In the book The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time, we learn about a St. Louis glassblowing artist and recovering computer scientist named Jim McKelvey, who lost a sale because he couldn't accept American Express cards in 2009. McKelvey was frustrated by the high costs and difficulty of accepting credit card payments, so he joined his friend Jack Dorsey (the co-founder of Twitter) to launch Square, a startup that would enable small merchants to accept credit card payments on their mobile phones.
Square was four years old and was under direct attack from Amazon. McKelvey reveals the business strategy that made Square impenetrable -- what he calls the Innovation Stack. After finding out that major credit card companies were profiting off small businesses at a rate of forty-five times higher than big billion-dollar corporations, McKelvey realized that his problem was a big issue for a lot of people, and a good reason to start a company.
"I've undertaken a dozen projects that people have called crazy. I've made a living as an artist and started a glassblowing studio. I've founded companies in the fields of software, book printing, roofing, and payments. I launched a non-profit to solve the national shortage of programmers. I'm currently trying to give people control of their online identities. I have no idea what, if anything, these organizations have in common except that at the core is a problem that I care about." -- Jim McKelvey, co-founder of Square, serial entrepreneur, author.
To learn more about the innovation stack and how entrepreneurs can create an unbeatable company, Ray Wang, CEO and founder of Silicon Valley-based Constellation Research, and I invited McKelvey to join us on our weekly video podcast DisrupTV. Here are eight takeaways of our conversation with Jim McKelvey on how to build an unbeatable company using the innovation stack.
According to McKelvey, Amazon attacked Square (same product with a lower price) when the startup was only four years old. Unlike any other time, Square was able to survive and beat Amazon in the payments industry. The math against surviving against Amazon is an impossibility and McKelvey could not explain the reason. It took him three years to research this and he ultimately discovered "The Innovation Stack" - a series of interlocking inventions that helped Square beat Amazon, and other companies like IKEA, Southwest Airlines, and Bank of America compete and succeed in their respective industries.
- Copying is a great place to start, but won't help you achieve transformational change. McKelvey said everything in his world is a copy - the people he knows, all the furniture around him, and most businesses. Copying is the most powerful force in the universe if you want to make something that works. This works in almost every situation except one where you have a new problem. A problem that has not been solved before means you do not have anything to copy. McKelvey studied people and companies that tried to do completely new things. The DNA of doing something new is totally different. We do not have a word in the English language for describing a business person who does something new. A business person that starts a business is called an entrepreneur, but most businesses are copies of existing businesses. McKelvey said that a hundred years ago, the word entrepreneur was used for only a special group of businesspeople who were doing new things that probably wouldn't work. If you wanted to make money, you go into business. But if you wanted to change the world, you became an entrepreneur and you were most likely to fail. McKelvey talked about Google being the 21st search engine to enter the market in 1998, but the company was so much more than just a search engine.
- Entrepreneurs are rare, but the entrepreneurial skillset is not. McKelvey said everyone wants to have a successful business and be their own boss. Successful business people are usually revered and pretty rich and cool. Entrepreneurship in its classic sense is not that cool until it works. McKelvey said Square was not cool and it was brutal. "We were being called idiots by very qualified people and we had nothing to argue with. If you are building something that's never been build before, the math is different. Because you can't point to a success," said McKelvey. When you are faced with new problems, you have to have the skills and the right talent to solve the problem. And with each solution, you can run into new set of first-ever experienced problems. At Square, each challenge was new and team had to solve a new set of problems. During this journey, you can solve 20 to 30 unique sets of problems that help you create a new market.
- Build for beauty and simplicity. McKelvey said that by sacrificing functionality in favor of beauty and simplicity, Square was able to build trust and reach a mass audience. McKelvey had two designs for the mobile card reader. The original reader was longer and bigger by 1.5 inches. He then builds a short device that didn't work as effectively. But the short reader started conversations with users. No one had seen anything so small and beautiful. Square choose a less functioning card reader, the smaller version because people appreciated the beauty of it. Most of what we do for attention gets ignored. McKelvey purposefully and intentionally chose the smaller reader that was 20% less accurate reading credit cards because of its unique shape. In the process, Square got rid of 40,000 longer readers that were better functioning units but not as interesting for the users. McKelvey the engineer chose beauty over functionality -- a beautiful lesson for tech entrepreneurs.
- Doing nothing can be the best response. McKelvey talked about how Square should respond to Amazon. Amazon had reduced its price by 30% but price matching was not an option for Square. Square's client on-boarding process and customer support were very unique. Square ultimately decided not to respond to Amazon by changing who they were. They did nothing. And it was terrifying according to McKelvey. His team didn't want to change anything about what Square was doing, and by not responding, they withstood the massive competitive challenge and ultimately won.
- You do not need to be an expert to be a successful entrepreneur. McKelvey said that finding the entrepreneur within yourself-even if, and especially if, you're not an expert is the mindset you need to develop and maintain. "You cannot be an expert in the new. The only time you can be an expert if the situation has occurred many times before and we have determined best practices and standards," said McKelvey.
- Don't disqualify yourself because you think you don't have the qualifications to solve an unsolved problem. McKelvey wrote his book for a certain person who is incredibly talented and hardworking, but a person who often hesitated when faced with problems that were new. When you are doing something completely new, it means you will not be qualified and you will not have the experience. Understand the difference between problems that you can solve by copying a solution versus new unsolved problems that require you to innovate.
- When you are doing original work, you will be faced with negative reinforcement. McKelvey said the world is against you when you are working on something truly new. They'll tell you that you are crazy, and they'll tell you why it's never going to work. All the coolness about being an entrepreneur goes away. You have to have grit, persistence, and self confidence when you are swimming in blue oceans.
- Innovation is super powerful and it is also super difficult. McKelvey said innovation is a last resort for him. He looks for existing solutions or adapting solutions to solve a problem. Innovation as a last resort is where you find success. McKelvey found the power of innovation and the innovation stack by doing extensive research on successful people and companies. McKelvey received confirmation of his thesis by collaborating with legendary business leaders from massively successful businesses.
Our conversation with Jim McKelvey, co-founder of Square and author of The Innovation Stack was incredible. I highly encourage you to watch the entire 20-minute video. The Innovation Stack will also make my top 10 business books of 2020.