Thirty Minute Mentors Podcast Transcript: Interview with Square Co-Founder Jim McKelvey

I recently interviewed Jim McKelvey on my podcast, Thirty Minute Mentors. Here is a transcript of our interview:

Adam: Our guest today is an entrepreneur, engineer, author, investor, philanthropist, and glassblower. He is best known as the co-founder of Square. Jim McKelvey is also the author of the new book, The innovation stack. Jim, thank you for joining us.

Jim: My pleasure.

Adam: A lot of us encounter challenges in our businesses but you partnered with Jack Dorsey to build an enormously successful company to solve a problem that you are facing in your business. Can you share with listeners how Square came together?

Jim: So I hired Jack when he was 15 years old to work at another company that I have. And Jack and I became friends. That was 25 years ago. But he and I like working together. And around the time of 2008, after he'd started Twitter, they kicked him out of Twitter. So Jack was out, he had nothing to do. And the way they kicked him out of Twitter was pretty crummy. So I was angry at what had happened to my friend. And I suggested to Jack that we go get even with the guys at Twitter. And I had some sort of schemes for doing that. And Jack said, “Well, why don't we just do something positive with all that energy and start a new company?” So Jack suggested we form a new firm. And I said, “Okay, what do you want to do?” He's like, “I don't know, what do you want to?” So neither one of us had an idea. But we knew we wanted to do something with mobile technology. So we hired an engineer from Apple to build an iOS client, but we didn't know what we're going to build. The engineer was starting in two weeks. So we had two weeks to figure out what the company was going to do. And I'm a, I'm an engineer by training, but I'm also a glassblower. And I have from time to time made my living in an art studio. And so I went into my art studio to pack everything up. And while I was there, I got an order from a lady who wanted to pay with American Express card. I couldn't take the payment for my last sale, and was really upset. So I called Jack and I said, “Hey, I know what we should do with this new company, we should build something so that artists like me, never have to lose another sale because we can't take the credit card.” And Jack thought that was sort of interesting. So that's what became Square.

Adam: Tell listeners about your new book, The Innovation Stack. What is The Innovation Stack and what should listeners Understand?

Jim: So you should first understand that I never wanted to write a book. I've written three. It's really a lot of work. And I don't want to do this but I had to, because I discovered this thing. That was super powerful. And what happened was Square got attacked by Amazon. When we were about four years old, Amazon copied our product and undercut our price by 30%, and just expected us to die. And they had reason to expect that because in Amazon's case that always worked. So Amazon has a 100% killed record against startups, when they undercut their price. It had the Amazon brand. So Square, like everybody else, was expected to die. But we didn't. As a matter of fact, a year later Amazon gave up and they were actually really cool. I gotta say one good thing about Amazon when they quit they mailed a Square reader to all their former customers. Though, like, I mean, I have respect for the company even though they attacked us. So I know when I totally slam Amazon, especially since like these days I'm totally dependent on them for, like, home delivery of everything. Oh, as well as sell this book. But oh, but here's the story. I couldn't explain why we won. Like I was happy Square won but I couldn't explain it. So the question is, why did Square win like, was it just luck? But I couldn't accept that answer because like, you don't just get lucky, you don't beat Amazon, they were some factor that prevented Amazon from winning. And it turns out that what Square did was this thing that literally thousands of companies have done throughout history. It's called an innovation stack. And it's rare, because of the, you know, 10s of billions of companies that have been formed. There are a few that have these things, but when they have them, they become dominant. And I mean, like, biggest in the world, in their respective fields. Like if you build an innovation stack, which is not all that complicated, you can literally dominate an industry.

Adam: Can you dive into that? Jim, I mean, what should entrepreneurs know? What are your best pieces of advice?

Jim: So the first thing you need to know is that entrepreneurs are not entrepreneurs. Okay? That today we use the word entrepreneur and business person interchangeably. So if you start a coffee shop, you're called an entrepreneur but one or two years ago they would have called you a businessperson. Okay. And the original use of the word entrepreneur; if you look back in history, Joseph Schumpeter, the economist, first started using entrepreneurs as a word, because he needed a way to differentiate people who did stuff that had never been done before. Like the Wright Brothers building the first airplane. Some people who do what has already been figured out, like, starting an airline. Like an airline has been done before you want to start an airline, guess what? There are other airlines. You can copy what they did, you're probably going to do a lot of the same stuff that they did. So what I needed was a word to differentiate entrepreneurs in the historical sense as these weirdos who did something that's never been done, because it turns out that almost everything you do in your life is a copy of something. Like I'm sitting in a room right now. Everything in this room is an applicant around the room; from the walls to the floor, to me- every physical thing in this room, a copy of something else. Like the books on the shelf are pretty much copies of other books like the book was not a new invention. Like the chair I'm sitting in. Somebody else had a chair idea before the guy who made this chair that I'm sitting in. Copying is such a powerful thing. You can basically do it your entire life. But if you end up in a world where you can't copy, and I would argue that we're kind of going into that world right now because like the coronavirus is terrifying- it's upending the economy- you will be in a situation that entrepreneurs are in every day, which is they don't get to copy. And when you're not able to copy a different set of rules apply.

Adam: What are those rules? And how can we, I mean, I'm an entrepreneur, and a lot of our listeners are entrepreneurs, but a lot of our listeners aren't. What are those rules and how can we adapt?

Jim: So the first is don't don't innovate if you don't have to, okay? Like if there was a solution, you could copy, then do that. I mean, I don't want to sit there and say, go out and invent and be original. No, like most original things fail. But if you're in a situation where you cannot find a solution to copy, then you have to become an entrepreneur and the skills of the entrepreneur are basically you work extremely fast, with a high level of humility, because a lot of the things you do will not work. And you have to realize that you are in a world without expertise. And what I mean by this is, there are no experts of the new. If you're doing something that has never been done in human history, you will be the first person to successfully do it, if you're successful, or you'll be a failure, but you don't get the luxury of finding some expert and copying what they do. And by the way, I love experts. I wish everybody in my life was an expert at what they did because that means they would have a high degree of success whereas entrepreneurs have a high degree of failure.

Adam: Can you talk a little bit more about the Square story and the Square success story and why was it a success and not a failure? And why it was such a smashing success? What made Square work?

Jim: My analysis of Square was that it did something that has been done throughout history, which is it built this innovation stack.

Adam: So what's an innovation stack?

Jim: An innovation stack, is a series of inventions that all interrelate and it's caused by the necessity to innovate by making a choice to serve a market that is previously non-existent.

Adam: So what did Square do?

Jim: Square tried to give credit card processing to, you know, artists like me, guys who, you know, didn't have commercial bank accounts, we didn't have credit scores. Some of us didn't have, you know, addresses because we lived at home. We certainly didn't have business, you know, business relationships with a bank, we didn't have the time to read 42 pages of, you know, small print, we didn't want to get locked into three year contracts, like there was all this stuff that Square threw out in order to solve a problem for this little merchant who, at the time was not even in the credit card world. So you start by selecting a new market. And then what you realize is that the only tools you have are tools for the old market. So in Square’s case, if we wanted to just shove credit card processing through the same pipes that everybody else was using, and make a completely undifferentiated thing to look like every other crappy credit card company, we could have done that. But those were exactly the things that were excluding our customers. So when I started looking at the customers, the banking system was close to us. What I mean by that, I mean, like when Square started during the first week in business, I discovered 1,717 laws, rules and regulations that we were violating with every single transaction that we were doing. So we got the product working, and we were totally on compliance with banking regs and the credit card regulations. And I mean, FAK and KYC. Oh, my God, it was a ton of things that were preventing Square from working. So we had to eventually fix all that stuff. It took a year and a half.

Adam: One of the things that I find particularly interesting about your journey, both as an entrepreneur and as a thought leader is that so much of your success has come in building a business in an extremely difficult economic time. Square launched in 2009. The country and the economy was in shambles after the market crash. Obviously we're in a moment now of uncertainty and disarray. People are drawing parallels and I thought you could provide a really valuable perspective to listeners on what are some of the lessons that we can take away from your ability to innovate during that period that can be applied now.

Jim: So it was funny, I remember talking to Jack before we started Square and saying, “Hey, man, you know, we're in the middle of the recession.” I said, “I personally love it.” Because in a recession, everything's in chaos, which I mean, it's not a good situation. But it is a relatively better situation to be a startup in a chaotic environment, where you're small and nimble than an established company that has all these legacy systems that may no longer be relevant. So Jack agreed with me. We thought that the environment to launch a massive company was perfect. I would not wish this situation on anybody. Like, what we're going through right now. I'm a director of the Fed now and I get to see economic activity, both through Square through the Federal Reserve. And we are in deep, deep trouble. Right now, I don't want to make light of this. I'm not one of these guys who says, “Oh, it's no big deal.” No people, first of all, a lot of people are going to die. Secondly, We're shutting down the world economy, like, this is dire stuff. But that environment tends to create massive chaos. And chaos is where entrepreneurs live. So if you learn the skills of entrepreneurship, the old school definition of entrepreneurship, you will be at a relative advantage and visa v. And if you take the world that is coming, because I'm not entirely sure that the world's gonna go back to the way it was, and if it doesn't, that is going to cause massive disruption and they will create some new Square loss companies who rise up and serve our needs, and they will all have innovation stacks.

Adam: Jim, that's a tremendous perspective. And what I thought was really interesting about what you said was the importance of really understanding the core principles of excelling as an entrepreneur and learning what entrepreneurs really need to do to successfully build businesses. Can you maybe list a couple of those to listeners who haven't been as successful as you have been in building businesses, that don't have MBAs? What are some things that you think listeners should either understand or take the time to go and learn right now?

Jim: I do want to answer your question. But I just want to preface this by not sort of sugarcoating this stuff and say, “Oh, here's a checklist, do these three things and you'll have a $20 billion company.” And then there is no map. By definition, there is no map to the unknown. Okay, you're going to do something that hasn't been done before. I can't give you a roadmap to that. Okay, so what could you have? The two things I think are critical are humility, mixed with audacity. What I mean by that, humility, meaning, you better admit that you don't know. Because if you think you know, then the only way you could have that knowledge and be correct is if you're doing something that's already been done before, in which case, you're a business person, go start a business, make a bunch of money. By the way, if you want to make a bunch of money, don't be an entrepreneur, be a business person. Go find a business or, like start a software business, they make a ton of money. Like I got a venture company that is nothing but SAS businesses, they make a ton of money. It's really easy. There's a formula, turn the crank, you'll be worth 10 or $50 million. Okay? Don't worry, but don't delude yourself into thinking that you're inventing something new. You're just doing a process that has been well proven, which is why we will invest with you if you do that process. But if you want to be an entrepreneur, if you want to do something that has never been done before, you better be humble, because you will not know. And understanding that puts you in a different set of it puts you in a different mental state. The second thing you got to do is have the will to continue. And this, by the way, is why I wrote the book. So the book was written for a particular woman that I know. And she is incredibly competent. She's great at everything she does, but she's one of these people that when she comes up against a problem that does not have a pre existing solution. She says, “Well, I'm not qualified to do that.” And, and then she doesn't do it. Now. Here's my argument. And this is why I spent 200 some pages on this. She's right, she is not qualified. But by definition, if it's a new problem, nobody is qualified. There is no expert the first time so like today if I want to go out and fly a plane, call the FAA, get a medical, take 40 hours of training, learn how to do spins and solo and pass a written exam and get a medical and do all that stuff, then I'm qualified, assuming I pass the check ride to become a pilot. I can become qualified to fly a plane today. But what about the Wright brothers? You know, Orville gets into the plane. He's not qualified to be a pilot. Nobody on the planet is qualified to be a pilot, because they don't even know if the damn plane is gonna fly. Right? So by definition, those guys weren't qualified. They were in fact, the first pilots in the world. But my friend, and it's heartbreaking to watch her disqualify herself, because her whole life she's been taught that the only thing she should do is stuff that she's qualified and prepared for. And I think the world is losing her creativity and a million other people's creativity because they're saying, “Oh, I'm not qualified to do that.” And my answer to them is, “Yeah, buddy, you're not qualified. But there are ways to do it anyway.” And if you want to know those ways, that's what we talked about in the innovation stack.

Adam: I love it. Jim, can you talk a little bit more about your relationship with Jack Dorsey? What it was like working together, what you learned working with Jack, and what advice you have for other entrepreneurs who are looking for business partners and working with business partners on what to look for and how to form a successful partnership?

Jim: Well, I would say be very open minded about the people you work with. Okay, so my business relationship with Jack started when he was 15 years old. So we had a computer software company at the time. We were publishing software and doing development work. And Jack joined the team and pulled an all nighter with us on his first day at the office, got himself in a lot of trouble with his mom. You know, sent him home at 5am. And that didn't go over well with Marsha. And Jack was competent, because he's a good, competent guy, even at 15 years old. He was very competent. I called him Jack the Genius sort of as a joke, but it was, you know, sort of a half joke because he really was really bright. But I mean, he was a 15 year old, you can imagine that he was not as competent as he is today. So, the critical thing there was I didn't look at him as a 15 year old. I looked at him as a guy who was actually good at doing stuff. So I kept giving him more and more stuff to do. And Jack kept doing it well. And by the end of his second year with us, he was managing a team of 30 year olds. And that was really awkward, because, you know, I'd hire these people to work on Jack's team. And, of course, you know, I wouldn't introduce them to Jack immediately. I would sort of keep him in the back room. So, you kind of want to savor this moment, right? Where you're, you're about to meet your new boss. And by the way, he's 15. I guess it was 16 at the time, you know, so one guy raised his hand and asked me what his job title was. And I was like, “Oh, your, your job title is assistant to the summer intern.” Because Jack was, you know, going to school, so it was all working really during the summer. But, you know, I guess my message here is, look, be open minded to what talent looks like. So I've got a nonprofit called Launch Code that trains a tremendous number of programmers, so we teach people to become programmers for free. And because our program is free, like it's totally free, a lot of the people who show up don't look like your typical programmers. A lot of them are older, or, you know, they're a different race or gender than you might stereotypically expect. But we don't look at any of that. We don't. We're completely blind. It's all about the talent. So, yeah, you got a 15 year old manager. So what? Yeah, you got a, you know, 50 year old JavaScript programmer. So what? So many times we look at the package, not the contents of the pack, and I'm sick of that. And so the reason I have a good relationship with Jack Dorsey, I mean, to this day, is because of the way we worked together when he was 15 years old, and, you know, now he's not, but I mean, I still kind of treat him the same. I do.. But I think the interesting question is after Jack was kicked out of Twitter he was the one that asked me to start a new company. You know, so there was something about that relationship that he found value in. And I mean, you'd have to ask him what the, you know, what his take on it was, but like, I believe that part of it was just simply that we had a professional relationship, like we worked together from, you know, 15, 16 and a little bit, you know, when he was 17, but, you know, then we had like this 10 year, downtime when, you know, he was basically off doing other stuff, and I was doing other stuff. I didn't see him too much. So, I guess I'd say something trite, which is basically don't be biased by what you see. You know? Don't think that the kid can't handle it, or the person who doesn't look like the stereotype can't handle it, which is great advice. Yeah, it's kind of trite, but people should push for that. I think it's true. It's been said a lot, but I don't think people live it as much. In fact, I can agree because I try to place people who, you know, don't look like normal programmers.

Adam: I agree with you. And I think that one of the things that I've learned in my own business is the importance of overlooking pedigree. You know, we've hired people from the best schools in the country, who have been awful. And we've hired people from schools that I've never heard of. And I've heard of most schools, because I love college sports. And these are schools that are never even, you know, in the NIT tournament, let alone the NCAA Tournament. And they've been great for us. So a big lesson for me is very similar to the lesson that you've expressed to listeners, which is to look for things that don't necessarily show up at the top of what people would otherwise look for. Jim, one of the things that I found really interesting in your narrative, and you talked about this in the beginning of the interview, And one of the reasons why you wrote the book was the decision to take on Amazon. A lot of entrepreneurs are faced with that call, and ultimately make the call of collaborating with Amazon rather than competing with Amazon. I'm sure that's something that you as an investor and advisor are often asked about. What are your thoughts for listeners, in terms of how they should think about Amazon? Should you take on Amazon? Should you collaborate with Amazon? Should you do a little bit of both? What are the circumstances and frameworks that we should think about approaching that question?

Jim: Well, I guess it depends. I mean, like, it wasn't like Amazon offered us a choice. You know, we had a product, they copied our product. We had a price, they undercut our price. They had the Amazon brand. We were in a sort of tiny little startup that very few people have heard of. So, I mean, would I've chosen to do that? Absolutely not. Do I wish they hadn't attacked us? Well, I mean, it kind of worked out for Square and ultimately, Amazon was really cool about, you know, sending our readers to all their former customers when they quit, which I thought was cool about him. But look, if you have a commodity product, and Amazon decides to get into your business, you're probably going to die. And I know this, because I interviewed all of the companies, I could find that Amazon had done that too, because look, I wrote this book. And I'm a scientist by training so I had to validate my theories. I got a bunch of theories in the book. And I was like, well, Is this right? Well, how do you validate? When you talk to people who've actually been there and say, “Well, here's my theory,” and you talk to somebody who's actually lived through it and yet you get them to say yes or no. But I did a bunch of checking. So one of the checks that I did was, I found the founders of all these companies that Amazon had killed. I couldn't find any founders of companies that Amazon that had survived and honestly, there were none of them. But I found a bunch of companies that had either been wiped out or had become purchased by Amazon. And here's the funny thing. And this is actually in the book as a footnote, none of them would go on the record with me. And some of these guys are multimillionaires, super successful, head of major corporations now. They still are so afraid of Amazon, that they would not let me use their name. And I have multiple examples of these people. This was not just one or two, this is a lot. So if Amazon is going to attack you, good luck. If you happen to have an innovation stack, Amazon will probably not win. And I prove why. There's some math in the book, but it's really terrifying. And if that happens, I say sorry. I really feel bad for you because based on what's happened to every other company that I've ever checked, you’re toast.

Adam: There was a really interesting story and I heard you have a talk about it, that you were preparing with Jack Dorsey for a meeting with Steve Jobs. Can you share with listeners, what was the lesson that you learned from that little story?

Jim: So the story was we’d just built the Square concept and we were terrified because the idea was to plug the Square Reader into the headset jack, as opposed to the dock connector. So Apple requires all peripherals to be connected through the dock connector, which was a sort of large clunky thing. And it was going to make our product really unusable, expensive, and terrible and it would have had all sorts of terrible things. So we said screw it and we essentially violated Apple's device by going through the headset jack. And it was a thing that we thought very well could get us kicked off the store basically kicked off the Apple platform which would have been the death of the company. So our solution to this was to pitch to Steve Jobs and show how cool everything was and have Steve, protect you because, like, if Steve likes you, you're protected at Apple. That used to be the case. So the problem was Steve was a hardware zealot. So he's a guy who, like, if an object isn't beautiful, Steve won't touch it. There's a guy who'd like didn't buy furniture for his house because he couldn't find anything that was worthy. Right? And, and when Bill Gates handed him a Zune, like the microphones, Zune, Gates refused to touch it. It was so ugly, like, and so I'm the hardware guy and I've got to make a piece of hardware to go in for Steve Jobs. So I'm terrified. So I immediately had to go to the Apple Store to copy designs that I know Steve likes, I was like, okay, my stuff has to look like it came out of the Apple Store. Otherwise, Steve will like throw it at Jack's face, which he was also famous for doing like if it was ugly, throw it. So, I saw this aluminum, like all the macintoshes were built of brushed aluminum, and I was like, oh, cool. Steve likes aluminum. So I got a bunch of aluminum. And I milled the very first Square Reader. We built it in an aluminum case. And it was a disaster because aluminum is electrically conductive. And so when you touch the thing, it would pick up your heartbeat, and just totally trashed the signal. So it didn't work. Like unless you couldn't touch it. We discovered this in a panic because like, don't touch the reader. When I swipe a card and Jack touches the reader. It's just, this is how he holds the device. So every time I used to work, and every time jack used it didn't work. And like we were in a panic, we couldn't figure out what the hell's going on. But eventually we figured it out. Anyway, the lesson for that- there are a couple lessons from that- is that you need to control the means of your own production. In other words, if I had been subcontracting out all this manufacturing to China, or to some, you know, third party that I didn't control, it would have taken us a month to correct that mistake. I fixed it the next day because I physically made all the devices myself. So I was like, oh, it's the aluminum. And I went out and got a piece of actually leftover countertop material for my kitchen counter. And that's what I made the other square devices out of. I mean, it's just stuff like that. Like, sure, control everything you can about your product. And then be fast, fast, fast, fast, man. So if you make a mistake, as stupid as the one that I made, you can correct it the next day.

Adam: Jim, any final tips or thoughts that you want to share with listeners on how they can become as successful as possible, personally and professionally?

Jim: Well, so it's gonna sound funny, but it depends on your definition of success. Like if you just want to make a bunch of money, and have a lot of sort of street cred don't be an entrepreneur. My advice is, be a business person. Do what somebody else has already done, let somebody else take all the arrows and figure it out. And then be willing to live with a bunch of competitors the rest of your life, but you'll make money. Like you can still have a bunch of competition and be successful. So like, if that's your goal, that's probably the best path. If however- and I probably just lost 80% of your list. Okay, so if you're still listening to Adam, like if you didn't just like, turn off the pod. For those who are still listening, if you want to be an entrepreneur, if you want to do something that has never been done before, the risks and rewards are much higher. And then that is not proportionally like the risk maybe 100 times and the reward maybe 10,000. But it is really a much more high stakes game. But, and here's the good news; the people who typically win these games are not prodigies, they're not. They're not bold, adventurous, brilliant, omniscient, superhuman folks, even though we tend to help tell hero stories about them in hindsight, these are typically people who, as they're going through it, as they're building their innovation stacks, look like you and me. And we tend to get wrapped up in these damn hero stories. Because, look, everyone loves the hero story. And that's how Hollywood tells it. They say, you know, some of these people after they become heroes think that, well, they were geniuses, you know, maybe not. So, recognize that. If you choose to be an entrepreneur, or I guess this is more relevant for today's situation. If the Hand of Fate throws you into being an entrepreneur, like it did with the founder of IKEA, like it did with Southwest Airlines, like it did with the Bank of Italy, which, by the way, biggest bank of the world and started right after the San Francisco earthquake in San Francisco, San Francisco Bank, and then the earthquake levels the entire city, the death and destruction that was happening in San Francisco at, you know, 5:12AM in April of 1906, was an order of magnitude worse than anything we're going through right now. And that was the environment that spawned the biggest banking success on the planet. Brought to you by a guy who was a produce vendor. He sold leather. Okay, that was his expertise. So it is something that normal people can do. And by normal, I mean, everybody.

Adam: Jim, thank you for the tremendous advice and thank you for joining us.

Jim: Adam, thank you so much. This is fun, and good luck to you, man. This is a crazy time.

Adam: Thanks a lot. Really appreciate it.