What is the PayPal Mafia: The full story of the investment empire created by Founders Fund

The term “PayPal Mafia” is not just a historical nickname but refers to a group that has had a profound impact on Silicon Valley and the global tech industry. It is an investment network derived from the early members of PayPal, comprising individuals who later shaped the rise of technology companies. In particular, the Founders Fund, formed around Peter Thiel, sits at the top of this mafia’s power structure and wields influence so significant that it has transformed the very nature of the venture capital industry.

Founded in 2005 with an initial capital of only $50 million, the Founders Fund evolved into an industry giant managing billions of dollars in assets. Throughout this growth, members of the PayPal Mafia repeatedly made historic investment decisions. The three funds recorded in 2007, 2010, and 2011 are considered some of the best performances in venture capital history. They achieved returns of 26.5x, 15.2x, and 15x on investments of $227 million, $250 million, and $625 million respectively. Such achievements are not mere luck but stem from the unique strategic thinking of Thiel and his team.

Thiel’s Power Network Construction: Strategic Placement on the Chessboard

Peter Thiel’s approach to thinking is fundamentally different from that of typical investors. He is known for predicting market movements up to 20 moves ahead like a chess player, precisely positioning key pieces. Just as he would place JD Vance at B4, Sean Parker at F3, Mark Zuckerberg at A7, and Elon Musk at G2, Thiel has built his own power structure by navigating the financial world of New York, the tech industry of Silicon Valley, and the political center of Washington.

Thiel’s appeal is not just charisma but his ability to convey complex ideas concisely. From Lucretius to Ted Kaczynski, he freely moves between classical and modern thought, preaching virtues of monopoly and the essence of business to entrepreneurs. This intellectual allure has attracted many talented individuals to Thiel’s orbit.

The fact that Ken Howery and Luke Nosek became Thiel’s close associates was no coincidence. Howery met Thiel at Stanford University, where Thiel founded the conservative student magazine “Stanford Review,” and during a steakhouse dinner in Sundance on the eve of graduation, Thiel engaged him in a four-hour intellectual conversation. Howery felt, “I might work with this person for life.” Meanwhile, Nosek, an entrepreneur developing a smart calendar app at the time, had received support from Thiel but forgot about him during a lecture at Stanford and asked, “Are you Peter Thiel?” Thiel recognized this forgetfulness and free-thinking as an ideal talent pattern, guiding their future collaboration.

The three, who officially met through a lecture at Stanford in mid-1998, spent the next seven years building their careers and deepening their cooperation.

Clash of Investment Philosophies: The Conflict with Moritz and the Birth of Founders Fund

From the early days of PayPal, Thiel’s investment perspective repeatedly clashed with Michael Moritz of Sequoia Capital. Moritz, a legendary venture capitalist who transitioned from an Oxford-educated journalist, had invested in Yahoo, Google, Zappos, LinkedIn, and Stripe. Meanwhile, Thiel’s ambitions for his investments continued to burn brightly.

Thiel immediately decided to invest $240,000 in Max Levchin’s project, which eventually yielded a $60 million profit and marked the beginning of one of the largest entrepreneurial stories of the internet age. Later, Thiel, Howery, and Levchin became core members, with talented individuals like Reid Hoffman and David Sacks joining, creating Silicon Valley’s most luxurious group of entrepreneurs.

However, this success also led to a decisive conflict between Thiel and Moritz. In March 2000, when both companies announced a $100 million Series C funding round, Thiel predicted the collapse of the dot-com bubble. He actively pushed for this funding, and his foresight proved correct—the bubble burst within days, causing many tech companies to fail.

Thiel then proposed an even bolder plan: if the market declined as expected, he suggested transferring the raised funds to Thiel Capital International and profiting from short selling. Moritz was furious. “If the board approves this, I will resign immediately,” he warned. The fundamental difference in values underpinned their conflict: Moritz wanted to “do the right thing,” while Thiel aimed to “be the right person.”

Ultimately, Moritz succeeded in blocking Thiel’s plan, but Thiel’s market predictions were entirely correct. Later, investors openly admitted, “If we had shorted then, the profits would have exceeded PayPal’s entire operating profit.” This boardroom conflict deepened mutual distrust and eventually led to a coup in September 2000. Thiel was appointed interim CEO but was forced to seek an external successor under Moritz’s conditions.

This experience directly led to the founding of the Founders Fund. Thiel needed a platform where he could fully implement his investment philosophy.

Merging Macro Investing and VC Activities: From Clarium Capital to Founders Fund

After earning $60 million from the PayPal acquisition, Thiel further expanded his investment ambitions. In the same year PayPal was acquired, 2002, he began establishing the macro hedge fund “Clarium Capital,” aiming to base its investments on a systematic worldview similar to George Soros.

Thiel’s innate ability to grasp civilization-level trends and his instinctive resistance to mainstream consensus immediately proved effective in Clarium Capital. Within three years, assets under management skyrocketed from $10 million to $1.1 billion. In 2003, the fund achieved a 65.6% profit from shorting the US dollar, and after a downturn in 2004, it posted a 57.1% return in 2005.

Simultaneously, Thiel and Howery began formalizing their sporadic angel investments into a professional venture capital fund. Their portfolio analysis revealed internal rates of return of 60–70%. Howery asked, “What if we managed this systematically?” leading to the creation of the Founders Fund.

In 2004, Howery started raising funds with an initial target of $50 million, tentatively named Clarium Ventures. However, raising capital from institutional investors proved more difficult than expected. Even Stanford’s endowment withdrew, citing the fund’s small size. Ultimately, external funding was only $12 million, with Thiel contributing $38 million (76% of the initial fund) from his own resources.

Just before establishing the fund, Thiel made two personal investments. One was in Palantir, a company he co-founded in 2003, utilizing PayPal’s angel investment techniques to target government and allied sectors with cross-disciplinary data insights. After 9/11, Thiel stated he “thought about how to fight terrorism and protect civil liberties.” Despite being snubbed by Sequoia Capital, Palantir received an initial $2 million investment from CIA’s In-Q-Tel. Later, the Founders Fund invested a total of $165 million, and as of December 2024, its holdings reached $3.05 billion, achieving an 18.5x return.

The other key investment was Facebook. In summer 2004, Reid Hoffman introduced 19-year-old Mark Zuckerberg to Thiel. During a meeting at Clarium Capital’s Presidio office, Thiel noted that he had researched social networking extensively. He saw Zuckerberg’s “social awkwardness characteristic of Asperger’s syndrome” as a strength to avoid imitation competition. Thiel agreed to invest $500,000 in convertible bonds, with the condition that if user numbers reached 1.5 million by December 2004, the bonds would convert into equity, giving him a 10.2% stake.

Although the target was not met, Thiel chose to convert the bonds into stock. This cautious decision ultimately yielded over $1 billion in personal profit. While Founders Fund did not participate in the initial round, it later invested a total of $8 million, ultimately generating $365 million (46.6x) in profit for LPs.

Iconic Investments: Facebook, Palantir, SpaceX — The Symbols of the PayPal Mafia

In the early days of Founders Fund, the investment team underwent significant changes. The addition of Sean Parker marked a crucial turning point. Parker, known as the founder of Napster and the funder of Plaxo, had been dismissed by Moritz in 2004 due to his unstable management style. He later met Zuckerberg and joined Founders Fund as a General Partner a few months afterward.

The strengths of Parker and the team were complementary. Thiel brought strategic thinking and macro trend focus; Howery excelled at valuation and financial modeling; Nosek combined creativity and analytical skills. Parker’s deep understanding of internet product logic and consumer needs further strengthened the team.

The most iconic decision made by this PayPal Mafia investment team was investing in SpaceX in 2008. Thiel reconnected with Elon Musk at a friend’s wedding. At that time, SpaceX had experienced three failed launches and was nearly out of funds. The industry was pessimistic about the company.

Parker initially opposed the investment, but Nosek, Howery, and Thiel pushed forward. Led by Nosek, the team increased the investment to $20 million (about 10% of the second fund), valuing SpaceX at $315 million and entering the market. This was the largest investment in Founders Fund history and the most debated decision. “It was highly controversial, and many LPs thought we were crazy,” Howery admits.

However, the team believed strongly in Musk and the technology’s potential. Having missed some projects during PayPal, they decided to go all-in this time. The decision proved correct. Over the next 17 years, the fund invested a total of $671 million (second largest after Palantir) in SpaceX. By December 2024, when SpaceX repurchased its shares at a valuation of $350 billion, the holdings were worth $18.2 billion, achieving a 27.1x return.

Meanwhile, investments in Facebook and Palantir were also symbolic. The Facebook investment alone yielded over $1 billion in personal profit and $365 million for the entire Founders Fund. Palantir gained the trust of government clients and grew into a company valued at $3.05 billion as of December 2024.

Through these investments, the PayPal Mafia fundamentally changed Silicon Valley’s investment patterns.

“Founder-First” Principle: Revolutionizing the Traditional VC Model

The greatest change brought by Founders Fund to the industry was its investment philosophy. Traditional venture capital involved active management by investors, including replacing founders if necessary—a “investor-led” model. Don Valentine, legendary founder of Sequoia Capital, joked that mediocre founders should be “locked in Manson Family’s underground dungeon.”

In contrast, Founders Fund adopted a fundamentally different approach centered on “never booting out founders.” While this may seem obvious now, in 2004 it was pioneering. Thiel’s ideological background was a firm belief in the genius of “sovereign individuals.” He believed that breaking rules was not only economically foolish but also destructive to civilization.

This philosophical difference intensified conflicts with Sequoia Capital. In 2006, Moritz reportedly presented a slide at Sequoia’s annual meeting warning others not to approach Founders Fund during its second fundraise. Moreover, Sequoia’s management allegedly threatened LPs that “investing with us would mean losing access to Sequoia forever.”

The Thiel-Moritz conflict was not just personal but a philosophical divide in the venture capital industry. One side aimed to “do the right thing” as a norm of investor control, while the other pushed a new paradigm of “maximizing founder freedom.”

Despite this, in 2006, Founders Fund successfully raised $227 million, with Stanford’s endowment as an anchor investor, marking the first formal approval from institutional investors. Thiel’s share of the investment decreased from 76% in the first round to 10%.

Systematizing Investment Philosophy: The Legacy of the PayPal Mafia

The “Founder-First” and monopoly-oriented approach of Founders Fund was codified in Thiel’s book Zero to One. Its core thesis is that “all successful companies are different, and they achieve monopoly by solving unique problems. Conversely, all failed companies are the same—they couldn’t escape competition.”

This theory directly influences Thiel’s investment strategy. Instead of seeking monopolies within the venture capital field, he looks for areas where other investors hesitate or cannot enter. After investments in Facebook and Palantir, the VC industry rushed into social media companies. Thiel, however, withdrew from this imitation race and turned his focus to hard tech sectors like SpaceX.

Rene Girard’s theory of “mimetic desire” underpins Thiel’s investment philosophy. It suggests that human desire arises from imitation rather than intrinsic value, explaining why many investors missed opportunities in social networks like Twitter, Pinterest, WhatsApp, Instagram, and Snapchat. Only investors who forge their own domain can achieve true monopoly returns.

The model created by the PayPal Mafia members, embodied by Founders Fund, has profoundly influenced the venture capital industry. In the 2010s, “founder-friendly” became a common concept, and the investor-led approach receded. However, this paradigm shift was driven by Thiel and his allies, rooted in their unique ideological background.

Global Impact of the PayPal Mafia: Politics and Business Penetration

Members of the PayPal Mafia have extended their influence beyond technology into politics. By January 2025, at the US presidential inauguration, former PayPal employees served as Vice President, a former partner of Stanford Review as a new director of AI and cryptocurrency in the administration, and the founder of Meta participated. This indicates that the PayPal Mafia has evolved from a mere investment group into a powerful network deeply embedded in the core of US politics, economy, and technology.

Thiel may not have planned all of this, but his strategic thinking akin to chess and his human network from the PayPal era have undoubtedly had a profound impact on reshaping the tech industry and political influence.

The essence of the PayPal Mafia is not just an entrepreneurial group or venture capital firm but a power network sharing a common philosophy and investment strategy. The core, Founders Fund, not only recorded the highest returns in VC history but also changed the entire investment industry paradigm. Concrete achievements like a 27.1x return on SpaceX, 46.6x on Facebook, and 18.5x on Palantir are the results of Thiel’s strategic thinking and talent discovery.

The investment philosophy and practices demonstrated by the PayPal Mafia have had a decisive influence on the development of the tech industry. The adoption of the “Founder-First” principle, pursuit of monopolistic business models, and sensitivity to macro trends transformed Founders Fund from an excellent fund into an institution symbolizing a historic turning point.