Entrepreneur of the Year: Elon Musk

In January 1996, the three co-founders pitched Mohr Davidow Ventures, a Sand Hill Road venture capital firm, and talked their way into $3 million in funding. (They'd eventually get $38 million more.) In order to get the money, Musk agreed to cede the CEO role to a professional--Richard Sorkin, a Stanford M.B.A. who'd been a vice president at hardware manufacturer Creative Technology. Over the next two years, Sorkin navigated Zip2 competently but not spectacularly. While Yahoo, another upstart directory service, marketed itself to Web surfers, Zip2 focused on helping newspaper companies offer maps, directions, and business listings to their online readers. To Musk's chagrin, Sorkin solicited investments from many of the same companies that were licensing its software. "We wound up beholden to the newspapers," Musk says. "They were investors, customers, and they were on the board--and they basically forced Zip2 into a position of subservience." As Yahoo ushered in an era of new media, Zip2, in Musk's view, was stuck kowtowing to the old guard. (Sorkin, for his part, makes no apologies. "It wasn't a philosophical issue," he says. "We went where the money was.")

By 1998, Musk, who remained chairman and executive vice president, was thoroughly frustrated with the direction of his company but found himself unable to do anything about it. Several rounds of funding had diluted his stake to a mere 7 percent. Investors, which now included Knight Ridder, Hearst, and the New York Times Company, occupied four of seven board seats. In April of that year, Sorkin tried to sell Zip2 to City­search, which would have created the country's largest local search company. Musk, who believed Sorkin was squandering the potential to create a viable consumer brand, helped spark a revolt among Zip2 managers, who threatened to quit if Sorkin was not removed. The board fired Sorkin and killed the deal. Unfortunately for Musk, it installed Mohr Davidow's Derek Proudian as CEO and promptly sold the company to Compaq. "What they should have done is put me in charge," he says. "That's OK, but great things will never happen with VCs or professional managers. They have high drive, but they don't have the creativity or the insight. Some do, but most don't."

Compaq's cash payment of $307 million for Zip2--at the time, the largest sum ever paid for an Internet company--made Musk a rich, but surprisingly unhappy, young man. Despite pocketing $22 million, he considered Zip2 something of a failure. He had set out to help build the Internet and instead had built software for The New York Times. Rather than taking time off, he immediately began work on a new idea: an online financial services firm that would make traditional ones obsolete. "The banks are terrible at innovation, and financial services is a huge sector, so I thought, There should be something here," he says. In the summer of 1999, Sequoia Capital, the legendary backer of Oracle, Apple, and Cisco, led an investment of $25 million in Musk's new financial services firm, X.com.

Like a lot of nutty ideas proposed during the bubble, X.com was forced to scale back its ambitions. Musk chose to focus on a single feature: the ability to make payments via e-mail. In 1999, he merged his company with a venture-backed competitor called Confinity, which had a similar product known as PayPal; the merged company kept the X.com name, and Musk became CEO. For 10 months, he presided over a heated clash of egos, personalities, and visions. "Elon is obviously really freaking smart," says Levchin, a co-founder of Confinity. However, Levchin adds that working with Musk--which is to say, working for Musk--can be difficult. "He's one of those guys who can be larger than the room," says Levchin. He and Confinity's other co-founder, Peter Thiel, became increasingly frustrated with Musk's penchant for micromanaging, as disagreements over technology and branding festered. In the fall of 2000, Musk went on a two-week trip to meet prospective investors. When he returned, he learned that Levchin and Thiel had orchestrated a coup. The board fired Musk, replaced him with Thiel, and renamed the company PayPal.

Though Musk admits he was hurt by the coup, he managed to keep his feelings bottled up. "I buried their hatchet," he says, as he pantomimes pulling a blade out of his back. "Life is too short for long-term grudges." Of course, it's also true that Levchin and Thiel went on to take PayPal public and make him even richer. But what Musk hasn't gotten over is the fact that the company never became more than a glorified feature, and he still believes that PayPal has the potential to become the world's largest consumer financial services company. "It has 120 million customers, and there's a high trust factor," says Musk. "There's a lot of unleveraged value there."

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