyone? (65)

This incentive led Levchin to hire two of his former UIUC classmates, Yu Pan and Simmons. This was consistent with Thiel’s view that “trust between teams was difficult to establish and that friends-turned-employees were pre-installed with trust” (72). However, PayPal COO David Sacks reportedly said that this school network-based hiring was not necessarily everyone’s ambition. Rather, he said that due to the ultra-competitive environment of Silicon Valley at the turn of the millennium, “we had to recruit our friends because no one else would work for us” (74).

Second, school networks provided access to investment capital. Thiel’s initial involvement with PayPal’s predecessor was through his investment. His fund, Thiel Capital, invested in Nosek and Banister’s startup after they were introduced through Thiel’s roommate at Stanford. Future investors also came from their social network. Confinity, for example, raised money from “friends, family and fools” (as is usually the case). Friends and family included Thiel’s parents as well as Norman Book, Thiel’s Stanford classmate and co-founder of the Stanford review (70). Stanford professors, such as Dan Boneh and Martin Hellman, vouched for Levchin at the request of potential investors (82).

For Soni, the notion of the “PayPal mafia” is essential to understanding Silicon Valley today. Major venture capitalists, like Andreesen, and top entrepreneurs, like Musk, continue to make headlines. Andreesen’s blue-chip venture capital fund Andreesen Horowitz (a16z) has come under fire for its $350 million investment in WeWork founder Adam Neumann’s new start-up Flow. For many, this epitomizes the tendency of Silicon Valley venture capitalists to back founders they know.

As Flow’s massive fundraising suggests, there may be a downside for start-ups that rely on social capital to hire and fundraise. For the PayPal executive, as Soni notes, “hiring friends risks creating a cloistered, exclusive monoculture and makes it extremely difficult to let people go” (72). Hiring people like you — called “homophilia” — has been widely documented to foster singular cultures that don’t accept or value outsiders, or even outside perspectives. Network-based growth can also accentuate exclusions based on gender, ethnicity, age and disability. Policies are working to reverse this exclusion to foster more inclusive innovation environments.

The founders shows how social capital – not necessarily human capital – fuels start-up growth. It reveals why and how these insider networks work, and how they backfire. For entrepreneurship scholars, it offers incredibly detailed and candid accounts of how certain campuses spawn unicorns. With this insight, industry and policy efforts can better design alternatives to trust and monocultures fueled by university labs to mitigate the exclusionary tendencies of tech strongholds like Silicon Valley.

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Note: This article gives the point of view of the author, and not the position of the USAPP – American Politics and Policy, nor of the London School of Economics.

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About the Examiner

Robyn Klingler VidraKing’s School of Commerce
Robyn Klingler-Vidra is Associate Dean and Lecturer in Entrepreneurship and Sustainability at King’s Business School. She is the author of The Venture Capital State: The Silicon Valley Model in East Asia (Cornell University Press, 2018) and Inclusive Innovation (co-authored with Alex Glennie and Courtney Savie Lawrence, Routledge, 2022). Robyn’s research and teaching focuses on entrepreneurship, innovation and social impact. She earned her BA from the University of Michigan, was a visiting scholar at the National University of Singapore Lee Kuan Yew School of Public Policy, and earned her MA and PhD in international political economy at the London School of Economics and Political Science. .