The PayPal mafia (cont.)

It wasn't just Musk; anyone who didn't mesh with the Levchin/Thiel culture ran into trouble. X.com had a number of people from the banking industry who didn't last long. "We had been rivals, so it was awkward," remembers Jeremy Stoppelman, who was an engineer at X.com, stuck it out after the merger, and is now the CEO of Yelp, a fast-growing restaurant- and bar-review site.

"And that awkwardness turned into total dysfunction and warfare. Most X employees ended up leaving or getting fired. The culture was really an intellectual pissing contest, and some people didn't like that."

The infighting eventually stopped. It had to, because there were too many other enemies to deal with - eBay, for example. Before buying PayPal, the auction giant tried in various ways to kill it - by purchasing a competing service, for example.

Meanwhile, PayPal losses were multiplying. It battled Russian fraudsters who were filching millions by cribbing credit card numbers. Customer-service complaints flooded the phone lines and in-boxes and were often dealt with by simply not answering the phone or doing a mass deletion. Louisiana temporarily banned PayPal from doing business in the state; MasterCard (Charts) threatened to pull the plug because of the high number of chargebacks.

"Peter Thiel didn't know what a chargeback was," says Jawed Karim, an early engineer who went on to found YouTube with fellow alumni Chad Hurley and Steve Chen - and then sell it to Google for $1.65 billion. "That's one of the fundamental things of any credit card payment system. Chargebacks almost killed the company."

But the executive team made up for nonmastery of details with unwavering vision, which inspired the troops. At his San Bruno, Calif., office, YouTube CEO Hurley remembers his PayPal days as an education in business. When he arrived in California with a degree in art from Indiana University of Pennsylvania, building a successful company seemed like something other people did.

"You never think it could happen to you," says Hurley. "But seeing Peter and Max and the guys come up with ideas and seeing how to make things work gave me a lot of insight. You may not have a business degree, but you see how to put the process into effect. The experience helped me realize the payoff of being involved in a startup."

After 11 revisions to the prospectus, PayPal pulled off its IPO on Feb. 15, 2002. The stock closed that day at $20 a share and rose for the next nine months, even as Nasdaq cratered, until the sale to eBay. Thiel walked away on the day of the acquisition; Levchin and Sacks followed. Botha considered sticking around - "Meg Whitman made me a terrific offer," he says - but left for Sequoia to stay in the startup game.

For those who remained in the name of a paycheck, the culture shock was profound. Premal Shah, a former product manager at PayPal and now president of Kiva.org, was put in charge of eBay's developing-world strategy. He went to India for three months - a dream assignment. But when he got back, it seemed that every day meant another PowerPoint presentation for yet another layer of management. "I quit after a year," he says.

By then, the PayPal mafia was well established. Today they call upon one another when they need money or advice - and when they need both, they go to Thiel, who seems to be at the center of it all. Among his many investments, Thiel has money in Slide, Yelp, and LinkedIn.

He helped his former assistant start Laïola, one of San Francisco's hottest new restaurants. His venture capital startup, the Founders Fund, invested the first $1.5 million in Sacks' Geni.com, where five of the 29 employees are from PayPal.

Levchin invested in IronPort systems, which was founded by early PayPal investor Scott Bannister and acquired by Cisco (Charts, Fortune 500) for $830 million. He put the first $1 million into Yelp and serves as its chairman.

He's also got money with Botha at Sequoia (even while Sequoia has a stake in Slide's rival, RockYou) and was an executive producer of Thank You for Smoking, along with Sacks, Thiel, and Musk. That last name may come as a surprise, but Musk has made peace with his mutineers.

He has invested in Room 9, Geni, Botha's Sequoia fund, and Clarium Capital. (But he won't let Thiel reciprocate. "We don't need the money," says Musk with a wry smile.)

As for the impact of PayPal's culture, that varies. At some places, like Slide, Levchin's work ethic lives on- though his hiring practices seem to have softened. His head of engineering, for example, was on the Stanford water polo team. "He probably likes to play hoops," Levchin jokes.

At other places there's nary an intellectual pissing match in sight. YouTube's quiet San Bruno office might be taken for a division of a large corporation (which it is).

At Yelp, Stoppelman has become a regular on the San Francisco party circuit, and these days spends little time sleeping under his desk. But both YouTube and Yelp learned a valuable lesson from PayPal: The first idea isn't always the best. Yelp was a convoluted e-mail referral service before becoming a top review site. YouTube started as a video dating play. Now it's at the center of the zeitgeist.

The mafia doesn't often convene in a physical place- they don't have a Bada Bing, where Tony Soprano and his crew would hang out. But they do have a sense of humor, and so at FORTUNE's request, the capos are gathered in Tosca, the legendary San Francisco watering hole, for a group photo.

Frank Sinatra is here, crooning from the Wurlitzer. So are Thiel, Levchin, Sacks, Botha, and many others. Musk wanted to come, but he's in Chicago to receive an "innovator of the year" award. Hurley and Chen bowed out after their Google handler objected to the gangster motif.

The group is decked out in gold chains and tracksuits, smoking cigars, drinking Maker's Mark. It's a happy moment, even if the lack of Wi-Fi makes Levchin antsy. Looking at the group laughing and joking, you'd never guess they're all supercompetitive hyperintellectuals- or that some don't like each other very much. But when you get to know them a bit, it's not all that surprising. As Stoppelman puts it, "We're all a little weird."  

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