How Did Square Defeat Amazon (in the calmest standoff in digital payments history)?!

Episode Thumbnail
00:00
00:00
This is a podcast episode titled, How Did Square Defeat Amazon (in the calmest standoff in digital payments history)?!. The summary for this episode is: When Amazon decides to clone your product, it’s the stuff of nightmares. Most folks on the receiving end tremble in their CEO boots. And honestly, so did Jim McKelvey (Co-Founder, Square).  Of all the possible strategies, Jim found himself doing something different. Something that could cost him and his company everything. Jim decided to do nothing at all. And here’s the thing: It worked. Learn how exactly Square defeated Amazon in what can only be described as the calmest standoff in digital payments history. Learn more about: The Shake Up HubSpot Podcast Network Learn more about your ad choices. Visit megaphone.fm/adchoices
What is The Innovation Stack?
01:55 MIN
When Amazon copied Square's product
01:21 MIN
What happened on Halloween 2015?
02:05 MIN
A Spanish Palace experience
05:32 MIN

Speaker 1: The Shake Up is brought to you by HubSpot Podcast Network. That's right, the HubSpot Podcast Network is a one stop audio destination for business professionals. It's where education meets inspiration with amazing shows like My First Million, where you can hear stories from the entrepreneurs who made it big, and where the hosts Sam and Sean, don't shy away from the tough questions. With access to a collection of marketing, sales, service and operation shows, you'll have all the information you need as your company goes from startup to scale up and beyond. Listen, learn and grow with the HubSpot Podcast Network at hubspot. com/podcastnetwork.

Alexis: You're listening to The Shake Up where we explore the business decisions that dare to be different and the leaders who are shaking up their industries. My name's Alexis Gay.

Brianne: And I'm Brianne Kimmel, And on each episode, we'll bring research and data backed insights to dig into the minds of business leaders and learn how they make the decisions that challenge the status quo.

Alexis: You can support the show by following us on our Apple Podcast or Spotify, or honestly, wherever you get your podcasts. We'll be there hanging out, talking business, ready and waiting to shake things up with you. Brianne, question for you. What are you working on these days?

Brianne: So I'm a venture capitalist and help tech companies with strategic insights to scale their business. Alexis, what's your deal? You're a comedian hosting a business podcast?

Alexis: Wouldn't you know it, I used to work in tech and now I'm a comedian hosting a business podcast. Well, here we are happy to be here.

Brianne: Are you ready to dive in?

Alexis: Absolutely. I could not be more excited to bring on today's guest. He's the co- founder of Square and author of The Innovation Stack, Building an Unbeatable Business One Crazy Idea at a Time, Jim McKelvey, welcome to The Shake Up.

Jim McKelvey: Thank you. Hi Alexis. Hi, Brianne.

Brianne: Hi Jim. It's so great to have you.

Jim McKelvey: I'm super excited.

Alexis: Just a note on the Innovation Stack quickly, Jim, you're funny. Like you're very funny.

Jim McKelvey: Well, thank you, but looks aren't everything, you know.

Alexis: I really loved the writing of your book. I thought it was really engaging the whole way and I also learned a lot. We love to learn. We love to learn and we love to laugh.

Jim McKelvey: I didn't want to write a business book. I really hated the idea that it would be a business book, but it is. That's the genre that it's in. But if you read it, there's actually just a really dirty joke in the book that my editor didn't catch and I was going to tell them about it and then I thought," No, man, if you're too checked out to find it, I'll leave it in."

Brianne: Can I guess which one it was?

Jim McKelvey: No, no, come on. If you got it, keep it to yourself. It's in there and I'm sort of embarrassed about it, but it's also a really puerile joke, so you have to have sort of the pretty raunchy sense of humor to get it. But oh yeah, it's there. It's there and keep it to yourself.

Jim Mckelvey: Okay. Secret's safe with me. So Jim, just before we dive in a little bit, can you tell us what is The Innovation Stack? So the Innovation Stack is this thing that I discovered while I was trying to answer a question that was plaguing me, which is how Square survived an attack by Amazon. So I think we'll get to this in a minute, but Square was attacked by Amazon when we were a startup. And at the time, every company who had been attacked by Amazon when they were a startup died. There was a 100% mortality rate or had been absorbed into Amazon, which I would also consider maybe death or worse. And so we were looking at this very dire situation and we did some kind of crazy stuff and it worked. And then after it worked, I thought," Why did it work?" And I couldn't answer that question. And I'm a sort of nerdy engineer and I went on this research quest looking for other companies that had lived through similar situations. So I studied historical businesses. I studied boring businesses. I studied the airlines. I studied all these areas where technology was not the major force, but there was this thing that kept showing up in my research. And it was this thing that I labeled an innovation stack. And it's just this very simple idea that invention is not one or two things. It's usually this messy conglomeration of 10, 20, 30, 40 things. So I always use the word innovation like a mass now, like cement. Like you don't buy a cement. You buy cement. It's this thing. It's volume. So to me, innovation is a mass noun.

Brianne: One thing that really struck me at the beginning of the book is the intellectual honesty of the founders at Square. You went through and listed all of the reasons that the company may potentially fail, which I think in this environment is a very audacious move to say, not only to have a pitch deck of all of the great things that are about to happen, but we've really thoughtfully broken down all of the reasons that we may potentially fail. And I greatly appreciated that level of honesty.

Jim McKelvey: So did our investors. It turns out that Brianne, that was a pivotal moment in us selling the company to the investment community because for the first time I think ever, we admitted all the stuff that could go wrong. And we openly discussed that in the pitch meeting. Look, humility is a superpower. Okay? Humility, if combined with audacity, gives you the ability to get feedback into your ego saturated brain.

Alexis: Absolutely. That's great advice across the board for anyone really thinking about starting a new venture. Okay, let's talk about the meeting about Amazon. So tell us a little bit about, you of course know the meeting that I'm referring to. Do you want to set the stage a little bit?

Jim McKelvey: Well, Jack was dressed in all black, and he announced that Amazon had copied our product and was going to undercut our price, which is what they always do. And he told the board what was happening. And we have a very intelligent group of people on the board and we have a lot of experienced folks and we were all stumped.

Brianne: And was everybody in the room with you?

Jim McKelvey: Yeah. Yeah. I mean, this was a board meeting. And the board meetings at Square are usually fun, and this was just dark. It was this moment where we hoped there was some solution. And we did what you normally do when confronted, which is you look for other people whose solutions you can copy. Like who's beating Amazon? Well, let's find somebody. There must be somebody. Nobody.

Brianne: Yeah.

Jim McKelvey: So then I went into full on panic. I was like," What are we going to do? What are we going to do? What are we going to do?" And then we started iterating through the questions of," Well, what could we do?" And one of the most basic ones was, Amazon was undercutting our price. Well, we could lower our price and match Amazon. And then, but here's the thing, we chose our price to be as low as it could be and still serve our customer. If we had matched Amazon price, we would have been out of business. And it also was not something that would've been honest to our consumers because it would've basically been say," Oh, you know, look, you know that price, we have been charging you for the last four years, well we could have done better."

Brianne: Yeah.

Jim McKelvey: And our answer to our customers was," Well look, I'm sorry, we're doing as well as we can. We're doing the best we can and that's the price you get. And if we can lower it in the future, we will. But we can't do it just because the biggest company in tech has decided that they want to kill us." So we didn't lower our price. We didn't actually even do anything that was different, which was the amazing thing. We wanted to do something because look, if you're being attack, the hardest thing you can is to not react or maybe not overreact.

Brianne: Wow.

Jim McKelvey: Yeah.

Brianne: That must have been a really hard conclusion.

Jim McKelvey: It was terrifying. And this made it even more interesting when we won, for me to answer the question why. What the heck happened? Because I was so happy we won, but then I was like," Why did we win? Was this just luck or was there some deeper pattern here? Was there something that might be a lesson for me or other people?" But the strategic discussions which I think I was privy to, were basically the same, which is like," What can we do? What can we do that we're not doing?" And the answer was, nothing. We're doing everything we can do and we have been. Because we're motivated by the needs of our customers.

Brianne: Totally.

Jim McKelvey: Focusing on the customers. So we weren't sitting there thinking," Oh, well, if a competitor does this, this is our counter move." We were like," What does the customer need?" And with millions of customers, you have a long list of requests.

Brianne: One thing that I really loved at the beginning of the book is when you talked about all of the regulatory constraints, and in the early days the fact that square was violating hundreds if not thousands of laws.

Jim McKelvey: 17.

Brianne: Oh my God.

Jim McKelvey: I was going to say, if you multiply the fact that every transaction broke 17 laws, rules or regulations by the number of transactions, we were in the millions of transgressions. Yeah, it would've been a bad meeting.

Brianne: Did that make you sweat? Would you think about that sometimes in the middle of the night and just be like," Oh my God, we're breaking the law."

Jim McKelvey: Yeah. In our case, we looked at some of these laws as these sort of vestigial things like there's a law in my neighborhood you can't have more than 12 chickens. Well, nobody has 12 chickens in my neighborhood. It is on the books.

Brianne: Okay.

Jim McKelvey: Some of those laws were like the 12 chicken laws.

Brianne: Okay.

Jim McKelvey: Some of the laws were simply ones that didn't anticipate the technology. And then there were a couple that were absolutely reasonable and needed to be complied with, OFAC, KYC, the security around moving money, we were in early violation of all that. But we had to get compliant with those and we did.

Brianne: Wow.

Alexis: So Jim, let's talk a little bit about Halloween in 2015. So you got some pretty big news on that day. Can you tell us a little bit? Well first actually, let me ask you this, were you dressed up?

Jim McKelvey: I was in costume.

Alexis: Okay. What were you wearing?

Jim McKelvey: I was dressed as the joker. My wife was dressed as Cat Woman and my son was dressed as Batman.

Alexis: That's adorable.

Jim McKelvey: The best treat I got that night was Amazon announcing that they were going to discontinue their competitor to Square. And not only that, they were going to mail one of the little white Square readers, the thing that I designed four years earlier, they were going to mail one of those to all their customers. So Amazon was not only getting out of the business, but they were basically giving us all their customers.

Brianne: Truly unbelievable.

Jim McKelvey: And I know I talk a lot of crap about Amazon, but they're a well run company. And look, they were probably not trying to be nice to us. What they were doing is they were trying to take care of their customers.

Brianne: Right, right.

Jim McKelvey: So they offered this thing. The thing didn't work. And they said," What's the best alternative for our customers?" Well, the best alternative was Square. So you know what Amazon did. They swallowed their pride. They got a bunch of our equipment and they mailed it to their soon to be former customers. I thought it was a classy move.

Brianne: Absolutely.

Jim McKelvey: Say what about Amazon, they treat their customers. They have that integrity, and I saw it and it was wonderful. So happy Halloween. I pointed to the press release and I'm not going to tell my kid because he doesn't understand this. I tell my wife. It's like," Guess what?" And oh my God, at that point it was like," Wow, maybe we can have guacamole with our next burrito because we won't be poor again."

Brianne: That's right. Full size candy bars next year.

Jim McKelvey: Yeah. Yeah, not the fun size.

Brianne: Did it feel real in that moment?

Jim McKelvey: No, it didn't. It didn't. This stuff takes days to settle in.

Brianne: Hmm.

Jim McKelvey: Sometimes it still doesn't feel real. When I look back right now and realize the trajectory that we had, I was like," Did that actually happen?" Yeah, it did. And it's well documented. But I still don't think a lot of the stuff that's happened to me is real. I've been so lucky. I feel like I'm the luckiest guy in the world.

Brianne: Do you still have any lingering nightmares or thoughts of what if the opposite were true? Like what if Square did not exist today? What if Amazon had won?

Jim McKelvey: Oh, I'd be fine. I always considered myself rich before Amazon not because I had a lot of money, but because I have really cheap taste. The day I realized I was rich, I was going to work and the radio was giving away some$ 10, 000 prize and the radio announcer's like," Just imagine how$ 10,000 is going to change your life." And I thought about and was like," Oh my God, it wouldn't." And I thought about how much money it would take to change anything. Look, I live in St. Louis, Missouri. I hang out with a bunch of people who are not rich. Do I have excesses in my life? Absolutely. I've succumbed a little bit. But basically if Square had not happened, I would have one thing that would be... there was one reason I wish it hadn't happened. These days I have to say no to so many things that I would normally just say yes to because people don't want to meet me, they want to meet my money.

Brianne: Ooof.

Jim McKelvey: People are pretending to be interested in Jim McKelvey or my ideas or my book or whatever, and then they kind of do that pivot." Hey Jim, I got this." And then boom comes the ask. And that just bums me out. I went out to lunch the other day with somebody who I kind of liked. And I didn't know him that well, he seemed really interesting. Oh man, halfway through the lunch, I was like," Oh, here it comes. Oh my God." You know? And I was like," Dude, you should have just had lunch with my wife. She runs the foundation and gives the money away."

Brianne: Right.

Jim McKelvey: So I regret that, but the rest of it's fine.

Alexis: Today's episode is sponsored by those fine folks over at HubSpot. Managing conversations with prospects and customers and creating remarkable experience can be tough. HubSpot wants to change that. That's why they created a CRM platform that makes it easy to align across teams.

Brianne: Oh, it's so much easier. With HubSpot's unified system of record, all teams can create a better customer experience without missing a beat.

Alexis: We love a unified system of record. We always say that. You can install live chat on your website and allow sales or support to get in touch with prospects directly.

Brianne: Or send marketing emails on behalf of sale reps or customer success managers.

Alexis: Not to mention, it allows prospects to book meetings with reps without wasting time.

Brianne: Yeah and best of all, teams can get access to all of the contacts history, so they can have more informed conversations with prospects and customers and design a better overall experience.

Alexis: The result, all your customer people can align around the same goals, consistently great customer journeys that drive growth and lifetime loyalty. Learn more about how you can scale your company without scaling complexity Hubspot. com.

Brianne: So Jim, I want to take you back to a moment that you talk a little bit about in the book, which is attending a party at a Spanish palace. I guess my first question just is if you could tell us a little bit about this palace. What's the vibe? Is this a dark, gloomy palace? Is this like gorgeous, opulent Phantom of the Opera palace? What kind of palace are we working with here?

Jim McKelvey: This is your Disney castle palace.

Brianne: Okay.

Jim McKelvey: This is your badass, super wealthy, great, great, great, great grandparents. This is nobility, back when they had nobility, back when the queen of Spain funded Christopher Columbus rich. Right?

Brianne: Yes.

Jim McKelvey: And it turns out, as it happened, that that was this family. This was part of the venture capital for Christopher Columbus. And I've got to set the context, because at this point I had been perplexed by the answer to the question," How did square survive Amazon?" So I've got this question rattling around in my head and I can't answer it. I'm like," What happened? What happened? What happened? How come I can't find it?" I'm studying. I'm talking to people. I'm basically obsessively trying to answer this question. I can't think of it. What happened? What's going on? What's going on? And so I go to this party and there's a tour group, because the place is kind of huge. And we go into the library and the tour guide shows, they show us the original letters of Christopher Columbus back to this family that had funded it.

Brianne: Wow.

Jim McKelvey: And I was like," Oh my God, this is his pitch deck. This is what Columbus did to get funded." And then I thought," Oh my God," because I was living in the startup world, I was like," Oh you think you had it tough trying to raise your money for your startup? This guy had to raise money and talk about hiring people." Like I hire people if we fail, they lose their job. Columbus fails, they die. And all of a sudden it just hit me in this moment. I remember because the tour group had left. I'm sitting there just transfixed, looking at Columbus's handwriting going," Oh my God, that's the answer. That's the answer. That's the answer." And the answer was, I've got to mine history. I don't want to look around me in contemporary business. I need to look at history because if there is a power that protects you from forces like Amazon, if there is that power and it exists, it will have shown itself through out history. And by God, the second I started doing it, it was like example, example, example. All of a sudden I went from no data to do my research, to like," Oh my God, I've got so much data. I've got too much data." And so then I could be super picky about the stories that I actually deeply researched. And I could just say," Okay, I need one right here. I need one right there. One right there." So it was a beautiful moment in self- discovery and research and also humility. What our forefathers had to deal with was just way worse than what we've got now. It is easy today compared to what people had to do.

Brianne: Totally. That's amazing. Jim, how has this discovery, your discovery of looking back on historical figures and moments in history where they were using the innovation stack, changed the way that you now moving forward in a post Amazon battle, obviously not post Square, how has that changed the way that you approach business today?

Jim McKelvey: So the big insight of the book is that the process of innovation is fundamentally different and it feels different. And here's how it feels, so what I tell by readers or potential readers is look, the reason you read the Innovation Stack is that at some point in your life, you are going to run up against the edge of human knowledge. And when you do, you have this moment of choice. I want more people in the world to feel like they could. Not necessarily going to succeed, but at least understand that there is the potential for success on the other side of that line. Look at what that potential is like. Sort of vicariously live through it, laugh about it, read some good stories about it. And let me tell you the thing, when you're in the process of building an innovation stack, it is so darn uncomfortable. So I want people to have recognition. So first of all, recognize the boundaries. That's hugely helpful. Okay? Secondly, understand when it's appropriate to copy and when you need to innovate. And a big chunk of the book is sort of this discussion of how we are wired to copy and why that's good. I'm not knocking copy. Everyone's like," Oh McKelvey hates copying." No, no, no, no. I do that every possible moment I can. I will steal your best ideas anywhere. I will use that because that's what usually solves a problem. Innovation is the last resort. But if it is your last resort, then understand how it's different. Then be able to recognize at least some of the big things about innovation that are likely to cause discomfort. So it's your expectation, if you expect things to be harder than they are, you're probably going to be happy. So one of the things I wanted to do was prepare the reader. Look, if you step across that line between the known and the unknown, it's going to get unpleasant. It will not kill you. It might be really wonderful on the other side eventually. But here's what it's like. Be prepared. Your focus is to build. Your focus is to figure out something that nobody else has figured out. How many pieces do you have to come up with before you've got an innovation stack that actually works? And by the way, there's no guarantee that you're ever going to reach that limit. But you do, and if you do, the world changes. It's just amazingly powerful if you build one of these things.

Brianne: Yeah. That's great. Amazing.

Alexis: Well, Jim, it's been so much fun catching up today. We've gone to a palace with you. We've hung out on Halloween. There's been so many amazing stories and this has been such a delightful conversation. One question for you...

Jim McKelvey: I'm sorry I didn't dress in costume.

Alexis: I know. I know. One question for you, what are you working on these days?

Jim McKelvey: Oh, a couple of things. I'm working on a glass that's difficult to drink from, a whiskey glass.

Brianne: I love that.

Jim McKelvey: To bring your focus back to the thing you're doing, because we're so distracted these days. I thought what if I could build a glass that is a little difficult to use? I mean, I told the story in the book about the Square reader being difficult to use and why it's purposely difficult to use.

Brianne: Right.

Jim McKelvey: This is the same thing. It takes your attention back to the thing you're doing, which in this case is drinking. So I'm working on that. I've got a company called Invisibly, which is trying to solve I think the biggest problem in society right now, which is that our attention is not under our control. It's being bought and sold by platforms that are not necessarily holding our best interests at the highest level. The third thing I'm doing is I'm experimenting with a low cost diaper because it turns out that poverty really starts when young families, particularly young, single mothers have to pay for diapers. And diapers are 25 cents a pop, and I'm trying to build a 5 cent diaper. And I don't know if it's possible, but that's kind of where the energy's going.

Speaker 1: It sounds like we've got the right man on the job. I feel like if anyone can do that, it's definitely you. And where can people learn more and get a copy of your book?

Jim McKelvey: Well, from Amazon of course. I've been dissing them all week. So let's pay some love back to the company that I literally criticize on the first page. No, anywhere books are sold. I prefer you bought it from a small bookstore if you can do that. But get it on Audible. Get it at Amazon. And my hope is that if you read it, you'll not only laugh, but you'll find this moment where you go," Oh wow. Now I recognize this moment that happened to me." And hopefully you don't let the next one get past you.

Brianne: Amazing.

Alexis: Yeah, thank you so much for joining us on the show today. We really, really appreciate it.

Jim McKelvey: This is so much fun. Thanks. Guys, I have great questions. It was so much fun to do.

Alexis: Hey Brianne, are you ready to do that thing we practiced?

Brianne: Oh my gosh. Is it time? I'm ready.

Alexis: Okay. 3, 2, 1. Don't forget to subscribe and leave us review. Pretty good. Today's episode was written and produced by Matthew Brown. Production support comes from Lauren Shields. Our engineer is William Lowe, with research from Corey Brockalini and special thanks to Kyle Denhoff and Lisa Toner.

Brianne: Word of mouth is the best way to help people discover our little podcast. Be sure to subscribe on Apple podcast, Spotify or wherever else you listen to podcasts.

Alexis: And don't forget to leave a review, you know, to let other people know how awesome we are.

Brianne: We have some amazing guests coming up this season that you won't want to miss.

Alexis: See you next time.

DESCRIPTION

When Amazon decides to clone your product, it’s the stuff of nightmares. Most folks on the receiving end tremble in their CEO boots. And honestly, so did Jim McKelvey (Co-Founder, Square). 


Of all the possible strategies, Jim found himself doing something different. Something that could cost him and his company everything. Jim decided to do nothing at all. And here’s the thing: It worked.


Learn how exactly Square defeated Amazon in what can only be described as the calmest standoff in digital payments history.