Jim McKelvey (Co-founder of Square, Founder of Invisibly, and Author of The Innovation Stack)

Jim on how Square fought off Amazon, his new book "The Innovation Stack," starting Square with his former intern Jack Dorsey, what it means to be an entrepreneur, and more.

Feb 01, 2021

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Guest Profile:

Interview Guest: Jim McKelvey (Twitter: @2000F)

Role: Co-Founder of Square; Founder of Invisibly; Author of “The Innovation Stack”

On Jim: Jim McKelvey is a billionaire philanthropist and serial entrepreneur. He has started at least seven companies, ranging from a CD cabinet maker to a glass-blowing studio. Most notably, he co-founded payments company Square with Jack Dorsey in 2009. He also sits on the board of the Federal Reserve Bank of St. Louis and started a nonprofit, LaunchCode, to teach people how to program. In March 2020, he published The Innovation Stack, a book detailing Square's battle with Amazon to create a better payments system.

Quick Note: This interview was recorded via a Zoom call between Jim, Roshan (that's me), and Rick (more on him below) in mid-January. Special thanks to Abe Cross for making this interview possible!

Roshan’s favorite quotes from the interview:

On qualifications: “If you think about the first human to do anything in the world, that person is never qualified. The first time man flew a helicopter or an airplane, it was done by somebody who didn't know what the hell they were doing. By definition, the first person to do it is always unqualified.”
On being attacked by a large company: “That's a funny pattern that I saw with all these other companies too. When The Bank of Italy was attacked, when Southwest Airlines was attacked, when IKEA was attacked, when Birdseye was attacked; when much more powerful forces attacked these other companies, they just kept doing what they were doing and basically ignored it. It turns out that ignoring your enemy is a really good strategy if you're an innovative company.”
On being an entrepreneur versus businessperson: “Historically, the word entrepreneur used to mean somebody who started a business that was unlike any other business, i.e., they were doing something likely to kill them or not succeed. Take the Wright brothers, they had a bicycle shop, so they made and repaired bicycles, and in their business of bicycle repair, they were businesspeople. Then they built the world's first airplane. And in building the world's first airplane, they were entrepreneurs.”
On advice for student entrepreneurs: “If you want to do something that hasn't been done before, then you probably ought to be in the engineering school of the art school, where the discipline is more on how to think about problems that you don't know how to solve, or how to think originally and do stuff that's not all copying.”

Our first interview collab!

Amazon.com: The Seed – The Startup Journey: Rick Liu

This episode was done in collaboration with fellow WashU undergrad Rick Liu of The Seed – The Startup Journey. Check The Seed out on their website and on YouTube.

Roshan: Can you tell us a bit about what it was like during the earliest days of Square? What made you so confident in your former intern Jack Dorsey?

Jim: I've worked with Jack since he was 15, so I've known him pretty well. When he was 15, Jack's nickname was "Jack the Genius," we teased him about that around the office. I've had a good working relationship with him for 30 years now. He's a real bright guy and hardworking, and fun to deal with.
He asked me to start a company with him, and I was like, "yeah, sure, what do you want to do?" He had no ideas beyond that, and I didn't have any at the time. So we cast around for some ideas and eventually came up with Square. It was never a question about whether or not I wanted to work with Jack – it was a question about what we were going to do. The good thing that happened was that I was at my glass studio trying to sell some work in the middle of that and lost a sale because I couldn't take a credit card. So that led to the idea for Square. As soon as I had the idea, I called Jack up, and he liked it too. So that's what became the start of Square. In the last ten years, Square's gotten into a lot of other stuff, but the core idea is to empower people in small businesses and connect folks. It's going pretty well.

Rick: In your book, The Innovation Stack, you talked about how you found out that what you wanted to do was illegal on the first day of starting Square. When most people come up with an idea, they research it, and finding someone else already doing it would lead them to stop working on the idea, let alone finding out it's illegal. So my question is, how should entrepreneurs assess their ideas, and what factors should determine whether or not they continue with their idea or pivot to something else?

Jim: Well, you got to look at why something's illegal. If it's bad for the world, and we've outlawed it, then you probably shouldn't do it. Sometimes, it's just some sort of holdover from a time when we weren't all as connected as we are now. There are laws in St. Louis where – if you guys are in the dorms right now – there are laws about how many chickens you can have in the place where you dwell. I think a lot of laws just need to be updated. We saw some laws that specifically prevented what Square was supposed to do, and we ignored them until we could get them changed or get compliant with them. So we got compliant with some of the laws, and we had to get others changed. But ultimately, I was pretty excited when I found that there was a reason people hadn't done what we were doing. Because what I wanted to do seemed so obvious to me that my first assumption was that surely other people have done this. Surely some other smart person has had the exact same idea I did. But it turned out that there were all these roadblocks. When I saw the roadblocks, I got very excited because I was like, "great, now all we have to do is get around all these roadblocks." I mean, we found about 17 laws, rules, and regulations that were right in Square's way. And I thought it was cool because if I found a way around all this stuff, there would be no competition.
The no competition thing was pretty much true for the first three years. Then we got the worst competition of all – Amazon. Amazon came in and decided that they wanted to basically take over our market, steal our product ideas, and just wipe us out. Amazon had a really good track record of doing that. When Amazon copies your product and undercuts your price, you end up dying. But it didn't happen in Square's case, which was amazing to me. The statistics would have said we should have been another dead body stuffed in a smiling cardboard box. The fact that Square survived was very good, but it was also very concerning because I couldn't explain why it happened. It's like I had survivor's guilt of some sort. That's what led me to do all the research for The Innovation Stack. I went looking for other companies that had similar epic survival stories. By looking back in history, it turned out I was able to find a bunch. Then I saw these patterns. I felt like I had to write a book about this because it's important to explain what happened because it's not a unique case. It's not something that just happened to Square. It happened to Square and probably 100 other firms. Interestingly enough, all those firms that I looked at had all become wildly successful. There was just a massive impact from these companies. It seemed like a powerful phenomenon that nobody ever explained to me.

Rick: You talked about how Amazon basically copied your reader and undercut your price, but facing this giant threat, you still basically decided to do nothing. Can you talk a little bit about your decisions back then and what entrepreneurs should take away from that experience?

Jim: It wasn't that we decided to do nothing; we decided to do nothing different. We were doing a lot, so we were really busy. And we were growing really fast and had a lot of customers, which meant that we had a lot of problems. We had a lot of customer requests, and we had a bunch of stuff that we knew we had to do. But when Amazon showed up and presented this massive challenge, there wasn't much that we could do that made any sense to us. The biggest example of that would probably be matching Amazon's price, which we couldn't see a way to do mathematically. In some sense, it's a price, we can charge whatever we want, and we could have charged a price that lost a bunch more money than we were already losing. But the price we had chosen was chosen for a very good reason: we thought we could eventually get profitable at that rate. We were pretty certain that at the rate Amazon was charging, we would never get profitable. Therefore, we decided to ignore Amazon's pricing; we didn't even respond to it. I think that was a good thing because it would not have been sustainable. Square would not exist today if we charged what Amazon was charging. If we had matched Amazon's price for a short time until they left the market, that would have upset all our users when we went back to a sustainable price. I'm really proud that the team at Square didn't respond, that we didn't do anything in response to Amazon. That's a funny pattern that I saw with all these other companies too. When The Bank of Italy was attacked, when Southwest Airlines was attacked, when IKEA was attacked, when Birdseye was attacked; when much more powerful forces attacked these other companies, they just kept doing what they were doing and basically ignored it. It turns out that ignoring your enemy is a really good strategy if you're an innovative company. If you're not an innovative company, it's probably deadly. But if you're innovative, then it's a pretty good move.

Rick: When most people hear the name Jim McKelvey, they think of your success. Can you share with us some of the moments when you failed and how they impacted you moving forward?

Jim: I consider most of the stuff that I do a failure until it eventually succeeds. I'll give you two examples from today. I'm trying to make these drinking glasses. I was in the studio thinking about drinking a lot this year, trying to make these things, and they crack when I cut them. So I'm trying to find a saw that will cut through glass and not shatter it. The company that makes the saw has gone out of business, and the guy that used to make these things died, and there are like no saws on the planet that I can find. I basically have an unlimited budget to buy a diamond saw and nothing that I can find works. So until I fix that, every piece of work I make has a 50/50 chance of meeting its end on this saw, so there's a problem. That's a failure. We're not producing the stuff that I wanted to produce today because they're all blowing up on the saws. And just this morning, I had another meeting with another company that I have, and they're having all sorts of problems that we're working on.
I'm an engineer by training. Engineers don't work on stuff that's successful; they work on stuff that is not successful yet. Once it's successful, you hand it over to the marketing department. I think people see the stuff that I've been associated with once it's successful, and they go, "oh, well, McKelvey was really excited about being so successful." But no, that was just the last step. It took Square a year and a half to get out the door. That's a year and a half of intermittent failure. We're like, "it's not working yet, it's not working yet, still not working yet, still not working yet." We said that for 18 months, and then finally it worked, and everyone's like, "whoa, you're such a success." But you don't feel that way because your time as an engineer is spent dealing with things that don't work. But I also find it super exciting because when I finally get something to work, the reward is way bigger than anything. It's just worth it.

Roshan: What do you think are the most important skills and traits of founders?

Jim: It depends on what you're founding. If you are just trying to start a business, even a technology business, even something that's generally considered cutting edge, there's usually a formula that you can follow. So the greatest skill is probably your ability to learn and copy, for you to quickly assimilate information of other people who've done it, and do basically what they've done in the way that they've done it, so you don't have to risk innovation. That, however, is not the only thing that smart people should limit themselves to. Look, this is why I wrote this book because, if you read the book, it's dedicated to somebody who I will tell you is super competent. She has a master's degree from one of the world's best educational institutions. It's not WashU, but arguably a place that's even got a better reputation than WashU does. She's got a technical master's degree, phenomenal talent, and a phenomenal work ethic. Yet, I've seen her over several years encounter problems where she says, "I can't solve this. I'm not qualified to do this."
I think that's a reasonable excuse in most cases, like I'm not qualified to go out and fly a helicopter. I've never been in a helicopter, so to put me at the controls of a helicopter pretty much dooms everybody to death. But if I wanted to fly a helicopter, I could go out and get trained, and eventually, I would become competent. That's a smart way to do it, but if you think about the first human to do anything in the world, that person is never qualified. The first time man flew a helicopter or an airplane, it was done by somebody who didn't know what the hell they were doing. By definition, the first person to do it is always unqualified. So my message to entrepreneurs and people in general is, look, you will find at times in your life, not a lot of times, but occasionally you will be confronted with a problem that has not been solved, and for which you can't just go YouTube your way to a solution. What do you do in that case? Do you sit there and say, "I'm not qualified, therefore I'm not going to do anything," or are you going to be more like the Wright brothers and say, "we're going to try to be the first people to do it, even though if we succeed, we will be unqualified."

Roshan: What advice would you give to students interested in entrepreneurship?

Jim: Well, I would say understand that there are two definitions of the word entrepreneur. The current one just means you have a business. You're not working for the man. You're working for yourself. You're your own employer. If your goal is to start a company, then I would call you a businessperson. Historically, the word entrepreneur used to mean somebody who started a business that was unlike any other business, i.e., they were doing something likely to kill them or not succeed. Take the Wright brothers, they had a bicycle shop, so they made and repaired bicycles, and in their business of bicycle repair, they were businesspeople. Then they built the world's first airplane. And in building the world's first airplane, they were entrepreneurs.
When the bicycle shop had a problem, they could go to 50 other bicycle shops and ask how they solved the problem, or they could hire one of their employees, or they could go to the bicycle conference, they could look back on hundreds of years of mankind peddling around the planet and figure out what the solution was through a different set of skills. If somebody wants to be an entrepreneur, in most cases, I think what they mean is they want to be a businessperson. They just want to start their own business. I don't have a lot of advice for those people. They should probably go to business school and learn how to copy what everybody else does.
If, however, you want to be an entrepreneur in the sort of historical sense, i.e., you want to do something that hasn't been done before, then you probably ought to be in the engineering school of the art school, where the discipline is more on how to think about problems that you don't know how to solve, or how to think originally and do stuff that's not all copying. But it's a much more difficult path to be an entrepreneur. The roads are bigger, but it's way harder to walk in that direction.

Roshan: You are obviously pretty involved at WashU. What can the WashU community do to help make more students start companies of their own? How can we incentivize entrepreneurship even more than it is today?

Jim: If you want to incentivize entrepreneurship, form support groups. Get people together who are all similarly minded. And if you get enough of them together, I'll show up, and we'll all bitch about what's not going right. I don't want a group of businesspeople. I don't want a bunch of people who are just copying other business models. If you really want people together who are trying to solve unsolved problems, that's a super interesting group to hang out with.
But the second thing I would say, that's fairly unique about WashU, is that we probably have the best school of social work in the world, we have one of the top medical schools in the world, we have world-class facilities in architecture, engineering, and business, the law school is pretty good – there's a bunch of resources that you probably don't touch. One of the things that made a big difference for me as an undergraduate was going over to the art school and taking a glassblowing class. I ended up sort of doing that as a profession for a while, and the opportunity to encounter that was fairly unique. At the time, there were five or six glassblowing furnaces in colleges in the nation, so had I chosen any other school I wouldn't have had that opportunity. At WashU, you go over to the medical school, and they've got equipment where there are three or four of these things in the world, and they've got one. So, I would say spend as much time out of your area of concentration as possible, because you're going to get a lot of really cool new ideas and you make some great friendships.

Rick: Most of the entrepreneurs or business people we've interviewed talk about their mentors. As students, how can we find good mentors, and what questions should we be asking them?

Jim: You may know this from the book, but I sort of whine a lot about the fact that I never had any mentors. The only mentor I had was somebody who I envisioned but never met. I had historical examples of people I thought would be sort of similarly minded, but I never met any of these people in the real world. So again, you ought to understand whether or not what you're doing has been done before. If it's been done before, find somebody who's done it that makes a great mentor. If you're embarking on another path, I spent the last two chapters of the book talking about this. When people read the book who have sort of been entrepreneurs, they always tell me about the last few chapters. I get these emails from people all the time like, "Oh, God, that's exactly how it feels."
I'll tell you right now, if you don't want to read the book, the answer is it's unpleasant, it's uncomfortable, it is terrifying, and not something that normal, sane, healthy people should do all their lives. You can do it for a while. So if you're looking for a mentor for that, I would say you're not going to get one. You may find a support group, you may find other people who are in it. But generally, folks who have done it and been successful, they're so rare that it's hard to get time with these people. That said, as a student, you can really reach out to alumni. I occasionally meet with students, although most of them don't really want to do anything interesting and new, so I tend to disengage. Because unless you're working on a problem that I 1. find interesting and 2. somebody hasn't solved yet, then I'm not your guy. But occasionally, somebody will come up with something. Somebody from the medical school approached me the other day about something that was super interesting, and I may be working with them on it. So yeah, they're out there.

Rick: This is a question from my podcast audience: what do you think is Square's competitive advantage versus other payment systems like Apple or Google Pay?

Jim: If you want to look at the competitive advantage, I'd say read The Innovation Stack, where I describe 14 things that we do differently, and I thought all of those were necessary to get the product launched. That was ten years ago; we've probably added seven or eight other things to that. So, that's the competitive advantage. Now, you take a company like Google or Apple that's a platform. The economics of a platform are way different. If you're a platform, you have different forces. For instance, there are certain things that Google can very easily do that they don't do because doing so would attract the government's attention and might hasten their demise. Likewise, there are some really vicious bullying tactics that I've seen both Google and Apple do to friends' companies and stuff. I had a friend that launched a search engine against Google, and things got so rough that both she and her husband ended up in the hospital for months. I've seen the fight get played out. Those platforms are insanely powerful, but again, Apple's probably not getting up every morning thinking about how to make your payment experience better, whereas people at Square are. Hopefully, that'll give us the ability to keep up with at least what the big platforms are doing.

Rick: To wrap things up, we also prepared some rapid-fire questions.

Roshan: If you could have a superpower, what would it be?

Jim: I'd like to fly. Even though it's useless because you can fly better in a plane than you could even with the ability to fly, I think flying is just so darn cool. So I spent a lot of time trying to make that superpower happen by flying around in small airplanes. But it wouldn't be anything like invisibility. It wouldn't be anything like that. So yeah, flight. Totally useless, but boy, would that be cool.

Rick: What is your favorite book, if you don't count your own?

Jim: Satan: His psychotherapy and Cure by the Unfortunate Dr. Kassler, J.S.P.S. I believe it is out of print, but it is the most outrageously hilarious book I've ever read. And it's fiction, by Jeremy Leven.

Roshan: Obviously, you're a big glassblower, but besides that, outside of work, what hobbies occupy most of your time?

Jim: Right now, I'm becoming a commercial pilot. So I'm trying to get type rated in big planes, and I'm learning how to be an airline captain. Just because I think it'd be fun to fly charters for rich people and sit in the front of the plane and watch their crazy behavior. I know that sounds silly.

Rick: Who is your greatest source of inspiration?

Jim: Probably the folks that I meet in desperate situations. Like, the lady who cleans this office just lost her son from COVID. And we talked about it a lot when she came in, because her son had just died, and I'm like, "why are you in here?" And she's like, "I can't stay home, I just cry." And I was like "you can cry here too." I have a lot of resources now, a lot more than I ever expected to have. So sources of inspiration right now are more from folks who I think can help me direct some of this in ways that could do good because I never prepared myself to have the ability to impact stuff. I was unprepared. So I spend a lot of time right now just listening to folks who are having trouble. We're in the middle of a pandemic, so I know a lot of friends who are unemployed. I hang out with homeless folks, I hang out with people who have been out of prison. I get a lot of inspiration from that. I'm not partying with tech entrepreneurs. They don't party anyway. We all show up at Marissa Mayer's house three times a year and sort of awkwardly say hi to each other. Marissa is cool, but the tech community is not your party peeps.

Roshan: What's the nicest thing someone has done for you?

Jim: I fell on my bike crossing a railroad track in San Francisco, and I spilled into the pavement, and a car hit its brakes before I died. If that guy had been texting, I wouldn't be here right now. As far as the little acts, I'm a super lucky person, and I meet a lot of folks who have done good things, and wow – I don't think I've got a good answer to that. I think I'm the recipient of so much good that I have trouble ranking it. Well, credit to the guy with the anti-lock brakes.

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