293: Square Co-Founder Jim McKelvey on the Connection Between Art, Innovation, and Entrepreneurship

Jim McKelvey needs to solve problems. “It’s not about money. It’s not about recognition. It’s not about anything you can measure. It’s just this burning need to fix something.” That burning need is what sparked the ideas for all of his startups, including the massive small business payments company Square, and now his current project, Invisibly. “I look for a problem that I care about,” McKelvey says. “I look for something that bothers me, something that angers me, something I will get up and bend my life into a pretzel to solve.” In fact, the problem that became the catalyst for Square—which, by the way, has grown to a $34 billion market cap—evolved from McKelvey’s first profession as a humble glassblower. That same unstoppable drive is something he’s seen in so many successful startups around the world, and it’s now the subject of his new book, The Innovation Stack. Someone sees a problem and, without experience or previous knowledge, they set out to solve it. For McKelvey, this is what true innovation is all about. Mira Publishing: Turning Failure Into Opportunity McKelvey’s first company, Mira Digital Publishing, solved two problems, actually. First, McKelvey wanted to create image storage and recognition software, something that was still in its infancy when he founded the company in 1990. Second, he needed a way to break out of his own rut. He had graduated from Washington University in St. Louis in 1987 with degrees in computer science and economics. At 19, he’d published a textbook called The Debugger’s Handbook: UCSD and Apple Pascal. But after he graduated, he was running at what he calls a “high level of mediocrity,” freelancing for IBM, blowing glass, and running a company that built storage cabinets for CDs. In 1989, his mother died suddenly, and it made McKelvely reevaluate his priorities. “I just asked myself, do I want to be mediocre at everything? And so I decided that one of the things I had not done in my life was focus.” So he gave up IBM and the CD cabinets (but not his glassblowing) and focused on starting Mira. Unfortunately, Adobe released Acrobat in 1993. “We got our heads handed to us by Adobe. … It was a giant mess.” But while their imaging software failed, some good still came out of it all. That’s when McKelvey met Jack Dorsey, the future co-founder of Twitter. The Entrepreneur and the Artist McKelvey is a trained glassblower, who has even written a textbook on the subject. In the past, he’s used his studio to support himself while working on his startups. “The cool thing about making a physical product is that you can do it whenever you want. So I could work on my technical companies during the day and head into the studio at night, make a bunch of work and stick it in galleries and make enough money to survive.” For him, art and entrepreneurship go hand in hand, not just because one can fund the other, but because they are parallel endeavors that achieve the same outcome. McKelvey says he uses an archaic definition of the word entrepreneur, which broadens its scope beyond merely starting a company. “The original meaning for the word entrepreneur was this crazy person who did stuff that hadn’t been done before.” Square: Starting With a Problem Dorsey started as an intern at Mira, and the two developed a bond that held fast over the years. After Dorsey was forced out of his position as CEO of Twitter in 2008, he reconnected with McKelvey and they decided to start a business together. They just had no idea what that business would be. They brainstormed together and came up with a few ideas. They knew they wanted it to be something mobile. They started looking into a journaling app, until another idea came to McKelvey while in his glassblowing studio. He tried to sell one of his glass pieces to a customer who wanted to charge it to her American Express card. But Dorsey couldn’t process her credit card. He lost the sale. “And so I called up Jack with the iPhone that I had in my hand and I said, ‘Jack, you know, it’s really stupid that this iPhone that does everything that I want it to do—it becomes a television, it becomes a book, it becomes a radio, a compass—but it couldn’t become a credit card machine. And this is stupid. We need to fix this.’” And so, they came up with Square. They originally wanted to serve artists who couldn’t take credit cards or receive electronic payments. “The tough thing about being an artist is, I make stuff nobody needs. Like, nobody has ever needed anything that I’ve made in the glass studio. So, you better be ready when they’re ready to buy and not make it too difficult for them.” The challenge Square faced was serving a community that didn’t have the typical business setup. “These little guys who didn’t have credit reports. Some of them didn’t have bank accounts. Some of them didn’t have credit scores. Some of them didn’t have mailing addresses. I mean they were weird outliers to the financial system.” Even some of their bigger customers were still too small by the standards of the industry to process credit cards. So, they were forced to reinvent the entire process, from signup to hardware to pricing schemes. And for McKelvey, that’s where real innovation comes from, when you are forced to improvise. “Invention is something that has to almost be forced upon us. And people get inventive when they have no other choice.” The Innovation Stack A few years after Square launched, McKelvey and Dorsey learned that Amazon had launched a small business payments service that was nearly identical to theirs. For the second time, McKelvey thought he was done. But then, an amazing thing happened. About a year later, Amazon shut down their service and sent all of their former customers a Square reader. For a long time, McKelvey couldn’t figure out how they had survived a direct attack from a giant like Amazon. “I was like, well what’s special about us? What did we do to be still standing after Amazon comes after us? And I couldn’t answer the question.” He talked to former executives at a number of companies Amazon had directly targeted. Some of them sold to Amazon, while others went out of business. None had survived. “I was happy we won, but I couldn’t answer the question, why did we win? I knew we’d won, but I’d like to think it’s more than just luck, but I just couldn’t explain it. So I went on this two-year quest to figure it out.” McKelvey found that Square wasn’t actually alone. Many companies had survived direct attacks from large competitors, and they all had one thing in common, what he calls the “innovation stack.” He describes the innovation stack as a series of interlocking inventions that create something you can’t attack. Instead of one big innovation, the companies that survive are innovative in several ways that all contribute to the overall success of the company. And that series of innovations is almost impossible to copy in their entirety. For Square, it was easy to copy the hardware, but that was just one of 14 different innovations that made the company different in the online payments field. “So I talk about 14 things that we did differently. Every one of those was necessary for the system to work. So, if we’d done 12 and we hadn’t done the 13th and 14th, Square wouldn’t have worked.” One of the 14 was their system for handling fraud. Since Square is a company that handles online payments, McKelvey says, it got hit from day one. Three years later, when Amazon came out with its product, Square had already developed unique processes for dealing with fraud, something Amazon couldn’t replicate. But, McKelvey says, even if every aspect of a company’s innovation stack is visible, it’s hard for large companies to copy it all successfully. Why? “Organizational culture,” he says. When a startup comes along with a new way of solving a problem, it’s difficult for a well-established brand to pivot, to change its ingrained processes to compete. His example i