Finally: Chapter 4 — PayPal (Part 1)
Part 1: 'Bankers Are Rich and Dumb'
Wow.
It’s been a crazy year, and it’s already coming to an end.
Finally, I’m pleased to release the next chapter in Elon Musk’s Success Decoded!
I’ve put in hours and hours of research to bring it to you, and am sharing with you the first part out of three. It’s a 10 minute read 😊.
Before we begin, if you’re interested in a one-off special workshop with my co-author Ash Ali and I to celebrate the paperback release of The Unfair Advantage, click here to register. We’ll be covering entrepreneurship, setting goals for 2021, and finding your own Unfair Advantage. Seats are already almost full. Would love to see you there, so if you’re interested register now.
Love you all and thank you for your patience and the amazing feedback you’ve given me so far.
Without further ado, here’s the next chapter in Elon’s story.
(If you haven’t already, you can read the previous chapters here.)
Chapter 4 – PayPal
Part 1: ‘Bankers Are Rich and Dumb’
Just a decade earlier, Elon was backpacking across Canada doing manual labour jobs. Now, having sold Zip2, his first startup, he’d made it—he was a young internet multimillionaire.
Most people who ‘make it’ in Silicon Valley put their feet up, stash away their millions and use their credentials as a way to risk other people’s money from then on. Not Elon. Instead, he put ‘skin in the game’ by puting his own money on the line. He had begun working on a second startup idea in late 1998, even before the Zip2 sale finalised in February ‘99. As soon as the sale happened, he ploughed a mind-blowing $12 million of his new fortune into his new startup, leaving him with only $4 million after taxes.
With that $4 million, he moved to a nice new house—for the first time in his life he didn’t have roommates. He bought a propellor plane and learned to fly (just like his adventurous grandfather who we’ll discuss later), and he also splashed out on a $1 million McLaren F1. Much to the horror of his friends and any car enthusiast, he was actually using the limited edition supercar, one of just sixty-two that had been made in the world, as his daily driver, taking it to the office everyday, for supermarket runs, and anything really. This is something far wealthier people than he wouldn’t do that, as even they would instead save it only for special occasions.
This gives an interesting insight into his mindset at this stage. Despite the fact that he had just lived through a decade of his life when money was very scarce—ever since he moved to North America and did all the manual labour jobs, and slept on floors—he was now driving around in an obscenely expensive car, and it was getting pooed on by birds.
He also tied the knot with his fiancee Justine. They delayed their honeymoon though as Elon had more pressing matters—his second startup.
But what was this second business that he jumped straight into?
‘Bankers are rich and dumb’
Ever since his summer internship at The Bank of Nova Scotia, back when he was still a student in Canada, Elon had been thinking about bankers.
During this internship, a fresh-faced 19-year-old Elon had spotted an opportunity for the bank to make billions by investing in some Latin American bonds, risk-free. Essentially, the bank held developing country debt, and by digging into this as part of a project he’d been assigned, he stumbled on what seemed like an obvious business opportunity.
Elon discovered that some of the Latin American bonds were being backed by the US government, so-called ‘Brady Bonds’, as part of a scheme to help these developing countries reduce their debt burden. Interestingly, Elon spotted that these bonds were being backstopped by the US at around 50 cents on the dollar, but they were being traded at only 25 cents on the dollar. Here was an opportunity.
He called up Goldman Sachs to see what they’d say if he asked for a ridiculous number of Brazilian bonds at this 25 cents price, something like $10 billion worth. When they confirmed that this was doable, Elon was floored. This was such an obvious arbitrage play, and one which nobody else seemed to be spotting. He rushed off to his boss’s office and pitched him the opportunity of a lifetime—to make billions risk-free.
He had spent the internship thus far earning $14 an hour and being told off by his superiors for using the executive coffee machine, but here was a way for him to finally make a splash and earn their respect—along with a huge bonus.
“Write up a report,” his manager said when Elon finished his pitch. His write up was passed all the way up to the CEO of the bank. However, his hopes came to screeching halt when, to his shock, the CEO rejected the idea.
The reason? They had been burned on South American bonds in the past.
“I tried to tell them that’s not the point,” Elon said. “The point is that it’s f*cking backed by Uncle Sam. It doesn’t matter what the South Americans do. You cannot lose unless you think the U.S. Treasury is going to default. But they still didn’t do it, and I was stunned.”
His main insight from that internship?
‘Bankers are rich and dumb’
“All the bankers did was copy what everyone else did. If everyone else ran off a bloody cliff, they’d run right off a cliff with them. If there was a giant pile of gold sitting in the middle of the room and nobody was picking it up, they wouldn’t pick it up, either.”
The Startup Idea
This insight simmered away in the back of his mind, and lead to his revolutionary startup idea, even from that young age. He was sick of the stuffy old-school ways of the banking industry, and could see the drastic way that the internet could change things.
He dreamed of starting an internet bank, one where it’s quick, easy and secure to do virtually anything banking and finance related. He’d actually had this idea even before he started Zip2, and he had even raved about it to the scientists he worked with at the energy storage company he interned at aged 24. They were unconvinced, as in those days people weren’t comfortable using credit cards online, let alone trusting their money to an ‘internet bank’. Elon though, as always, was undeterred and had kept the idea in the back of his mind since then.
He was happy with the millions he’d made with Zip2, but was sorely disappointed by the fact that the technology he’d developed there was hardly being used at all. He still had this burning desire to do something truly groundbreaking on the internet (item #1 on his list of things to change the world). He felt that Zip2 wasn’t allowed to flourish with all the influence of the media companies and VCs on the board who had a very conservative and risk-averse approach.
“We had really sophisticated software, at least comparable to Yahoo, Excite and others (the internet giants of the time). However, because it was being filtered through these partners, it wasn’t getting properly used. I thought I want to do something that could be a more significant contribution to the internet.”
What was this significant contribution that he wanted to make? That’s when he came back to his idea of an internet bank, because, as he explained in his trademark Musk-ian way, “money is simply low bandwidth entries into a database”. And bandwidth mattered, because remember this was still the ‘90s, when internet speeds were abysmal by modern standards (if you’re old enough to remember the ‘bleeps and bops’ sounds of a dial-up modem, then you remember how incredibly slow it was).
He had visions of his futuristic internet bank upending the stagnant banking industry. He wanted to build a company where could have all your financial services in one place: a current account, savings account, a mutual funds brokerage, insurance, loans, payments... Somewhere secure which worked smoothly and quickly, without annoying niggling fees.
Ambitious to say the least.
There was one major problem with this startup idea though: Elon Musk had zero expertise in banking and finance. To address this gap in his knowledge, he turned to books—buying a detailed and boring textbook about the intricacies of banking and finance. He devoured it.
Also, he wasn’t going to take on this challenge alone. He got in touch with a contact of his from his time at the Bank of Nova Scotia, Harris Fricker, and incorporated the company with him and two other co-founders.
Elon had gotten along well with Fricker at the Canadian bank. Like Musk, Fricker was bright, ambitious and competitive. He was a Rhodes scholar, which means he’d been granted one of the most competitive scholarship in the world to study at Oxford. Fricker knew more about the banking world, and was ready to make his mark.
The Founding of X
They were all excited and raring to go, pumped up by their shared vision of disrupting the banking industry for the new internet era, and doing away with old-fashioned bank branches and cashiers.
They called their new banking startup X.com, a name championed by Elon, which was an odd branding decision given the connotations of the letter ‘X’ on the internet. However this was the least of their problems, as it wasn’t long before the sheer magnitude of their vision started to become clearer—it seemed the more they got into learning about the huge regulatory obstacles in their way, the more complex and difficult they became.
Five months later, and they still hadn’t made much progress at all. As soon as they felt they’d finally got a grasp over one obstacle or issue, a new one would pop up in it’s place. The regulatory issues kept getting worse and worse. They were getting nowhere.
Banking is the epitome of a high barriers-to-entry market. The obstacles to prevent someone from setting up their own bank were so gargantuan as to be virtually insurmountable. The complicated banking laws and regulations were literally designed to stop you from doing what X was trying to do.
At one point, they considered buying an existing bank so that they could bypass all the problems of setting one up. Even that plan didn’t work out, instead they managed to land a senior controller from Bank of America, who explained in painstaking detail the complexities of protecting accounts, transferring money, and sourcing loans.
The Fall-Out
This lack of progress led to another issue that’s very common with struggling startups—conflict between the cofounders. Many on the team were getting fed up with Elon, especially Harris Fricker. As the months went by, Musk and Fricker clashed more and more. To Fricker, X was the vehicle to prove himself, and he wanted to take the helm and run the startup in a more traditional corporate way. He’d had enough of the press fawning over Musk, the internet whizz kid who’d made millions. Elon had been lapping up the press attention and had been raving about how they were revolutionising the whole banking industry, while in reality, they weren’t making much progress at all, and that really grated on Fricker.
Tensions mounted and Fricker threw down an ultimatum: either he takes over as CEO or he’s just going to take everyone from the company and create his own. Elon wasn’t one to back down—“You should go do that” he said.
So that’s what Fricker did.
Despite his best efforts to convince the other two co-founders to stay, they followed Fricker, and so did most of the staff. Elon was left with just a shell of a company, and only a small handful of loyal engineers.
Remember, Elon could’ve had his feet up in a tropical island somewhere, avoiding this kind of grief. So imagine how he must’ve felt when virtually everybody left the company that he’d bet three-quarters of his newly minted fortune into.
“After all that went down, I remember sitting with Elon in his office,” said Julie Ankenbrandt, an early employee. “He just looked at me and said, ‘I guess we should hire some more people.’”
Hope you enjoyed Part 1. Part 2 is coming very soon so keep an eye on your inbox.
Love,
Hasan
PS: If you’re interested in learning from me and my co-author Ash Ali in a very rare online workshop, register here.