From PayPal Mafia to Investment Kingdom: The VC Innovation Created by Founders Fund

Founded in 2005 with a small fund of $50 million, Founders Fund has transformed in less than 20 years into an investment empire managing tens of billions of dollars. The driving force behind this success has been the elite investors known as the PayPal Mafia. They are known for their mastery over Silicon Valley’s power structures and their reputation as strategic visionaries who read the times ahead.

The Origins Carved by Failures During the PayPal Era

The history of Founders Fund is not just a success story but a tale filled with revenge and conviction. Its origins trace back to PayPal. In mid-1998, a speech at Stanford University sparked the meeting of three geniuses: Peter Thiel, Ken Howery, and Luke Nosek. Initially, they engaged only in sporadic angel investments.

However, the hardships Thiel experienced during the PayPal days laid the foundation for the philosophy of Founders Fund. In March 2000, Thiel, foreseeing the collapse of the dot-com bubble, aggressively raised $100 million. When the market indeed plummeted as he predicted, Thiel proposed a bold plan: to allocate part of the raised funds to short selling and transfer the profits to Thiel Capital International.

This enraged Michael Moritz of Sequoia Capital. He strongly opposed, stating, “If the board approves this, I will resign immediately.” Despite Thiel’s strategy being entirely correct, the proposal was blocked. Later, an investor candidly remarked, “If we had shorted then, the profits would have exceeded PayPal’s entire operating income.”

This humiliating experience was deeply etched into Thiel’s mind. When eBay refused to sell during the PayPal acquisition and later raised the purchase price fivefold, Thiel felt a complex mix of emotions. The distrust behind the success became a driving force to build a new investment empire.

Thiel’s Philosophy and the Birth of the Founder-First Approach

After earning a $60 million profit from the PayPal acquisition, Thiel shifted to full-scale investing. In 2002, he established the macro hedge fund Clarium Capital. Within just three years, assets under management skyrocketed from $10 million to $1.1 billion. Simultaneously, he nurtured a plan to systematize the sporadic angel investments under Thiel Capital International.

In 2004, Thiel and Howery officially launched a fund. Originally named Clarium Ventures, it was later renamed Founders Fund. The name was symbolic, representing a clear rebellion against the industry norm of investor dominance over founders during the PayPal era.

“Back then, Silicon Valley’s way was to find technical founders, hire professional managers, and then push out the founders. Investors were the true rulers,” said Ryan Petersen, CEO of Flexport. The strategy Thiel promoted through Founders Fund was a direct challenge to this industry practice.

The simple yet revolutionary concept of “never pushing out founders” shook the venture capital industry. John Collison, co-founder of Stripe, summarized, “Until Founders Fund appeared, the venture capital industry operated for the first 50 years under a model led by investors.”

The Elite Composition of Founders Fund: Reuniting the PayPal Mafia

Between 2005 and 2006, significant changes occurred in the composition of Founders Fund. The addition of Sean Parker transformed the fund into a true investment empire. Parker, the founder of Napster and an early president of Facebook, brought a new dynamic. His inclusion shifted the fund from “efficient chaos” to a more systematic operation.

Roles within the core team were clearly defined. Thiel focused on strategic thinking and macro trend analysis, Howery handled team evaluation and financial modeling, Luke Nosek brought together creativity and analytical skills, and Parker contributed deep understanding of internet products and consumer insights.

At the same time, Moritz began to show clear hostility toward Founders Fund. During the 2006 fundraising, Sequoia’s CEO reportedly presented a slide to LPs warning, “Avoid approaching Founders Fund,” and even issued a threatening warning that “investing with us would mean losing access to Sequoia forever.”

However, this attempt only strengthened 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. Stanford University’s endowment joined as an institutional investor for the first time, and Thiel’s ownership share dropped from 76% in the first round to 10%.

Girard’s Theory and the Essence of Monopoly Strategy: Thiel’s Philosophy

To understand Founders Fund’s investment decisions, it’s essential to know the philosophy of French philosopher René Girard, whom Thiel admired. Girard’s “mimetic desire” theory became a core framework for Thiel’s investments. The idea that “human desires are born not from intrinsic value but from imitation” is highly effective in analyzing Silicon Valley phenomena.

After Facebook’s rise, the VC industry jumped on the social product imitation wave. However, Thiel resisted this trend. In “Zero to One,” he states: “All successful companies are different and gain monopoly status by solving unique problems. Conversely, all failed companies are the same and could not escape competition.”

This philosophy is clearly reflected in Founders Fund’s portfolio. Investments in Facebook, Palantir, and SpaceX are all in areas that Thiel judged as “domains that other investors either avoid or cannot enter.”

Iconic Investments That Delivered Astonishing Returns

In 2007, 2010, and 2011, three funds set records for the highest performance in venture capital history. They achieved total returns of 26.5x, 15.2x, and 15x on investments of $227 million, $250 million, and $625 million, respectively.

Facebook investment is emblematic. In August 2004, Thiel met Mark Zuckerberg. The 19-year-old founder appeared in sandals and a T-shirt. The trait Thiel later described in “Zero to One” as “social awkwardness typical of Asperger’s syndrome” was actually his strength as a founder.

Thiel invested $500,000 in convertible bonds. The valuation jumped from $5 million initially to $85 million at Series B. Thiel, falling into a valuation trap, chose to pass on further investments. However, including subsequent investments, Founders Fund invested a total of $8 million, ultimately generating $365 million (a 46.6x return) for LPs.

Similarly, the investment in Palantir, co-founded in 2003, was overlooked by traditional VCs. With major clients like government agencies, Palantir was initially shunned by VCs like Sand Hill Road. Founders Fund invested a total of $165 million, and as of December 2024, its assets reached $3.05 billion, recording an 18.5x return.

SpaceX Investment: The Most Controversial Yet Wise Decision

The most debated investment was SpaceX. In 2008, at a wedding, Thiel reconnected with Elon Musk and proposed a $5 million investment. At that time, SpaceX had experienced three failed launches, and the industry was pessimistic.

However, inside the fund, led by Nosek, a different judgment was formed. The investment was increased to $20 million (about 10% of the fund’s second phase), with a pre-investment valuation of $315 million, and the decision was made to enter the market. This was the largest investment in Founders Fund history.

“Many LPs thought we were crazy,” Howery admitted. Even prominent LPs who approached the fund cut off contact. Yet, the team’s conviction remained unshaken. Having missed several projects during the PayPal days, they believed they had to go all-in this time.

That decision became a historic success. Over the next 17 years, Founders Fund invested a total of $671 million. By December 2024, when SpaceX repurchased its shares at a valuation of $350 billion, its assets had grown to $18.2 billion, achieving a 27.1x return.

The Significance of the PayPal Mafia’s VC Innovation

The trajectory of Founders Fund is not just a story of a successful investment fund. It is the process by which the elite group known as the PayPal Mafia fundamentally transformed the structure of the venture capital industry.

Their “Founder-First” approach was initially seen as heretical. The opposition from investor-led firms like Sequoia and Kleiner Perkins was fierce. However, over time, the market proved the validity of this philosophy.

Founders Fund redefined the relationship between investors and founders. It demonstrated that respecting the autonomy and originality of talented individuals could produce the most superior returns.

As of 2026, Thiel is also deeply involved in Washington’s political scene. The humiliation and setbacks he faced during PayPal have now been sublimated into an investment empire and a business philosophy. The members of the PayPal Mafia are not just wealthy elites but continue to hold influential power in shaping 21st-century technology and business structures.