3 Takeaways - How to Build an Unbeatable Business One Crazy Idea at a Time: Square Co-Founder Jim McKelvey (#64)

Episode Date: October 26, 2021

Learn how Square Co-Founder Jim McKelvey successfully created and built Square, how (as a start-up) Square beat Amazon, and other tips he has for the 3 Takeaways audience. Jim shares why sometimes doing nothing is the best response.Square lets anyone with an iPhone, iPad, or Android mobile device and a bank account accept credit card payments. Jim McKelvey co-founded Square in 2009 with Jack Dorsey. Jim is a serial entrepreneur, inventor, philanthropist, artist, and author of The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time. 

Welcome to the Three Takeaways podcast, which features short, memorable conversations with the world's best thinkers, business leaders, writers, politicians, scientists, and other newsmakers. Each episode ends with the three key takeaways that person has learned over their lives and their careers. And now your host and board member of schools at Harvard, Princeton, and Columbia, Lynn Thoman. Hi, everyone. It's Lynn Thoman. Welcome to another episode. Today, I'm excited to be here with Jim McKelvey. He's the co-founder of Square, the payment processing company that lets anyone accept credit cards. Square went public in 2015 for $9 per share, and today the stock is worth around $250 per share, and the stock is worth around $250 per share and the company is worth over a hundred billion dollars.

In addition to Square, Jim has founded several other companies and his Square co-founder, Jack Dorsey, went on to found Twitter. Jim recently wrote a book on entrepreneurship, which is wonderful, called The Innovation Stack. I'm excited to learn from Jim how he successfully created and built Square, how as a startup Square beat Amazon, and what other tips he has for our listeners. One idea of Jim's that I'm fascinated by is that sometimes doing

nothing is the best strategy. Welcome, Jim. And thanks so much for being here today. Thanks, Lynn. This is going to be fun. I'm looking forward to it as well. Can you tell us how you came to start Square? It was sort of serendipitous. Jack Dorsey and I had known each other for years, and he had actually just been kicked out of Twitter right before he came to St. Louis for Christmas.

And so we were talking about what he was going to do. And he said, well, Jim, why don't you join me and we'll start another company. And I said, great, what do you want to do? And he's like, I really don't know. What do you want to do? And I was like, oh, I don't know either. So we flew out to California, brainstormed for a couple of weeks and came up with a couple of other ideas, none of which we were that excited about. But then I went back to my glass studio because I was a glassblower and I used to try to sell my work whenever I could. And I lost the sale because I couldn't take a payment with an American Express card. And I was holding one of these things.

I had one of these in my pocket when I lost this sale. And I was so angry. And I looked at my iPhone and I thought, why didn't this thing magically turn into a credit card reader? Because my attitude towards the iPhone is that it's this thing that becomes whatever I want it to become. It becomes a phone book if I want to look up a number or a TV if I want to watch a show or it turns into a map if I want. It just magically transforms into whatever I need it to be. But it wouldn't transform into a point of sale terminal. It wouldn't transform into a credit card reader. And I thought, well, we should fix that. So I called Jack and I said, hey, I think I know we should do. And that's what became Square. And you had already hired somebody to work for you. Yes, yes, we had already hired our first

employee. And he was starting in two weeks, because he'd given notice that Apple he was quitting, and he was coming to join us. And so we had to have something for him to do. So on his first day at the office, we basically pulled the switcheroo and said, well, I know we were going to work on this other thing that we talked about when we hired you, but now we're going to work on payments. Get busy. The word entrepreneur is used all the time. What is an entrepreneur and how common are they? Well, the way I use the term is they're very rare. And I had to dust off a hundred year old definition of the word entrepreneur in order to write the innovation stack. Because when I started to write the book, I mean, page one, I was like, OK, I need a word to describe this type of business where you don't get to copy from a known working business model. And I thought there has to be a way for me to describe that.

And it turns out there is no word in the English language to differentiate a business person who is following a fairly known playbook from somebody who is making that place up as they go along. But in my research, what I discovered, which was really interesting, was that that was the original meaning of the word entrepreneur. So if you go back to what Schumpeter said, he was a long since dead economist, but he was the guy who needed this word to describe this class of behavior that was not typical business. And so to write my book, I, in the first chapter, basically say, look, we're going to use an archaic definition of entrepreneur and an entrepreneur by my definition, or I should say Schumpeter's definition is somebody who is doing something that probably won't succeed,

has no precedence and is likely considered crazy. And that's why the word crazy is in the subtitle of the book is that crazy is not really a compliment some people will say oh i'm crazy but you're not that crazy right it's got this little bit of a sting to it if somebody says oh you know lynn's crazy that's not a compliment same way 100 years ago i said oh well lynn's an entrepreneur they'd be like oh watch out so that's the way i use it and it's a very rare thing partially because most people are unable to resist the urge to copy everything and we talk about this throughout life we are really well trained to be copiers of everything and that's what education does for us it's what our DNA does

human beings and all animals all living things are really good at copying. We are not good at experimenting. We're not good at trying new stuff. And so I wanted to be able to discuss that new stuff. And that's why I had to dust off the definition of entrepreneur. So by that definition of entrepreneur, entrepreneurs are very rare. And you applied that crazy approach all throughout Square. And I was fascinated, for example, by your fundraising pitch to Venture Capitalist. You did the one thing that nobody does. Can you tell us about that? Yeah, we told them why it wouldn't work. We actually put this slide right in the middle of our pitch. Right when people start getting excited, we just depress everybody by putting up this pitch where we literally listed 140 reasons why we thought Square would fail.

We listed everything that could possibly go wrong. And we're very candid about it. Now, a couple of them were humorous, but most of them were very serious. And it totally changed the tenor of the pitch because most VC pitches are like one of these, there's this kabuki theater going on. You've got the attackers, which are the entrepreneurs and the defenders, which are the VCs. And the attackers are going to tell you everything's great. And this is the best company in the world. And the VCs are going to try to poke holes in it. And it creates this sort of adversarial tension in the room by basically dropping our masks and walking over to the defender side and say, look, here's

everything you could criticize us for, because we don't know if this is going to work. And by the way, it's never worked before. And here are a bunch of stuff that we're breaking all these laws and blah, blah, blah. It just changed everything. Instead of having the investors, or I should say potential investors, fight us, what they did was they started pitching in. And they would say, well, like, and one guy said, because we said Amazon attacking us was one of the things we put on the slide. And he's like, oh, oh, I'm on the board of Amazon.

And if you take our money, I'll get Jeff to back down. So it was very interesting to watch how that just admission of what you don't know changed the way the presentation went. You have called your approach to innovation at Square an innovation stack. Can you explain what that means? It wasn't just Square. It was this pattern that I found throughout all these other companies. Because what happened, we lived through this really dark time at Square when Amazon was trying to kill us. And when Amazon tries to kill a startup, they always win. At least that had been 100% true when they copied Square and were looking like they were going to kill us. Amazingly, it didn't work.

And I say amazingly because we were the only company that I know of that survived an attack by Amazon while they were still a startup. I was happy we won, but I couldn't explain why. And so what I did was I started looking for other examples. And I couldn't find many until I started going back in history. And when I mined history, then I found all these examples. And the examples started to fit this pattern. And the pattern had this thing, and I didn't know what to call the thing, but the thing was this messy conglomeration of new inventions that all worked with each other and enhanced each other and

sometimes conflicted with each other. And it was messy thing and so i started calling it an innovation stack because if you live through the creation of this it does seem like you're piling one brick on top of another and so that was sort of how i visualized it but it's not just this thing at square it was this thing that i found that literally was president all of these companies that later went on to dominate their industries. And it's a very easy concept. I'll save your listeners 15 bucks here, right? You don't have to buy the book. You just listen to this. The basic concept of the innovation stack is that innovation is this really messy iterative process that requires not one or two or three, but usually a dozen or 20

or 50 different inventions, all of which piled on top of themselves, create this new thing. And that new thing, once you get it running is amazingly powerful, powerful enough to protect a startup from the attack of an Amazon, powerful enough to protect another startup from attacks by governments. I've seen the innovation stack weather these cataclysms, which you would think would just wipe these companies out, and it turns out these companies thrive. And I think it's an important concept to understand.

Let's talk more about some of the elements of your innovation stack. One of the key ones is simplicity. Jim, can you tell us about that? Yeah, and I'll try to make my explanation simple. Look, we're all overwhelmed. And there is a danger that we all fall into when we become deeply immersed in a product. So if you're building something, by the second or third day of working on that thing, you already understand it so well

that you're almost incapable of understanding how confusingly complex it is to somebody else. And some of my friends who worked for Microsoft in the 90s and worked on Microsoft Windows told me a story about how they surveyed their audience and asked for new features to put in the next release of, I'm sorry, it wasn't with us. It was Microsoft word. They asked for the new features that the people would want in word. And it turns out that every feature that they asked was already in word. People just couldn't find it because it was so cumbersome. The interface was so difficult to use. And I said to my friend, I was like,

well, of course, like words, impossible. It's got 15 menus and macros, all this stuff, you know? And he was like, no, it just makes perfect sense. No, it's perfectly logical. It makes perfect sense if you're an engineer who works at Microsoft, but we all as product creators get too familiar with our products and we create things that only experts can use. And so the trick when you're building a product is have the humility to make it not as cool as you know it could be, but make it so beautifully simple that people don't expend any energy worrying or waiting. And simplicity in Square's case was a massive competitive advantage. And one to this day that we still really harp on.

When we release a new product, there is actually a whole process that removes complexity from what we're about to launch. We keep stripping it down to the point where you should be able to open it up without a user's manual and make it work for you. And we're talking about money here. So people really care if you screw up with their money. And we don't, you know, there's no consultant that shows up when you sign up for Square. You're on your own, but fortunately the journey is pretty simple. You also made it easy with free signups and no contracts. Yeah. So it turns out that doing the easy in the financial world is really difficult. And since you mentioned contract, I'll tell you about the contracts. When we started the contract that I signed to get our first merchant account was 42 pages long, 42 pages of like six point type. And it was so offensive

to sign that contract, knowing that there was some clause in there where I was signing away some right that I probably would need in the future if there was a problem, but I was giving it away and there was nothing I could do. So at Square, we basically simplified all that stuff and we put that contract online. So it's just one of those user agreements. And look, we know you don't read them, but you're supposed to, but even if you don't, you click accept. Good. It turns out't you click accept good turns out that's illegal turns out according to the banking laws of 2009 2010 you're not allowed to have that sort of contract and the question is wait a second why is it legal in the software world and illegal

in the banking world and the answer is the banking world was 20 years behind the tech world and so one of the things we had to do which was very difficult was to catch the banking world. And so one of the things we had to do, which was very difficult, was to catch the banking world and the money world up to where technology had been for the last 15 years. And so as something as simple as an easy user agreement was impossible before we did it. You also had no live support, which is just about unheard of in the financial industry. How were you able to do that? That was a conscious choice at the beginning because we wanted a system that was so easy to use that you didn't need to have support. You didn't need to have somebody on the other line. And again, people thought that was crazy, but Jack and I had an answer for them, which is, do you use Gmail? Right? I use Gmail. You use Gmail. Have you ever called Google about

your Gmail account? I've never met anyone who's made a tech support call to Google about their Gmail account. There is this precedent, this wonderful precedent for people who use a product that's very complex like Gmail, but never call you. So that was our model. And we didn't have tech support. Actually, we had tech support, but it was all email. And we wouldn't answer the phone. And it turns out that that was a very good way to start

because it forced us to keep our product so simple that you didn't have to call us. And it also, I think, drove away the people who really wanted to talk. There was a certain type of user that just was never going to be a Square customer in the early days before we had support because they wanted to talk. Nowadays, we have support. So I should tell you this, if you're a current Square customer, yes, we'll talk to you on the phone. We might even call you. But the philosophy of making something that's so simple, you don't need the user's manual or any support still survives to this day. You also have beautiful software and hardware

and you essentially sacrifice functionality in favor of beauty and simplicity. Can you tell us about that? This was my fault or my decision, I should say. So I was the guy that built the hardware. That little white square reader, that was me. And actually I've got one here. I can show you the problem because it's easier if this is a video to demonstrate it.

Okay, so here's a square reader. Pretend this is a credit card. It's actually my square ID. But if you are swiping a card through a reader, it tends to wobble. It tends to do this. And as a result, it screws up the read. So if you're trying to read a mag stripe on something that's this small, it doesn't work very well. And as a result, only 80% of the reads will go through on the first try on this device. Now, I was the guy that built this device. I was the guy that designed its size.

And I tested a second version that was wider. It was about twice the width. And in that case, the card wouldn't wobble and it worked perfectly. So the question is, why did we release a piece of hardware that didn't work as well as it could have? And the answer was not to say plastic or anything, or because it was square or anything like that. The answer is when I tried the big unit and I tested it on my friends, they were still pretty much asleep. They go, okay, you read my credit card. Well, big deal. When I read their credit card on something this size, and actually our early reader was even smaller than this. When I read it on the square reader, they were like, what is that? It got their attention. It was so small that it woke them up for a second

and it got us noticed. It also had an interesting side effect in that people had to practice their swipes. It takes about 10 tries until you get your move down. And then once you got your move down, you're proud because you acquired a new skill. And what do you do with a new skill? Well, you show off, right? So people were actually showing off how good they were at reading by showing our products proudly to their friends. And boy, that was great marketing. You also decided to offer Square at a low price, but not the lowest possible price. How did you think about price? Our idea with the price was to charge as little as we could and still keep the company running.

And it was interesting because we picked a price that was not profitable for the company, but we could become profitable if we kept growing. So we basically looked at a price and we said, well, this is absolutely the lowest we could go and still have a chance of being a profitable company someday. And so we launched with that price and we kept that price. And interestingly enough, we didn't even lower that price when Amazon came in a couple of years later and undercut our price. When Amazon came in and undercut our price by 30%, which is a lot of money, we looked at it and we said, how are they doing that? And again,

part of it was like, well, they're Amazon. I guess they figured something out. They're smarter than we are because they're Amazon. We're just a little startup in California. We thought that they knew some magic that we didn't, but we didn't understand what the magic was. And we certainly didn't have that magic. And so we didn't lower our price when Amazon came after us. And it turns out they didn't have any magic. Turns out that what they used to do,

and I think still do, is they would take a competitor they wanted to kill and they would undercut them by 30%, even if it meant they lost money. And so they were probably, I'm guessing, because I don't work at Amazon, losing millions of dollars to their rates. And I think that's one of the reasons they eventually gave up. But Amazon did not affect us on the low side. And I think pricing, so I studied pricing. This is really interesting because I want you to know the innovation stack is not about Square. It's about this pattern that occurs in other companies.

And I found really great examples of pricing strategy practiced in a couple of different ways. And the best example I have is from Southwest Airlines. And Southwest for years pursued a low price strategy. And when I say low price, I mean they charged as little as they could, but still kept the planes in the air. There is another pricing strategy called lowest price. And in a lowest price scenario,

what you do is you first look over both of your shoulders to see what your competitors are charging. And then you match their price. Maybe you're a little higher, maybe a little lower, but you're basically pricing along with the rest of the pack. This works if you're a pack animal, and a lot of companies are pack animals and probably should be. But if you're a company with an innovation stack, it's a really huge mistake. And so one of the great case studies I cite from the book is Southwest Airlines, which pursued this low price strategy up until Herb Kelleher retired. And when Herb left Southwest, the new management decided that they could make way more money by charging more to their customers. And Southwest had never done

that before. So we had this perfect example of an innovation stack company doing it one way for 20 years and then doing it another way for 20 years. And the results are stark. Southwest is still a great company. It's still one of the biggest airlines, but they're not nearly as dominant as they were. They're not nearly as dominant as they were. They're not nearly as competitive as they were. They're just not so far ahead of the pack. So pricing really impacts how a company endures long-term. And it's a choice you make. If you want to take that excess value and capture it this quarter, you can certainly do so. But I think in many cases, you're undermining the decades-long potential that you have if you keep pricing correctly.

Jim, Square has become so successful, and you've become a billionaire. How has that changed your life? More people ask me for money now. Here's the weird thing. I always thought I was rich before I started Square, because there was one morning I was driving into my glass studio and there was this radio station that was giving away 10,000 bucks. And the radio announcer came on and said, just think how $10,000 would change your life. I thought about it for a minute. I was like, you know, it really wouldn't. It's not that I didn't want 10 grand. It's just, if somebody gave me $10,000, it wouldn't change where I ate lunch.

Like it wouldn't change any of the things I'm going to still, I mean, I live in St. Louis, Missouri. It's a cheap town. I blow glass. I drive a beater car. I had an old airplane. You know what I still have today? I got the same old airplane. It was 40 years old then. Now it's 50 years old. What I realized then was that money wasn't going to change me that much. And even though I didn't have much money by Silicon Valley standards, it was like, well, it isn't gonna make any difference. So I guess I'm rich. And I wasn't rich by any conventional definition. I just realized that, oh, wait a second, money's not going to improve anything. So stop chasing it so hard. And then I started Square. So now we're in the weird situation of we've got this almost toxically large amount of family wealth and my wife and I

trying to figure out how to give it away. So that's the new challenge. And I think we can do a lot of good with it. And I'm happy that we get that chance, but it has not been life-changing for me. It's been life affirming because nowadays when I see something that heretofore I might have said, oh, I want to get that someday. Now I got to go, well, you can get that tomorrow and probably have three of them delivered. No, I really don't want that. I can just, there's a lot of this stuff.

And just, you want a 20,000 square foot house? Ick. You want your own basketball court? I mean, look, you play for the NBA, maybe. Like you're some white guy who drives a midlife crisis Harley Davidson and you got your own basketball court? I mean, look, you play for the NBA? Maybe. Like you're some white guy who drives a midlife crisis Harley Davidson and you got your own basketball court? I don't want to be him. So I got a two-car garage. So Jim, what is next for you? There are two problems that I'm working on right now. One, LaunchCode, this is a nonprofit that I started,

that's mission is to create thousands and thousands of programmers. And we train you for free. So you can come and get a free education at LaunchCode, and then we'll place you into a job. And the job training and job placement part is just fantastic. And we've trained thousands and thousands of people, but more to come. So I'm still super interested in that. The other area that I'm working a lot on is a company called Invisibly, and I'm actually wearing their T-shirt today. Invisibly is an effort for us all to reclaim our online identities. Because it turns out that your eyeballs are being bought and sold without your consent, without your direction, without even your self-interest being considered. And so when you use a product for free, what they're really doing is they're selling your attention, probably

in ways that you don't want. And this is having all sorts of terrible effects. And we see it in journalism. We see the demise of journalism. There's a litany of problems. And so invisibly is an experiment and I'm not claiming this working yet, but the experiment is if we allow people to take control of their identities. In other words, you basically give us permission to try to get the most money for your eyeballs, the most money for that minute of attention. And there are some really interesting things that happen when the attention is consensual, when it becomes something where the person is participating willingly. And we don't know if it's going to work, but so far it's been working pretty well. And we're just in the early stages of launching invisibly, but that's my new thing. LESLIE KENDRICK That's so important. Jim, before I ask for the three takeaways you'd like to leave the audience with today, is there anything else you would like to mention that you haven't already discussed? I'd like to put a plug in for the Federal Reserve because and I know we're in a hot time for the Fed.

It always seems to be a hot time of the Fed. I came into the Fed and Janet was there and we were doing QE and now we got this multi-trillion dollar balance sheet. You are lucky as U.S. residents to be in a country that has a good central bank run by people who aren't political. And I didn't realize this until I joined the Fed. And when you join the Fed, you have to basically renounce your political allegiance. And that was so important and so insightful to me because we just lived through the Trump administration. I came into the Obama administration and now we're in Biden. And during that whole time, I've been politically neutral and I have learned so much from listening to people who disagree with me. And I've also learned so much by watching these people who are running the economy, not just for the U.S., but for the world,

make really good decisions. And the independence of the Fed is something that I don't think people appreciate. The fact that we've got this bank that can't be pushed around by Congress, that can't be pushed around by a president. That's a really good thing. And I don't think people appreciate that. So he gave me a freebie. That's my freebie. It's a plug for the central bank. And you're a member of the board of the St. Louis Fed. Is that right? Yes, I'm deputy chair, soon to be chair of the St. Louis Fed. Is that right? Yes, I'm deputy chair, soon to be chair of the St. Louis Federal Reserve Bank. Last question. What are the three key takeaways you'd like to leave the audience with? First is to understand that innovation is a last resort. It is not something

that you should probably aspire to. I see a lot of people say, oh, I want to be innovative. We're not going to do the same things that everybody else does. And I'm like, why not? It usually works to find somebody who's figured it out beforehand and do whatever he or she did. That's usually a very good formula. Innovation, I think, should be a last resort. And if you're willing to think of it as this last resort, it's very liberating. Because then you don't feel pressured to put blue flecks in the laundry detergent. I use a washing powder. It's got mostly white crystals, but occasionally these blue crystals.

I'm like, what the hell is the blue stuff? And I find out that, no, no, no, the blue stuff is not from the chemistry department. It's from the marketing department. Somebody thought blue flecks in the laundry detergent makes it look cleaner. Okay, great. I don't want that type of innovation. I don't want somebody to say, we need to put new on the box. So come up with something different.

I want people to go, oh no, I have to innovate. So that's takeaway one. Innovation should probably be a last resort. The second thing I really want people to understand is it should be a resort. It should be something that you're capable of doing. And here's the reason I wrote the book. I'm spending all this time doing podcasts and speeches and trying to get this message out. It's not to make another 12 bucks. Okay. Or I actually don't make that a copy. I think I make 90 cents or something. But the point

is steal the book. If you have to buy it from a friend, I don't care. Stream it down. I don't make that a copy. I think I make 90 cents or something. But the point is, steal the book if you have to. Buy it from a friend. I don't care. Stream it down. I don't care. But the idea I want you to get is that most of your life you have been taught to not do anything that hasn't already been proven to work. And that if you find yourself on that edge of what humanity has figured out, and the only way to walk past that edge is to innovate, to try something new, all of your training, all of your friends,

all of your systems, all of the things that have supported you are going to very quickly turn against you and try to pull you back over onto the safe side of the line. And the safe side of that line is the line where we know how it all works. And I just, this is the reason I had to write the, I was the line is the line where we know how it all works. And I just, this is the reason I had to write the, I was going to say the damn book. I guess I just did. The reason I wrote the book is because I don't want everybody, when they come up to that line to say, I can't cross it. You don't have to, but I want you to understand that it is possible for some people to cross it successfully. And I guess the final thing that I would tell your listeners

is that if you step across the line, get ready for stuff to work differently. The physics in the world of innovation stacks and entrepreneurship is absolutely different. And we talked about price a little bit, but there are dozens of other examples and you should understand that. Well, you should understand not to make the mistakes I made when I was a young entrepreneur, I would have a problem and I would call my friend who had a very successful company and would say, how did you solve this problem? And she would tell me, Oh, Jim, I did this. And so I'd go back to my company. Oh, thank God. And I did that. And it blew up in my face. And the would tell me, oh, Jim, I did this. And so I'd go back to my company. Oh, thank God. And I did that. And it blew up in my face. And the reason was I was copying from a different world where the physics worked differently. In the world of business,

there are rules and practices that have been well proven and they work. If you take those same rules and you move them into the world of innovation and entrepreneurship, oftentimes they work backwards. And that was a real revelation to me. And actually a revelation that I didn't fully appreciate until I finished the research for the book. And I was like, oh my God, what am I doing for the last 20 years? It just woke me up. And I was like, oh, at least I now respect the fact that there are different behaviors and they're appropriate in different circumstances. Those are the three takeaways.

Jim, this has been fascinating. Thank you so much. I really enjoyed your book, The Innovation Stack, and I look forward to seeing you in person. Likewise, Lynn. It'll be a pleasure to meet in person and nothing wrong with Zoom, but boy, let's get together. If you enjoyed today's episode and would like to receive the show

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