Chapter 3—How Elon Became a Millionaire
Elon Musk: Success Decoded
Previous chapters in the Elon Musk series: Introduction, Chapter 1, Chapter 2
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(12 minute read)
Chapter 3—How Elon Became a Millionaire
That summer, 24-year-old Elon Musk watched a scrappy internet startup called Netscape — founded by Marc Andreessen, a kid younger than himself — quintuple in value the day it IPO’d.
Marc Andreessen, founder of Netscape, on the cover of Time Magazine. He was a big deal.
“It just became clear that the Internet was going to change the world in a major way, whereas the capacitor stuff might bear fruit, or it might not,” Elon said. “The internet was not going to wait.” So he decided to switch to pursuing item number 1 on his ‘five areas to change the course of humanity’ list:
The Internet.
Elon had applied for a job at Netscape even before their IPO, but lacking a computer science degree, he didn’t even get a reply. Undeterred, he decided to turn up at their offices one day with his résumé in hand. It didn’t work out. “Yeah it was pretty embarrassing, I was just sort of standing there (in their lobby) trying to see if there’s someone I could talk to, I was too scared to talk to anyone so then I left.”
So once the semester started, and after only two days on campus, Elon dropped out of Stanford. He’d decided to put his PhD on deferment with the plan to launch a startup and, hopefully, ride this internet wave. He only had $2,000 in the bank, an old car, a computer, and no friends in the Bay Area — but he did have one thing: an Insight.
During one of his summer internships, a salesman from the Yellow Pages had tried to sell the idea of an online listing as a supplement to the regular (physical) Yellow Pages listing. Elon noticed that the salesman struggled with his pitch as he didn’t actually understand what the internet was, or how someone would be able to find a business on it — remember this was the very early days of the internet.
Yellow Pages — How people used to look up business information aeons ago
‘These guys don’t know what they are talking about. Maybe this is something we can do,’ he told his brother Kimbal. (They had spent the previous summer on a road trip across America discussing startup ideas to harness this new internet thing). The insight this salesman had given Elon was the impetus to launch an internet company, and in terms of timing, it was now or never as he was one of the very few with the coding Expertise to maybe pull it off.
Elon poured his energy into this simple startup idea, which we can now look back on as a combination of Yelp and Google Maps — but way before either of these two companies existed. He convinced his brother Kimbal to come down from Canada to join him.
The startup idea was about getting local businesses, from restaurants to clothing boutiques to hairdressers, onto an online internet directory with the feature of turn-by-turn directions so customers could find their stores. Elon cobbled the first version of the product together using two resources: a business directory he bought on CD-ROM for only a few hundred dollars, plus mapping software which a company called Navteq had spent hundreds of millions of dollars developing (which, against all odds, they managed to get for free — ‘shows what you can get if you just ask’ said Kimbal). Elon wrote some code to merge the two databases to get a rudimentary system up and running. Now they had their ‘proof of concept’.
They rented a small office with a leaky roof for $400 a month. They repaired the ceiling, bought a sofa-bed (futon), and replaced the carpet. They didn’t have enough money to afford the rent on both an office and an apartment so they simply lived there for the first 3 months. “We more or less squatted in the office, as the landlord was out of the country, and nobody was using it”. They showered at the local YMCA, and unable to afford a high-speed internet connection, Elon ran the website on their one computer using a dial-up modem.
“I’d program it in the night and turn the server on during the day. When the website wasn’t working, it was because I was compiling code.” —Elon
Elon was in charge of the technology (the product) and Kimbal, the more extroverted brother focused on sales and networking with investors.
This is when you saw the sheer ferocity of Elon’s work ethic. He literally coded from the moment he woke up to the moment he fell asleep. He’d sleep on a beanbag next to his desk and he asked early employees to wake him up with a gentle kick when they arrived in the morning. He’d get up from the beanbag and sit down at his computer and immediately get back to work. He never seemed to leave that little office at all.
Elon at Zip2
One of the ideas they had in terms of commercialising it quickly was to partner up with the company that owned the Yellow Pages to take their publication online, but after many rejections, and an extremely arrogant reaction from them — one executive even throwing a big yellow pages at them and yelling ‘do you think you can replace this??’ — they gave up on the idea.
Deciding instead to sell direct, Kimbal went door-to-door at local businesses to get customers, but even with all his charm, getting sales was extremely tough. They were getting rejected by every business they’d approach. These business owners didn’t understand what the internet was, and why they’d even consider spending money to have a boosted ‘presence’ there.
What made it worse is that Kimbal was actually there illegally — his visa had expired — and Elon was running against the clock on his student work visa as well. They were living this crazy life driving a rundown old car (that soon fell apart — the wheel literally came off in the middle of the road), eating endless fast food and cheap pasta dishes they’d cook in the office, while getting rejected by customers left, right and centre.
What helped them through this tough time was Kimbal’s positivity and Elon’s ability to continuously and aggressively keep improving the product. It went from a very rough Proof of Concept (POC) to an actual working product that the salespeople could demo to prospective clients (what’s known as an MVP — a Minimum Viable Product).
Their relentless efforts eventually started getting them customers, and this traction (along with the halo effect from Netscape’s successful IPO) got them attention. Investors started hearing about these two young South African brothers who were creating a yellow pages for the internet.
This is when they actually started to get somewhere with fundraising. Much earlier, they had tried to speak to Venture Capitalists, but even most of them had never used the internet! Although Elon wasn’t a great speaker, he was very rough around the edges, his grit and perseverance shone through. This is when the public speaking contests he took in college must have come in handy. Investors loved his intensity. He was prepared to stake everything on the success of this startup. He said to one VC, “My mentality is that of a samurai. I would rather commit seppuku than fail.”
Seppuku is a gruesome ritual suicide that Samurai used to perform when they felt they had brought shame to themselves.
They managed to raise a very impressive $3 million from venture capital firm Mohr Davidow Ventures in early 1996. They gave up 60% of their equity, but were happy to because suddenly they weren’t in trouble any more.
Here’s what Kimbal had to say: ‘We had to break the news to them that we took the bus to get to their offices. We didn’t have a car, we didn’t have an apartment, and we were illegal!’.
The VCs gave them a salary so they could rent an apartment, Elon got a Jaguar E-type while Kimbal got a new BMW 3-series, and most importantly, Kimbal got a visa through the company and so wasn’t in America illegally anymore. They were saved.
Their mum took them out to dinner at the nicest restaurant in Palo Alto to celebrate. ‘This is the last time you see my credit card’ she said, as she had been helping them out with expenses, and even invested $10k of her own money into their business.
Supportive mum Maye Musk with her sons Kimbal and Elon.
They were now able to move into bigger, plusher offices. They had built the best directory and direction systems on the internet, and now that they’d raised this funding they expanded their scope from the San Francisco Bay Area to the whole of the United States. They also pivoted to selling software packages to newspapers, who had been very slow to react to the threat that the internet had to their business model of classifieds. By buying these packages, they could immediately get to work building their online directories, rather than having to develop the software for themselves from scratch.
Unfortunately, the venture capitalists also pushed Elon out of the CEO position, and demoted him to only CTO (Chief Technology Officer). This was typical for what VCs would do at the time, and is quite common even today — the idea being that the founder is not thought to be skilled or experienced enough to scale the company. While Elon initially agreed, he came to resent losing operational control.
Zip2 Logo
As a boss, Elon was not exactly pleasant to work for. His incredible book smarts and IQ clashed with his lack of emotional intelligence, as he often berated staff, and created a bad atmosphere with his condescension and intensity. He often saw everyone’s actions and decisions as simply stupid, coupled with the fact that he always set incredibly overambitious deadlines and was very confrontational. He even clashed with his brother sometimes, leading to a few actual fistfights, and often made employees feel like crap. While never expecting more from his team than he put in himself, nobody could match his superhuman work ethic.
(Side Note: he once told a girl when he was in college that he wished he didn’t have to eat ‘If there was a way that I could not eat, so I could work more, I would not eat. I wish there was a way to get nutrients without sitting down for a meal.’)
Kimbal and Elon in the ‘90s
He did however slightly improve as a leader during the Zip2 days. He says he noticed that his brash and abrasive management style wasn’t working very well, so decided to soften up. His main concern wasn’t hurting people’s feelings though, instead, it was purely based on productivity, and he realised that low morale led to low output from his staff. He started to consciously try to hold back on his strong urge to criticise others.
Selling to newspapers was going extremely well. The timing was perfect as CraigsList had just launched as a web platform that year, so they could hoover up as many desperate newspapers as possible. They managed to land The New York Times, Hearst Corporation, Knight Ridder, and many other media properties. They didn’t only become customers, they became investors as well and took board seats and ended up exerting a lot of influence. This influx of cash allowed Zip2 to grow at a very fast rate. In 1997 they moved into even nicer offices.
However, more competitors were now entering this space. CitySearch, their main competitor, had strong sales and marketing teams and an extensive set of directories in cities all around the country. The decision was made to merge instead of continue competing, but this merger failed leading to some bad PR. Musk urged the board to fire the CEO and reinstate him. They did fire the CEO, but it backfired on Elon, because not only did they not reinstate him, they actually took away his chairman position as well.
With the busted merger, Zip2 was now in a bad position because they were losing money fast. Elon had been frustrated with the outsized influence of the newspaper companies and VCs who were taking an extremely conservative approach. He had been wanting to take the product directly to consumers for some time, but they wanted to stick with their B2B approach. Zip2 had amazing technology which wasn’t being deployed correctly — only a small fraction of the potential of the tech was being harnessed.
Worse news was coming in, Microsoft the absolute behemoth of the time, was entering the fray to compete with Zip2 as well. The chances of failure were getting very high. The engineers started to get nervous, fearing that they would not be able to keep up with all these competitors.
In early 1999, less than four years after they set up the company, and just as the situation seemed most dire for Zip2, computer maker Compaq suddenly offered to snap up the company for $307 million, in cash. Elon and Kimbal were instant multi-millionaires, with $22 million for Elon and $15 million for Kimbal.
Elon was just 27 years old, and unlike other young Silicon Valley dotcom millionaires, he didn’t decide to move to an island and put his feet up, semi-retiring and maybe dabbling in some angel investing. Instead, Elon wasted no time at all in jumping into a completely new startup idea, in a new industry — one that would disrupt finance and payments and would reverberate in its influence for decades to come.
He didn’t completely forgo a bit of self-indulgence though, he set aside a cool one million dollars to get a limited edition McLaren F1, a car capable of 240-mph.
CNN captured him receiving it in a now-infamous interview (below).
He proceeded to use this car, unbelievably, as his daily driver, and just a year later wrecked it completely when showing off to a business partner. Find out in the next chapter how Elon disrupted online payments, and how he managed to wreck his one-million-dollar McLaren…
Before that though, let’s end on that infamous interview of Elon with Justine Wilson, who’s engaged to him by this point, receiving the car in 1999. If you haven’t seen this, you’re in for a treat. You’ll also get an insight into that next startup, which became PayPal, and how it changed the internet forever.
Success Decoded is based on the principles in The Unfair Advantage:
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(I just couldn’t resist 😁)
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Can't wait to read the next chapters!
This is gold! Well written Hasan.