The Two Startups that Enabled Musk to be Musk

Elon Musk is embroiled in controversy and a possibly failed effort to turn X (once named Twitter) into an app with a broad array of services. But still, a case can be made that he is the most successful CEO in the last half century and possibly ever. Under his watch at least 10 times he has marshaled game-changing disruptive innovations to fruition: most notably Tesla, SpaceX and their offspring, such as Starlink, X.ai, Neuralink, Tesla Energy and Gigafactory. In combination, these were enough to make him the wealthiest person on the planet with a net worth of over $240 billion, while allowing him to meaningfully address some challenging societal issues as well.??

?An important question for strategists and CEOs is how did he pull it off, especially with such a distasteful management style? As recorded in several books, Musk engages in bullying colleagues, impetuously firing people, avoiding sharing credit, insisting that others share his passion for a vision, creating artificial goals that are unrealistic but spawn 24/7 “put-out-the-fire” pushes and a personal policy of “having no empathy.” He explicitly chooses to have no personal relationship with employees or colleagues in part because that would inhibit firing them. How can a person be so successful with such operating practices? Should some or all of it be emulated?

In answering that question, it is important to recognize the role that two startups, Zip2 and PayPal, played in his ultimate success even though each lasted less than four years. In each, Musk lost his CEO role because of his management style and because he would not compromise his strategic vision. But these startups created for him a $250 million fund, which he used to nurture the two big winners, Tesla and SpaceX, which became the base of his wealth. Importantly, it also enabled him to win political struggles to assume operating control of both, thus creating the freedom to manage the Musk way, with its pros and cons, without being tossed.??

Let’s review these two key startups— Zip2 and PayPal:

The first, Zip2, was stimulated when a NYNEX representative gave a college talk about plans to make a digitally interactive Yellow Pages. Musk recognized the market opportunity and believed he could do the software better, faster and less clunky while expanding the concept to include maps that would guide people to locations. Around 1995, he sold the idea to a venture capitalist who invested $3 million and replaced him as CEO with an executive qualified to be the “adult in the room.” He became intimately involved in building the software, often making changes in the middle of the night, which did not endear him to his programming staff. He learned that without CEO status, he did not have control over key elements of the program and strategy.

?In order to create profitability, the backers decided to combine Zip2 with a city guide firm. Musk successfully fought that move but was not able to get reinstated as CEO. In fact, his strategic direction for the firm, to sell to end users instead of providing software to newspapers, was outvoted, his influence was reduced, and he was removed from being board chairman. But in 1999, the firm was sold to the computer firm Compaq for $300 million, and Musk at age 27 had a $22 million nest egg.

The second startup, X.com (not today’s X.com), was founded in 1999 and funded in part by the Zip2 payday. X.com was a digital bank that would also handle digital purchases. The goal was to take care of all a person’s financial transactions including loans and investments instantly. In the early days, Musk would create artificial deadlines, again “improve” the software at night, and, in general, was rude and detached from the staff, which precepted turnover. Musk attracted an investment from the prestigious Sequoia Capital, which led again to the appointment of an “adult” CEO.

The Musk vision of a digital bank was premature at best. A person-to-person payment application, however, did get traction but had a competitor having equal success in a firm with PayPal as its offering. The logic dictated a merger, which occurred in March of 2000 with Musk, the largest shareholder, as CEO. Arguments with the board and other executives about the name (X.com vs. PayPal), emphasizing personal payment vs. full-service banking, and Musk’s difficulty working with other executives and staff led him to be removed as CEO only a few months later. In July of 2002, just over three years after starting the firm, it was sold to eBay, a big user of its service, for $1.5 billion, and Musk now had a $250 million nest egg. The involvement in Tesla and SpaceX became possible.

Three observations about Musk’s role in these two startups and how they led to his amazing success:?

1. Musk had the ability to find, pursue and truly believe in a strategic vision. In both cases, he sensed a marketplace opportunity for disruptive innovation. He then committed himself to that vision, taking a personal risk by being “all in” with respect to time, emotion and resources. Then, critically, he was able to translate that commitment, confidence and passion toward his vision into enticing outside investors that are the lifeblood of a startup.
2. He leveraged his gifted programming talent honed by building computer games as a teen. He understood what software could do in these contexts when crafting a vision. And when it became time to achieve implementation, creating code that is efficient and user-friendly, he could not only direct the work, but as a hands-on micromanager, he could contribute to it. These were software firms, and he was a software expert.
3. The Musk management style and commitment to an original vision may have helped overcome some early product problems, but it could not survive even a few years in either startup. As a CEO, he was removed twice by seasoned backers of startups because he lacked political control in large part because others were the majority owners and because his “I know, and I am right” style did not work in that setting. It seems clear that the Musk management style is particularly problematic without real organizational power.

How can a person or firm duplicate the Musk success (and should they)? One approach is to change tactics from “funding moonshots” to funding and empowering “moonshot people.” The reality is that success may involve a series of ventures in order to build and test capabilities and confidence levels. Google provides one model with Google X, the moonshot group, and another with the policy that anyone can spend a day a week on any project useful to Google. Startup accelerators or corporate venture capital ventures are often focused on “moonshot people” rather than on projects and that can unleash winners.

Whatever the strategy, there will be a need to develop confidence in a person and his or her idea and patience in its creation. It should be recognized that the probability that any person, including Musk, could duplicate his achievement is near zero. This becomes clear when you consider the sequence of strategic visions and the fact that sufficient entrepreneurial power to maintain control in the face of resentment toward a management style and the stress of mission-critical problems is hard to come by. An organization that offers that power up front will have a hard time maintaining that stance when the moonshots are facing crises (as all of Musk’s did in spades). Consider what happened to Steve Jobs during a downtime at Apple. He was fired.?

Final Thoughts

In evaluating Musk, especially as a role model, it is critical to look at the totality of his many moonshot efforts, not only how each survived a myriad of crises, but how they worked together, each relying on what came before. One of his strategic assets was his ability to leverage one business to help or enable another. Power to do your own thing, power that can persist through downturns in fortune, is so critical and so difficult to create and maintain.