From PayPal Mafia to Investment Empire: The Journey of Founders Fund Led by Thiel

On January 20, 2025, a shadow of a figure was deeply cast over the heart of American power. On that day, many of those who took the podium to deliver speeches at President Donald Trump’s 47th inauguration were directly or indirectly influenced by Peter Thiel’s life. From former employees to allies and investment targets, a network known as the PayPal Mafia was quietly forming the core of power. Even without Thiel’s direct presence, his strategic placement of chess pieces left traces everywhere.

The true meaning of the PayPal Mafia is not merely a group of financial success. With the emergence of Founders Fund, established in 2005, this network transformed from a corporation into an investment empire. What started with a $500,000 stake has now grown into a giant managing hundreds of billions of dollars in assets.

Strategist Thiel: Thinking 20 Moves Ahead in Chess

Peter Thiel’s greatest strength lies not in execution but in strategic thinking. A former chess player, he possessed the ability to foresee the future of business as if reading 20 moves ahead on the board. During the PayPal era, he predicted the collapse of the internet bubble and strongly pushed for Series C funding. His decision was validated by a market crash just days later.

This foresight extended beyond macroeconomic analysis. He freely navigated between technology and politics, with an intuitive ability to identify talented outsiders. A lecture at Stanford University led to the discovery of two geniuses, Ken Howery and Luke Nosek. At the time, Howery was hesitating over a high-paying banking job, but after a four-hour intellectual dialogue at Sundance Steak House, he decided to join Thiel.

“I had never met anyone who showed such deep insight into topics from political philosophy to entrepreneurship,” Howery later recalled.

Conflicts During the PayPal Era: Power Struggles with Moritz

PayPal’s success inevitably created conflicts. Michael Moritz of Sequoia Capital was furious at Thiel’s ambitious investment proposals. After the dot-com bubble burst, Thiel proposed using some of the raised funds for short-selling macro hedge strategies. Moritz immediately rejected this.

“Peter, that’s an easy thing,” he said at the board meeting. “If approved, I will resign immediately.”

Thiel’s predictions proved entirely correct. As later acknowledged by an investor, the profits from that short sale would have exceeded PayPal’s entire operating profit. Yet, despite the accuracy of his forecasts, the distrust between Thiel and Moritz only deepened.

Months later, Thiel led a coup to oust Moritz from the management team. Moritz’s conditions for the new CEO were strict, including the humiliating restriction that Thiel remain as interim CEO. This conflict would influence Thiel’s entire life thereafter.

In 2001, when eBay proposed to acquire PayPal, Thiel immediately advocated for a sale. But Moritz believed in further growth. As a result, the offer skyrocketed from $300 million to $1.5 billion, five times Thiel’s initial estimate. This victory left Thiel with deep psychological scars. While demonstrating his excellence as an investor, he was defeated in the power struggle.

Members of the PayPal Mafia would never forget this era. Relationships with talented individuals like Reid Hoffman, Keith Rabois, and David Sacks would later form the core of Founders Fund.

The Vision of an Investment Empire Starting with Clarium

The $60 million profit from the PayPal sale ignited Thiel’s investment ambitions. Initially, he began establishing Clarium Capital, a macro hedge fund modeled after Soros’s systematic worldview. Its performance was astonishing; in 2003, it achieved a 65.6% profit from shorting the US dollar.

Meanwhile, Thiel and Howery were working to turn scattered angel investments into a systematic venture capital fund. When they examined their portfolio, they realized internal rates of return reached 60-70%. “This is from part-time investments. What if we managed this systematically?” Howery asked.

In 2004, Howery started raising a $500,000 fund. Named Clarium Ventures, it would later be renamed Founders Fund. Due to limited support from institutional investors, Thiel decided to contribute $38 million (76% of the fund) from his own funds.

Two Iconic Investments: Palantir and Facebook

Before founding Founders Fund, Thiel’s two personal investments laid the foundation for the new fund.

The first was Palantir. Founded in 2003, this data analytics company was initially shunned by the venture capital industry. Many investors doubted the viability of a business model that targeted government clients. Moritz of Sequoia doodled disinterestedly during meetings. However, when the CIA’s investment arm, In-Q-Tel, invested $2 million, the situation changed dramatically. The Founders Fund invested a total of $165 million, and by December 2024, its holdings reached $3.05 billion, with an 18.5x return.

The second was meeting Mark Zuckerberg. In summer 2004, Reid Hoffman introduced the 19-year-old founder to Thiel. The meeting at Clarium Capital’s Palo Alto office lasted only a few minutes. Thiel saw Zuckerberg’s “social awkwardness characteristic of Asperger’s syndrome” and intuitively realized it could be a weapon to escape the imitation race.

Thiel decided to invest with convertible bonds worth $500,000. The simple condition was: if the user base reached 1.5 million by December 2004, he would exercise the conversion right. Even if the target was not met, Thiel chose to convert to equity. This decision ultimately brought him over $1 billion in personal profit and yielded a $365 million (46.6x) return for the Founders Fund’s LPs.

Founder-Friendly: Revolutionizing Venture Investment

When Founders Fund was established in 2005, Silicon Valley venture capital was dominated by a investor-led era. The management interference model practiced by Kleiner Perkins and Sequoia for over 30 years was the standard. Don Valentine, founder of Sequoia, joked that mediocre founders should be “locked in the Manson family’s underground prison.”

Founders Fund directly challenged this conventional wisdom. Its core philosophy was simple yet revolutionary: never kick out the founders.

The addition of Sean Parker exemplified this philosophy. Parker, founder of Napster and failed at Plaxo, became a General Partner at Founders Fund at just 27. Some LPs expressed concern, but Thiel saw Parker’s “disappearing when he runs” trait as a valuable asset. Disruptive innovation required individuals capable of breaking existing rules.

Ryan Peterson, CEO of Flexport, later reflected: “The Silicon Valley way back then was to find technical founders, hire professional managers, and then fire both. Investors were the real rulers.”

The founder-friendly approach of Founders Fund was not just a management strategy but rooted in Thiel’s deep philosophy. He firmly believed in the genius of “sovereign individuals,” and saw regulating rule-breakers as not only economically foolish but also a threat to civilization.

Moritz’s Warning and Its Consequences

In 2006, as Founders Fund raised $227 million, Moritz counterattacked. At Sequoia’s annual meeting, he displayed a warning slide: “Avoid approaching Founders Fund.” Threats to LPs also began, including explicit warnings that “investing with us would mean losing access to Sequoia forever.”

However, this strategy favored Thiel’s camp. Investors wondered, “Why is Sequoia so timid?” It became a positive signal, and Founders Fund secured Stanford University’s endowment as an anchor investor. It was the first time institutional investors recognized the fund.

The unity of the PayPal Mafia grew even stronger.

Girard’s Theory and the Shift to Hard Tech Strategy

Thiel’s investment philosophy shifted after encountering French philosopher René Girard’s “mimetic desire” theory. It posits that human desires are born from imitation, not intrinsic value. After Facebook’s rise, the venture capital industry fell into a mimetic boom of social product imitation.

Thiel’s words are clear: “All successful companies are different, gaining monopoly status by solving unique problems. Conversely, all failed companies are the same, unable to escape competition.”

Based on this theory, Thiel turned his focus to hard tech—moving from the “bit” to the “atom” world. Missing investment opportunities in consumer social networks like Twitter, Instagram, and WhatsApp was a cost. However, this strategic shift made Founders Fund a unique entity in the industry.

SpaceX Investment: The Most Controversial Decision

In 2008, Thiel reunited with his former rival, Elon Musk, at his wedding. Musk had used the proceeds from the PayPal sale to fund Tesla and SpaceX. Initially, Thiel proposed a $5 million investment.

However, project leader Luke Nosek had a different view. He advocated increasing the investment to $20 million (about 10% of Fund II) and entering at a valuation of $315 million. At that time, SpaceX had experienced three failed launches, and the industry was pessimistic.

“Many LPs thought we were crazy,” Howery admitted. “But we believed in Musk and the potential of this technology. We had missed some projects from PayPal colleagues, so this time we had to go all in.”

This decision became the wisest investment in Founders Fund history. By December 2024, when SpaceX repurchased its shares at a valuation of $350 billion, the fund’s holdings reached $18.2 billion, a 27.1x return.

One LP parted ways over this. That investor would later miss out on over $66.7 billion in gains over 17 years.

Completing the Investment Empire: Legacy in VC Industry

The performance of Founders Fund matched its reputation. The three funds raised in 2007, 2010, and 2011 set records as the most successful in venture capital history, with total returns of 26.5x, 15.2x, and 15x respectively.

This investment empire, starting from the PayPal Mafia, went beyond mere financial success. Thiel and his colleagues revolutionized the philosophy of the venture capital industry itself. As pioneers of the founder-friendly concept, they redefined the relationship between entrepreneurs and investors.

Their relationships with portfolio companies were also unique. Thiel himself served as CEO of Palantir, appointing Alex Karp, stood by Zuckerberg at Facebook, and continued to believe in Musk at SpaceX. The decisions with the highest risk of failure often yielded the greatest returns.

Today, the network of the PayPal Mafia is not just a relic of the past. The companies they founded, entrepreneurs they mentored, and investors they nurtured continue shaping the worlds of technology and capital. Just as Thiel can foresee 20 moves ahead on the chessboard, Founders Fund is transforming the future of the industry.