8. REID HOFFMAN ET AL.

“My membership in a notable corporate alumni group in Silicon Valley has opened the door . . .”

The Silicon Valley era that produced the PayPal mafia companies—the years immediately following the tech stock market crash of 2000—couldn’t have been more different from Andreessen’s golden age. This bleak time, which was exacerbated by the 9/11 attacks, has been called the valley’s “nuclear winter” when high-profile dot-coms disappeared and weren’t replaced. Over a period of three years, venture capitalists cut their investments by 80 percent.¹ The events called to mind nothing so much as when a massive meteor collided into the Earth eons ago, casting a pall that wiped out the large, lumbering dinosaurs. We would do well to recall how that ancient calamity provided a great opportunity to the early mammals, our ancient ancestors. Once a minor class of animals on the fringe, the mammals were finally out of the dinosaurs’ shadow and could use their bigger brains and more advanced social skills to take charge of a relatively barren ecosystem. In due course, their descendants—us, of course—reached the top of the food chain. In much the same way, Silicon Valley’s nuclear winter provided a clear path to dominance for a group of clever, well-connected, already wealthy entrepreneurs.

Tough times do have a way of clarifying things for wannabe entrepreneurs. Remember, it was only during the tech world’s nuclear winter that Google’s investors put their feet down and insisted that the company’s founders, Sergey Brin and Larry Page, find a way to turn their happy, re-created computer lab into a profitable business. By 2001, barely a year later, Google was profitable; by 2004, it was a runaway success. PayPal, too, had been forced by the tough economic conditions to focus on a winning strategy; using venture capital to purchase an audience $20 at a time was no longer an option. Strange to say, but this actually was an extraordinary time to start a tech business, assuming you had the resources to get off the ground. Was the Web any less useful after the bubble in tech stocks burst? Of course not. The Internet was still going strong, even if many Internet companies weren’t.

In that fateful year, 2000, about 120 million Americans had access to the Internet in their homes; by 2003, the total had grown by nearly 60 million, to 179 million.² The global growth in Internet users over that same period was even more impressive: roughly 415 million users in 2000 became more than 781 million by the end of 2003.³ Online commerce kept growing during these dark days as well. Total e-commerce in the United States in 2000, according to Census data, was $27.6 billion. That total doubled by 2003, to $57.6 billion.⁴ As far as anyone could tell, the winning Web strategy remained largely the same, too: be quick to market and ruthlessly exploit the network effect, the virtuous loop that drives people to join a service because others have already joined.

Start-ups of this era would need to run on lean budgets, but then again, conditions had never been better for pulling that off. To begin with, there was the relative lack of competition, which meant that a new company could build an audience without fear of being undercut by a well-financed rival. Another advantage was that expenses were falling across the board—computer hardware was getting faster and less expensive, while free software was becoming more reliable and pervasive. Perhaps the greatest advantage of that era was the spread of faster broadband Internet connections, which enabled enthusiastic Web users to post online all manner of creative work and personal information—essays, recommendations, technical advice, photos, videos.

The tools for collaboration and direct publishing that Tim Berners-Lee had argued for at the start were introduced to the mainstream during these years as Web 2.0. This phrase immediately stuck in his craw, however. What exactly was new—2.0-ish, that is—about these companies built around user contributions? They were simply fulfilling the original vision for the Web, where “interaction between people is really what the Web is.”⁵ There was one vital difference, however. In Web 2.0, the tools for sharing and publishing were part of a social network or service that profited off of what you created there. You weren’t publishing a video to the Web, you were publishing a YouTube video; you weren’t writing a restaurant review on the Web, you were posting a Yelp review. The truly new idea expressed by Web 2.0 was a commercial one, and perhaps that is why Berners-Lee couldn’t recognize it.

Directly profiting from what the public posted online certainly was a much better deal for tech businesses. While Google had proven that there was a business to be made by treating everything freely published on the Web as a collection of “user-generated content,” think how hard the task was: Google had to collect and store enormous quantities of data and then build a complicated algorithm to extract value from it. By contrast, a Web 2.0 company could find itself flooded with valuable contributions from its own users, which it could exploit. The method for profiting might have been the same—publishing compelling material that would appear next to relevant advertisements—but a Web 1.0 company had the enormous challenge of sifting a fast-changing river of information for gold powder, while the others were, in effect, melting down gold jewelry that had arrived as a package left on the porch. Google eventually understood this distinction, too, and began collecting troves of user-generated content that it could exploit, whether through homegrown services like Gmail or Google+ or through its acquisition of businesses like YouTube or its ambitious scanning of the world’s libraries.

A trailblazer of Web 2.0 strategy was HotorNot.com, which was founded in 2000 and immediately became an online sensation by allowing a user to upload a photo and receive a snap judgment on “hotness” from the site’s visitors, who voted on a scale of 1 to 10. When three PayPal veterans—two programmers, Jawed Karim and Steve Chen and a designer, Chad Hurley—created YouTube, they were intending to bring the hot-or-not idea to video. In an interview, Karim said he was impressed by HotorNot because “it was the first time that someone had designed a Web site where anyone could upload content that everyone else could view. That was a new concept because, up until that point, it was always the people who owned the Web site who would provide the content.” After a few months, YouTube broadened its mission by allowing all manner of online videos and was acquired by Google in 2006 for $1.65 billion.⁶

This openness to user contributions on the part of Web 2.0 companies easily blended into a laid-back approach to potential copyright violations, in that much of what users wanted to “share” was material others had made or owned. This was the hacker ethic from the computer labs, which insisted that a frictionless system for passing along material meant that anyone should be allowed to do so. Copyright owners in the music, film, news, and TV industries, however, quickly recognized that these sites could threaten their businesses. Silicon Valley would have to fight in federal and state courthouses for greater tolerance for posting copyrighted material.

Google’s YouTube division, among others, came to rely on the “safe harbor” provision of the 1998 Digital Millennium Copyright Act to be spared liability for hosting illegal copies of copyrighted material. As long as they promptly removed material when notified by the copyright holders, these services wouldn’t be liable for what might otherwise be infringing behavior. YouTube benefited from being a comprehensive video-sharing network with many uses beyond transmitting copyrighted material. Courts treated it differently from, say, Napster, the peer-to-peer music sharing site that was seen by friends and foes alike as principally a means of acquiring copies of copyrighted music; Napster was shut down by a judge’s order in July 2001.⁷ YouTube thrives to this day. The safe harbor provision proved crucial to the acceptance of Web 2.0 sites, helping to mainstream the practice of copying and posting clips of copyrighted material, even as these services created automated systems for identifying and removing material once copyright owners complained.⁸

Thus the Web, even through 2.0, made another detour from the Berners-Lee model of personal and direct online collaboration. Instead, collaboration continued to be centralized and commercialized, as Andreessen had conceived from the start, like a global TV network. YouTube and Facebook and Amazon became the way people accessed news and entertainment. The single-minded pursuit of large online audiences by tech companies threatened the financial underpinning of traditional news outlets and cultural businesses and organizations, in yet another example of how the combination of hacker freedoms and entrepreneurial greed produced the social disruption we are experiencing today.⁹

The formula for Web 2.0 success at the dawn of the new millennium was ideally suited to members of the PayPal mafia: there was a chance for great success quickly, provided that you arrived on the scene with a new service that was interesting, reliable, and scalable. During the nuclear winter in Silicon Valley, when outside investor money had largely disappeared, the PayPal mafia had each other—millionaires who either were talented programmers or knew how to run a start-up. They established the kind of business-friendly support system that Terman perfected at Stanford in the 1950s and ’60s: there were early investments that acted like government grants; access to well-trained former colleagues, who were the equivalent of graduate students or research assistants; and there often was spare office space to borrow, so a team could move in immediately.

In addition to YouTube there was Slide, a photo-sharing service from Max Levchin, which was quickly snapped up by Google for $200 million; Yammer, cofounded by David Sacks, which produced an internal communication tool and was bought by Microsoft for $1.2 billion in 2012; and Yelp, the publicly traded company cofounded by two former PayPal programmers, which harnesses user responses to create reviews of a restaurant or even of a local doctor. Facebook, which launched in 2004, joined the PayPal mafia’s orbit when its founder, Mark Zuckerberg, moved to Silicon Valley and needed an infusion of cash.

To see how the PayPal mafia worked in practice, consider how Reid Hoffman used the connections he made at PayPal to build his start-up, LinkedIn.¹⁰ In 1997, Hoffman cofounded the Web site SocialNet, which tried to turn online connections into offline relationships, romantic and otherwise. Looking back, you could say that SocialNet was too early to social networking, and consequently never managed to build a large audience or figure out how to profit from the small one it had. When Hoffman sold the company, he had a mere $40,000 to show for his efforts.¹¹ After giving up on SocialNet, however, Hoffman was invited by Thiel, his close college friend, to join PayPal, first as a board member and later as a top executive.¹² At PayPal, as we’ve seen, Hoffman was front and center in maintaining the company’s access to eBay’s customers one way or another; at times, he would cajole eBay’s lawyers into playing nice, at others he would encourage the Department of Justice to investigate eBay for anti-competitive behavior.

Once eBay decided to buy its pesky rival for $1.5 billion, Hoffman’s profile in Silicon Valley changed radically. “They tracked SocialNet as modestly interesting,” Hoffman said of his fellow entrepreneurs and investors, but, he added, “PayPal was my induction into the circuit. It pegged me as legit; it pegged me as a player.”¹³ And, indeed, when Hoffman proposed a new company called LinkedIn for building professional networks, he was able to get started quickly because of his enhanced reputation and personal wealth, as well as a network of friends who served as cofounders, early employees, and investors. Financing for the company came from, among others, Thiel and Keith Rabois and other multimillionaires created by PayPal’s sale to eBay; the company’s first office space was provided by a former PayPal colleague. Later, once LinkedIn was a viable company, Hoffman was able to pay it forward, giving office space to the former PayPal employees who created YouTube and joining them as an early investor.¹⁴

There is something jarring about a group of self-styled survival-of-the-fittest free-marketeers committing to a strategy of collective risk and mutual support. At least one pillar of the Silicon Valley ideology was toppled by this arrangement: that success was handed out to an entrepreneur strictly according to ability and hard work, no matter his station in life or place of origin. Marc Andreessen once expressed this faith in individual merit in an interview with the New York Times journalist Tom Friedman, offering another example of how the world is flat: “The most profound thing to me is the fact that a 14-year-old in Romania or Bangalore or the Soviet Union or Vietnam has all the information, all the tools, all the software easily available to apply knowledge however they want. That is, I am sure the next Napster is going to come out of left field.”¹⁵ Somehow, things haven’t quite worked out that way. Instead, a collection of male executives from a single company, a few of whom were hired as much for their right-wing political beliefs as for any latent computer or business talent, managed to create a roster of successful companies. A kid in Romania, it seems, no matter how talented, didn’t stand a chance against these guys.

Considering their origin in university friendships and earlier start-ups, networks like the PayPal mafia tended to be nearly uniform when it came to sex, race, and educational background: white, male, elite. Somehow, though, the experience of profiting from connections and college friendship hasn’t diminished the lecturing from Silicon Valley about how other institutions—typically highly unionized ones like the public school system or the automobile industry—are rife with favoritism. Here is Hoffman explaining Detroit’s decline in The Start-Up of You, his business-advice book: “The overriding problem was this: The auto industry got too comfortable. . . . Instead of rewarding the best people in the organization and firing the worst, they promoted on the basis of longevity and nepotism.”¹⁶ Hoffman makes no mention of any similarity to the PayPal mafia, which he describes this way: “My membership in a notable corporate alumni group in Silicon Valley has opened the door to a number of breakout opportunities.”¹⁷

Though considered a liberal in Silicon Valley, Hoffman adheres to the consensus view there that society is organized around unbridled competition within a market. “Keep in mind,” he writes, “that the ‘market’ is not an abstract thing. It consists of the people who make decisions that affect you and whose needs you must serve: your boss, your coworkers, your clients, your direct reports and others. How badly do they need what you have to offer, and if they need it, do you offer value that’s better than the competition?”¹⁸ And you had better please this market, he continues, because the social safety net is an illusion. In a footnote, Hoffman counsels his readers to “consider the Social Security tax that comes out of your paycheck like you would a loan to a second cousin who has a drug problem. You might get paid back, but don’t count on it.”¹⁹

Thiel and Hoffman say they became friends through dorm-room political arguments including one over Thiel’s agreement with Margaret Thatcher’s statement that “There is no such thing as society. There are individual men and women and there are families.” Hoffman considers himself on the left, and vehemently disagreed with Thiel over this harsh view of humanity.²⁰ But if the society that Hoffman advocates for is little more than a marketplace where individuals must slug it out, then the gap between the two isn’t so significant. Hoffman’s society—Silicon Valley’s, really—ain’t much of a society.

For instance, knowing how unforgiving the market is, why would Hoffman begrudge workers the right to form a union as a way of ensuring some stability and protection? Hoffman prefers that each of us build “a network of alliances to help you with intelligence, resources and collective action.”²¹ A wealthy Stanford graduate, Hoffman has undoubtedly benefited greatly from his “mafia” of similarly situated peers. However, an economy based on personal networks undoubtedly disadvantages nearly everyone else, even ambitious, well-educated entrepreneurs like Jimmy Wales, born in Huntsville, Alabama, and eager to cash in on the Web craze.