Sarah Lacy understands the world's obsession—taken to dizzying new heights in the blog era—with Silicon Valley minutiae. She understands how tech culture has become a celebrity culture. She understands why people want to know what kind of car Larry Ellison drives.

"What I can't understand is why someone would care what shoes I wear to a party," says Lacy.

Somehow, in covering the complex landscape of startups and venture capital in the valley over the last decade, Lacy has become a part of that landscape. The San Francisco–based business reporter is no stranger to controversy—perhaps the most outrageous accusation was that her BusinessWeek cover story on Digg founder Kevin Rose would start a second Internet bubble.

"People care so passionately about these companies," says Lacy. "They're really emotional about it."

It was no different with the release of her new book Once You're Lucky, Twice You're Good: The Rebirth of Silicon Valley and the Rise of Web 2.0.

"I've already gotten a lot of heat for it," she says.

Some critics are accusing her of going too easy on the book's subjects. Others are accusing her of being too harsh. Certain readers were just shocked at the detail she was able to go into about entrepreneurs like Rose, Facebook's Mark Zuckerberg and others.

"There are spouses of people in the book who didn't know certain things until they read it in the book," she says. Earning particular attention in it are two PayPal alums, venture capitalist Peter Thiel and LinkedIn founder Reid Hoffman.

"Peter and Reed have been in the middle of almost every significant Web 2.0 company," says Lacy. In the following excerpt from Once You're Lucky, Twice You're Good, Lacy traces the roots of Web 2.0 back to the "Paypal Mafia," a collective that would become a force in a legion of major startup successes, from Friendster to Yelp to YouTube.

"I just started noticing that every road went back to PayPal," she says.

Excerpted from 'Once You're Lucky, Twice You're Good: The Rebirth of Silicon Valley and the Rise of Web 2.0'

by Sarah Lacy

Published by Gotham Books; reprinted by permission

In Valley circles, much has been made of the PayPal mafia's quick and early success. By 2006, Yelp and Slide were doing well, but other ventures run by PayPal alums were doing even better. Reid Hoffman, a former PayPal exec, had been building LinkedIn for four years. LinkedIn is like a MySpace or Facebook for the business world. As with those sites, you have a profile that tells people facts about yourself. And as with those sites, you invite people you know to join your network.

But there are restrictions. You have to have someone's email address to ask him or her to be your friend. And unlike MySpace, where you can cruise around, chatting up anyone you want, on LinkedIn you ask your network to introduce you to someone you don't know. Another crucial difference: Until very recently, there were no photos. Instead of listing your favorite bands or movies, the profiles contain your jobs and people who "recommend" you. LinkedIn's founders wanted to make sure it stayed about careers and work life, not dating. That emphasis meant LinkedIn grew more slowly, but it has also made it one of the few social media sites that's designed for adults and never feel like a meat market. It has also resisted being a fad. That means it's less hot than MySpace or Facebook, but may have more staying power.

Reid was one of the first people to get social networking back in 2002, when a handful of companies were started including Friendster, LinkedIn, Tribe, and a few others. LinkedIn managed to outlast all of them. It had 9 million users and in addition to advertising revenues offers so-called premium services, unlike most of its peers. For a fee, LinkedIn will deliver a message to people you don't know but would like to. You can also post a job opening and scour your extended network for viable candidates. It's only the beginning of hundreds of applications Reid wants to roll out on LinkedIn. As of late 2006, this early foray into fee-generating services had already gotten the company to profitability and a valuation of $250 million. A company that wanted to buy LinkedIn could become one of the first stand-alone $1 billion-plus companies to come out of Web 2.0.

And then there was YouTube. It was the most culturally transformative of the bunch, getting regular mentions on late-night talk shows and joining with CNN to host the 2008 Democratic presidential debate. And it was the first Web 2.0 site to make more than $1 billion for its investors, netting PayPal alums Chad Hurley and Steve Chen a tidy $300 million each. Keith Rabois, an early LinkedIn employee and PayPal alum, invested in YouTube and suggested Roelof Botha, PayPal's former chief financial officer, take a look at it as well. Roelof had joined the elite venture capital firm Sequoia Capital as its newest partner after PayPal sold, and YouTube was one of his first deals. Not bad for a rookie.

Meanwhile, Peter Thiel had emerged as an even bigger force in the financial side of the tech world. Peter met Max Levchin back in 1998 at a Hobee's off the Stanford campus. Hobee's is like a Denny's with a Northern California makeover—that is to say, they serve avocado slices on a huge pile of scrambled eggs. It's a family-owned local chain and they dot all the geeky corners of the fifty-mile stretch between San Francisco and San Jose. If you are an engineer and you live in the area, you've been to Hobee's. If you are Marc Andreessen, you go through stretches where you eat two meals there a day.

Peter was a thirty-one-year-old Stanford graduate who logged a few years in a prestigious New York law firm before becoming bored. He'd fled back to the West Coast to invest a small fund of money. The freshly arrived Max cornered him one day on Stanford's campus after a speech, wanting to pitch Peter on a business idea about how to wire money between Palm Pilots. Hence the date at Hobee's.

Max was late to breakfast, as usual. When he did show up, he wowed Peter. Peter not only invested but became the company's CEO. Peter dazzled Max as well, and only impressed him more the more time he spent with him. One night when PayPal was still mostly just an idea, Peter and Max were at a dinner with some potential investors. Someone at the table was bragging about his chess prowess. Very calmly Peter, a U.S. chess master, challenged him to a game, right then and there. It was a mental match across the dinner table. The board was in their heads. Peter won, and Max was in awe. Max loved to be blown away by someone's brilliance, and Peter loved to amaze people with his. It was an ideal match.

But when they sold PayPal in 2002, their paths diverged. Unlike Max, who vowed to build an Internet business bigger and better than PayPal, Peter was done with start-up life once they sold, at least for a while. Instead, he started a hedge fund called Clarium Capital and within a few years grew it into one of the largest and most prestigious on the West Coast. He would more than triple investors' money in the first few years. He also started a venture fund on the side, called the Founders Fund. Its ethos grew out of his experience with venture capitalists and was rooted in giving founders better terms and getting out of their way.

The PayPal mafia even had Hollywood success. Jeff Skoll was one of the first eBay executives who became friends with the PayPal crew when eBay bought the company in 2002. He started up Participant Productions on a lark, and it has been one of the most profitable productions companies in Hollywood. Among its first four films were Syriana, Good Night, and Good Luck, North Country, and An Inconvenient Truth. Skoll's success convinced Max and Peter to start dabbling in Hollywood, bankrolling the 2006 indie flick Thank You for Smoking, along with David Sacks, PayPal's former chief operating officer.

While Sacks continued to play the Hollywood game, he also launched a new social networking site for families, called Geni.com. It allows people to fill out their family trees and link them to the family trees of spouses and in-laws. Anyone on the tree can add to the tree, the idea being that over time you discover people you're related to that you didn't know. It's a bold idea, one of the first Web 2.0 start-ups aimed squarely at families. Peter Thiel, naturally, backed it early on. And in Geni's first venture capital round with Charles River Ventures, it got nosebleed $100 million valuation. The CRV partner who wrote the check was George Zachary, Skoll's early partner in Participant Productions and a friend of Max and Peter's. By 2006, the PayPal mafia was an incestuous world where, for now, everyone seemed to be making lots of money.

Was there something in the water at PayPal? Its alums seemed to have the Midas touch. On one hand, this much success couldn't be just luck. But it couldn't all be talent either. The odds that in 1999 Max and Peter just happened to recruit all of the smartest, most talented people were pretty low.

Much of the PayPal mafia's post-Pal success is cultural. It goes back to the whole notion of believing in the Net. The PayPal crew—along with those on the Google campus and in a few other pockets of the Valley—simply had an experience of the bust different from that of everyone else. They lived through it, and it wasn't easy. They watched restaurants around them go under and friends lose jobs and leave town. But the bulk of their world was PayPal. And PayPal was still growing as the rest of the Valley was crashing. Even the post-9/11 economic slide couldn't take down PayPal, as it became one of the few tech start-ups to have a successful IPO in the fall of 2001. Their bankers and lawyers were simply amazed. About the time the rest of Silicon Valley was finally realizing just how bad this downturn would be, the PayPal guys were at their IPO party, whacking away at a dollar-sign piñata and competing to see who could do the longest keg stand. It was surreal, downright anachronistic.

Peter remembers an off-site meeting the company had in April 2001, as the company was prepping to go public. PayPal wasn't wildly profitable. They weren't profitable at all, in fact. They had large companies trying to drive them out of business. And they'd burned through a pile of cash. But their business was still growing even amid the onset of dotcom nuclear winter. And—knock wood—that seemed to be enough even as companies were closing their doors all around the Valley. No one was sure this IPO would take. PayPal and a few others with the guts to try would be like canaries in a coal mine. Employees were happier than most of their peers, but confused and nervous still.

Always the economic philosopher, Peter addressed them, seeking to make sense of it all. He articulated what he called the liberal view: that the Internet age had been a tremendous period of personal growth and learning; people were pushed and stretched and could now take all that back into the so-called old economy. In other words, the bubble was good. Then there was the nihilistic point of view: There was no sense to be made out of any of it. Just be glad you were spared.

Peter rejected them all. Instead, he gave his view: "You can never lose sight of the fact that every death is an absolute tragedy. Every company failure is an absolute tragedy. We have to do whatever we can to make sure this one succeeds."

Keeping their jobs was good. Getting to cash in their stock options was great. But the real gift from the PayPal IPO was this crew got to keep their optimism. They had been sobered enough to realize they had to work hard to build a Web business and there were no guarantees. But they watched PayPal beat the odds at the worst possible moment. At the bleakest possible time, it sold for $1.5 billion.

On a human level, it meant they all stayed friends. The friction that inevitably results from the arduous task of building a company and then steering it through turmoil was reduced to mere water under the bridge. They had the luxury of remembering the good times. Each of them got to live the moment of the IPO party at a time almost no one else did. They got to watch PYPL crawl across the NASDAQ ticker for the first time and gleefully calculate their net worth. Max would call it the happiest day of his life; he still has a picture of himself and Peter, with paper crowns on, beaming. So happy, Nellie would re-create the IPO party in PayPal's garage for his thirtieth birthday. This time he was sure to do a keg stand—he had been too overwhelmed the first time. "I think that in most failed start-ups, people don't remember any of the good times. But that also goes in reverse," Peter says, looking back. In other words, the PayPal guys could hardly remember the bad times.

A few years after the IPO party, Peter was raising money for his hedge fund Clarium Capital. He had plenty to tell potential investors about the market and his strategy, but one question stumped him. "Do you consider yourself a lucky person?" one investor asked him. It's a trick question, Peter thought. If he said yes, that sounds superstitious. What's next? Astrology and tarot cards? On the other hand, if he said no, that seems sort of strangely un-self-aware. Like PayPal's success was all Peter and Max and no other outside forces. He thought for a moment, ever the chess master considering his next move.

"I consider myself to be very fortunate," he answered. It accounted for the serendipity of his being in Silicon Valley in the mid-1990s, but still acknowledged it wasn't just that.

Luck is a big question in the Valley. It might be the only place on earth where just creating a single $1 billion company wasn't enough. An entrepreneur had to do it twice to know he was actually good. And three? Well, that was Jim Clark, the brash entrepreneur who started Silicon Graphics, Netscape, and Healtheon. He was the only person to start three billion-dollar-plus companies and is a legend in the Valley for that reason. And even Clark needed the bull market of the late 1990s to get market caps that high. You could count on two hands the guys who'd done it twice. On the other hand, failing several times didn't necessarily mean you were bad. It was agonizingly hard to quantify. Most everyone knew luck played some sort of role, but where exactly did it end and your skill begin?

Perhaps Max and Peter were fortunate, but almost everyone who went to work for them was lucky. There were thousands of Silicon Valley companies they could have joined and all seemed to have promise. In fact, PayPal was one of the least sexy. Had they joined any other place, they might have been too burned to try again.

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