Jim McKelvey - Co-Founder of Square, studied Computer Science, worked as an artist glass blower, sold his work to survive and now roughly worth $3.2 billion. Met Jack Dorsey when Dorsey was 15 and hired him to help out around the office. This is his story and Q&A.

How did Jim McKelvey meet Jack Dorsey and what is Jack like?

Met Jack Dorsey when Dorsey was 15. McKelvey knew Dorsey's mother who had said that Jack was a computer whiz kid. Dorsey visited McKelvey's office one time, they were really busy and hired Dorsey to help. The relationship blossomed from there. Dorsey was very keen to do a lot of tasks and when Dorsey was fired from Twitter, they reconnected, brain stormed around mobile phones in 2008-09 (thinking the smartphones/iPhone would change they world). They couldn't touch social networking because of Twitter and they had therefore thought of doing a journalling app to get started.

What's the story behind Square?

During McKelvey and Dorsey's brainstorming, McKelvey wasn't too keen on the journalling app. So he went back to his glass blowing studio. A lady came to buy a big piece, McKelvey was very excited as he needed to money to move to California but he couldn't take the sale as he couldn't take an American Express card and the lady only had AMEX. McKelvey looked at his iPhone and wondered why his iPhone couldn't take credit card payments. McKelvey called Jack to look into how they could support small merchants, and they started exploring payments. Both had no experience in this, they took a beginner's mind to try do so.

"At the time, we were just bumbling around, we didn't understand the payments world and it turns out it was a lot harder than we thought but it was also an advantage to not know how difficult the road would be".

- Jim McKelvey

Q) How do you decide to focus on certain ideas?

"It isn't so much about ideas. It is at least in my mind something you could focus on. And in my case, I focus on problems not opportunities. I was the guy that got up in the morning and thought gee I need to sell my stuff. I couldn't accept their credit cards and that was a problem for me personally. That was Square. It wasn't built for the world, it was for me initially. And then we moved on to help a flower vendor outside of Jack's apartment".

Q) Is there any formula or checklist in your book ('The Innovation Stack: Building an Unbeatable Business One Crazy Idea At A Time') on how to succeed?

No. There is one thing which is kind of formula like though.

There is a pattern with the multi-billion dollar dominating companies. "They didn't start with serving the elite. They served the disenfranchised, the people who were not included. There aren't just that many of elites of the world. If you make a douchey product that elites would want, well good luck with that... But there are a lot of normal people.  Simple folk. To be included more... if you look at the great fashion brands of today, a lot of them are for the ordinary people. The Walmart and Amazon. Getting the product to the normal people cheaply".

You can start on the high end to get a foothold. In Square's case, it started with the bottom. Elite clients however want more and more features. Not lower cost and increased accessibility.

Q) How much data did you have when you started Square?

We didn't. As a small merchant I was feeling ripped off but I couldn't prove it. It was more of a feeling.

Now I have more of the luxury to investigate the crime scene - small businesses pay 45 times more than big businesses to process credit cards. Square has brought that down.

Q) How do you differentiate something that is truly useful, innovation vs just invention for invention sake?

You can avoid that problem with one simple step. That is focus on the problem and then just apply the following formula, start by assuming someone has solved it and copy what they did. Invent as a last resort.

Don't make seminar innovation. The process is a very painful recognition of mankind's knowledge. Innovation starts where we run out of knowledge. You are trying to solve a problem, you discover no one has figured it out and now you have to figure it out by yourself. It is probably not going to be a very pleasant experience... you'll have to slug it out. But in doing so, you would have begun innovation on an innovation stack.

Q) How did Square get the first 10 and 100 customers?

We would just show the product to people and they would want to use it.

That was really strange as our initial product was only useful if you were selling things and most people don't selling things. So we figured out that, you know, if we found 10 people at random, only one of them was actually likely to be selling anything, but even then we would show the product and almost everybody knew somebody who needed it.

So if we'd show the product, I'd say I've showed it to you, but maybe you're not in the business of selling anything, but maybe your sister, has a quilt business and she's going to craft fairs and for her it's perfect. We didn't do any promotion or advertising. And then, as soon as they'd use it, they'd meet 20 people who wanted the product and they'd all call us.

We had no trouble getting customers.

There are 2 phases of launch:

  • There was the beta launch, and that was the pieces of hardware. I had to build each one of those by hand and the limiting factor was how quickly I could use a Bridgeport mill and hand assemble a reader. It took me probably an hour to build each one. The constraint was how many pieces of hardware I could get out the door. The software was not a problem. On the other hand, the beta test was kind of illegal was it was not compliant with the banks, the Fed or the credit cards.
  • So before we released it publicly, we had to get compliant. The thing is the whole market kind of ignored all of the small merchants who would have happily taken credit cards. We very naively built outside the market. We didn't use traditional underwriting. We didn't use traditional software. We didn't use traditional receipts or contracts or, sign up periods or, customer support like we did, we did all these things differently. And as a result, we built something that worked for people who would not in that market.
"If you're playing against somebody who has a totally different set of physics. They may be able to do something that you think is impossible and for you, it is impossible, but for them it's not."


Q) What was Square's innovation stack? What made Square possible?

Square's innovation was 14 different things and none of them can be removed. Take for example the hardware. We needed to give our customers hardware so they could read the card because they needed to read a magstripe and the iPhone won't read a magstripe so we needed to give them a reader. And at the time, a credit card reader on the market sold for about a thousand dollars retail. So I built one that costs 97 cents to manufacture. We could  have sold it for a hundred dollars and been 10% of the price or sold it for $10 and been 1% of the price, or $1 and 1000th of the price.

The dollar was pretty much our cost. So we thought that it was so cheap we decided to give it away. So our hardware was free but our hardware had to plug into the iPhone and we had to sort of hack the iPhone to make it work. There was some innovation there.

We then had to set up a way to have a paperless experience, which at the time was impossible because of all the rules in the credit card world required signed contracts. And you can't just take one of these things and separate it from the out, from the rest and say, Oh, this is what made square possible.

Q) When is innovation necessary and what innovation actually looks like?

I wrote the book ['The Innovation Stack'] to get people to recognise those moments when innovation is necessary and what innovation actually looks like because we have this massive delusion about what innovation is and it's holding so many people back.

I'll give you an example of the person that I wrote the book for. I had this one person in mind and she's really competent. She's got everything she's beautiful. She's brilliant. She's hardworking. She's got phenomenal degrees from institutions that you would recognise if I gave you their names, and just qualified in every level.

Yet this person, whenever she encounters a problem where there is not a solution already in existence, she says, well, I can't do that now. This breaks my heart because I see this person and I know she could do some amazing stuff, but she always stops herself because her whole life, she has been trained to not do something until she becomes qualified.

Now that's really good behaviour. That's really good, good behaviour for most situations. But what happens when you run up against the problem that hasn't been solved? You would have to get trained by somebody who's already solved this problem but if nobody has solved this problem, you can't get trained by anybody. You can't get a diploma or some credential to do something that humanity has never done before. So we have this person who has the capacity to do this amazing stuff. Sitting on the sidelines. Whenever she comes up against the edge of what mankind has done, she stops.

The first person to do anything is always unqualified. The Wright brothers who flew the first airplane, neither one of them were qualified because nobody ever flew before. The first time something is done, it is always done by an unqualified person.

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P.S. Interesting side note - The Innovation Stack was initially a graphic novel and you can get a free copy of it here.

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Q) Amazon tried to copy Square. How did Square go up against Amazon and win?

When Square was four years old, still a startup, Amazon copied our product. They then undercut our price by 30%. When Amazon does this to any startup, the startup dies.

In our case, we didn't die. As a matter of fact, a year later, Amazon relented. And they were actually really cool about the way they did it. They, mailed a square reader to all their soon to be former customers. I was happy we won, but I couldn't answer the question why, and that was driving me crazy. I couldn't find any other companies that had survived Amazon, but what I did do was look throughout history for startups who were attacked by incumbents where you would expect the incumbent to win, but then the startup wins.

I noticed this weird pattern where not only did the startups win, but they actually ended up dominating the whole market. I thought perhaps maybe I was confusing myself because when you study history, there can be selection bias where you choose examples that support your thesis.

Then I discovered, that there's no word in the English language for somebody who does a business that hasn't been done before, that word does not exist. Somebody who opens a business today is called an entrepreneur, that's how we use the term. However, a hundred years ago the word was used to differentiate business people who were doing something totally new, like the Wright brothers from business people doing normal business.

The innovation stack is created when solving a new problem, when you solve it you create new processes, technology, and systems that form a differentiable advantage.

The Innovation Stack by Jim McKelvey