At 27 years old, Elon Musk earned $22 million from the sale of his 7% share of Zip2. Elon bought an 1800 square-foot condo and a second-hand Dassault Falcon 900. He also bought a silver F1 McLaren sports car. Peter Thiel was in the passenger seat when Elon wrecked the car. It wasn’t insured.
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Elon Musk grew up in South Africa and later moved to Canada and the United States to study and work. While studying physics at Queen’s University, Musk interned at the bank of Nova Scotia in the early 1990s. He noticed an arbitrage opportunity in developing country debt. The bank’s CEO rejected his proposal to act on it. He founded Zip2 with his brother Kimbal in 1995, which was later sold to Compaq for over $300 million. He went on to formalize his plans to build an online bank. Elon incorporated X.com in 1999. His co-founders had a falling out and the company split. Undaunted, Musk attracted new funding and restructured to form the successful online bank. X.com later merged with Confinity which turned into PayPal.
The following is Methods of Prosperity newsletter number 30. It was originally deployed January 11, 2024. As of September 19, 2024, original subscribers have received up to issue number 66: Phil Knight (continued).
Part 30.
Elon Musk
of the PayPal Mafia (continued).
TL;DR
Elon Musk co-founded X.com in 1999. It was an online banking service. Peter Thiel’s company Confinity created PayPal. At first, they enabled peer-to-peer payments for the Palm Pilot, a hand-held device. PayPal tied payments to email. Elon’s X was in direct competition. Confinity needed cash reserves. Confinity merged with X.com. Investors removed Elon as CEO, anticipating their IPO. They replaced him with the former CEO of Intuit, Bill Harris. Musk later returned as CEO after the merger, but not for long. They forced him out again, this time by conspirators. Peter Thiel returned as CEO.
Key lessons:
Have some semblance of a business model.
There’s no game without opponents.
If you can’t beat ‘em, join ‘em.
Ideas don’t belong to you.
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Remember, Peter Thiel co-founded Confinity in 1999 alongside Max Levchin and Luke Nosek. Musk had been trying to raise funding for X.com with not much of a company left. His co-founders Harris Fricker, Christopher Payne, and Ed Ho abandoned him. Michael Moritz was a notable venture capitalist from Sequoia Capital. He backed Elon’s risky online banking company.
Elon recruited a new team of engineers including Scott Anderson. They formed a partnership with Barclay’s. They secured the required banking licenses and FDIC insurance. They provided mutual funds to offer their new customers. On the night before Thanksgiving of 1999, X.com went live.
Musk did away with customer fees. Instead, X offered a $20 cash card for signing up, and a $10 card for every new customer they referred. The big idea that Elon Musk came up with was the same as PayPal. A peer-to-peer payment system in which a user could send money to an email address. The recipient would receive their payment as an incentive for signing up. More than 200,000 users signed up to X.com within the first few months.
All of a sudden, Elon’s competition entered the chat...
with the same idea.
Peter Thiel’s Confinity developed security software for hand-held devices like the PalmPilot. The team later pivoted toward digital money transfers. The co-founders of Confinity were Luke Nosek and Max Levchin. They rented a small office at X.com headquarters on University Avenue.
That building was too small for two startups working on the same problem. Confinity moved to their own office down the street. They developed a product they called PayPal which tied payments to email.
“The big PayPal insight that we sort of came up with in the summer of ‘99, was the idea of linking money and email.” Said Peter Thiel in an interview with co-founder Reid Hoffman, “It seems really simple, basic in retrospect, although we’d spent six or seven months in the business without thinking of that before hand.”
The rival companies became locked in a heated battle. They competed to outdo each other feature-for-feature and attract more users. Much of their battle was against hackers. In March 2000, the rivals called a truce.
Confinity was paying out hundreds of thousands of marketing dollars per day. This burn went towards customer rewards for PayPal users. They lacked the cash reserves. Elon’s X.com had plenty of cash reserves and more sophisticated banking products. The merger terms placed Elon as the largest shareholder of the new company. They used the name X.com.
Shortly after the deal closed, X.com raised $100 million from backers. This included Deutsche Bank and Goldman Sachs. Anticipating the IPO, the investors removed Elon Musk as CEO. They replaced him with the former CEO of Intuit, Bill Harris to make the company more attractive. After the merger, Harris resigned and Musk returned as CEO. Two months after the merger, Thiel resigned. Max Levchin threatened to leave.
Elon Musk’s X.com was breaking as it grew over a million users. Problems worsened as transactions increased. The website crashed. The software malfunctioned. Hackers and fraud robbed X.com of profits. Mounting credit card fees and new competitors didn’t help X.com turn a profit either. Not having a solid business model for X.com, Elon Musk’s CEO powers faded.
That’s when his co-founders and employees did him dirty. They met behind Elon’s back at the local bar to plot their evil plan. It would go down like this. They would persuade the board to kick Elon out and bring back Peter Thiel as CEO. While on his honeymoon with Justine, his enemies sent a letter of no-confidence to the board. By the time Elon returned, Peter had replaced him as CEO.
To be continued…
I like you,
– Sean Allen Fenn
Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.
