Introduction
In "The Innovation Stack," Jim McKelvey takes us on a journey through the world of true entrepreneurship. As the co-founder of Square, a company that revolutionized payment processing for small businesses, McKelvey shares his experiences and insights on what it takes to build a groundbreaking business from scratch.
The book explores the concept of the "innovation stack" - a series of interlocking inventions and solutions that arise when entrepreneurs tackle previously unsolved problems. Through his own story and those of other visionary entrepreneurs, McKelvey illustrates how innovation stacks are built, how they protect businesses from competition, and why they are crucial for creating lasting change in industries.
The True Meaning of Entrepreneurship
McKelvey begins by challenging our understanding of entrepreneurship. While many people consider anyone who runs a business to be an entrepreneur, he argues that true entrepreneurship involves venturing into uncharted territory and solving problems that no one else has addressed.
He uses the analogy of medieval Edinburgh, with its protective stone walls, to illustrate this point. Most people stayed within the safety of the walls, even though life inside was far from ideal. But true explorers - the entrepreneurs of their time - were willing to venture beyond the walls into the unknown, risking their lives to discover something new.
In the business world, McKelvey argues, most companies simply copy existing ideas with slight modifications. They stay within the "walls" of established business practices. True entrepreneurs, on the other hand, are those who dare to step outside these boundaries and create something entirely new.
The Birth of Square: A Perfect Problem
McKelvey's journey with Square began with what he calls a "perfect problem" - an unsolved issue that he and his co-founder, Jack Dorsey, were uniquely driven to address. The problem revealed itself when McKelvey, then working as a glass artist, lost a sale because he couldn't accept American Express cards at his studio.
This incident opened McKelvey's eyes to the broader issues in the credit card industry. Small businesses were often unable to accept credit card payments due to the high costs and complex regulations involved. Moreover, credit card companies were charging small merchants significantly higher fees than large corporations.
McKelvey and Dorsey saw an opportunity to level the playing field. They founded Square with the mission of making credit card payments accessible to all businesses, regardless of their size. The name "Square" itself came from the phrase "square up," reflecting their goal of making the payment system fair for everyone.
Innovative Pitching: Securing Investments
When it came time to pitch Square to potential investors, McKelvey and Dorsey took an unconventional approach. Instead of relying on traditional pitch decks filled with optimistic projections, they demonstrated their product in action by charging the investors' credit cards on the spot.
They also included a slide titled "140 Reasons Square Will Fail" in their presentation. This bold move, which outlined potential risks ranging from fraud to a robot uprising, impressed investors with its transparency and thoroughness. It showed that the founders had considered all possible pitfalls and were prepared to face them head-on.
This innovative approach to pitching changed the dynamic between the founders and the investors. By being upfront about potential challenges and demonstrating their product's functionality, McKelvey and Dorsey established themselves as equals in the conversation, rather than supplicants seeking approval.
Building the Innovation Stack
As Square began to take shape, McKelvey and his team encountered numerous challenges that required innovative solutions. Each problem they solved often led to new problems, creating a chain of innovations that McKelvey calls the "innovation stack."
One of the first innovations was Square's pricing model. They chose a simple, flat rate of 2.75% per transaction, regardless of the business type or transaction size. This was a radical departure from the complex, variable pricing structures common in the industry. While this simplicity was attractive to merchants, it meant that Square would lose money on small transactions due to fixed fees charged by credit card networks.
To make this pricing model work, Square needed to attract a large volume of transactions, particularly larger ones. This led to further innovations in marketing, customer acquisition, and product design. They created a card reader that was not only functional but also aesthetically pleasing, even earning a place in museum collections.
Square's commitment to simplicity and transparency extended to their contract terms. Unlike traditional payment processors, Square offered a contract-free service, allowing merchants to leave at any time. This customer-friendly approach required Square to continually innovate to retain their users.
Each of these innovations - from pricing to hardware design to contract terms - became a block in Square's innovation stack. McKelvey emphasizes that these blocks are interconnected; removing any one of them could cause the entire stack to collapse.
Facing Goliath: Square vs. Amazon
Square's innovation stack was put to the test when e-commerce giant Amazon entered the mobile payment market with a competing product. Amazon's card reader addressed some of the functional limitations of Square's device and undercut Square's pricing by 30%.
In the face of this formidable competition, Square made a surprising decision: they did nothing. Instead of scrambling to match Amazon's product or pricing, Square stayed true to its principles and continued to focus on its core strengths.
This strategy paid off. By Halloween 2015, Amazon announced it was discontinuing its card reader. McKelvey attributes Square's victory to the power of their innovation stack. By creating a set of interlocking innovations that worked together seamlessly, Square had built a business that was difficult to replicate, even for a company with Amazon's vast resources.
Learning from History: A.P. Giannini and the Bank of America
In his search for entrepreneurial role models, McKelvey found inspiration in the story of A.P. Giannini, the founder of what would become the Bank of America. In the early 1900s, Giannini revolutionized banking by focusing on serving small businesses and individuals who were largely ignored by traditional banks.
Giannini's Bank of Italy (later renamed Bank of America) built its own innovation stack, introducing concepts that are now standard in modern banking. These innovations included:
- Focusing on small businesses as valuable clients
- Opening banking services to women
- Establishing branch networks to serve more communities
- Offering savings and checking accounts to ordinary people
- Providing small loans to help businesses grow
Each of these innovations addressed a specific need in the market and worked together to create a banking system that was more accessible and beneficial to a wider range of people. Giannini's innovation stack was so powerful that it transformed his small local bank into one of the largest financial institutions in the world.
The Myth of Expertise in Entrepreneurship
One of the key insights McKelvey shares is that expertise, while valuable in established fields, can be overrated or even detrimental in true entrepreneurship. He points out that many of the world's greatest innovators, including himself and Giannini, had no formal qualifications in the fields they revolutionized.
McKelvey argues that expertise is most useful when you're trying to improve on existing ideas or processes. In these cases, deep knowledge of the field can help you identify small optimizations or incremental improvements. However, when you're venturing into entirely new territory - as true entrepreneurs do - everyone starts from the same level of inexperience.
In fact, McKelvey suggests that a lack of expertise can be an advantage in innovation. Without preconceived notions of what's possible or "how things are done," entrepreneurs are free to imagine and implement radically new solutions. The key is not expertise, but the willingness to take action and learn through doing.
This insight is particularly empowering for aspiring entrepreneurs who might feel held back by a lack of formal qualifications or industry experience. McKelvey's message is clear: if you have identified a problem that needs solving, don't wait until you feel like an expert. Start now, learn as you go, and build your own innovation stack.
The Evolution of Innovation Stacks
McKelvey emphasizes that innovation stacks are not planned out in advance. Instead, they evolve organically as entrepreneurs encounter and solve problems in their quest to build something new. Each solution often reveals new challenges, leading to further innovations.
This process is illustrated through the story of the Wright brothers, who had to invent numerous components and systems to achieve powered flight. They didn't set out to create an innovation stack; they simply solved each problem as it arose in their pursuit of their ultimate goal.
Similarly, Square's innovation stack developed as the company faced and overcame various challenges. Their commitment to simple design led to innovations in pricing, which in turn necessitated innovations in hardware cost and customer acquisition. Each innovation was a response to a specific problem, but together they formed a powerful and cohesive system.
McKelvey argues that this organic, problem-driven approach to innovation is what sets true entrepreneurship apart from mere business operation. While many businesses focus on optimizing existing processes, entrepreneurs are constantly pushing into new territory, solving new problems, and building their innovation stacks as they go.
The Power of Principles in Business
Throughout the book, McKelvey emphasizes the importance of sticking to core principles, even in the face of fierce competition or tempting shortcuts. This is exemplified in Square's response to Amazon's entry into the mobile payment market.
When Amazon introduced a competing product that addressed some of Square's functional limitations, Square could have easily abandoned its commitment to beautiful design in favor of a more utilitarian approach. Instead, they chose to stay true to their principles, believing that the aesthetic appeal of their product was an integral part of their value proposition.
This decision, which might have seemed risky at the time, ultimately proved to be the right one. By maintaining their focus on design and user experience, Square retained its unique identity and continued to appeal to its core customer base of small businesses and individual entrepreneurs.
McKelvey argues that this adherence to principles is not just about maintaining brand identity; it's a crucial part of building and maintaining an innovation stack. Each principle or core value in a company becomes a guidepost for future innovations, ensuring that new solutions align with the company's overall mission and ethos.
The Importance of Transparency and Humility
Another key theme in "The Innovation Stack" is the value of transparency and humility in entrepreneurship. McKelvey and Dorsey demonstrated this in their unconventional pitch to investors, where they openly discussed all the ways their business could fail.
This approach, while risky, earned them respect and trust from investors. It showed that they were not just salesmen with a polished pitch, but thoughtful entrepreneurs who had carefully considered the challenges they faced.
McKelvey extends this principle to the broader practice of entrepreneurship. He argues that true innovation requires a willingness to admit what you don't know and to learn from your mistakes. This humility allows entrepreneurs to remain open to new ideas and to adapt quickly when their initial assumptions prove incorrect.
Moreover, transparency with customers, employees, and partners builds trust and fosters a culture of continuous improvement. By openly acknowledging challenges and soliciting feedback, companies can tap into collective intelligence and find innovative solutions more quickly.
The Role of Persistence in Building Innovation Stacks
Building an innovation stack is not a quick or easy process. It requires persistence in the face of numerous setbacks and challenges. McKelvey's own journey with Square was filled with moments of doubt and seemingly insurmountable obstacles.
One of the most significant challenges Square faced was navigating the complex regulatory environment of the financial industry. When they first launched, they discovered that their business model technically violated numerous laws and regulations. Rather than giving up, they persisted, working tirelessly to find ways to comply with regulations while still achieving their mission of making payment processing accessible to all.
This persistence is a common thread in the stories of other entrepreneurs McKelvey admires, including A.P. Giannini and the Wright brothers. In each case, these innovators faced repeated failures and setbacks but continued to push forward, driven by their belief in the importance of their mission.
McKelvey argues that this persistence is what separates true entrepreneurs from those who simply have good ideas. Ideas are plentiful, but the willingness to work through countless iterations, failures, and challenges to bring an idea to fruition is rare and valuable.
The Impact of Innovation Stacks on Industries and Society
Throughout the book, McKelvey illustrates how powerful innovation stacks can transform entire industries and even society at large. Square's innovations in payment processing made it possible for millions of small businesses to accept credit card payments, enabling them to compete more effectively with larger corporations.
Similarly, A.P. Giannini's innovations in banking democratized access to financial services, helping to fuel economic growth and social mobility in the early 20th century. By making loans available to small businesses and individuals who had previously been excluded from the banking system, Giannini's Bank of America played a crucial role in building the American middle class.
McKelvey argues that these transformative effects are a key characteristic of true innovation stacks. Unlike incremental improvements that merely optimize existing systems, innovation stacks have the potential to reshape entire markets and create new possibilities for people and businesses.
This perspective on innovation challenges entrepreneurs to think beyond mere profit-making. McKelvey encourages readers to consider how their innovations might "square up" some aspect of the world, making it fairer or more accessible to a broader range of people.
The Future of Innovation and Entrepreneurship
In the concluding chapters of "The Innovation Stack," McKelvey turns his attention to the future of innovation and entrepreneurship. He argues that despite the rapid pace of technological change, there are still countless unsolved problems and opportunities for transformative innovation.
However, he cautions against the tendency to focus solely on technology-driven innovation. While technology is a powerful tool, McKelvey believes that some of the most impactful innovations of the future will come from rethinking business models, customer experiences, and social systems.
He encourages aspiring entrepreneurs to look for "perfect problems" - issues that they are uniquely passionate about and positioned to solve. These problems might not always be obvious or glamorous, but they often represent significant opportunities for innovation and impact.
McKelvey also emphasizes the importance of diversity in entrepreneurship. He argues that the most powerful innovation stacks often come from outsiders who bring fresh perspectives to longstanding problems. By encouraging and supporting entrepreneurs from diverse backgrounds, we can unlock new sources of innovation and create more equitable economic systems.
Practical Advice for Aspiring Entrepreneurs
Throughout "The Innovation Stack," McKelvey offers practical advice for those looking to embark on their own entrepreneurial journeys. Some key takeaways include:
Embrace the unknown: Don't let a lack of expertise hold you back. Be willing to venture into unfamiliar territory and learn as you go.
Look for perfect problems: Seek out issues that you're passionate about solving, even if they seem trivial or niche at first.
Build, measure, learn: Adopt an iterative approach to problem-solving. Create quick prototypes, test them with real users, and refine based on feedback.
Stay true to your principles: Develop a clear set of values and use them as guideposts for decision-making, even when faced with tough choices.
Be transparent: Open communication with investors, customers, and team members builds trust and can lead to valuable insights and support.
Persist through challenges: Building an innovation stack is a long and often difficult process. Be prepared for setbacks and maintain your commitment to your mission.
Think beyond profit: Consider how your innovations can make the world fairer or more accessible to a broader range of people.
Cultivate humility: Remain open to new ideas and be willing to admit when you're wrong or don't know something.
Embrace diversity: Seek out diverse perspectives and experiences within your team and network.
Keep exploring: Even after achieving success, continue to look for new problems to solve and new ways to innovate.
Conclusion
"The Innovation Stack" is more than just a business book; it's a call to action for aspiring entrepreneurs and innovators. McKelvey's central message is that true entrepreneurship is about venturing into the unknown, solving problems that others have ignored or deemed impossible, and building systems of interlocking innovations that can transform industries and society.
Through his own experiences with Square and the stories of other visionary entrepreneurs, McKelvey illustrates the power of innovation stacks to create resilient businesses and drive meaningful change. He challenges readers to look beyond conventional wisdom, to embrace uncertainty, and to persist in the face of seemingly insurmountable obstacles.
The book serves as both an inspiration and a practical guide, offering insights into the mindset and methods of successful entrepreneurs. It encourages readers to identify their own "perfect problems" and to start building their own innovation stacks, one solution at a time.
Ultimately, "The Innovation Stack" is a testament to the transformative power of entrepreneurship and innovation. It reminds us that some of the most significant advancements in business and society have come from individuals who dared to question the status quo and imagine new possibilities. In doing so, it invites all of us to consider how we might contribute to solving the world's problems and creating a more equitable and innovative future.