A Conversation with Jim McKelvey, Co-Founder of Square and Author The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time.

In 2009, a St. Louis glassblowing artist and recovering computer scientist named Jim McKelvey lost a sale because he couldn’t accept American Express cards. Frustrated by the high costs and difficulty of accepting credit card payments, McKelvey joined his friend Jack Dorsey (the cofounder of Twitter) to launch Square, a start-up that would enable small merchants to accept credit card payments on their mobile phones. With no expertise or experience in the world of payments, they approached the problem of credit cards with a new perspective, questioning the industry’s assumptions, experimenting and innovating their way through early challenges, and achieving widespread adoption from merchants small and large.

But just as Square was taking off, Amazon launched a similar product, marketed it aggressively, and undercut Square on price. For most ordinary start-ups, this would have spelled the end. Instead, less than a year later, Amazon was in retreat and soon discontinued its service. How did Square beat the most dangerous company on the planet? Was it just luck? These questions motivated McKelvey to study what Square had done differently from all the other companies Amazon had killed. He eventually found the key: a strategy he calls the Innovation Stack.

In this interview I speak to Jim McKelvey, Co-Founder of Square and author of The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time. We talk about how to build a pattern of ground-breaking, competition-proof entrepreneurship that is rare but repeatable. And how we can find the entrepreneur within ourselves and identify and fix unsolved problems–one crazy idea at a time.

[bios]James (Jim) McKelvey is a serial entrepreneur, inventor, philanthropist and artist. He is the cofounder of Square, was chairman of its board until 2010, and still serves on the Board of Directors. In 2011, his iconic card reader design was displayed at the Museum of Modern Art. In 2016, McKelvey founded Invisibly, an ambitious project to rewire the economics of online content. He is currently Deputy Chair of the St. Louis Federal Reserve.[/bios]

Q: What does entrepreneurship mean?

[Jim McKelvey]: Entrepreneurship was a word that I used without thought for years. In the process of writing this book, I realised I needed a word to differentiate people who are doing new things in business from people who were doing things that we already knew how to do. I stopped dead in my tracks and realised there was no word in English for this!

I started looking into the history of the word entrepreneur and lo-and-behold, the original meaning was just that; the person who was undertaking something new. It was Schumpeter, the economist, who popularised the word some 150 years ago. He was trying to describe these wild spirits and needed a word – and I found myself in the same position.

Words get denatured, over time we use and overuse them. Disruption is another word I hate, it’s overused now… Artificial Intelligence is the same – everything is ‘AI’ now. The stuff that I used to call statistics is now artificial intelligence – ‘this car uses artificial intelligence to choose what gear you want to be in…’ no dude, that’s math! That’s matrix algebra! The word entrepreneur is heading the same way.

I would like to resurrect the original meaning of the word – if we can have that meaning, we can have conversations about a world that’s otherwise invisible to us. We need to make sure that our language can differentiate and section-off the world of the entrepreneur from the world of the normal businessperson.

Q: What is a good metaphor for the difference between an entrepreneur and a businessperson?

[Jim McKelvey]: I was in Edinburgh, looking at the city walls and realised that they made me feel protected but also constrained. It made me see that outside the wall it was a different feeling – one of being vulnerable, but free.  People make too much of the glory of entrepreneurship – too much of being first and unique. Doing something that has never been done before is terrifying… all the people who love you will tell you not to do it… not because they’re jealous, but because they’re genuinely scared for you… they’re worried for your wellbeing. If you venture outside that wall, you are really somebody who has traded security and certainty for freedom and risk. Think about it… in medieval times, one of the biggest punishments was being kicked out of the city out of the safety of familiar society.

I also want to dispel the hero-myth of entrepreneurs, that they’re somehow super-gifted individuals who are better than me or the people I know. I don’t know any like that – my friends sleep late, smell funny, do stupid stuff and have weird joint problems. I don’t know any superhumans. In the typical business book, some guy gets successful and says I’m going to write a book! They then tell the hero story about how they did this, did that, and how snakes fell from the ceiling which they had to fight with their bare hands. They perpetuate this hero myth – they may or may not believe the story – but its good television, people want to hear about the snakes!

Most people I would consider world-class, successful entrepreneurs never volunteered for the job. They were kicked out like the guy who offended the king and was kicked out of the city walls.

Entrepreneurs go along – some stuff works, some doesn’t, and it’s difficult to know why. You can know something does work, but not why. I speak to a lot of airline passengers when we get on planes, and I ask them if they know why the plane flies… you know what, most people don’t know why an airplane stays in the air, but they’ll still get on and fly to another continent.

I’ve lived through 4 companies, and still didn’t realise what the hell had happened to me. Like everybody else, I didn’t have the words to label the staff that was unique, so I lumped it altogether. The experience that should have been counted in one column was counted in the other column because I didn’t have any sort of metric in my head to sort out the knowledge. I was treating all 4-legged animals as dogs and not realising that some of them are porcupines, some are cats, and some are alligators.

Look at someone like Columbus, by reading his manuscripts we are able to see that he had the worst (or maybe the best) pitch in the world. He had to convince people to fund something that was probably going to make them lose their money and kill lots of people. It’s not trivial stuff. He had to do all these things that were giant versions of problems that I was confronting in the business world. If you look back through history, the lessons should stand out like stars against the dark sky. There’s the phenomenon of entrepreneurs, again and again…

Q: What is the role of copying in entrepreneurship?

[Jim McKelvey]: Many great businesses were built on the back of copying. You should try and copy everything you possibly can! It’s just that if you run out of alternatives, if you run out of options to copy, you will realise that your entire life has conditioned you to not only be a great copier, but to hesitate when copying is no longer an option. With this book, I wanted to communicate to people that they don’t have to stop at that line, even though we’ve been trained to, even though all of our schooling, socialisation and institutions stop us when we get to the edge of what’s been done.

I’m working with one guy right now, he started a company, he’s a great entrepreneur and is doing stuff that hasn’t been done before. He comes home and his wife, who loves him dearly, just says honey, why are you doing this? Can’t you go get your job back at Salesforce? He doesn’t want to… he’s stepped over that line… and that’s what happens with people, they try to copy and then occasionally run into a problem that’s unique… where the solution can’t be copied. They find themselves up against an invisible line… the city wall. At that point, they can choose to proceed into the unknown, or not.

The problem with the unknown is that the solutions are different. Take a look at pricing – using an innovation stack, I can show you that the math of pricing is done differently. The area under the curve over time is greater if you keep your prices low than if you jack them up to maximise revenue. I’d get kicked out of a business school for saying something like that, but it’s true.

In his book, Jim refers to the fact that, “solving one problem usually creates a new problem that requires a new solution with its own new problems. This problem-solution-problem chain continues until eventually one of two things happens: either you fail to solve a problem and die, or you succeed in solving all the problems with a collection of both interlocking and independent innovation. This successful collection is called an innovation stack…” he also notes that, “…innovation stacks are hard to see in the present. You can view them more easily by looking back in time, for they change the course of history. In fact, much of history is simply a chronicling of ancient Innovation Stacks…”

Q: How can innovation stacks help companies to do better?

[Jim McKelvey]: I’ve had lots of companies come to me and say that they’re now formally looking for their innovation stack, and doubling down on the things they find, enhancing them where possible, and finding new things where possible too. It’s a good lens – it allows you to sit there and sort quickly. If you have a taxonomy of slots where you can put your data, you’re going to learn faster. If you sit there and apply the wrong schema to the information, you misanalyse it. Ultimately, I want to encourage people to be willing to venture into the world of innovation and return safely. I want them to go out, build new things, and when they’re built, go back to copying, doing more work, and you have a formula!

Q: How did you fend off Amazon, and win?

[Jim McKelvey]: I can’t claim any great active heroics in Square beating Amazon. We literally did nothing differently – we didn’t touch the controls when things started to get crazy with Amazon. It wasn’t like we didn’t want to – but we didn’t have a lever to pull to make ourselves more competitive in the face of Amazon, at least not one we could think of. It’s easy to understand in abstract, but in reality, when you’re attacked… your physiology changes and you want to respond… you want to cower, or rage, or change your behaviour in some way to respond to this new stimulus.

At Square, we asked ourselves what we could do. The list was long, and most of the things on it, we were already doing. The one that blows everyone’s mind was that we didn’t match Amazon on price. We had $40 million of Vinod Khosla’s money, we also had Kleiner and Sequoia, but we were taking on a company who could fight us with $4billion, with $40billion, whatever it takes. The idea of a price war just seemed stupid plus we couldn’t’ understand how they came up with their price. It made no sense to us at all. We were like what do these guys know that we don’t? are we being stupid? What are we missing?

I knew dozens of levels of detail below the surface of what everything cost down to 3 decimal points, and the math just didn’t’ work. What I realised later was that their math was based on our math. They just knocked 30 points off it and said, ‘let’s under-price them by 30%…’ They were underwater on every sale.

[Vikas: How can we then maintain a healthy relationship with competition?]

[Jim McKelvey]: The question to honestly ask is if the company is selling a similar product or not, because that will tell you what side of the line, you’re on. If you’re an undifferentiated business, you’d better pay attention to the competition! For instance, Square allows you to trade stocks on our Cash App. There are a lot of other companies that allow you trade stocks, and we’ve got to keep an eye on them because we’re not that unique insofar as we don’t have a full innovation stack for stocks that will protect us.

You’d better be able to numerate what it is that protects and differentiates you if you’re going to take the hands-off response. The flipside is that if you do have an innovation stack, your job is to pay attention to the market and your customers and basically ignore the distractions of your competitors. If you look at the way companies with innovations tacks behave, competition is generally irrelevant. If you spend too much time looking at your competition, you end up with a weirdly distorted view of what’s possible.

Take a look at Southwest Airlines. They could easily have based their pricing on what other companies were charging for a trip on an airplane between the same two cities. Talk about an undifferentiated product! A coach seat on American and a coach seat on Southwest…. Boy there’s a commodity. They ignored what other companies were doing, for decades. Under Herb Kelleher, Southwest did an amazing job of not paying attention to extremely similar products, and did things so differently that ignoring was appropriate.

Q: What do you hope your legacy will be?

[Jim McKelvey]: When I think of legacy, the first thing I think of is my family. It’s difficult raising kids who can google the net worth of their parents. In my case, they ain’t getting it! I know of very few young people who have grown up with a toxic amount of family wealth who have come through it normal. That’s challenge #1, and you’ll have to wait 20 years to see if I’ve done a good job.

The next layer for me is my extended family, mostly people who live in St. Louis. It’s my hometown, and it has a lot of problems. I’m just one guy, but I do believe that my town needs a reboot in a lot of areas.

The third layer is the McKelvey family looking at worldwide philanthropy. That I’m not touching, it’s being done by my wife. I’ve not been able to wrap my mind around the problems of the world in a focussed manner, but my wife has. I’m therefore trusting her to do that.

Nobody’s stockpiling bronze for my statue!

The last one would be the book! I want to advance the conversation about when you innovate, how you innovate and how to fight the inevitable pushback of our physiology and psychology when we try to do it. If I could choose between giving away $4 billion or getting the idea of entrepreneurship into the consciousness of the world, I’d do the latter. I really hope the $4 billion will do some good, but I don’t think it will in the grander scheme of things. Imagine though, if we could get 4 billion people to think a little more about that moment when they could choose to try something new, to advance humanity forward. That’s a great legacy.

If I could be the guy who moves a massive number of people a little further towards stepping across the line a couple of times in their life when they need to? That would be wonderful.

Thought Economics

About the Author

Vikas Shah MBE DL is an entrepreneur, investor & philanthropist. He is CEO of Swiscot Group alongside being a venture-investor in a number of businesses internationally. He is a Non-Executive Board Member of the UK Government’s Department for Business, Energy & Industrial Strategy and a Non-Executive Director of the Solicitors Regulation Authority. Vikas was awarded an MBE for Services to Business and the Economy in Her Majesty the Queen’s 2018 New Year’s Honours List and in 2021 became a Deputy Lieutenant of the Greater Manchester Lieutenancy. He is an Honorary Professor of Business at The Alliance Business School, University of Manchester and Visiting Professors at the MIT Sloan Lisbon MBA.