The Innovation Stack

What makes an entrepreneur? It's not qualifications or expertise – it's the courage to step into the unknown and solve problems no one has dared to tackle.

1. Stepping Beyond the Familiar Defines True Entrepreneurship

Entrepreneurship, at its core, is about leaving the safety of known territory to explore solutions to unique problems. While many businesses succeed by copying and repackaging existing ideas, real innovation emerges in uncertain, unexplored areas.

In medieval Edinburgh, people stayed within the city's protective stone walls, fearing the dangers outside. Entrepreneurs are like the brave few who venture beyond these boundaries – not for safety, but for the thrill of discovery. In business terms, this means asking questions others are too afraid to ask and tackling problems others deem unsolvable.

Jim McKelvey emphasizes that real entrepreneurial growth arises when one dares to push boundaries. By approaching challenges with curiosity and tenacity, entrepreneurs like McKelvey disrupt stagnant systems for something better.

Examples

• Shake Shack founders leveraged known inspiration (like Steak 'n Shake) but introduced minor improvements.
• True entrepreneurs venture into uncharted areas, like McKelvey revolutionizing payments for small businesses.
• Historical explorers risked everything to discover lands beyond their walled cities, much like entrepreneurs risking stability for innovation.

2. The Idea of Square Was Born from an Everyday Problem

In 2008, McKelvey lost a sale for an art piece because he couldn't accept an American Express card, revealing a widespread issue for small businesses. This roadblock drove him and co-founder Jack Dorsey to create Square and solve payment barriers for small merchants.

The credit card industry, rife with complications, favored big corporations while small businesses paid disproportionately high fees. For McKelvey, this inequity was not just a challenge but a problem crying out to be fixed. His art studio misstep turned into a world-changing epiphany.

McKelvey's "perfect problem" demonstrates that everyday frustrations often conceal opportunities for pioneering solutions when approached with determination.

Examples

• Credit card vendors profited 45 times more from small businesses compared to large ones.
• McKelvey's inability to accept a customer's payment seeded the idea for Square.
• Naming the company "Square" echoed their commitment to fairness and simplicity in payment systems.

3. Creative Pitching Builds Trust and Captures Attention

Raising investor funds for Square required unique tactics, as McKelvey and Dorsey chose to break norms with radical transparency and creative demonstrations. Their pitches weren’t about idealized forecasts – they embraced humor and addressed potential flaws head-on.

Uncommon pitching strategies like swiping investors' own credit cards through their prototype gave direct proof of their concept. Including a slide called "140 Reasons Square Will Fail" established trust by openly discussing risks and demonstrating forward-thinking preparation.

This unconventional approach not only captured attention but also showcased their confidence in problem-solving and ensured investors saw them as solution-driven.

Examples

• Charging investors a small fee showcased Square's functional prototype.
• "140 Reasons Square Will Fail" reframed failure as a shared challenge.
• A top venture capital partner called it the best pitch he'd ever seen.

4. Problems Paved the Way for an Innovation Stack

Square's journey wasn’t smooth, as legal challenges arose almost immediately. With every roadblock they faced, McKelvey and Dorsey devised interconnected solutions, creating an "innovation stack" – a chain of unique, interdependent improvements.

Their flat, transparent pricing model (2.75%) was groundbreaking, offering fairness in an industry notorious for hidden fees. However, it introduced the problem of compensating for low-value transactions. Each solution sparked new challenges, pushing them toward more creativity.

This iterative process didn’t just solve isolated issues. As Square developed new processes, they crafted a foundation so robust it changed the way payments work globally.

Examples

• Transparency in pricing built trust among small businesses.
• Legal hurdles were tackled with continuous innovation rather than avoidance.
• Square’s innovation stack evolved with each new challenge encountered.

5. Innovation Stacks Emerge from the Need to Overcome

Building a business that survives and thrives requires inventing out of need, not premeditation. The Wright brothers, for instance, had to create entirely new systems and mechanisms to enable flight. Each breakthrough added to their overall innovation stack.

For Square, each segment – affordable elements, design principles, and contract-free commitments – contributed to their system's integrity. Any missing piece would compromise it entirely. This interconnectivity defines the innovation stack’s strength.

Developing these interconnected solutions forced Square to remain nimble and adaptable, ultimately benefiting its users and reinforcing its mission.

Examples

• The Wright brothers built numerous interconnected inventions, from lightweight engines to steering methods.
• Square's $0.97 card reader marked a seismic shift in affordability compared to competitors' $950 models.
• Flexibility allowed Square to address user pain points like difficulties in exiting vendor contracts.

6. Staying True to Core Values Outsmarted Amazon

Square faced monumental competition when Amazon launched its own payments hardware, offering more functionality for a lower price. Rather than altering its design or lowering costs to match Amazon, Square chose to hold steady and trust its principles.

Despite Amazon's superior resources and aggressive strategy, they abandoned their competing product after a year. McKelvey believes Square’s unyielding adherence to design and service priorities played an essential role in maintaining trust and differentiation.

This David vs. Goliath narrative demonstrates that consistency and authenticity can outlast brute force in business.

Examples

• Amazon’s card reader was cheaper and solved Square’s wobble issue, yet it failed to oust Square.
• Square’s card reader was celebrated as art, appearing in the Museum of Modern Art.
• By staying consistent, Square avoided alienating existing customers.

7. Innovation Isn't New: A Historic Case in Banking

McKelvey found inspiration in A.P. Giannini, who revolutionized banking by confronting unfair practices in 1901. He prioritized small businesses and women, opening opportunities traditional banks ignored.

Giannini’s innovation stack brought concepts like branches and small loans into mainstream banking, turning the Bank of Italy into today’s Bank of America. His ability to reimagine systems made banking accessible and set a precedent still felt centuries later.

McKelvey admired Giannini's relentless drive to fix what others overlooked, proving that history holds valuable lessons for modern innovators.

Examples

• Giannini’s "Women’s Banking Department" offered independence to female account holders.
• Small business-oriented banking replaced loan sharks with fair finance options.
• He grew the Bank of Italy with continuous innovations modernized as the Bank of America.

8. Expertise Is Overrated for True Entrepreneurs

Aspiring entrepreneurs often feel discouraged due to a lack of qualifications. Yet, history reveals that game-changing businesses were often built by people with unrelated backgrounds. In fact, expertise is more useful for iterating pre-existing ideas, not for pioneering.

McKelvey himself started as a glassblower; Giannini was a produce vendor. Both exemplify how entrepreneurial success hinges on effort and curiosity, not formal training.

Innovation flourishes when people are unrestrained by insider constraints or limiting beliefs of what is "practical."

Examples

• McKelvey went from artist to payment systems disruptor.
• The founder of the Bank of America created modern banking without any financial background.
• McKelvey and Dorsey dived into payments with no prior industry experience.

9. Innovation Requires Tackling Fear and Uncertainty

Fear is a constant companion in the entrepreneurial journey. Innovators must face uncertainty without guarantees of success. While failure looms as a real possibility, the willingness to push forward regardless defines transformative leaders.

McKelvey emphasizes that exploration is the antidote to the fear of the unknown. Staying curious and embracing risks unlocks opportunities that wouldn’t exist otherwise.

Entrepreneurship isn’t about eliminating fear but learning how to advance alongside it.

Examples

• McKelvey overcame fear by solving one payment hurdle at a time.
• The Wright brothers risked ridicule and failure in public experiments.
• Square entered payments armed with only a mission, not certainty of outcome.

Takeaways

1. Look for "perfect problems" in your daily frustrations – they might inspire innovative solutions.
2. Be ready to face fear and persevere when entering unexplored territories of business or life.
3. Build your business around strong principles and values, even when competitors try to outmatch you.