November 26 2007: 8:52 AM EST
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Meet the PayPal mafia

An inside look at the hyperintelligent, superconnected pack of serial entrepreneurs who left the payment service and are turning Silicon Valley upside down. Fortune's Jeffrey O'Brien reports.

By Jeffrey M. O'Brien, Fortune senior editor

Max Levchin (left) and Peter Thiel hatched the idea for PayPal over breakfast.
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(Fortune Magazine) -- A door opens, and a blond man appears in a white jacket with large buttons. "Good morning," he says. "Peter's in back. Make yourself comfortable in the dining room. I'll be serving breakfast shortly."

Holy cannoli. Peter Thiel has a butler. The 40-year-old entrepreneur runs a $3 billion hedge fund. He's the founder of a new venture capital firm that's the talk of Silicon Valley. He's got an early $500,000 stake in Facebook that's now worth about $1 billion on paper. The man has bankrolled everything from restaurants to movies and is lauded by many as some kind of free-market genius. He drives a half-million-dollar McLaren supercar. And now a butler.

Just back from a morning run, Thiel emerges into the dining room of his home in the shadow of San Francisco's Palace of Fine Arts. Wearing a powder-blue T-shirt wet with sweat, he displays the relaxed self-confidence of Michael Corleone. Perhaps it comes with the butler. "I'm Peter," he says, extending his hand and smiling before thanking me for agreeing to such a late breakfast meeting. It's 7:30 A.M. "It was nice to sleep in."

The doorbell rings, and in walks a scruffy, sleepy-eyed Max Levchin, 32, who has trekked over from his new $5 million-plus home a few blocks away in Pacific Heights. Every garment on Levchin's unwashed body is a freebie - University of Illinois zip jacket, mismatching shorts, bright orange T-shirt with some Hebrew lettering.

Levchin runs one of the hottest companies on the web, a photo-sharing site called Slide that draws 134 million users a month. Making neither eye contact nor conversation, he presses his lips together, nods to indicate that he is, as ever, ready for business, and sits.

It's been nine years since Thiel and Levchin first dined together at Hobee's, near Stanford University. Levchin had an idea for a company, and Thiel wanted to invest. In short order Thiel joined as a co-founder, and together they set out to "create the new world currency."

Their brainchild would change the course of the Internet. They'd bring on several hundred employees to what would become PayPal. They'd sign up more than 20 million users and burn $180 million in funding before breaking even and selling out to eBay (Charts, Fortune 500) for $1.5 billion.

And then things got interesting. The eBay deal, remarkable only because it happened in the bleakness of 2002, wasn't so much an exit as an explosion. Most of PayPal's key employees left eBay, but they stayed in touch. They even have a name for themselves: the PayPal mafia. And the mafiosi have been busy.

During the past five years they've been furiously building things - investment firms, philanthropies, solar-power companies, an electric-car maker, a firm that aims to colonize Mars, and of course a slew of Internet companies. It's amazing how many hot web properties can trace their ancestries to PayPal.

Besides Facebook and Slide, there's Yelp, Digg, and YouTube. Thiel and Levchin, the don and consigliere of the mafia, figure that all told, there are dozens of enterprises worth a total of roughly $30 billion - and that value is growing rapidly, as evidenced by Thiel's good fortune with Facebook.

This group of serial entrepreneurs and investors represents a new generation of wealth and power. In some ways they're classic characters of Silicon Valley, where success and easy access to capital breed ambition and further success. It's the reason people come to the area from all over the world. But even by that standard, PayPal was a petri dish for entrepreneurs. The obvious question is, Why?

Maybe it comes back to the early hires. After their first breakfast, Thiel and Levchin began recruiting everyone they knew at their alma maters. "It basically started by hiring all these people in concentric circles," Thiel remembers. "I hired friends from Stanford, and Max brought in people from the University of Illinois."

They were looking for a specific type of candidate. They wanted competitive, well-read, multilingual individuals who, above all else, had a proficiency in math. Levchin's original idea for PayPal was to beam money between PalmPilots, but Thiel has a way of seeing the bigger picture.

A staunch libertarian, Thiel figured a web-based currency would undermine government tax structures. Getting there, however, would mean taking on established industries - commercial banking, for instance - which would require financial acumen and engineering expertise.

Thiel and Levchin also wanted workaholics who were not MBAs, consultants, frat boys, or, God forbid, jocks. "This guy came in, and I asked what he liked to do for fun," Levchin recalls. "He said, 'I really enjoy playing hoops.' I said, 'We can't hire the guy. Everyone I knew in college who liked to play hoops was an idiot.'"

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