From PayPal Mafia to Investment Empire: Founders Fund's Success Strategy

The name PayPal Mafia is an indispensable part of the history of Silicon Valley’s investment landscape. The Founders Fund, established by a genius group including Peter Thiel, Ken Howery, and Luke Nosek, grew from a small venture capital of just $50 million into a Silicon Valley powerhouse managing billions of dollars in assets. The journey of this investment empire is not merely a success story of capital management but a revolutionary tale that transformed the entire venture capital industry, fundamentally redefining the relationship between entrepreneurs and funds.

The Moment Silicon Valley Elites Meet

Thiel’s first turning point in life was his encounter at Stanford University. In the mid-1990s, in the editorial office of the conservative student magazine “Stanford Review,” Peter Thiel met Ken Howery, a Texas native. As Howery studied economics and was promoted to senior editor of the magazine, their bond deepened.

Thiel’s extensive knowledge system, from the French philosopher René Girard’s ideas and political philosophy to entrepreneurial strategies, captivated the young Howery. Thiel proposed a four-hour intellectual dinner at the Stanford steakhouse “Sundance” for Howery, who was about to graduate. That night’s conversation changed Howery’s life. Initially set to join an investment bank in New York, Howery decided the next day to become the first employee of a nascent hedge fund with less than $4 million in assets, instead of pursuing a traditional career.

The third key figure, Luke Nosek, was met more by chance. When Thiel was giving a speech on the Stanford campus, a young man with brown curly hair sitting beside him suddenly leaned forward and asked, “Are you Peter Thiel?” Nosek was an entrepreneur developing a smart calendar app Thiel had invested in, but he had forgotten Thiel’s face. Thiel saw in this forgetful talent an ideal prototype of an entrepreneur—“talented, independent, and boldly exploring conclusions that ordinary people hesitate to consider”—which perfectly aligned with Thiel’s values.

In mid-1998, the three officially met after a lecture at Stanford. Over the next seven years, they began individual venture capital activities in earnest, eventually developing a deeper cooperative relationship.

The PayPal Power Struggle and Conflict with Moritz

The birth of PayPal marked the first major test of Thiel’s investment philosophy. In summer 1999, Thiel’s encounter with Max Levchin, a Ukrainian-born genius entrepreneur, led to the creation of one of Silicon Valley’s most glamorous entrepreneurial teams. Thiel immediately decided to invest $240,000 in this project, which ultimately yielded a $60 million profit and marked the beginning of one of the most dramatic entrepreneurial stories of the internet age.

Levchin quickly hired Nosek, followed by Thiel and Howery joining full-time. Top talents like Reid Hoffman, Keith Rabois, and David Sacks joined, creating Silicon Valley’s top team. The company, initially called Fieldlink (later renamed Confinity), after conflicts with Elon Musk’s X.com, adopted the new name PayPal.

However, this integration had serious issues—particularly the relationship with Sequoia Capital’s Michael Moritz, an legendary venture capitalist who had early investments in Yahoo, Google, LinkedIn, and Stripe, but held fundamentally different investment philosophies from Thiel.

In March 2000, after the merger, PayPal raised $100 million in Series C funding. Thiel pushed for this raise, predicting a rapid macroeconomic downturn. His prediction proved correct—the internet bubble burst within days.

Thiel saw a new opportunity: using the newly raised $100 million to short-sell in Thiel Capital International’s portfolio. Moritz was furious—Sequoia’s investors had warned against it. There was an unbridgeable gap between Thiel’s desire to “be the right person” and Moritz’s desire to “do the right thing.”

Ultimately, Moritz succeeded in blocking the short-selling plan, but Thiel’s prediction was entirely correct. Later, an investor candidly said, “If we had shorted at that time, the profits would have exceeded PayPal’s entire operating profit.”

In September 2000, the power struggle intensified. Levchin, Thiel, and Scott Banister led a coup to oust CEO Elon Musk. Musk refused to accept this, and Thiel’s rebellion required convincing Moritz to accept Thiel as CEO. The conditions were harsh—Thiel was only an “interim CEO” and was forced to search for a successor, enduring humiliation.

This power game deeply hurt Thiel and laid the groundwork for founding the Founders Fund. Interestingly, in 2001, when eBay proposed a $300 million acquisition, Thiel advocated selling, but Moritz insisted on developing independently. Moritz’s judgment prevailed, and eBay increased its offer to $1.5 billion—five times Thiel’s initial proposal. Ironically, their disagreement contributed to PayPal’s success and marked the beginning of endless rivalry.

Systematizing Venture Investment with Clarium Capital

After earning $60 million from the PayPal acquisition, Thiel’s ambitions reignited. During his time at PayPal, he and Howery continued managing Thiel Capital International, spending countless nights and weekends on fund management. They built a portfolio combining stocks, bonds, currencies, and early-stage startups, executing 2-3 deals annually.

In the same year as the PayPal deal’s completion, 2002, Thiel began establishing the macro hedge fund Clarium Capital. Its founding philosophy—“pursuing a systematic worldview as advocated by Soros”—aligned perfectly with Thiel’s thinking style. Naturally talented at capturing civilization-level trends, Thiel instinctively resisted mainstream consensus.

This mode of thinking quickly proved its market power. Clarium’s assets grew rapidly from $10 million in three years to $1.1 billion, and in 2003, it achieved a 65.6% profit from shorting the US dollar. After a sluggish 2004, it posted a 57.1% return in 2005.

Simultaneously, Thiel and Howery began formalizing their sporadic angel investments into a systematic venture capital approach. Their portfolio analysis revealed internal rates of return of 60–70%, achieved through part-time investing. What results might they produce if they managed these systematically?

After two years of preparation, Howery began fundraising in 2004. The initial $50 million fund was to be called Clarium Ventures but was later renamed the Founders Fund. Due to difficulties in fundraising, external capital was limited to just $12 million, prompting Thiel to contribute the remaining $38 million (76% of the initial fund) from his own funds.

Innovating a Founder-Friendly Strategy

Two personal investments Thiel made before establishing the first Founders Fund eventually turned into a fortuitous position in Silicon Valley.

The first was Palantir, co-founded in 2003. Thiel played dual roles as founder and investor, collaborating with PayPal engineer Nathan Gettings, Clarium employee Joe Lonsdale, and Steven Cohen. The following year, he appointed Stanford Law School classmate Alex Karp as CEO.

Palantir’s mission was provocative: borrowing the image of the “true knowledge spar” from “The Lord of the Rings,” it aimed to leverage PayPal’s fraud prevention technology to help users gain cross-domain data insights. Unlike traditional enterprise services, Thiel targeted U.S. government and allied clients.

Despite being snubbed by legendary VCs, Palantir was highly valued by In-Q-Tel, the CIA’s investment arm. An initial $2 million investment from In-Q-Tel later brought Thiel enormous financial gains and reputation recovery. Subsequently, the Founders Fund invested a total of $165 million, and as of December 2024, assets under management reached $3.05 billion, with an 18.5x return rate.

The second investment was more effective. In summer 2004, Reid Hoffman introduced 19-year-old Mark Zuckerberg to Thiel. Hoffman, a PayPal alumnus, and Zuckerberg, despite differing political views, respected each other.

When Thiel met Zuckerberg at Facebook’s offices, he saw in the young man “social awkwardness characteristic of Asperger’s syndrome.” Zuckerberg did not try to please others intentionally and asked questions about unfamiliar financial terms without hesitation. Thiel considered this trait a strength of entrepreneurs.

A few days later, Thiel agreed to invest $500,000 in Facebook in the form of convertible bonds. The terms were simple: if Facebook reached 1.5 million users by December 2004, the bonds would convert to 10.2% equity; otherwise, the funds could be withdrawn. The target was not met, but Thiel chose to convert to equity anyway.

Later, Thiel admitted that during Facebook’s Series B funding, he fell prey to cognitive bias. The initial valuation was $5 million, but eight months later, the Series B valuation soared to $85 million. “The office graffiti was terrible, the team only had 8 or 9 people, and it felt like nothing was changing daily,” Thiel recalled. This bias caused him to miss the opportunity to lead the investment, which continued until the valuation reached $525 million in Series C.

Sean Parker joined the Founders Fund as an investment partner in 2005. At 19, Parker had shocked the tech world with the peer-to-peer app Napster, then founded the contact management app Plaxo. Despite attracting $20 million from Moritz and other investors, Plaxo ultimately failed. In summer 2004, Moritz dismissed Parker, escalating the conflict.

After leaving Plaxo, Parker quickly started working with Zuckerberg. They had met earlier that year when Facebook took over Stanford campus. After Plaxo’s collapse, Parker reconnected with Zuckerberg in Palo Alto and soon became Facebook’s president.

His first act was revenge against Moritz and Sequoia. When Facebook surpassed 1 million users in November 2004, Sequoia tried to contact them. Parker and Zuckerberg played a cruel joke, arriving late in pajamas, and provocatively presented a slide titled “10 Reasons Not to Invest in Wirehogs.” The slides included “No revenue,” “Late in pajamas,” and “Involved Sean Parker.” This was Sequoia’s most painful mistake in history.

The core philosophy of the Founders Fund was simple yet disruptive: “Never kick out the founders.” At the time, this was pioneering.

Traditional VC models involved finding tech founders, hiring professional managers, and then firing both—making investors the true controllers. Since the 1970s, firms like Kleiner Perkins and Sequoia Capital had succeeded by actively intervening in management.

However, Thiel’s “Founder First” approach was not just a differentiation strategy but rooted in his worldview, philosophy, and understanding of progress. He believed in the genius of “sovereign individuals” and saw regulating rule-breakers as not only economically foolish but also destructive to civilization.

After raising $50 million in 2004, the Founders Fund launched a second round in 2006. The team was entirely new, but Parker joined, Nosek was full-time, and Thiel was an early external investor in Facebook. This move clearly angered Moritz.

Sequoia’s CEO tried to sabotage the fund-raising. “When we were raising the second fund, there was a slide at Sequoia’s annual meeting warning ‘Don’t approach Founders Fund,’” Howery recalls. More specifically, “They threatened LPs that if they invested with us, they would lose access to Sequoia forever.”

However, this boomerang backfired, boosting the Founders Fund. “Investors wondered, ‘Why is Sequoia so timid?’ It was actually a positive signal,” Howery said. In 2006, the fund successfully raised $227 million, with Stanford University’s endowment leading the investment and gaining institutional recognition.

Focused Investment in Facebook, Palantir, and SpaceX

The Founders Fund’s investment strategy evolved from the initial $100 million to a new phase. Because Thiel disliked institutionalized management, the fund remained in an “efficient chaos” state for the first two years. Howery was busy exploring projects, and the team refused to hold routine meetings.

With Parker’s addition, the fund’s operations became more systematic. The three partners complemented each other: Thiel with strategic thinking and macro trends, Nosek with creativity and analysis, Howery with valuation and financial modeling. Parker deeply understood internet products and consumer internet challenges through Facebook experience.

Facebook investment became a hallmark success. The fund did not participate in Series A but invested a total of $8 million later, ultimately generating $365 million (46.6x) for LPs.

Palantir represented a longer-term view. Starting from In-Q-Tel’s initial $2 million, the fund invested a total of $165 million, and as of December 2024, assets under management reached $3.05 billion, with an 18.5x return.

However, the true investment empire was built through SpaceX. In 2008, Thiel met Elon Musk at a friend’s wedding. At that time, SpaceX had experienced three failed launches and was nearly out of funds. While the industry was pessimistic, Thiel proposed a $5 million investment.

Parker, unfamiliar with the field, declined, but others pressed ahead. Lead investor Nosek increased the investment to $20 million (about 10% of the second fund), arguing for a pre-investment valuation of $315 million. This was the largest and most prudent investment in Founders Fund history.

“Many found it controversial, and many LPs thought we were crazy,” Howery admits. “But we believed in Musk and the technology’s potential.” Ultimately, this investment quadrupled the fund’s investments in promising projects.

Over 17 years, the fund invested a total of $671 million in SpaceX (second only to Palantir). By December 2024, when SpaceX repurchased its shares at a valuation of $350 billion, the fund’s holdings were worth $18.2 billion, achieving a 27.1x return.

Imitation Desire Theory and Shift to Hard Tech

The Founders Fund’s true uniqueness emerged after 2008, with a shift toward hard tech. As the VC market chased the next generation of consumer internet hotspots, Thiel lost interest.

This shift was rooted in the ideas of René Girard, the French philosopher Thiel admired at Stanford. Girard’s “Imitation Desire” theory posits that human desires are born from imitation, not intrinsic value. This became a core framework for Thiel’s analysis of the world.

After Facebook’s rise, the VC industry followed the imitation boom of social products. The Founders Fund invested in Gowalla, a local social network, but was passive. Thiel summarized the strategy in “Zero to One”:

“All successful companies are different, gaining monopoly by solving unique problems. All failed companies are the same, unable to escape competition.”

This concept guided the fund’s investment approach—seeking fields others avoid or cannot access.

Thiel turned to hard tech—companies building in the atom world, not just bits. This strategy had costs: after Facebook, the fund missed opportunities with Twitter, Pinterest, WhatsApp, Instagram, and Snapchat.

But as Howery says, “With SpaceX, we can do all that without missing out.” In fact, the fund’s track record proves the strategy’s validity.

The Significance of Building an Investment Empire from the PayPal Mafia

Looking back at the growth of the Founders Fund, it’s clear how the PayPal Mafia transformed the VC industry. The three funds in 2005, 2010, and 2011 set records for performance, with total returns of 26.5x, 15.2x, and 15x on investments of $22.7 million, $25 million, and $62.5 million respectively.

The investment empire built by Thiel, Howery, Nosek, and Parker is more than just capital management. They pioneered the “Founder-Friendly” concept, countering the 30-year “investor-led” model of the VC industry.

From the 2002 investment in IronPort Systems through the 2008 SpaceX investment and beyond, the PayPal Mafia has consistently identified overlooked opportunities and invested in fields others fear to consider.

Today, the Founders Fund manages billions of dollars, with assets totaling $21.2 billion from Palantir and SpaceX alone as of December 2024. The construction of this investment empire began with the power struggles of the PayPal era, conflicts with Moritz, and the philosophy of “Founder First.”

Thiel’s talent for chess—placing JD at B4, Sacks at F3, Zuckerberg at A7, and Musk at G2—ultimately influenced not only Silicon Valley but the entire tech industry and even US politics.

The success story of the PayPal Mafia is not just about financial returns but a revolution that fundamentally changed the relationship between entrepreneurs and investors, bringing new values to the entire innovation industry.