Jim McKelvey, Co-Founder, Square
The Art of Innovation
Jim McKelvey, glassblower and co-founder of Square, thinks he’s cracked the code for creating a truly innovative startup.
Jim McKelvey needs to solve problems. “It’s not about money. It’s not about recognition. It’s not about anything you can measure. It’s just this burning need to fix something.”
That burning need is what sparked the ideas for all of his startups, including the massive small business payments company Square, and now his current project, Invisibly.
“I look for a problem that I care about,” McKelvey says. “I look for something that bothers me, something that angers me, something I will get up and bend my life into a pretzel to solve.”
In fact, the problem that became the catalyst for Square—which, by the way, has grown to a $34 billion market cap—evolved from McKelvey’s first profession as a humble glassblower.
That same unstoppable drive is something he’s seen in so many successful startups around the world, and it’s now the subject of his new book, The Innovation Stack. Someone sees a problem and, without experience or previous knowledge, they set out to solve it. For McKelvey, this is what true innovation is all about.
Mira Publishing: Turning Failure Into Opportunity
McKelvey’s first company, Mira Digital Publishing, solved two problems, actually. First, McKelvey wanted to create image storage and recognition software, something that was still in its infancy when he founded the company in 1990.
Second, he needed a way to break out of his own rut. He had graduated from Washington University in St. Louis in 1987 with degrees in computer science and economics. At 19, he’d published a textbook called The Debugger’s Handbook: UCSD and Apple Pascal.
But after he graduated, he was running at what he calls a “high level of mediocrity,” freelancing for IBM, blowing glass, and running a company that built storage cabinets for CDs.
In 1989, his mother died suddenly, and it made McKelvely reevaluate his priorities. “I just asked myself, do I want to be mediocre at everything? And so I decided that one of the things I had not done in my life was focus.”
So he gave up IBM and the CD cabinets (but not his glassblowing) and focused on starting Mira. Unfortunately, Adobe released Acrobat in 1993. “We got our heads handed to us by Adobe. … It was a giant mess.”
But while their imaging software failed, some good still came out of it all. That’s when McKelvey met Jack Dorsey, the future co-founder of Twitter.
The Entrepreneur and the Artist
McKelvey is a trained glassblower, who has even written a textbook on the subject. In the past, he’s used his studio to support himself while working on his startups.
“The cool thing about making a physical product is that you can do it whenever you want. So I could work on my technical companies during the day and head into the studio at night, make a bunch of work and stick it in galleries and make enough money to survive.”
For him, art and entrepreneurship go hand in hand, not just because one can fund the other, but because they are parallel endeavors that achieve the same outcome. McKelvey says he uses an archaic definition of the word entrepreneur, which broadens its scope beyond merely starting a company.
“The original meaning for the word entrepreneur was this crazy person who did stuff that hadn’t been done before.”
Square: Starting With a Problem
Dorsey started as an intern at Mira, and the two developed a bond that held fast over the years. After Dorsey was forced out of his position as CEO of Twitter in 2008, he reconnected with McKelvey and they decided to start a business together. They just had no idea what that business would be.
They brainstormed together and came up with a few ideas. They knew they wanted it to be something mobile. They started looking into a journaling app, until another idea came to McKelvey while in his glassblowing studio.
He tried to sell one of his glass pieces to a customer who wanted to charge it to her American Express card. But Dorsey couldn’t process her credit card.
He lost the sale.
“And so I called up Jack with the iPhone that I had in my hand and I said, ‘Jack, you know, it’s really stupid that this iPhone that does everything that I want it to do—it becomes a television, it becomes a book, it becomes a radio, a compass—but it couldn’t become a credit card machine. And this is stupid. We need to fix this.’”
And so, they came up with Square. They originally wanted to serve artists who couldn’t take credit cards or receive electronic payments.
“The tough thing about being an artist is, I make stuff nobody needs. Like, nobody has ever needed anything that I’ve made in the glass studio. So, you better be ready when they’re ready to buy and not make it too difficult for them.”
The challenge Square faced was serving a community that didn’t have the typical business setup.
“These little guys who didn’t have credit reports. Some of them didn’t have bank accounts. Some of them didn’t have credit scores. Some of them didn’t have mailing addresses. I mean they were weird outliers to the financial system.”
Even some of their bigger customers were still too small by the standards of the industry to process credit cards. So, they were forced to reinvent the entire process, from signup to hardware to pricing schemes.
And for McKelvey, that’s where real innovation comes from, when you are forced to improvise.
“Invention is something that has to almost be forced upon us. And people get inventive when they have no other choice.”
The Innovation Stack
A few years after Square launched, McKelvey and Dorsey learned that Amazon had launched a small business payments service that was nearly identical to theirs. For the second time, McKelvey thought he was done.
But then, an amazing thing happened. About a year later, Amazon shut down their service and sent all of their former customers a Square reader. For a long time, McKelvey couldn’t figure out how they had survived a direct attack from a giant like Amazon.
“I was like, well what’s special about us? What did we do to be still standing after Amazon comes after us? And I couldn’t answer the question.”
He talked to former executives at a number of companies Amazon had directly targeted. Some of them sold to Amazon, while others went out of business. None had survived.
“I was happy we won, but I couldn’t answer the question, why did we win? I knew we’d won, but I’d like to think it’s more than just luck, but I just couldn’t explain it. So I went on this two-year quest to figure it out.”
McKelvey found that Square wasn’t actually alone. Many companies had survived direct attacks from large competitors, and they all had one thing in common, what he calls the “innovation stack.”
He describes the innovation stack as a series of interlocking inventions that create something you can’t attack. Instead of one big innovation, the companies that survive are innovative in several ways that all contribute to the overall success of the company.
And that series of innovations is almost impossible to copy in their entirety. For Square, it was easy to copy the hardware, but that was just one of 14 different innovations that made the company different in the online payments field.
“So I talk about 14 things that we did differently. Every one of those was necessary for the system to work. So, if we’d done 12 and we hadn’t done the 13th and 14th, Square wouldn’t have worked.”
One of the 14 was their system for handling fraud.
Since Square is a company that handles online payments, McKelvey says, it got hit from day one. Three years later, when Amazon came out with its product, Square had already developed unique processes for dealing with fraud, something Amazon couldn’t replicate.
But, McKelvey says, even if every aspect of a company’s innovation stack is visible, it’s hard for large companies to copy it all successfully. Why?
“Organizational culture,” he says. When a startup comes along with a new way of solving a problem, it’s difficult for a well-established brand to pivot, to change its ingrained processes to compete.
His example is Southwest Airlines. They revolutionized the boarding process, turning a 45-minute process into a 10-minute one. And they did it by rethinking the whole process, right down to cleaning the plane.
With Southwest, even the pilots helped clean the cabins before boarding new passengers, something McKelvey says United or Delta Airline pilots would not be willing to do because they were already used to a certain organizational culture.
Because Southwest was new, they could set their own culture. “Let me tell you that the Southwest pilots, you didn’t become a Southwest pilot unless you were willing to play their game.”
McKelvey writes about Southwest and several other companies who shook up their industries in his new book, The Innovation Stack.
No Experience Needed
As he researched his book, McKelvey noticed something else about these innovative companies. Companies from Southwest Airlines to the Bank of Italy all began the same way he did—by solving a problem for a previously ignored segment of the market and having no idea how to do it at first.
He came to the realization that starting a business isn’t about the market needs, but rather the needs of a small, even fringe group of people. “I don’t think you should choose a big market. I think you should choose a big problem,” he says.
From Southwest, which figured out how to make flying affordable, to the Bank of Italy, which started out giving loans to farmers and immigrants when other banks wouldn’t, they were all sailing in uncharted waters.
And because of that, none of their founders had any kind of expertise in their field.
“I looked throughout history and I saw all these people who had basically no qualifications for what they did.”
That included himself and Jack Dorsey. While McKelvey holds two degrees, he finds neither relevant to what he does today. As for Dorsey?
“So, like, Jack’s professional credential, he has one professional credential. He is a massage therapist. I mean, you’ve got a glassblower and a massage therapist and they start a payments company. We knew nothing about payments. We didn’t know a thing.”
The Innovation Continues
McKelvey still sits on the board of directors for Square, but his focus is now on his new startup.
With Invisibly, he wants to change the way publishers monetize their online content. The current model, where ads pop up in the right rail, across the top of the page, and even on top of the content you’re trying to read is infuriating to McKelvey.
“Our attention is being bought and sold without our permission or knowledge. So when you watch something or read something, you’re essentially trading your attention to advertisers in a system that is largely biased against you, and in many ways subverts your interests.”
And, he says, ad blockers are not the solution, which is essentially saying to journalists, “Starve to death, guys, because I’m not paying anything.”
So he and his team at Invisibly are working on a way to allow users to control the ad experience.
McKelvey has also founded a nonprofit called LaunchCode, which trains programmers for free and helps place them in jobs. Oh, and he’s also a deputy chairman for the Federal Reserve in his hometown of St. Louis.
McKelvey has built his success by solving problems. “If you have a problem that has never been solved, man you probably want me around.”
And he’s seen other people create world-changing companies by doing the same, and by building innovation stacks that all but guarantee their success.
He looks at entrepreneurship, not as the process of starting a business, but as an art form, a means to bend and mold an industry to create something no one’s seen before, something that makes life a little better for everyone.
Interview by Nathan Chan, feature article reprinted from Foundr Magazine, by Laurie Mega
- Why McKelvey believes he was running at a “high level of mediocrity” early in his career, and how a family tragedy shifted his priorities
- The launch of his first company, and why it ultimately failed
- McKelvey’s unique background as a glassblower, and why he believes art and entrepreneurship go hand in hand
- How McKelvey and Jack Dorsey came up with the idea for Square
- How Square survived a direct attack from Amazon
- How the answer became the inspiration behind McKelvey’s latest book, The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time
- How McKelvey plans to continue solving problems with his newest startup, Invisibly, and his nonprofit, LaunchCode
Full Transcript of Podcast with Jim McKelvey
Nathan: The first question that I ask everyone that comes on is, how did you get your job?
Jim: What do you mean by job? I do about six different things. I work in a glass studio, making art. I have a startup of my own called Invisibly, which is trying to give people control of their eyeballs, how our attention is bought and sold online, which is a big problem. I’m on the board of directors of Square which is a company I co-founded. I am on the Federal Reserve. I’m a deputy chairman of the St. Louis Fed and then a few other things. I’m not the guy to talk to if you want to learn focus.
Nathan: Yeah. Interesting. I found on Crunchbase that your first company was Mira Digital Publishing. Is that correct?
Jim: Yep. 1989. So 30 years ago, I started my first company straight out of school and knowing nothing.
Nathan: Can you tell us a little bit about that? How it started? Why? What happened to it?
Jim: The start was dark. My mother had just died-
Nathan: I’m sorry to hear that.
Jim: And I was heartbroken. This was 30 years ago. If you ask me why I started the company… At the time mom died, I’ve been doing three things. I was working as a freelance engineer for IBM. I had a glassblowing career, I was making art and then I had my own company that built storage cabinets for compact discs, which were big at the time. I was doing these three things to a high level of mediocrity. My mom died and I just asked myself, “Do I want to be mediocre at everything?” “Do I want to be mediocre at a lot of things?” So I decided that one of the things I had not done in my life was focus.
I quit IBM. I quit blowing glass for a time. And then I focused… And I sold my company, my manufacturing company, and I focused on this idea for software that would store images and it was a new phase of software at the time, image storage and recognition. We’re the only products in it and then got our heads handed to us by Adobe, which came out with a product called Acrobat.
It was a giant mess. Although, interestingly enough, the company survives 30 years later. We were able to pivot and pivot again and Mira is still around. I still have the same phone number. If you care to call it, it will eventually get the message to me. And there’s no… I’ve seen a lot of other companies come and go in the meantime, but Mira’s never been a stellar success, but it was my first effort.
Nathan: Yeah. Wow. Interesting. And it’s still around.
Jim: Still around. Yeah. Probably the most noteworthy thing about Mira was that it’s where I met Jack Dorsey. Jack used to be my summer intern when he was 15 years old. He came and joined us. I was in my early 20s. Jack was in his late teens and we started forming a partnership that’s lasted well to this day. I still like working with Jack.
Nathan: Yeah. Wow. That’s crazy. Tell us about how Square came about because I want to talk about your latest book, The Innovation Stack. But yeah, I’d love to talk about Square early days, how that came about, absolute behemoth. My girlfriend, she has a physical product business and it’s predominately sold online, this time marked water bottle using Shopify, using these new tools. It was not so much new but using these new age tools. In the early days, she wanted to get into trade shows and markets and fairs and I was like, “The way you’re going to process is just get a Square.” And she did. It’s so easy, so simple.
Jim: Oh, that’s great.
Nathan: It’s amazing.
Jim: Love it. Your girlfriend is a user and she makes something. She makes a physical product, which is exactly the situation that I was in.
Nathan: What happened?
Jim: Jack founded Twitter and ran Twitter for a while and then they kicked him out. Jack was home for Christmas. We both live in St. Louis. I should say this, we both lived in St. Louis. I still live there and Jack comes back to visit his family during holidays and he was back. This was 10 years ago.
He was in town and we got together and started talking. I heard this horrible story about how they kicked him out of Twitter. I was pretty upset because Jack was also like a little brother to me. I said, “Why don’t we go get even with those guys?” Jack, to his credit, said, “Jim, why don’t we do something positive and start something of our own?” The only thing that we had as a constraint was that it couldn’t be anything to do with social media. We were just going to stay clear of that whole social media mess and at the time, we didn’t really have an idea for a company.
We went back to San Francisco, brainstorm for a couple of weeks, and actually hired our first programmer because we knew that something was going to be mobile about it. We definitely wanted to develop something for the new range of mobile devices because the iPhone had just come out. So with that as a start, we had this idea that was… It was kind of a journaling app. It was actually Jack’s idea and I went back to St. Louis to pack up my stuff and I was in my studio one day trying to sell a piece of glass to a lady who couldn’t pay because I couldn’t take an American Express card. I lost this big sale and I was angry. I was really upset.
I called up Jack with the iPhone that I had in my hand and I said, “Jack, it’s really stupid that this iPhone that does everything that I want it to do, it becomes a television, it becomes a book, it becomes a radio or a compass. The iPhone is this sort of magical thing that transforms into whatever you need it to be. But it couldn’t turn into a credit card machine.” And I was like, “This is stupid. We need to fix this.” Jack was interested and that became the basis of Square.
Nathan: Yeah. Wow. You’re a glassblower. It sounds like glassblowing has been a hobby or you’ve had a company around that for a long time?
Jim: Yeah. It’s a hobby/profession depending on how desperate I am. There were years when I made a living off the stuff that I sold as an artist. The cool thing about making a physical product is that you can do whenever you want. I could work on my technical companies during the day and I head into the studio at night, make a bunch of work and stick it in galleries and make enough money to survive. You can actually make a really good living as a glassblower.
The first time I went to Australia, I was at a glass art conference in Adelaide. It’s taken me all over the world and it’s a phenomenal outlet creatively and I like things that are physical. I like having to do stuff. The dozen things I love about glass and the community of people that work in it are just fantastic. It’s fantastic. But now, it’s more like therapy as opposed to a vocation because I go into the studio when I need to go into the studio, when I want to go into the studio, when I want to get my hands dirty.
But I don’t do it for a living full time anymore. Although I still make product and sell it. If you call and you order something from me, I will still drag myself into the studio and crank it out just because I’ve done it for so many years that the discipline of selling is something that I really respect especially in art. It’s really easy to just get lost in the process and never make anything that people want and I’ve always been of the mind that part of the process is getting that piece into somebody’s hand and that’s usually a sale. Yeah, a lot of respect for what your girlfriend does.
Nathan: When you talk about the difference between art and business and entrepreneurship, sometimes I see them as one and the same. Entrepreneurs are modern day artists.
Jim: It depends what definition you’re using for entrepreneur. I use a definition that’s very archaic, and we talked about this in the book a lot, and that is the original meaning of the word. Entrepreneur was this crazy person who did stuff that hadn’t been done before and that really is like an artist. So if you’re an artist and you just copy what other artists have done before you, nobody cares. I can go into a gallery and make a perfect replica of somebody else’s work and that’s worth almost nothing. But if I make something original, that’s worth tremendous amounts in the art world. As a matter of originality, by itself, is actually something that the art world cherishes.
But if you look at most businesses, most businesses of the opposite. Most businesses are copies of some other business. As we’re sitting here right now, I’m looking at a Starbucks. There is nothing original about a coffee shop. You could say, “Our coffee shop is different from this coffee shop.” But I bet you, you have a coffee grinder. I bet you, you have one of three different espresso machines. I bet you, you have… I can tell you what a coffee shop is like in almost any part of the world without having been there because there’s a formula to opening a coffee shop and if you want to have a successful coffee shop, you follow that formula. The innovation in that world is sort of incremental.
But if you’re an entrepreneur, at least by my definition, you’re somebody who has done something that has not been done before. If you open the first coffee shop ever, you’re an entrepreneur. If you see a guy who’s opened a coffee shop and say, “Hey, I’d like to do what that person did.” Well, then you’re business person, and no disrespect, but it’s a different set of skills.
Nathan: Yeah, I agree. I’d love to hear what are the reasons that compelled you to write this book, The Innovation Stack?
Jim: It was funny. I was freaked out when we started Square because a couple years in, everything was going great. Our product was growing. Amazon came and gave us what we thought was a death notice. They copied our product, copied our hardware, undercut our prices by 30%, which is a lot in credit card, and then put the Amazon name on top of that and then they gave live customer service, which at the time we didn’t have. We were like, “Oh my god, Amazon’s going to kill us.”
A year later, Amazon quit. They just gave up. They said… They didn’t call us and say, “Well, we’re giving up.” It wasn’t physically waving a white flag. Although they were really cool about it. I don’t want to disrespect Amazon here because the way they finished that fight was super cool because they mailed every one of their former customers a Square Reader. When they gave up they were like, “Okay, we ripped you guys off and…” I don’t know why they did it. I’m not going to put words in the mouth of amorphous company. But I will tell you this, when Amazon quit, they quit with class.
Nathan: That’s crazy.
Jim: But here’s the thing, how many startups do you know that have survived a direct attack from Amazon?
Jim: Name one. There are none and I went looking for one. Because I was looking for companionship at that time. I was looking for other companies that had been through it. And I was like, “Oh my God. I need to…” There’s probably like therapy group that meets on Wednesdays. If everybody who’s been attacked by Amazon and maybe some sort of Amazon like survivor camp, and there were no survivors. There was no museum to the survivors. I looked and I was like, “What’s special about us? What did we do to be still standing after Amazon comes after us?” And I couldn’t answer the question.
I found a bunch of companies who Amazon had wiped out and I talked to their execs and I talked to another bunch of companies that Amazon had just bought, basically, with the threat of wiping out if they didn’t sell out, and I talked to… Nobody has survived. This was driving me nuts. I was happy we won, but I couldn’t answer the question. I was just like, “Why did we win?” Okay, I know we won and I’d like to think it’s more than just luck, but I couldn’t explain it.
I went on this two-year quest to figure it out and what I found out was that what had happened to Square had happened to a bunch of other companies throughout history, and the trick to finding those companies was not to look in the present but to look through the past. Once I started looking in the past, I found a bunch of examples of companies that had been through almost exactly the same circumstance. They weren’t attacked by Amazon. In some cases, they were attacked by the government or sometimes they were attacked by competitors that were 50 times the size they were, but the same pattern.
These startups survive these vicious assaults from competitors who you would say would absolutely win and they lost. The big guys lost. I was like, “What was it about these startups?” I discovered this pattern which I call the innovation stack of a series of interlocking inventions that creates something that you can’t attack or if you attack, you’re going to lose.
Sure enough, it’s what happened at Square and sure enough, it happened at literally hundreds of other companies throughout history. But the reason we don’t see it is because it’s rare to see original innovation.
Nathan, I don’t want to be rude, but I would rather be rude than wrong. It would be wrong for me to sit there and say, “Look, innovation’s everywhere.” It’s not. The type of innovation I’m talking about, the stuff that is changing the world that has not been done before, that is actually not that prevalent and not that visible.
Right now, you’re in Melbourne, Melbourne is a dynamic city. Right now, around you are 50 or 100 really innovative things that are happening, but you don’t know any of them. Because, one, you’re blind to them because you’ve never seen stuff like that before, so you don’t even know what to look for and two, they’re really small. When you’re innovating, you’re at a scale that people can’t see. Unless you happen to be best friends with the lady who’s doing something that’s never been done, you’re not even going to notice it.
We don’t notice these things until they become these behemoths that then become part of the lexicon but it’s a really interesting problem and once I saw the solution, man, I just had to write a book.
I was not looking to have my name on another book. I’ve written two textbooks on computer science and I wrote a textbook on glassblowing. I was like, “Man, I’m done. Writing is a lot of work.” I’m a slow writer. I am like, “Ah, it’s tough for me.” And then I wanted to make it fun to read. So I had to rewrite it until people started laughing when they were reading it. But I just had to do it.
What I want to do, and this is the reason I love what you’re doing at your podcast, and that is the pattern that I discovered is one that does not require expertise. What do I mean by expertise? If you’re an expert in something, it means you have a skillset that has been defined as right. So if I’m going to have heart surgery, I want to go to somebody who’s a heart surgeon expert, which means hopefully I’m not their first case and hopefully… They didn’t even invent the techniques they’re using. Hopefully, there are 50 predecessors of heart surgeons who have refined these techniques and I want to get an expert. That’s what I want expertise and we value expertise in this world.
But if you’re doing something new, there can be no experts. That is the interesting thing that united all these entrepreneurs. Because I look throughout history and I saw these people who had basically no qualifications for what they did. Jack’s professional credential… He has one professional credential. You want to guess what it is?
Nathan: No idea.
Jim: He is a massage therapist. I think he’s got a high school diploma but he didn’t graduate from college. Now I got a college degree in two irrelevant subjects. I’ve got a computer science degree and an economics degree, both of them completely irrelevant to what we did at Square. At the time we started Square, I was working as a glass artist. You got a glassblower and a massage therapist and they start a payments company. We knew nothing about payments. We didn’t know a thing.
I looked at the biggest bank in the world. The biggest bank in the world was founded by a guy who was a retired produce salesman, never finished. He dropped out of school at 15 years old. Biggest bank in the world. Everything you think of as a bank was invented by this guy named A.P. Giannini 100 years ago and he had zero qualification for it. He sold lettuce.
What I saw was like, “Oh my God.” Not only is this pattern super powerful, but it is super accessible. You reach out to early stage founders. Your market are people who are wrestling with these early, early concepts of, “Can I build a business to do this?” Or, “Can I solve this problem and it’s a business way to do it?” Those are the folks I want to reach. Because that’s the moment when all this really, really world changing stuff happens.
Nathan: I love to go a little bit deeper and talk about… I guess some of these things, these qualities that you saw around these companies and The Innovation Stack. Can we delve a little deeper on this?
Jim: Sure. The interesting thing about these companies, and I studied them all when they were startups, so I studied them when they were evolving their innovation stack and you can follow them throughout history. One of them was IKEA, which is now the largest furniture store on the planet. But if you look at what Kamprad did as a teenager and the innovations they went through, what I noticed was this very interesting pattern and that is people are not naturally innovative. In other words, innovation, inventing something new, is not and should not be your first move.
Your first move, if you’re an intelligent person, is to copy something else that works. If you want to do something, I don’t care what, you want to chop down a tree. I got to get a tree and I got to knock the tree over. How am I going to do that? Well, guess what? Other humans have figured out good ways to do this. I would be really smart to go on YouTube and watch a couple of guys chop down trees or watch some creative ways of getting trees down, but I might not want to invent my own way of getting a tree to fall off.
Invention is something that has to almost be forced upon us. People get inventive when they have no other choice. The pattern that I saw with these companies is they made decisions and they took steps that forced them to become innovative and it was a beautiful pattern.
When I studied IKEA, Kamprad was kicked out of Sweden basically. Driven out. There was this boycott. There was a bunch of stuff about him. He really got almost kicked out of his country. His company was effectively booted out of their country and as a result, he had to do all this innovation. What you see today in the IKEA stores is a result of this very harsh environment that he evolved in.
I studied Southwest Airlines and I got to meet Herb Kelleher. Herb unfortunately died pretty recently, but I got to spend time with Herb. I got to talk to Herb about the early days. You guys don’t have Southwest in Australia, but it is the dominant plane in the U.S. and it’s the most profitable airline almost in the history of flight. There’s so many things that Herb did that were exactly in line with what I talked about in The Innovation Stack and Southwest was literally forced to do all these things differently.
I guess my message for your listeners is you may think you’re innovative, but to seek innovation directly is going to produce this weird stuff. It will produce something different perhaps, but it won’t produce something likely to work. But there is a way you can place yourself into this survival mode where the innovation comes because of your need to survive. I go through that process in detail in the book. I talked about how we did it at Square and how these other companies did it and I think it’s something that can be replicated. That was my great takeaway.
Nathan: This is fascinating. You talk about these kind of survival mode, is this what happened to you guys at Square?
Nathan: Because it’s such a great product now and a great model, so what happened?
Jim: Square wanted to serve artists like myself and my friend, Bob. I tell stories about Bob in the book. But basically Bob’s another artists like me, great guy, very, very good glassblower who could never make a living as a glassblower. I was like, “Why can this guy not make a living?” The answer was he couldn’t sell his work. If you can’t take credit card payments… People don’t carry chequebooks anymore and a lot of people don’t even have cash, and if you can’t accept a piece of plastic in exchange for the thing that you made, you’re not going to sell it because nobody… The tough thing about being an artist is I make stuff nobody needs. Nobody has ever needed anything that I’ve made in the glass studio. So you better be ready when they’re ready to buy and not make it too difficult for them.
What Square was trying to do was we were trying to serve the smallest people we could, these little guys who didn’t have credit reports. Some of them have bank accounts. Some of them didn’t have credit scores. Some of them didn’t have mailing addresses. They were weird outliers to the financial system. And then even the ones who were sort of more normal were still way too small by the standards of the industry to ever process credit cards.
So we had to reinvent the whole system because we chose a target that was so outside of the norm. We were forced to create all sorts of different things. We had a different signup process. We had a different user agreement. We had different customer service. We had different hardware. We had different software. We had different settlements. We had different rates. We had different pricing schemes. We had different refund. We had different… I talked about 14 things we did differently.
Every one of those was necessary for the system to work. So if we’d done 12 and we hadn’t done the 13th and 14th, Square wouldn’t have worked. We were forced into a situation where we had to do 14 things that had never been done before and that is what I call Square’s innovation stack.
Nathan: Why couldn’t Amazon compete? Because of those 14 different things? They couldn’t replicate or what?
Jim: Yeah. It becomes a problem of math. Now, I’m not saying that if Amazon as a company had focused their entire corporate resources and their tens of thousands of employees on replicating everything Square was doing, they could have eventually gotten us. But that’s not how the game’s played. These giant companies when they compete with you are… They are giant companies because their concern is doing other things that keep them to be giant companies.
Amazon had to maintain its presence as Amazon and now they’re going to take on Square, so what do they have to do? Well, first of all, they look at Square and they look at it as somebody who’s copying because what Amazon does is they bring our stuff in and they look at our software, they look at our hardware, and they copy everything they can, and then they say, “Okay, let’s go to market.” But the way they’re copying it is not the way it was developed. You can copy what you can see. But you don’t get to copy the 12 things that Square is doing that Amazon couldn’t see.
Nathan: Like what?
Jim: They couldn’t see our fraud. So we had, by the time Amazon was competing with us, several hundred million transactions with very, very small merchants and we knew how those merchants behaved and we know that some of them were… Just for the record, if you move money, people try to steal it. People love stealing money. Money tops the list of the stuff people want to steal.
Let me just state the obvious. Square, as a company that moves money around, is a really good place if you’re a thief to try your best and we got hit from day one. Amazon attacked us about three years, so we have a thousand days of being attacked every day, experience on how to handle fraud, experience on who to trust and who not to trust, and not just that gross experience, but who to kind of trust. Maybe we’ll give this guy a little bit more leave room but this person we’re going to treat… We’re going to put her on a shorter leash than this person. You end up evolving these systems and our system had evolved and it had evolved very organically. That’s not something you can just copy.
And then the other thing that Amazon failed to do was understand that we were in fact doing 14 things differently as opposed to three. It was pretty obvious to see that we had unique hardware. It was also obvious to copy that hardware. They could literally take our product, hand it to a team, and say, “Here, make something like this and change the shape and colour,” which basically was what they did. But all the stuff that we do that was behind the scenes, they could not replicate and they couldn’t change it.
The funny thing is, Nathan, even in the historic examples that I looked at where the competitors could see everything that was being done differently, they still couldn’t replicate it.
Jim: Organisational culture. Let’s take an example everyone can relate to, getting on an aeroplane. Southwest Airlines in the old days, not today, but in the early days, they boarded their planes differently. They still kind of do. But in the United States, if you board Southwest flight in the old days, you would have a plastic reusable boarding pass. You would have boarding by groups. There was no sorting into different statuses. There was no first class. The way people get on the plane is different. Well, the way Southwest turn the planes around at the gate, they created a 10-minute turnaround, which means from the moment they got into the gate and got out with passengers on it was 10 minutes.
Think about that. Most planes take 45 minutes today to turn around on a gate, but half an hour is considered speeding. Southwest was doing that in 10 minutes, which means that their entire system from the way they handled luggage, to the way their pilots would help, to the way their flight attendants would help. Their entire system was set up to turn planes in 10 minutes because they had an emergency. They ran out of money. They had to sell one of their planes in the early days and they decided that the only way they could survive was to turn their planes at this absurd rate.
The other airlines who were competing with Southwest looked at this and they said, “We’d love to be Southwest but our pilots would never walk through the cabin diving for diapers in the seat back pockets.” Believe me, the horror of the cleaning crew is in the seat back pocket. There’s some stuff… The United pilots wouldn’t do that. They were used to being United pilots. That was not part of their culture. Well, let me tell you, the Southwest pilots, you didn’t become a Southwest pilot unless you were willing to play their game. If you signed up for Southwest, you knew what was going on and you were this scrappy, hungry startup. It’s just a different culture.
Nathan: You could copy that system though. Hypothetically, you could hire people from Southwest and United and say, “We do XYZ. This is the system.”
Jim: You’d think so, but in fact, it takes years, years and years. Typically, what you can do is copy one or two of these innovations at a time, but if you’re going to copy 12 or 14 interrelated innovations, sometimes you don’t have the luxury of doing one or two things differently.
I’ll give you the example. Go back to the airlines. Let’s say you figured out how to get passengers on the plane in 10 minutes by completely replicating Southwest’s thing because, let’s say, you hire a bunch of people from Southwest and they train your pilots and you fire your pilots. You fire your flight attendants. You rehire people and you’ve just done nothing but that, okay, great. Now, you got to get the baggage on and off in 10 minutes. How you going to do that? Because Southwest uses different techniques for their baggage than the other plane to use. And where are you flying into because Southwest Airlines uses different airports? The way they set up their gates are different. They’re doing 20 things differently.
If you wanted to copy one of these things, it’s not going to work. You have to copy all 20. Now what are the odds of you copying those 20 things successfully at the get go? The answer is pretty bad math because you take the chance of success. I’m sorry… Let’s say the chance of success is 80%. You’re eight out of 10 times likely… You got an 80 chance of succeeding if you got to do one thing. If you got to do two things, it’s 80% times 80%. So now you’re down to 64%. Every time we add another thing you have to do, that percentage drops and drops and drops and if you have to do 10 things differently, you’re down in the sub 10% range. The math really gets tough to copy these companies that have innovation stacks.
Nathan: Yeah, I can start to see what you mean. As you start to build out your company and you start to innovate, you’re saying you create more and more things around it that eventually built out this moat.
Jim: Yes. The interesting thing about my study… My study is not about business. It’s not about your average company. It is about companies that evolve innovation stack and become world changers. The pattern I saw was the companies who start off with an innovation stack end up dominating their markets. Full stop. They just end up with an unassailable position and it’s happened all over the world.
Nathan: Interesting. When you talked about the fraud piece with Square, one thing that I wrote down, which came to mind is around… You had a thousand days on Amazon, what you essentially had was data. You have data… Three years ahead of learnings and data.
Jim: Yes. And more importantly, we had a user group that had never been surveyed before. That data wasn’t available anywhere else. The only way you could have gotten what we had was to do what we did. This is another sort of theme that I like to emphasise and that is. if you want to be a world changing company, a big, big deal, there is almost always at the bottom of the market some people who would love to participate but are being excluded.
In Square’s case, it was myself and my friends. I knew a bunch of poor artists who couldn’t take credit cards for a bunch of dumb reasons and we fixed all that and it turns out that there were millions of other people, like my friends, who showed up. But at the moment we did it, we had no proof that those millions of people would show up.
When Southwest started flying people around, they weren’t taking business away from the other airlines. They would take business away from cars and buses.
When the Bank of Italy, which is the bank that I profile which is almost a perfect parallel to Square, which became the biggest bank in the world, its mission was… This guy, A.P. Giannini, he was a produce vendor and he was so upset that the banks wouldn’t lend to immigrants like himself. He was an Italian immigrant in the United States 100 years ago and there was a lot of racism and a lot of ethnocentrism and just a lot of bias and he was excluded and his friends were excluded and the farmers were excluded, like normal people 100 years ago, could not use banks the way we do today.
This pissed off A.P. Giannini. He went out to build something for people who were disenfranchised. That’s the other thing that I saw as a pattern, which is these super successful companies have very, very humble roots where they’re trying to provide service to somebody who otherwise wouldn’t participate at all. They compete at the bottom part of the market. They try to build the market and make it bigger.
Nathan: When it comes to building a company, you should choose a really, really, really big market. What are your thoughts there?
Jim: I think that’s an interesting question. I don’t think you should choose a big market. I think you should choose a big problem. Because to say there’s a big market… Square didn’t have a big market when we started. There was no market. Now you tell me that people who don’t process credit cards is our market. No. I don’t know. We didn’t get all of those people. If you say, “Everybody in the world who can’t take a credit card payment is Square’s market.” No, that’s nonsense.
But you can’t sit there and say, “These people who’ve never had access to this thing want this thing.” You don’t know. There’s no way to survey that market. If you start asking that question, you’re a copy business because only existing markets are the ones that you can say are big or small. The markets I’m talking about did not exist. If you ask that question, in my opinion, you will build a company that is a copy of something else, and again, no judgement . That’s a great way to make money.
I’m sitting here looking around me and I can see probably 20 businesses from where I’m sitting. I see a Fitness Studio. I see a Mexican restaurant. I see a tanning salon. You can tell them in a parking lot here. I see a dry cleaner. I see a pharmacy. You know what? When I say those words, every one of your listeners knows what I’m talking about. Those are great business.
You know the guy who owns that probably makes a pretty good living. The lady who runs the Mexican eatery, I think I can see her, she looks pretty happy. She’s got a good business. But that’s not what we’re talking about in The Innovation Stack. So you said, “Choose a big market,” and I say, “Yeah, if you want to be derivative.” If you want to change the world, choose a big problem. Ignore the market.
Nathan: I’m curious, what are you doing around Invisibly? Is that your main focus now?
Jim: So it is, and this is a big, big problem that I think everybody in the world has, to some extent, and that is our attention is being bought and sold without our permission or knowledge.
When you watch something or read something, you’re essentially trading your attention to advertisers in a system that is largely biassed against you and in many ways, subverts your interests and you have no control of it and you have no knowledge of it. I believe that’s a solvable problem. But it’s a big, big thing. Again, it is a problem that has never been solved before. So there has never been a way for me, as a consumer, to sit there and express my interest or disinterest.
For instance, I look at a page in my local newspaper which I read online. My view of that page may earn that paper a quarter of a cent and in order to generate that quarter of a cent, I have six or seven ads that block up, scroll over the stuff that I’m trying to read, slow my page down, cookie the heck out of me. It’s just a mess or I could throw on an ad blocker and then the poor paper doesn’t earn anything. Now, I’m effectively saying to the journalists in the world, “Starve to death, guys, because I’m not paying you anything.”
But there’s a better way. The better way is to give people control. Now, the hard part is building all the systems and plumbing to give people that control and then doing it in a way that doesn’t require them to care. The reason the company is called Invisibly is not that it’s any great secret, it’s that we believe the best system is one that works without you having to think about it.
The invisible force I always think of as gravity. Gravity, man, that is useful. If there was not gravity right now I would be in deep trouble along with everybody else on the planet. We would all be dead. But you just kind of assume it. We’re trying to build something that is almost as pervasive and invisible that way but early days, we still are figuring out how to do it. No promises that it’s going to work. It works in the lab, great. But does it work in the wild? I don’t know. We’re figuring it out.
Nathan: It’s interesting that you started this company in 2016, but you’re saying if it work or not because it’s such a big problem, did you feel that way with Square?
Jim: No. With Square, it was a totally different thing. With Square, it was personal to me. Invisibly is personal to me, too. But with Square, we had a very discreet mission and it was to get small businesses paid. We’ve expanded that mission a lot in the last 10 years, but the core was economic empowerment for small merchants.
In Invisibly’s case, we are trying to do essentially two things for the individual. First, give them control over how their eyeballs are bought and sold and secondly, and this is very important, we’re trying to give them an economic voice in their content.
Here’s the problem with the way the system works, Nathan, if I trick you into watching an ad for 20 seconds and then after 20 seconds… Actually, I’m sorry. If I trick you into reading something for 20 seconds, looking at my page for 20 seconds, I will earn the same amount of money as if I create 20 seconds that you love.
You’re in the content creation business. Right now, you and I are making content. You’re going to put this out and you’re going to try to make money with it. You’re going to try to monetize it and what if what we have created is awesome, what if it’s fantastic? In the current ecosystem, you don’t get more money except by getting more views. Your money is basically proportional to the quantity of your product that is consumed as opposed to the quality. And that’s not how life works.
I’m sitting in my friend’s car right now doing this interview and he’s got a really expensive car. The reason he has an expensive car is because people for the last 100 years have been paying more money than they needed to have cars with fancy seats and lots of leg room and he’s got a navigation system in here. This is not the cheapest car that could be made by humanity. This is pretty nice one.
You, me, every person on this planet wants to be able to pay more for the stuff we like and less for the stuff we don’t like. That’s why the economy works and that works everywhere, except online. As soon as you’re online, you are in this weird communistic state. It’s actually not even communism. It’s actually worse than that. But the bottom line is you are only as valuable as your time and that’s a crappy way to reward people who make quality because I actually value concise content.
If you give me something and it takes 30 minutes for me to consume it, but then you work on it and refine it and edit it and cut away all the crap and just polish it up so that now I can consume it in 15 minutes. Man, I will pay you more you’ve just created great value. You’ve given me 15 minutes of my own time back for the same value, probably for better value. You know when that happens? Doesn’t happen online. Online, man. Let’s pad it out. Can we stretch it to an hour and a half? The incentives are just perverse. So this is what Invisibly is working on.
Nathan: Yeah, interesting. Jim, I could talk to you all day man. This is fascinating conversation. We have to work towards wrapping up though. I’m mindful of your time.
Nathan: One thing you said to me, which was interesting when you said all the things that you were doing was you said the focus was a problem.
Jim: Yeah. Focus is the problem. It’s not my strength. I am not a guy who you want in every meeting. As a matter of fact, almost every one of my companies, Square included, has at some point asked me to leave the room. My glass studio kicked me out. Mira kicked me out. Invisibly kicked me… Everybody kicks me out at some point because I am really comfortable at that early stage when nothing is known and we’re developing stuff that’s never been done. If you have a problem that has never been solved, man, you probably want me around. But once we know the solution and it becomes a process of just implementing that solution and being careful and detail oriented, I’m a disruptive person to have at that stage.
I always remove myself from operations at that moment. Once the invention and innovation is done and systematised, get me out of the way.
Nathan: Yeah, that’s interesting. Could you not just create as an example for Square because… As you said, the mission has evolved over the past 10 years and you guys are doing many different things now, could you not just stay within the company and just create new product under the brand to further serve for those small business owners?
Jim: Yes. I’ve contributed some new ideas to Square but again, once you start running in an area, a lot of the best ideas for new products are going to come from the customers. My input isn’t that valuable. If I’ve got a million customers who are all telling me the next product that they want and I’m just smart enough to listen to them and then build those products, that’s a good way for a company to continue innovating.
My specialty is stuff that has never been done. Stuff that people can’t imagine and typically, customers are not going to call you and say, “This has never been done, but I love it.” At least for me, again, I’m not holding myself up as some sort of model here because I think… That’s probably not good. But what works for me is I try to keep as much of my energy as possible and then I look for a problem that I care about. I look for something that bothers me, something that angers me, something I will get up and bend my life into a pretzel to solve. It’s not about money. It’s not about recognition. It’s not about anything that you measured, it’s just this burning need to fix something.
Once I have that problem in my hand and in my heart, then I get this motivation and then I start trying to solve it. Now, I don’t always solve it but that’s the part of the process where I’m most comfortable and probably most valuable.
Nathan: Yeah. I see. Because you’ve had incredible success, it really is about the craft now, right?
Jim: It’s about the problem. It’s about fixing the problem. I’ve got a nonprofit called LaunchCode that trains programmers for free and gets them jobs in high numbers. This is a free education that will get you a real market rate job and the course takes sometimes… Average time is about six months. It’s fantastic programme. I was motivated to do that by this problem that I saw in my city, which is companies didn’t have the talent they needed to grow and then people didn’t have opportunities, and there were a lot of smart people who couldn’t get work. I was like, “This doesn’t make any sense.” We built this thing.
To me, I’m really lucky that I can hold on through the quiet periods when there are no burning problems and then when there’s a burning problem I work on it. I quickly assemble a team of people to work with me. Together, we figure out an innovation stack that’s hopefully going to create something new and then it’s time for me to get the heck out. I got to get out of the way or I will become disruptive to that team that’s now got a clear mission.
Nathan: Yeah, I respect your self awareness because not everybody can work that out even after many years of doing something. How did you work it out?
Jim: I failed. I tried to focus on one thing and I was like, “Wait, this is a disaster.” I’m not the sort of guy who focused as well. I’m the sort of guy who when it’s never been done, bring me into the team. When it’s been done and we know how to do it, don’t even let me in the room. That’s just me. I’m not saying that… You want complimentary skillsets, but for people who are at the early stage of creation, what I wanted to do in this book was share the skillset, was just to say, “Look, you don’t need my skillset for very long. As a matter of fact, you don’t even needed my skillset because I don’t have a skillset.” When I do something new, I do it in an area that I almost know nothing about.
I start with the same incompetence as everybody else on the planet. But the only thing that I’ve learned how to do is get comfortable doing stuff that I don’t know how to do and where that makes the most. If you go into an industry where there are a bunch of established businesses and you don’t copy what they’re doing, you will get killed. Because they’ve evolved a system that is better than you can create on your own. But where I like to work is in areas that nobody’s ever solved before, where we’re all starting from zero and now, my particular familiarity with having this survival mentality is… It’s an advantage.
What I wanted to do in the book was I wanted to say, “Okay, look, by the way, folks, everybody on the planet has the same potential.” I’ve just happened to be a guy who through sort of circumstance ended up in more of these situations than most people. But it’s the same pattern again and again. It’s something that can be repeated and it’s something that you can go out… Imagine yourself upset about something. You see some problem. The other day a friend of mine came to me and he was very interested in social causes. He says, “Do you know where poverty starts for a lot of people in America? It starts when they have to buy diapers.”
It turns out that the diaper market is really messed up for a bunch of reasons I won’t bore your listeners with, but the fact is, diapers are super expensive and if you’re poor, they have these terrible problems because they keep the kids in the diapers too long and then the kids get rashes and they can’t go to school. They’re landfill problem. There’s all sorts of problems with diapers. He wants to fix that problem. It’s never been done before the way… Now, diapers have been made, but what he wants to do has never been done before. He came to me and we just spend an afternoon just riffing on this whole idea because there’s a problem to solve.
You know what? He doesn’t have any experience with diapers. I don’t have experience with it. But we’re looking at that problem and we have… As long as we do something sufficiently different, we have the same opportunity as everybody else’s.
Nathan: I love it. Look, Jim, we have to work towards wrapping up. We’ve been speaking for a while and I’m really enjoying this conversation. Just mindful of your time. Last question is where’s the best place people can find out more about yourself and your work?
Jim: Thank you. I don’t use social media. I think there will be some sort of Facebook presence but I wouldn’t count on it and I never look at LinkedIn unfortunately because I have too much going on to do that on a regular basis. But I’m putting up a website jimmckelvey.com. It’s not so much about me, but I’m trying to make it about the things that I care about and then the book will be on sale everywhere. That’s probably the best I can do as far as an introduction to this weird way of thinking. But, boy, I’d love to see more entrepreneurs. I’d love to see more people in the world going out and solving problems that haven’t been solved before because we sure have a lot of them.
Nathan: Yeah, I agree. Awesome, man. Look, thank you so much for your time, Jim. I really appreciate it. You’re very, very generous and hope you have an incredible day. Thank you so much.
Jim: Nathan, thank you. I appreciate the work you do to inspire and motivate and teach people how to do new things. It’s a noble calling. Tremendous respect for what you do as well.
Nathan: Thank you so much.