What is the PayPal Mafia? The truth behind the investment empire created by Founders Fund

PayPal Mafia——This term is not just a nickname for a former startup group, but refers to a network of connections that fundamentally reshaped the power landscape of the modern technology industry. From the Founders Fund, which started in 2004 with a modest $50 million, to the current giant managing billions of dollars, the background of this fund is rooted in the meticulous strategies and philosophies of the core members of the PayPal Mafia.

The human network formed during the PayPal era has evolved into an investor group that influences the future of the tech industry. They are not merely funders but creators of new investment philosophies, directly challenging the conventions of Silicon Valley.

The Origins of the PayPal Mafia: An Adventure Starting from PayPal

The relationship between Peter Thiel and Ken Howery began with their first meeting at Stanford University. Meeting at a reunion of the conservative student magazine “Stanford Review,” they laid the foundation for a long-term collaboration.

In 1994, shortly after Howery left Texas for California, Thiel proposed an invitation—becoming the first employee of a hedge fund. During a four-hour conversation at the Sundance steakhouse in Palo Alto, the young Thiel demonstrated the breadth and depth of his ideas. That night, Howery instinctively felt, “I might work with this person for life.”

Their meeting with Luke Nosek was equally enigmatic. During a lecture at Stanford, a young entrepreneur with brown hair suddenly asked Howery, “Are you Peter Thiel?” At that time, Nosek was involved in developing a smart calendar, but he was actually the founder of a company that Thiel had invested in. Yet, both had forgotten about the supporter they had met. This eccentric and free-spirited mindset was the prototype of the talent Thiel admired.

In mid-1998, during a lecture at Stanford, the bond among the three was officially confirmed. Seven years later, in 2004, they launched an independent venture capital fund. However, until then, they shared an unforgettable experience from the PayPal era.

The Confrontation with Moritz and the Birth of Investment Philosophy

The internal power struggle within PayPal became a turning point, transforming the PayPal Mafia from just an entrepreneurial group into an independent investor collective. The deterioration of relations between Michael Moritz of Sequoia Capital and Thiel led to the core principles of the Founders Fund.

During the 2000 dot-com bubble burst, Thiel foresaw worsening macroeconomic conditions and aggressively raised $100 million in March of that year. His prediction proved correct, as the bubble burst days later. But Thiel’s foresight did not end there. He proposed betting on further market declines through short selling.

Moritz was furious at this proposal. The board declared he would resign. Thiel, driven by a desire to be “the right person,” made strategic decisions, while Moritz adhered to an ethical stance of “doing the right thing.” There was no room for compromise between these two extreme perspectives.

As a result, Moritz succeeded in blocking Thiel’s plan. However, Thiel’s prediction was entirely accurate. Had he engaged in short selling, the profits would have exceeded the entire operating profit of PayPal—this bitter lesson convinced Thiel of the necessity of an independent investment platform.

Later that year, in September, an internal coup at PayPal erupted. Under the leadership of Rebitz, Thiel, and Scott Bunsen, employees ousted CEO Elon Musk. Moritz hesitated to recognize Thiel as CEO, demanding approval from external candidates. This power game of “criticize first, praise later” left deep scars on Thiel.

In 2001, when eBay proposed to acquire PayPal for $300 million, Thiel insisted on an immediate response, but Moritz pushed for in-house development. Ultimately, the acquisition price soared to $1.5 billion. This moment, where Moritz was proven correct, further strengthened Thiel’s resolve for subsequent actions.

From Clarium to Founders Fund: Building an Investment Empire

With the $60 million profit from the PayPal acquisition, Thiel began multiple investment activities simultaneously. Reflecting his broad interests, a diverse portfolio was built, including stocks, bonds, currencies, and early-stage startups.

In 2002, he invested in IronPort Systems, an email security company, which was acquired by Cisco Systems in 2007 for $830 million. The need to systematize these sporadic angel investments became increasingly clear.

The same year as the PayPal acquisition, Thiel established Clarium Capital, a macro hedge fund. Advocating for a systematic worldview like Soros, the fund grew rapidly, expanding from $10 million to $1.1 billion in three years, and achieved a 65.6% profit from shorting the US dollar in 2003. By 2005, it posted a 57.1% return.

Meanwhile, Thiel and Howery were working to formalize their sporadic angel investments into a professional venture capital fund. Portfolio analysis revealed internal rates of return of 60–70%. The question, “If part-time yields this, what if we manage it systematically?” led to two years of preparation.

In 2004, an initial fund of $50 million was raised. Originally planned to be called “Clarium Ventures,” it was later renamed Founders Fund. This name change was not just a rebranding but a declaration that the PayPal Mafia members were pioneering a new era.

Institutional investor interest was initially very limited. Even Stanford University’s endowment declined to invest, citing the small size. As a result, Thiel decided to contribute $38 million (76%) of the fund himself. “The basic division was that Peter provided the capital, and I did the work,” Howery recalls.

The Philosophy of Protecting Founders: Birth of a New Investment Philosophy

The most revolutionary idea created by the PayPal Mafia was the simple yet disruptive concept of “never pushing out the founders.” Today, “founder-friendly” investment styles may seem commonplace, but at the time, it was heretical in Silicon Valley.

The traditional venture capital industry viewed the process as “finding technical founders, hiring professional managers, and then firing both.” Investors were seen as the true rulers, and founders as interchangeable parts. Kleiner Perkins and Sequoia Capital had succeeded for over 30 years through active management. Legendary Sequoia founder Don Valentine joked that ordinary founders should be “locked in Manson Family’s underground dungeon.”

Thiel’s philosophy was fundamentally different. He believed strongly in the genius of “sovereign individuals” and saw breaking rules as not only economically foolish but also as destroying civilization. This ideology became the core of the Founders Fund.

By 2004, Sequoia’s interference had already begun. When the Founders Fund aimed to raise a second round of $120–150 million, Moritz presented a warning slide at Sequoia’s annual meeting, advising “not to approach the Founders Fund.” Investors were even threatened that investing in Sequoia would mean losing access to the Founders Fund forever.

However, this antagonism backfired. Investors began questioning, “Why is Sequoia so cowardly?” In 2006, the Founders Fund successfully raised $220.7 million. Stanford’s endowment led the investment, and Thiel’s share dropped from 76% in the first round to 10%.

Historic Investment Success: The Pinnacle of the PayPal Mafia

The investment portfolio of the Founders Fund proved that its philosophy was not just idealistic but led to tangible value creation.

Facebook: Discovering Unpredictable Value

In summer 2004, Reid Hoffman introduced 19-year-old Mark Zuckerberg to Thiel. During a meeting at Clarium Capital’s luxurious office, Thiel immediately recognized Zuckerberg’s unique personality. The young man in a T-shirt and Adidas sandals embodied the “social awkwardness characteristic of Asperger’s syndrome” that Thiel later praised in “Zero to One.”

Thiel agreed to invest $500,000 in convertible bonds. The simple condition was that—if by December 2004 the user base reached 1.5 million—the bonds would convert into 10.2% of equity. The target was not met, but Thiel chose to convert to equity. Several years later, this decision would net Thiel over $1 billion in profit.

Although the Founders Fund did not participate in the initial round, it invested a total of $8 million afterward, ultimately delivering a return of $365 million (46.6 times).

Palantir: Long-term Value from Government Contracts

In 2003, Thiel co-founded Palantir Technologies, based on PayPal’s technology, with Alex Karp as CEO. The company’s mission was to build data analysis platforms targeting governments and allied nations. As Thiel states, “After 9/11, I thought about how to fight terrorism and protect civil liberties.” This business model drew skepticism from investors like Sequoia, due to concerns over slow government procurement processes.

However, the CIA’s investment arm, In-Q-Tel, saw things differently. It was the first external investor to put $2 million into Palantir, and later the Founders Fund invested a total of $165 million. As of December 2024, the fund’s holdings reached $3.05 billion, achieving an 18.5-fold return.

SpaceX: The Boldest Decision Yielding the Greatest Return

Among the PayPal Mafia’s investment choices, the most iconic and daring was SpaceX. In 2008, Thiel proposed investing $5 million in Elon Musk’s SpaceX and Tesla, his former PayPal colleague.

At that time, SpaceX had experienced three failed launches, and funds were nearly exhausted. The industry was pessimistic. Sean Parker opposed investing due to lack of understanding, but Nosek, Howery, and Thiel’s core members decided to push forward.

Nosek, the project leader, increased the investment to $20 million (about 10% of the second fund), advocating for a valuation of $315 million before investment. This was the largest investment in Founders Fund history and caused controversy, with Howery admitting, “Many LPs thought we were crazy.”

This decision led one prominent LP to sever ties with the fund. However, over the next 17 years, the Founders Fund invested a total of $671 million in SpaceX. By December 2024, when SpaceX repurchased its shares at a valuation of $350 billion, the fund’s holdings were valued at $18.2 billion, achieving a 27.1-fold return.

What Is the PayPal Mafia: Definition and Significance

The PayPal Mafia is not just a nickname for a past startup team. It refers to a network of individuals who practice a new investment philosophy, challenge the traditional dominance of venture capital, and fundamentally redefine the relationship between founders and investors.

Born from the shared experience at PayPal, Thiel, Howery, Nosek, and Parker have shaped not only financial returns but also the future direction of the entire tech industry. Their “founder-friendly” philosophy has become the standard in Silicon Valley today, influencing many subsequent funds.

In 2007, 2010, and 2011, three funds recorded the highest venture capital performances in history—investments of $227 million, $250 million, and $625 million respectively, with total returns of 26.5x, 15.2x, and 15x—eloquently demonstrating the validity of the PayPal Mafia members’ investment philosophy.

The PayPal Mafia is essentially the invisible power structure that continues to dominate the tech industry.