The Bregman Leadership Podcast
Episode 196

Jim McKelvey

The Innovation Stack

Special Note: this episode was recorded before the COVID-19 pandemic hit the United States.

How do you solve a problem no one has thought about before? Jim McKelvey, author of The Innovation Stack, explores the idea of serial invention and innovation with his life experience. In this special episode, Jim walks us through his journey from writing textbooks as a college freshman to becoming a glass blower to co-founding Square—a company that allows small businesses and entrepreneurs to take credit cards affordably and easily. Discover what Square did when Amazon started catering to the same market, why innovation isn’t easily copied, and why you shouldn’t always disqualify yourself—especially if you’re facing an entirely new problem.

About

Get the book, The Innovation Stack, from Amazon here:

Learn more

Website: JimMcKelvey.com
Bio: James McKelvey is a serial entrepreneur, inventor, philanthropist and artist. He is the cofounder of Square, was chairman of its board until 2010, and still serves on the Board of Directors. In 2011, his iconic card reader design was displayed at the Museum of Modern Art. In 2016, McKelvey founded Invisibly, an ambitious project to rewire the economics of online content. In 2017, he was appointed as an Independent Director of the St. Louis Federal Reserve.

Video

Transcript

This transcript is unedited.

Peter:

With us today is Jim McKelvey. He is the co founder of square, which if you’ve ever had your credit card process through a little white square that’s connected to the audio input of an iPhone that’s because of Jim. He is the, also the author of the book, the innovation stack, building an unbeatable business, one crazy idea at a time. It is a terrific book and it is very funny. So like if you want to read a business book that has some really good story in it, that also has some really great takeaway in it, and that is sort of a joy to read because it’s just kind of funny. You know, you should pick up the innovation stack. So I’m really happy to have a gym with us. Jim, welcome to the Bregman leadership podcast.

Jim:

Thank you Peter. And thank you for reading the book. It’s brand new and apparently not everybody who interviews you actually for people who interview me, who have not read it. And I can tell because you know, there’s some irreverent, well you’ve, you read it, there’s some stuff in there. This one dirty joke that I slipped in and the publisher didn’t catch and I, and then I told them later and then they said, well, where is it? And I was like, why can’t I tell you? I’m going to tell you, like if you don’t have enough of a sense of humor to get the dirtiest thing I’ve ever written, I will let it. But like if you haven’t read it right, I can tell, you know, that’s, I guess a challenge to me is it’s in there that’s in there.

Peter:

I’m very much interested in you as a person, as a leader and your discovery of the ideas as well. And the story of square, which I think is really interesting. So let’s start with you as a wee child. You grew up, born and raised in st Louis, Missouri.

Jim:

Um you know, mom was from New York. My dad was a professor. I was basically raised in academia and my father, you know, brought me to campus when I was a little kid. And a very geeky lots of math, lots of you know, Dungeons and dragons.

Peter:

My understanding is your first, I can’t remember, this is your first business venture, but basically your first main venture was writing a textbook.

Jim:

I wrote a textbook when I was a freshman in college cause you were pissed off cause I was pissed off. The professor forced the class to buy this text that he had written that was terrible. And I was so upset having to read this thing and buy this thing cause he, you know, the, he got paid for making us buy book and the book was terrible. And a lot of the programming, programming examples didn’t work. And I was so frustrated that I said to my roommate, I said, I can write a better book than this. And he said, well, why don’t you, and I was like, all right, I will. So yeah, I mean, you know how you do stuff, right? So I started writing a textbook and I spent the summer of my freshman year writing a computer science text, which was funny because I had never played with computers as a kid. I was not a computer science major. I was an economics major and I had no qualifications for this, like zero.

Peter:

So let me ask you a question because you write about this in your sort of chapter around entrepreneurship and, and like, there’s a way in which, you know, anybody can learn to be an entrepreneur, but I wonder about whether you could actually develop that or whether like you’re born with it because it like how many people get frustrated with a textbook and then just decide to rewrite it in a subject they know nothing about.

Jim:

So, I don’t know. I mean, it seemed natural for me. It’s probably not normal for everybody, but here’s my point. And this is the thing that I sort of discovered when I was researching what we’re going to talk about today. And that is I don’t think entrepreneurs, real entrepreneurs, as we’ll get into the definition have any particular skillset, they may be just have a little less discomfort with doing stuff that hasn’t been done before, right? So, I mean, look, I was clearly not qualified to write a textbook, right? But I wrote the damn thing. And low and behold, it was a huge success because it turns out that if you’re a freshman idiot writing for other freshman, freshman idiots, you write at a level that just works. And the professors will way up here. They understand all this theory that we didn’t understand, but I understood what the student was feeling, right?

Jim:

And so I connected with all these students and the thing became a real hit. And then and then the publisher asked for a second book, right? And that one became a bestseller. And it was, it was, it was because of my ignorance. It was because the stuff that was confusing me, I just assumed was confusing everybody else. And I explained it.

Peter:

So let me ask you a question. Why not at that point, as an entrepreneur, build a publishing house that recreates every textbook from the vantage point of the student, because we know now that this is a successful product.

Jim:

Cause I had midterms, you know, I was playing, I had to finish school and I was doing this. I took the money, like, like literally I took the money from the book. I bought a Porsche you know resold the car. I was like, I was importing automobiles from, from Europe. I was just goofing around. Right? and it wasn’t, so it’s excruciating to write a textbook. It was kind of boring and I wasn’t that interested in computers. Right. So but the funny thing about that experience was it taught me how little formal qualification you need to actually have something that is commercially successful, right? Because, you know, like we sold a bunch of books in Australia, the Aussies weren’t, you know, looking up academic credentials. Right. And if the book’s good, it’s good. Right. Right. And they were probably also looking at sales numbers and going, well, it’s good. And it’s selling and people using a university. Well, yeah, yeah, they’ll snowball. Starts rolling.

Peter:

And then, you know, you got all this street cred, so continue to walk us through your entrepreneurial career. What was next for you?

Jim:

So graduated with degrees in computer science and economics went to work briefly for IBM as a contractor. But during that time I was also working at a startup, right. The startup was run by a crook. I quit and then I needed an income and I decided I would blow glass. So looks to the naked eye like a left turn. It was a, it was a sharp veering left because what happened one day I, I was working with this guy, he was a crook and I said, I quit. And then I had no way to pay the rent in that moment.

Peter:

Where you, what were you feel like? Were you scared?

Jim:

It was just, Oh, like I’d watched him with other people and I saw how he was dealing with all these people. And then this little light went on. I said, wait a second, he’s going to do that same stuff to me. Right. Like when it’s my turn. And as soon as I said that I just quit. I was like, I’m out. Right. But then I woke up the next morning, I had no way to make a living. Right. and did that occur to you when you quit or no, no. No. It was like, I’m out. Right. So I’m out and then I’m starting to see a trend in entrepreneurial thinking or, or lack thereof. Not necessarily thinking through the next three steps. No, no, no, no. So, so I became a glassblower, not because I was a great artist, but because it was the only skill that I had that I thought could make money quickly. Right. So I went into the studio, made a bunch of work and started trying to sell it and it’s, it wasn’t sell cause my work was terrible.

Jim:

But it’s amazing how quickly you can learn a skill, right, if you have to do that skill for a living. So I got really serious about art really fast and within a month I was selling and then glasses really this wonderful material getting competent in that skill. But it’s the selling part too. Like there’s lots of people who blow glass, I’m sure don’t sell a piece. Yeah. So I was unconstrained by artistic integrity, so all these other people were trying to be artists. I was like, Oh, pink and blue matches your couch. Fine. I will make it, I don’t care like lady, give me a sample your curtains and I will so already super, I mean, I don’t want to like overdo this highly customer oriented, very much like, like it’s like I will, you want it, I’ll make it absolutely right. Yeah. Right.

Jim:

And to this day, I mean literally this week I made a commission that I didn’t really want to make for somebody who wanted a piece. And I just, I just had to make it. I was like, I can’t say no.

Peter:

So you’re still doing it. You still make glass and yet it’s not your main gig.

Jim:

No, I don’t do it for a living anymore.

Peter:

Right. Yeah. Right. And why did you, why did you stop doing it for a living?

Jim:

So I stopped for a while after my mother died very suddenly and I was really depressed and very sad and I realized that I was mediocre at everything that I did. I saw I had this other company that made storage cabinets for compact discs. I was, I was moonlighting for IBM blowing glass and I was like a mediocre IBM employee and I was a mediocre artist and I was, you know, a mediocre business person. And I thought the solution is to focus cause I’d heard that good people focus like, and so I was like, okay, I’m going to quit everything I’m doing half-ass and I’m going to focus, I’m going to do one thing. And so I started this company called mirror to build software and started with a friend of mine. And that was all I did for five years. I made no money and I was starving your focus though. I was focused and failing. It was a disaster. So my friend quit after about two years. So it was like me by myself, right? Like just solo. And then we slowly built the company back. And then actually Jack Dorsey was one of our interns. [inaudible] Jack Jack came in in the middle of this fire drill week where we’d screwed something up and had to be cleared who worked on on square, who was also a cofounder of Twitter.

Jim:

So I met Jack or miraculously, I met Jack’s mother who sold us chocolate covered espresso beans, which was how we stayed awake before Ridgeland was widely available. And we ended up hiring Jack as a summer intern. He was awesome. He became, you know, part of the crew and he worked with us a couple of summers and we stayed in touch ever since. And then, you know, kept in touch with Jack and Jack started Twitter and then they kicked him out of Twitter and then he came back to st Louis and we hooked up, this was about 10 years ago, right? And he said why don’t you started a company with me? And I was like, all right, let’s do something. So that’s how square started, that’s the thing.

Peter:

I thought it was your suggestion. I forgot it was his suggestion to start the company.

Jim:

It was my idea of what the company should do.

Peter:

Right. Okay, great. So now let’s start, because let’s, let’s go along this path of square and the innovation stack and like how you got to that idea.

Jim:

So you’re like, okay, let’s start a company. Great. Doing what, what do you want to do? Yeah, like the Peter, what do you want to do? And you’re like, I don’t know Jim, what do you want to do? So Jack and I did this back and forth and so I was like, well let’s go out. And so we basically locked ourselves in a room for a week and you know, brainstorm ideas. And we knew we wanted to do something with mobile phones. Right. and we knew we didn’t want to do anything with social networking. So Jack was like nothing that was Twitter. Like, and I was like, cool, cause I don’t, you know, get all that stuff necessarily. And so we were casting about for an idea, right? And I went back so, and we hired our first employee cause we needed a guy to code the iPhone client of whatever we were going to do. We knew there was going to be some iPhone component. So we’d hired our first employee, he was starting and we were kicking around a couple of ideas and I had some ideas and Jack had some ideas and we really couldn’t settle. We picked one of Jack’s ideas, which was this journaling app that we never really fleshed out entirely. And I went back to st Louis to sort of get my affairs in order and move out to California. Right. And when I was out there, I was trying, I came into my studio, I got a order from a lady in Panama who wanted to buy a glass bathroom faucet, like this ridiculous piece of glass with orange and swirling.

Jim:

And it was hideous. I had been sitting on the shelf for two years and I was like, you already had, Oh, I had it made. It was just sitting there. You don’t just blow off the dust and shove it in the box. And really expensive too. Right. and I lost a sale cause I couldn’t take an Amex card. Right. And I was so pissed off because, because your glass blowing studio is small and you don’t, you know, like you’re not the size of business a company that can be accepting credit cards at that point. So we took MasterCard and visa. So I tried to steer her over to MasterCard or visa and she was like, I don’t have those. My husband has the visa card. And I was like, you said, Oh, let me, I was like, Oh, let me get this right.

Jim:

He doesn’t know you’re about to spend 3000 bucks on this piece of glass. And he, yeah. And she was like, yeah, you know, so lost the sale because I couldn’t take an American express card. And that led me to look at my iPhone in my hand. And I thought, this device just failed me and my attitude to the iPhone or any piece of technologies, this thing should do whatever I want. Right. Like it turns into a movie camera right now, it turns into a Geiger counter. If you’re in, you know, some places like the, the iPhone can morph into anything. I’m turning into a TV or a book or you know, a map. Right. And it wouldn’t turn into a credit card machine, which is insane. Yeah. So, so already we’ve got our first problem, right? Yeah. Which is like, you know, you’re, you, you, you need to use, you want to be able to use your iPhone in order to very simply and easily process credit card.

Peter:

Yup. Great. So you go back to Jack, go back to Jack. Show him the problem.

Jim:

Uh actually I called him that afternoon cause he was in California and I described the problem. He said, well that’s interesting. We should talk about it. So we talked about it for about a week and I convinced him that this is what we should do. Right. And it was a great thing because we already had our first client, which was me, right. And more than me, we had this friend of mine who I always think of when I build stuff. Bob, I have a friend who, you know, is a very interesting guy.

Peter:

This is an imaginary friend or?

Jim:

No, no, no, he’s, he’s an actual friend. Some of those too. But no, Bob’s real. But he’s he’s a really interesting guy and he’s had some knocks in life that have prevented him from, you know, sort of banking the way normal people bank. Right. And there’s no way Bob could accept credit cards. So there’s no, and because I knew it was a glassblower, he was also a glassblower and great class blower and he was not able to sell his work cause he couldn’t get paid at all. Right. And believe me, Peter, if you, if you sell something that nobody needs, you gotta make it easy. Yeah, seriously. Yeah. These are impulse things. That’s beautiful. Are you going to call me on Tuesday and remember? No. Like I need to get paid now. Right. So we built this thing with Bob in mind or at least that was great. My idea.

Peter:

So, and, and, and like any entrepreneur class that they, that you would have, and it’s questionable as to whether you should have entrepreneur classes, but any entrepreneur class you should have would say find a problem that you’re facing that you don’t have a solution for.

Jim:

Build a solution around it. I think so. I mean, I think, I think the formula, if you, if you need a formula, here’s a formula, a finer problem that pisses you off enough to motivate you. Right? because money and fame and all the other stuff, all the sort of secondary effects are very weak. Right? so Jim, this sounds super simple. You just build a device. How hard could it be because there’s all these devices, processing credit cards. It seems like a simple solution. I’m sure if someone else had developed it beforehand, I thought so too. I thought I could just go out and buy the components and put this thing together and we’d be out the door in a couple of weeks, not the case. And there was nothing. Right. And we kept looking for something that would serve the small merchant. And what we eventually discovered was that the rules had been basically designed to prevent anybody who sold less than a hundred thousand dollars a year from accepting credit cards.

Jim:

Right. And if you didn’t sell $100,000 for the year that you could technically process, but it just was disastrous. Right. And all of the things that we were trying to do were outside of the world that had been already served by the credit card world. So we ended up an unbeknownst to us sort of forging this new path for credit card acceptance on behalf of all these tiny little merchants. Right. And what led me to you know, sort of discover the innovation stack in hindsight was that this process of invention and invention and invention invention creates this massive interlocking innovation that it’s really hard to copy, right? Which is, which, you know, go to the punchline, which is amazing because Amazon tried and failed. Amazon tried.

Peter:

So the worst thing that can happen to any business is Amazon enters your market. Hold on. We’re talking with Jim McKelvey, we’re talking about his book, the innovation stack. He’s one of the cofounders of square. And, and, and I, I, I just love a cliffhanger right now, which is like Amazon, you know, tried to, to take over the business and failed,utried to replicate the business and failed. So we’re going to get there before we get there. Let’s talk about the, the kinds of problems because I found this a very interesting part of the book, the kinds of problems you started to encounter. So it’s like, okay so you know, what do we need to do? We need to build a a credit card processing machine that connects with the iPhone. Seems simple enough but beginning that like focusing on that problem and beginning to solve that problem buys you a couple of other problems. Oh God. Bring us through that and then we’ll, we’ll…

Jim:

So there were dozens, I won’t bore you with all of them but the first thing is how do you read the credit card? So a second day of the company, Jack and I have this fight about how we’re going to read the credit card and Jack’s like I don’t want to build any hardware, let’s use the camera to take a photo. And I was like well that’s useless because a photo doesn’t prove you have the card cause I can take a photo of your card and mail it to India. Does they have, does that mean the card’s in India making purchases? Like, no cause the photos too easy to transport. So I said, well, we got to read the magstripe because that’s what the industry does. And Jack was like, well now we need separate hardware. You can’t build that. And I was like, yes we can. And he’s like, no you can’t. And so we had this little fight. And I thought, well, I better go build the hardware before Jack and get his OCR working. So I flew back to st Louis and put a little team together to build the the hardware. Right. And we ended up with a working prototype a couple of weeks later….

Jim:

Okay, great. So you build the prototype. It works most of the time it works most of the time. And then we get into the situation where we start looking at the rest of the credit card system, which is, you know, connecting to the banks and how you do sign up and how your merchant services agreements cause they’re, they’re, they’re ways to do this. And we realized literally on the first day that we were in violation of 17 different laws, regulations and rules. Like we were violating MasterCard’s op-ed operating regulations. We provided relating visas. We were violating a bunch of KYC and OFAC and we were a bunch of like banking laws. I’d be like, just like it was, we stopped counting after 17, it could have been more than seventeen, but I, I was like tallying them up on this sheet of paper and I went and got to 17 I was like, I now know why nobody’s ever tried this.

Peter:

And to me like you’re, if I’m remembering correctly, your response to that was like both brilliant and surprising, which was you just ignored it and kept going.

Jim:

Yeah, plow ahead. Like, like, you know, you would think at a point at which you realize you’re violating a whole bunch of laws. It’s like, okay, we’re going to have to solve this and we’re going to have to deal with legislators that we’re going to have to find ways around it. And you just sorta kept going. Yeah, there was one. So the laws were reasonable. Okay. And we thought, well, at some point we could get to get complying with, you know, like KYC, know your customer. That’s an important thing. We figured out at some point we’d be able to do that. Right. You know and, and a lot of the, you know, sort of Washington based laws, we figured we can comply with the, the two things that we were absolutely dead dead. We had to change or MasterCard and visa had specific rules against doing exactly what we were doing, which was card present aggregation, which is we were collecting on behalf of a bunch of little merchants charges that we would then submit to the network. Right. So it was our balance sheet, not their balance sheets. And it was our credit, not their credit, but acting as an intermediary was specifically forbidden.

Jim:

Like it was like they, they had imagined a business like ours and said, we don’t want it. Right. So in order to get MasterCard and visa to change, we had to basically convince these massive organizations that they should change. So fast forward to a meeting that you’re in with MasterCard, terrifying, and you’re presenting this but not having solved for the fact that you’ve, you’re actually violating their laws. So it was about a year into the company. We’ve got everything working with the hardware, built a, we’ve got the software working, everything’s solving 50 other problems. All these other problems are solved and it’s moving money, right in direct violation of what MasterCard is doing. And we get this meeting with ed McLaughlin and his team in purchase New York and Jack and I fly up there and we go into the room. Now you got to remember by this time we demo this thing probably a hundred times Jack and I had our game down.

Jim:

And Jack’s a very good [inaudiable] he never interrupts and I never interrupt. So, so there’s that moment when there’s just dead silence in the room and Jack and I will not file it. Violate that silence. And so we do this demo for the head of MasterCard using his MasterCard. I take his own MasterCard, take it, swipe it, and he says, how much money did you take from a dollar? Because my understanding is depending on whether you like the person or not, Oh, you’re doing demos more or less money off of their credit card. In fact, if we didn’t like you, you can look back at your statement. The most we ever charged was a guy who we thought was a total tool. He paid 40 bucks to watch square demo. If you, if you were charged for a dollar, it’s the highest compliment we could pay. You know, if you’ve got your, if you’ve got your statements from 10 years ago, look ’em up and you’ll know just telling you. But we charged them a buck a buck. We used the guy from MasterCard. He was going about to save our necks. And he says, he says, ah, that’s great. Is this a, is this a fake transaction? And I said, no sir, it’s real. You’re going to see the money. Leave your account now. And he said, you realize what you’re doing is violating our operating regulations. And I said, yes sir. We know.

Peter:

What were you feeling in that moment?

Jim:

The low, lower half of my body went numb. I mean, I was like, and after I said, yes sir, we know, nobody said, Oh. And is, is, is the very business hinges on this moment. So the entire business, everything we’ve done that you’ve done so far, everything we’ve done on this moment, you know, we a year and a half of work for a dozen people. I think we’d, I think we’d been funded by the, I mean we were, we were, we were there. The whole thing worked. Right? And 20 seconds of silence and ed turns to his team and said, so I guess we have to change our operating regulations.

Jim:

You don’t feel my legs again. Yeah. I was like all blood back. It was terrifying, but look, they had to change and they should’ve changed. Like it was a good decision for MasterCard to do that. But there are many examples when the right thing is not done by these big companies. There could be some, you know?

Peter:

Right. So,utell me the concept of an innovation stack.

Jim:

So an innovation stack is this thing that I, that I discovered exists at the Genesis of new markets. Okay. So what we have to do is talk about copying and how copying is probably the most powerful force in the world. And almost everything is a copy of something else. Like, okay, like this fireplace screen. Okay, it’s a nice fireplace screen. It was not the original fireplace screen and you know, nor was this, you know, metal or these chairs or frankly you and me and were copies of our parents. You know, I see some of your relatives up there. I’m guessing, you know, nothing in this room is, is truly original, which is good because original stuff almost always doesn’t work right? Like you invent something totally new, it’s probably terrible, but sometimes a new thing works. And in that case it gets copied. Okay. That’s how the universe works. The problem with copying is that it doesn’t create new things so if you have a truly new problem you end up without the ability to copy the solution. Right. In which case you got to do invention and this is the problem that I address in the book because what I discovered was that we have this essentially word problem which is that the, there is no word in the English language to describe a business person who solves a new problem. We used to have a word like that. It was called entrepreneur, but these days entrepreneur means business person. I can be a coffee entrepreneur, I can open a coffee shop. Okay. Lots of other people have opened coffee shops. I can actually go to a convention where everybody knows how to open a coffee shop. I can have coffee consults. As a matter of fact, one of my friends is a coffee consultant. You want to open a coffee shop? I will give you a guy who you know opened blue bottle coffee. He trained the blue bottle guys to open blue bottle, right? Jim’s name is Howard learner. Howard will teach you and you will be a coffee.

Peter:

So it’s basically like a person, a franchise.

Jim:

Yeah, like of sorts of sorts. Right. If you shoot, if you can copy, you should copy, but in some cases you can’t. In some cases you’re solving a problem that has not been solved before, in which case you have to invent and you probably have to invent a lot of things.

Jim:

And the thing that I realized about innovation was that in Square’s case, we didn’t do just one or two things differently. We did about 14 things that had never been done right. And it wasn’t that we were trying to invent new stuff, it was just that we needed to, there, we kept creating more problems. We’d solve one problem and it would create two others. Right? So now we’d have two other problems to solve and we looked to see if we could copy the solution to you, those new problems. Well, if we couldn’t, now we had to invent more. So it just kept going and going and going. And eventually we ended up with 14 things that we were doing differently. But if we did all of those 14 things differently than the system worked, right, and of course we did it. No way you could have predicted that ahead of time. We didn’t even know what’s happening, right? None of this we did.

Peter:

So everything is trial and error. Like it’s not like you could, you know, in a corporate environment you create a budget and you create a, you know, some structure and then you plan out what the year looks like and what you’re doing is you’re like trying stuff and then finding six problems and solving those problems and finding 12 more.

Jim:

Amen. Amen. And so what happened and what led me to this whole thing with the innovation stack and the book and all this stuff is Amazon did the worst thing in the world. They copied our product, they undercut our price, they added the Amazon brand to it. And then they added live customer service, which we didn’t have. Right? And everyone’s like, Oh Square’s dead. Cause every time Amazon has done this to any company, it’s been like, Oh well they’re dead.

Peter:

Right. You know. Oh Zappos, well they’re part of Amazon diapers.com part Amazon name. Any company that Amazon has played this game with part of Amazon. Did they try to buy you?

Jim:

Nope. Just kill. They were like, Oh, stand on the plastic please.

Peter:

Right. You know, so you could Zappos they bought and diaper dot there. But, but they didn’t try to buy you.

Jim:

No.

Peter:

Right. Okay. They were just going to, they were like, that’s, there’s like, there was some hubris I guess there, but that was the, the idea of we’re not going to buy you is like, cause why bother to buy them? We’ll just do it ourselves. We’ll just wipe it out. We’ll just cheaper to do it. Right.

Jim:

So I’m, and I don’t know what they were thinking, but that was that. So everyone thought square was dead. We looked at what other successful companies had done to beat Amazon.

Peter:

At this point. You were, you’re still, you’re venture funded –

Jim:

Venture funded, four years old, not public, not public. Yeah. Very little resources. I mean we were doing all right, we a lot of million customers. But we were not Amazon. Right? And they were running their playbook that always worked. And we looked for other companies to guide us in how to withstand an attack for Amazon. Found none. Looked at what we could do differently and amazingly couldn’t think of anything to do differently. Like we looked at all the stuff we were doing and we’re like, well we’re doing this for the right reason and this for the right reason. We liked how we’re doing this. So just did what we were [inaudible] we basically did nothing. He said we’re just gonna, they’re gonna compete. We’re just gonna keep doing what we’re doing. We’re going to do what we’re doing cause we think we’re doing it for the right reasons.

Peter:

Was that terrifying for, you know, cause you want to do something right?

Jim:

Like okay so like you know, you can really spend a lot of time spinning your wheels on like a million things, spending a ton of money, you know. So I’m from st Louis, my city flooded in 92. I had the best hand in my life cause I was building, you know, levies all, all summer, deltoids. And I was like bagging sand again. Cause you know you’re going to, you know, nature is gonna flood your city, you fight back, you want to do something even though none of those levees held okay. You still felt better doing something. Amazon attacks, we looked at what we were doing and we didn’t do anything differently. So, and how do you like the confidence to not do anything in a situation is really like, I just want to unpack it for a second because there’s like, is it confidence?

Jim:

Is it, is it a sense of hopelessness? Like what, like what is it in that moment if you bring yourself back to that moment it’s rational thought over fear. It’s rational thought over here. So you said you, you asked that and I immediately pictured the time. So I’m a, I’m a pilot and I fly small planes and small planes are terrifying. Okay. As you get into weather, you know, Jessica goes over the weather, a little plane goes either around it or through it or up and down in it. Oh yeah. So I mean I’ve gotten into some stuff where I’m like, Oh, I’m gonna die. You know? And, and at that moment you’re terrified, but you still have to act rationally. Cause you, if you are an irrational pilot, you are dead. Right. so you’re terrified, or at least I am. But you still got to fly the plane, right? Okay. So Amazon’s attacking you. Great. What are you going to do? Right? So you go through your options, conclude that there’s nothing else different that you should do, right? You like all the things you’re doing right, so you to keep doing. So you say like, this is like scary as hell, but yeah, we’re not going to make stupid moves right now. We’re trying to manage our emotional thing differently, need to act and not act now we didn’t do a thing differently.

Peter:

Wow. So then what happened?

Jim:

We heard nothing for like a year.

Peter:

So you were running your business, your business didn’t suffer,

Jim:

Not noticeably, not noticeable growing like crazy, you know? Right. So, so, and you’re, you’re advertising, you’re continuing doing our stuff, doing, we are running square and meanwhile symmetrically Amazon is, is, you know, on the side kind of doing, trying to sell their product. Yes. Right. And a year later on Halloween night, it was Halloween…it was Halloween and Amazon announced we’re out, we quit, right? We’re, we’re going to send a square reader to all of our former customers, but we are out of this. The most amazing part of this was, it was so cool. So props to Amazon for how they, how they got out of the market. Like that was, that was so cool. Like you never, I don’t know, have you ever gotten into a fight with somebody and then afterwards you’re like, wow, really cool person. You know, I felt that way. I mean, I’ve, I was like, Oh wow, they were really cool, but, right.

Peter:

So yeah. So Amazon gave all of their customers a square reader and they gave them to you.

Jim:

They guess they, they, everyone who was already customer out gave them to you. You guys can help you out. Go to the, go to the people who are best at this. It was the coolest move I’ve ever seen. Right, right. And and so where there’s this flood of relief, right? Oh we won. Right. And then of course, cause I’m never satisfied. I was like, Oh that’s great. Why? Like why did we win? Like it doesn’t make any sense. Nobody beats Amazon. This doesn’t happen. Right. Nobody name another name you. So you’re an expert in this. I see all your books. You’re famous. You should know one other example. Can you think of any?

Peter:

No, I mean I might not know, but I cannot think of an example.

Jim:

Neither can I. And I studied the thing for three years, right? I talked to all the companies, they wiped out, I talked to their CEOs, I talked to their former employees. I got some great stories all off the record cause nobody will go on the record about what actually Amazon did. Right. I couldn’t explain it right. And so I went on the search cause I’m a, I’m a scientist by nature and I was like, I have to explain what happened like this, this can’t just be locked. Right. Right. And I couldn’t find any other examples. Right. So I’m wandering around literally with this question burning in my head. And and I, I stumbled, I was, I was in a, I was in a palace in Spain and they had funded the voyage of Christopher Columbus and they had Columbus’s letters, which he wrote these books and, and I’m looking at this letter, it’s an old dilapidated palace. It was a beat up old palace that they were, they rented it out for parties. Right. Okay. But they had this library that was, you know, the, the tour group left and I was just mesmerized. I was like, thinking about Columbus’s voyage. I was like, wait a second. Imagine Columbus is pitch deck, right? He’s like, I’m going to go sail in a direction where everybody has disappeared. Like nobody comes back if you sail, you know, straight to the West. Right. And yet that’s what I’m going to do. And if I’m wrong, you’re gonna lose all your money. And everyone on my team, including me is gonna die. Right. but give us the money away. And if you’re right, you have exclusive access to a new market.

Peter:

Yes. Yeah. All politics aside. Yeah. We’re just talking about the entrepreneurial element of trade access to India.

Jim:

That’s where they thought they were going. Right. And I thought about, I was like, Oh my God, Columbus was an entrepreneur. He was somebody who did something that had not been done before. And I was like, Oh my God, all the stuff that Columbus was dealing with were sort of like big problems. And I had like little junior versions of his problems. Right? I was like, Oh my God, there’s the parallel. And all of a sudden I realized what the solution was to answering my question of how we beat Amazon, which is history has to be full of examples of this, right? So I kept, I, I, you know, I was looking around Silicon Valley and I was looking around, you know, sort of contemporary business and, and none of the answers were there, but you look back in history and it’s just full of them. Take the start of any industry and you will see an innovation stack, right? And you will see this messy process of invention, this, this moment when you can’t copy your way to a solution where you’re very rapidly changing stuff. And then I looked back and I was like, Oh my God, that explains aviation. Like the Wright brothers. Like, like it explains frozen foods. Like, you know, like birds. I like the way they freeze vegetables at minus 40. Like, it’s amazing, right? Like the discovery of a frozen, you know, a properly frozen pea was you know, was happenstance, but, but it turns out these aren’t single inventions, right?

Jim:

They’re messy stacks of inventions. And I looked at this and I was like, Oh my God. And stacks. When you say stacks and inventions, it means problem, solution, problem, solution, problem, solution, problem, solution. Yeah. Right. All and problem solutions that you couldn’t foresee all the problems ahead of time. Correct. Because one solution creates two more problems. Yes. And because it hasn’t been done before. Right. Which is why persistence from an entrepreneurial perspective is so critical because if you’re not going to be persistent after 12 problems, you give up, you quit. Yeah.

Peter:

How do you know if you’re going to be 70 problems down going, this was a bad idea, but I’m just not going to quit. I don’t know. When is the right time?

Jim:

You don’t, I don’t know when the right time is to quit. I almost killed myself. I’ve almost killed myself in a couple of cases because I’ve literally put myself in so much danger because I don’t know when to quit. Right. And I have, I have a deficiency there these days. I surround myself with people who are like, Jim, you might not want to do that. But yeah. You, I mean, look, if, if it’s survival, right, you either survive or die, right? People don’t die in business. They’re, you know, they could wipe their savings out or, you know, there’s a lot of money for other people, you know, but the penalties usually not capital punishment. Right. you know, I don’t know, man, you get funded by taking a couple of guys at my house to say, I won’t name their names, but you know, so tell us where square is. Oh my God. We’re international. We have a dozen different products to serve small businesses. We have a completely new line of business the cash app, which is phenomenal. We have you know, literally millions of users, but you know, the core product, same thing.

Peter:

Right. You know, and you can, we tried to use it and because, because we process stuff but not, but we never see someone’s credit card. Everything’s online or over the phone. And I think we couldn’t, you must have an app at this point for processing credit cards where you don’t need a reader and you can’t…

Jim:

Oh, that’s been in there for instance, since day one. Yeah. Yeah. You can do that. Okay. Cause I, when I sell, I usually am almost never seen my customer. Right. But yeah, it’s it’s a big deal. I don’t know what our market cap is. I don’t ever look at the stock price cause it stresses me out. Right. It’s massive. It’s like tens of billions of dollars and somewhere there. Right. You know how has the success changed your life or has it, people don’t tell me when I’m really acting dumb. That’s sort of the main thing. It’s, it hasn’t improved sort of materially that much cause you know, I was doing pretty well before square. Right. I’d had these companies, I had everything I wanted. Right. I I bought a couple of places. I got a place here in Manhattan. It’s nice. Right. You know, before that I would visit and stay with friends and that was almost kind of nicer, you know, so now I don’t have to say with my friends, you know that’s, there hasn’t, there hasn’t been much. It is interesting that that point is very interesting. How like when we have money it affords us to do things that are sort of the natural next step of like, you know, staying with friends, stay in a hotel, stay in your own apartment. But it doesn’t necessarily make your life nicer.

Peter:

Yeah. I mean kind of fixing you might for many people it might, it makes your life maybe more comfortable.

Jim:

Yeah. So what I realized is that I’m ego constraint when it comes to money and that is, I don’t have the ego to buy really, really fancy stuff. Right. And my wife and I are the same way and we get a little house with two bedroom or two, you know, two, two car garage. Very Warren buffet of you. Yeah. But we’re not even, it’s not some political statement, it’s just we looked at where we wanted to live. It’s like, well, we can have this like big mansion and a bunch of, you know, land around it that I would have to mow or find somebody to hoe and then my kid has no friends.

Peter:

Right. You know, that’s the, that’s the problem that people with money often end up with. It’s just that they do the natural extension and they isolate themselves. Like that’s the, yeah, that’s the, that’s the challenge. That’s one of the, you know, one of the dangers.

Jim:

Yeah. So I mean, it hasn’t really changed that much. It’s,uI gave a big gift to Washington university’s engineering school in honor of my father who taught there for 27 years. UI’ve,uI, so I started a nonprofit called launch code, which is training people for free to become programmers. That’s a great program. I backed down,uuI’m, I’m rebuilding parts of st Louis because like, you have to be almost crazy to do some of the stuff that I’ve done in real estate because it makes no sense at all. And I was like, Oh, well you need a rich idiot. I was like, Hey, so only an idiot would do, Hey, I know the guy, you know, so you know, I’m experimenting with some,uuwith some urban rehab. Uit’s [inaudible] you know, I’m not, I’m not giving it back directly, but I’m trying to get rid of it indirectly.

Peter:

Right, right, right. You make this point in the book and I think it’s a super interesting point and specifically related to the innovation stack, which is in retrospect, we can look back and go, Oh wow, all of these were really smart decisions with, and yet luck plays, plays are unimportant. Role is huge.

Jim:

Yeah. Luck is funny because in my opinion, you don’t feel lucky when you’re working hard. So if you loved that point, I think it’s such an important point. Say it again. Cause if you don’t, if you’re working hard and you get lucky, you attribute your success to the hard work and not the luck. Right? So if you win the lottery, you haven’t done anything for it. You’re like, wow, I’m really lucky. Yeah. So work super hard and, and you win the same lot. You’re getting the same. You know, you a buyer comes out of nowhere and and buy something. Then you’re like, wow, my work paid off. 1,000 companies started the same year square did. We’re the one that made it to tens of billions of dollars of market cap. Right? And the rest of them didn’t. Right. Okay. Now our jacket and I geniuses, are we so smart or did we get lucky? Well, I don’t know. I mean, we’re both working really hard. What does that mean? Does that mean you should, you know, listen to everything I say? No, you should just buy my book, buy the damn book. And I’ve listened to you by the way, but I’m an point is you get a, we get trained from the time we’re little kids. Work hard, work hard, work hard to get the reward.

Jim:

Okay? So you work hard and then you get the reward and you think, Hey, mom was right by hard work gets rewards. Indeed. Right? And that may be true, but I will show you an example of somebody who is just as smart, just as hardworking. Right? Who was not successful right now, how do you explain that? And the answer is luck, but you don’t know where you’re getting lucky or not, right? We got tremendously lucky at square, right? We just don’t know where. Right. You can’t see it in hindsight. Right? So it’s an, it’s not an operable idea. Like it’s like you have to work hard. You have to be smart, be smart as you can be. Work as hard as you can work. Recognize you have to be persistent and it may work. Some things work, some, something’s right, something’s done right. And look, I think, you know, you trot out all the platitudes and say, well, you know, the harder I work, the luckier I get. I’ve heard that one, that’s a good one. But the, the, the feeling is and you don’t, you don’t just count on luck, but it’s there. Right? And the problem with luck is that because people who get successful don’t credit luck enough, they tend to get very self-important and they tend to grow up very prescriptive. Right? And, Oh my God, how many people I’ve met who’ve been successful know how to teach you how to do it, you know? And that’s not what I’m trying to do here. Right. what I was trying to do, the reason I had to write this book was because I felt that there was a real gap between people who had the potential to solve great problems and the people who were actually willing to take the chance. Right. And I’ve heard so many people who I think are really capable, right? Say, well, Jim, I’d really like to do this, but I’m not qualified. I could never do that. I don’t, you know, I couldn’t, you know, do my own podcast. I couldn’t, you know, do I couldn’t do. And I just want to tell him, look, like if you study the history of entrepreneurship, like of invention of people who create world dominating companies and you trace it back to the origin, biggest bank in the world started by a guy who sold lettuce. He was a produce vendor, never went to high school, you know, no formal education past the age of 14 right. Okay. Builds the biggest bank in the world. Biggest furniture company in the world. Started by a guy who was 17 you know, like you can go through the history of these world-changing companies and you trace them back to the origin and you find somebody who was totally unqualified.

Peter:

Right. But of course, that’s one way to look at it. The other way to look at it is, look, everyone’s unqualified. If it’s truly, I mean that’s your point. Your points is like by definition, yes, you start from a place of unqualified, otherwise the problem has been solved. Yeah. You’re not solving a problem. It doesn’t.

Jim:

Yeah. And, and, and I, I think, you know, the one thing that square has done in my case is it’s given me the credibility to say that, right. Cause if you sit there, you know, without a $10 billion company and you say, this is how it’s done, people go, well, if you’re so smart, you know, where’s your jet? Right. You know? But no, it’s really true. You can, you can go all the way through this. And it’s a pattern that repeats and is accessible to so many people who disqualify for, for a logic that is almost right and, and you know things are almost right, are very, very dangerous because you sit there and you say, Oh yeah, yeah, that makes sense. It makes it, I think you have one little thing that’s wrong. Here’s, here’s, here’s why. It’s almost right. If you want to fly a plane today and you just say, Jim, I’m going to get in. I think I got this figured out. I’m going to take off. I’ve never been in a plane before. I’m going to figure out how to fly. You’re an idiot, right? You should go get trained. You are not. That’s a problem that has been solved. Problems. You just don’t know the answer. You have not been right. You are not qualified to fly a plane. You have not had a hundred hours of training and that’s a good reason to not do something right. But what? It’s the first plane. What if you and I just built the first airplane in the world and one of us has to get in and fly it and you go, I’ll go. That’s an adventure. You’re still not qualified. Right? You don’t know how to steer. You don’t know how to recover from a spin like you don’t know how to lay it out where you’re going to go to learn.

Jim:

Nobody has that knowledge. And so here’s the thing. If you’re going to do something totally new, you’re going to solve a problem hasn’t been solved before. You are by definition, unqualified and you will feel unqualified. And the rest of the parts of your life where you feel unqualified, you go, Oh, I shouldn’t do this, but this is the case where you should. Right? Except that your physiology will react the same way we always do, which is when we do something that we’re not qualified to do, you know, we’re second guessing ourselves. We’re really worried. You’ll fear, we feel. Yeah. Yes. Terrifying. Right? And I just want, I wanted to tell people, look, we are all like that. Right? Every time I do something new every single time, doesn’t matter if you know square head, it’s IPO and blah blah. None of that stuff helps me with the next thing that I’m not qualified to do. Right, right.

Peter:

And you still feel that same fear and you still feel and the probably the rush also. Yeah of like there’s that right. Cause those two things I was go together. Yeah. Jim, it has been such a pleasure to be speaking with you. Jim McCalvi. He is the co founder of square and has written the innovation stack building an unbeatable business. One crazy idea at a time. You could think about this as a business book if you want to think about it as business book cause it is, but it is also a really fun and interesting narrative and you know you get a, people will get a feel from me from just listening to this, but I highly recommend the book and it’s been such a pleasure having you.

Jim:

Thank you so much Peter. Thank you so much. This is super fun.

 

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