If you're doing something innovative and truly innovative and has not been done before on the planet and you feel like you're too early, that's probably the right time. Because if you feel comfortable, if you say, 'This is the right time,' you feel comfortable, you think, 'Oh, now's the time. The world needs this.' I guarantee you a hundred other people in the herd have also had the exact same feeling because we are a herd animal. Humanity is a giant herd and we think alike and we invent alike and we feel good at the same time.
Welcome to From Startup to Grown-Up. My guest today is Jim McKelie. Jim is pretty eclectic. He's a glass blower. He's the chair of the Fed Reserve of St. Louis and he's the co-founder along with Jack Dorsey of Block, formerly called Square. Jim is also the author of a pretty great book, The Innovation Stack, Building an Unbeatable Business, One Crazy Idea at a Time. Jim and I had an amazing conversation and we covered quite a bit including the founding insight of Square, how he learned about the payments business and the surprising tactics Square used to counter Amazon's attack. We discussed Jim's framework for innovation, when you should copy and when you should innovate, and why true entrepreneurs tend to feel alone. We also talk about the difficulties of founding a startup, including the panic attacks Jim got on a regular basis while he was founding Square and how he handles and counteracts his impostor syndrome. This is a fantastic conversation and you're going to love it. So, please enjoy this great conversation with Jim McKelie, co-founder of Square, now called Block. Jim, welcome to the show.
I'm so excited to have you here. My goodness. I want to dive right in. So Jim, people who don't know you don't realize that you are a glass blower, that you are the chair of the Federal Reserve, and that you're the co-founder of Square Block, which is formerly known as Square. And so I want to just give you that as a multifaceted introduction.
Some people only know me as a glass blower. I mean, the people in my studio are kind of like, what's this other stuff? Although they kind of know Square down because they all use it.
Right? I can imagine. The thing is, and I want to get into all the things, but in all the research I did about you, I actually don't even know how you became a glass blower. I don't understand that.
I needed money. I needed money. I graduated from college. I took a job with a startup before it was cool and before startups were well-funded. My startup was run by a guy who was a crook and I quit without having another means to support myself. So, I woke up one morning and I was like, how am I going to pay the rent? And I didn't have that many skills that were marketable at the time. I mean, I had a degree in computer programming or computer science, but there was not this huge demand. So, I thought, well, actually, I'd taken some glass blowing classes in college.
Because you were just interested.
Yeah. Just for fun. And then I thought, well, maybe I could make work and sell it. And I soon discovered that the answer was no. My work was terrible. But it's amazing how quickly you can learn a skill. So, I've always said like it doesn't matter what the skill is. If you had to be a banjo player in a month, you would be pretty damn good if that's the way you fed yourself. Like, so I just woke up one morning, I was like, 'All right, I've got nothing preparing me for this, but I better be an artist and I better be a good artist.' Which to me didn't mean making good art. It meant selling enough to pay the rent.
So, it was commercial success that I was looking for, not some sort of artistic outlet.
Well, I think everyone glorifies a starving artist. Look, I eat a lot.
I don't. I need a lot of food. So, yeah, I don't want to starve.
Although, listeners, he is thin.
Yeah, I am thin and I'm always thinking about food.
So, you were a glass blower and you had a startup and this guy named Jack was your intern.
Tell us about Jack. Jack Dorsey.
Jack Dorsey was my intern. Hired him when he was 15 years old at a company that I actually I still to this day own. Mirror Digital Publishing was an early competitor to Adobe Acrobat. So, you can imagine how well that went. And then Jack was a high school kid. We met him because we were buying chocolate-covered coffee beans from his mother who ran a coffee shop.
And that was your drug of choice.
That was. Well, you know, Red Bull wasn't widely available then. And you know, meth despite the rumors about Missouri, we were not a meth capital back then. So if you wanted to stay awake, Marcia Dorsey sold us some pretty good stuff and we met her son and we hired him and he was fantastic. So Jack and I, you know, became sort of friends and then years later when they kicked him out of Twitter the first time, he came back to St. Louis and asked me to start a company with him, which was sort of weird because I would have expected him to ask somebody in Silicon Valley.
But I don't think he trusted those people. There's something about the Midwest ethic. There's a lot more permanence to relationships. So I don't know. I honestly don't know why Jack asked me, but.
No, it seemed inappropriate.
Uh-huh. So he just said, 'Let's start a company.' He just came back after Twitter and said, 'Let's start a company together.' And then you were searching out what you wanted to start a company around.
Yes. So we'd chosen the idea of a mobile device. So the iPhone had just been released and we were going to make something for the iPhone, but we didn't know what. And we'd already hired our first programmer. And then I went back to St. Louis to pack up my stuff and was in my studio trying to sell a piece of glass at the last minute before I got out of town to a lady who only had an American Express card and I don't take AMEX at my studio. So I was like, 'Well, don't you have a Visa or Mastercard?' She's like, 'No, I don't. I guess I can't buy this thing.' And she was actually Panamanian. It was a phone order. And I was so upset because I was about to unload this really expensive and pretty ugly piece of glass that I'd had sitting on the shelf for several years and I lost the sale.
And so I called Jack on my iPhone and I said, 'Man, we should turn my iPhone into a credit card reader so I never lose another sale.' And that was the whole idea for Square. That was the end result was could we make this thing into a credit card reader because, you know, my iPhone magically transformed into anything that I wanted it to be. It became a book. It became a map. It became a TV, but it didn't become a credit card machine. And that's what I wanted to do. So that's how Square started.
Amazing. You do have this book. It's called The Innovation Stack. Building an unbeatable business one crazy idea at a time. And there is a passage in this book that's so good that I interrupted my boyfriend.
Bob is an important character in the Square story. You go on to say how not just you are losing sales, but Bob and his ilk can't even make a living as a small merchant. So talk more about Bob, but also the data that you uncovered about small merchants.
So Bob was a friend of mine and in addition to driving this beater Corsica, he sometimes had to live in the back of the thing. And that's kind of heartbreaking because Bob and I were both glass blowers and I was actually making a pretty good living as a glass blower. And Bob is a better glass blower than me. I've said this publicly for years, but his stuff is better than my stuff. It's more creative. It's just better. And so you would think that he would be able to earn at least as much money as I was earning with a better skill set. But in fact, no. I made a bunch of money blowing glass and he didn't. And the reason was, Bob's kind of a weirdo and he doesn't get along with bankers and he once cut off his ankle bracelet because it was itchy. He's sort of a goofball, but he shouldn't be prevented from making a living just because he was a goofball. But if you're a goofball and you can't deal with banks, then you can't take credit cards. And if you can't take credit cards and you sell something as useless as glass art, then well, good luck getting cash.
So, people don't carry that much cash anymore. They don't carry checks. And so, Bob was really sort of the poster child for Square in my mind. As a matter of fact, there was a photo of his beater 92 Corsica on my desktop when we were starting the company because he was the inspiration and it was to make a system that worked for Bob. Making a system that worked for me was sort of the original team goal, but I'm fairly good with bankers. Like I'm actually now on the Federal Reserve. So, I get along with bankers just fine, but Bob doesn't. And so the question is, could we build a system that anybody could use? And by anybody, I meant my buddy who was living in the back of his car.
Right. I love that. And I love how that was like your founding insight on this. I think what I appreciated about your story is that you dove into it and found out the data and the sort of exploitation of small merchants. And also, you went after it as in we are not going to hire experts to tell us about a broken system. We're going to figure it out ourselves.
Oh yeah. So talk about all those things. So the first thing to know is that neither Jack nor I knew anything about payments, right? Except that I was frustrated. Jack wasn't even frustrated because he had never been a merchant. I mean, he worked for people, but he had never literally sold things directly. But I was deeply frustrated and deeply ignorant. And so we thought, oh, this will be easy to build. And then we discovered that no, no, no, the system was sort of not just rigged but designed to prevent people like us from doing what we wanted to do. And so we built the system, took us three weeks. We had a completely illegal hacked together system that would read your credit card and put the money in my bank account. Like that was this thing. And in doing so it broke 17 laws.
Okay. Like I stopped counting at 17. It may actually have been more but there were so many rules against what we were doing that it was pretty clear that the industry specifically forbade what we were doing. And then the question was, should we quit? And the answer was, well, no, because what we're building seems reasonable. It seems reasonable that I, as a small merchant, should be able to get paid just like a big guy does. Like, it seems reasonable that I should have the tools at my disposal that big people have at their disposal. And, you know, that just seemed reasonable. So, we just kept running towards that end. And it took us a year and a half to get either compliant with those 17 laws or in some cases get them changed.
So it was not clear that Square would ever exist.
And that was sort of a big risk. And I, you know, I really respect the founding team because there was no guarantee that it was going to work because we could point to things that were specifically saying we couldn't do what we were doing, right? And as far as industry experts, which is the other part of your question, they were telling us it was impossible or stupid or both. So there was this one dude who ran a company called VeriFone and VeriFone's still around but he's not. But he took me out to dinner once and downed a couple of martinis and then for like 2 hours told me I was an idiot for trying to serve the riff-raff.
The people who if they defaulted you couldn't sue, the people who were so small that they weren't worth anything. And it was deeply offensive, but he was running a $4 billion company and I had like this startup. So, I listened to him, but I got pretty pissed. But we didn't hire experts because actually that's not true. We hired one expert and his advice was so laughably bad that we said never again. Like everything he said we should do, we ended up just doing the opposite and that turned out to work. But like why pay for that advice?
Yeah, exactly. You can feel that yourself. So I think that's when you know as you're sort of pulling this all together, I guess I am curious when did you realize this is actually going to work?
The moment hit me when I was in New Orleans and a taxi driver just at random started pitching me on Square because he could take credit cards for the first time in his life.
So I'm in the back of this taxi and this guy's telling me he's like I can take a credit card. He's like you can pay me with a credit card. He's like, 'I got this thing. It's fantastic.' And he was telling me about Square and I was like, 'Oh, well, do tell.' You know, and so, you know how like when you first meet somebody, there's that little period of time where you can get away with not being truthful and then after a while you have to just sort of go with a lie. Well, that was it. I had like a minute where I could have said, 'Hey, I'm the guy that invented that.' And I didn't. So then I had to just play along. And he was getting most of it wrong. Like he was saying it's totally free. And I was like, 'No, actually not. We take a discount on the transaction.' And you don't have to do that. And I was like, well, that's actually not true either, but he had the spirit right. And he was so enthusiastic and this was a random occurrence in a city that I'd almost never been to. And I thought, 'Oh my god, this is going to be significant.'
Because you had your customer right there singing your praises, even though they're getting it all wrong.
Yeah. I mean, he got the main things right, you know, read credit cards and it was basically free to sign up.
Yeah. Yeah. Still is today.
Yeah. Tell me about the $8 million counter offer.
Oh, yes. So, we had somehow upset the Google hierarchy when we were hiring engineers and people would want to come work for us for some reason. And we were, you know, we were offering like $100,000 of salary and equivalent amount of stock. And that was our typical offer to an engineer. And Google got sick of us poaching their engineers. So, we interviewed one guy and made him an offer. And Google counter offered $8 million. Like it was not $8 million into a lump sum. It was $2 million a year for four years.
But still like that adds up to $8 million. And this guy didn't take it. Like he turned down an $8 million offer. Now it turns out in his case it was actually financially rational because the Square stock has done so well that yeah, he's probably fine. Well, I never found out why he did it because it just seemed insane. And of course, you know, I'm not going to ask him because like what the hell are you doing, Stan? Like, I mean, I can't do that. So, yeah, it was an $8 million counter offer, which just goes to show how much money these platforms make. Like, if you own search or, you know, social or some sort of vertical where you're just this market dominator, there's a lot of money there.
Yeah. For sure. And you say he made a rational decision. That's true from expected value. But in that moment, you were how big and I thought his decision was crazy. Like there was no way at that time that that was an economically rational decision given the odds of Square succeeding the way it did, right?
It turned out in hindsight to be a good call. But that's like, you know, somebody playing the Powerball, right? The odds are not in favor. You can still win, but the odds are not in your favor.
So I was amazed. But the reason I use that story is that people didn't work for Square for money. They worked for Square because we were on this mission to empower small business people. And you know, I don't know why this person did it, but we had a lot of people who said, you know, I remember my dad or my mom or my uncle having a small business and getting the shaft.
Or not being able to sell their stuff. Like there were a lot of people who were deeply passionate about what they were doing because either, you know, they personally or a family member had been through some trauma where, you know, they were shut out. And I don't know if you're an insider or an outsider. I think everybody's sort of an outsider at some point in their lives. And it's just a very angry, lonely feeling. And that motivates people to fix that. And so that's sort of one of the things that we, you know, latched on to was this, you know, deep spirit in our team and they did amazing things.
Yeah. So they were real missionaries and you hired it sounds like for that missionary. You know, something that we talked about when we saw each other at lunch a few weeks ago is this idea of like culture like people talk about the culture of innovation and I think that's like a lot of platitudes and like a lot of words and people say, 'Oh, we like failure.' But they don't really like failure.
I know. So, but you, it sounds like you really cultivated a culture of people who were very passionate about what you were building and were missionaries for it.
Well, yeah. I mean, the culture of embracing failure is just baked into a company that's illegal to start.
Right. So like anyone who joins that team and we were very upfront about the hurdles that were ahead of us. Anyone that joined that early team pretty much was hoping for a miracle that the law would change, you know, that the rules that Mastercard and Visa had would be somehow rewritten for us.
So it was pretty easy to get supportive employees because we didn't pay that much and we had this sort of crazy impediment that everyone was aware of. And so if you joined that team, you were a special person.
Yeah. So it's these and the culture of innovation is sort of baked in like we didn't have any posters around the office like oh be innovative or think for yourself or you know try fast and break stuff and disruption.
None of that. We were just working on a problem that was so difficult that people sort of were prepared for the fight.
Mhm. And that culture then permeated and people were willing to try something when you don't know what the solution is. There's this culture that bubbles up around let's try something else, let's try something else. Let's try something else. And that was just in the water at Square.
Yeah. Is there an example of like when like a specific example where everybody had to be like, well, that's not going to work. Well, that's not going to work. That's not going to work. And then you kept trying and iterating.
Oh my god, there were dozens. Yeah. But you know the one I was responsible for the hardware. So I was the guy that built all the reader and the reason it's so small and the reason it is square and the reason it had the spring design like I did all that stuff initially you know basically by myself but then eventually with a team of you know factories in China but the idea was very simple and that was I had to read a magstripe fast.
So I had this guy Sam Wen who was a brilliant programmer. Actually I had lunch with him this morning and yes it was lunch and yes it was in the morning.
You know he coded it and it was kind of Sam and me and a couple other people but very very small team and we just built and built and built until we found something that worked. And you know what we were doing was really a hack because we were not using the dock connector on the iPhone. We were using the microphone port, which was, you know, that was pretty offensive to Apple because they charged money to use the dock connector and the microphone port. Well, you know, they never expected their device to be, you know, sort of connected through that to anything but their headset. So, doing that was pretty radical and their hardware wasn't designed for it. We had to engineer around all these, you know, like DC blocking filters and crazy stuff that you put in an audio signal and you don't put in an electrical signal. But that spirit was just go go go go go and you know move fast because if you're doing something that doesn't necessarily have a high degree of success, then you better take a lot of shots.
You know, to this day when I work on a project, like I'm looking for daily shots on goal, if in fact we're doing something truly novel, right?
Right. So, okay. So, you had built this, you know, beautiful card reader and you had people and you were doing something illegal, right? You're trying to either get laws changed or whatever meeting with Visa, Mastercard and then it was all kind of working and you had people joining even though they were counter offered and then I think it would be proof for you that it was working because big bad Amazon came after you.
Tell us what that was like.
Yes. As bad as it is to have Google make an $8 million counter offer to somebody you're trying to hire, way worse is Amazon announce a competitive product that's 30% cheaper under the Amazon brand name.
Yeah. And when they did that, and what year was this?
And it was just chilling. We were a startup. We were a successful startup. We were still a startup and we were growing like crazy. But Amazon, when they do that to a startup, always wins.
And that was 100% true back in 2014 when Amazon did this to us. And we looked at our options and there were very few because of course we're not Amazon. We don't have, you know, their scale or their servers or their talent or their brand name. We don't have a listening device in everybody's home. Like we just don't compete very well head-to-head with Amazon. And then on top of this, they were undercutting our price. And there weren't too many moves we could make. So we did nothing. It wasn't actually I was on a Fed call today and the discussion was should we do nothing or should we do nothing, and our decision was to do nothing. We chose to not do something. We could have done it. So we did nothing. We aggressively did nothing against Amazon and that was sort of our only option that we could think of.
So we basically ignored the most vicious competitor in the world and it worked. So the miracle the reason I'm sitting here the reason there's a book the reason all this stuff is because that strategy was successful. And then the question is.
What the hell happened? Like startups don't beat Amazon and I had statistical proof to support that and the answer drove me nuts for probably about three years. I started well first I was very happy we won and by the way just as a not to knock Amazon because I am selling a book on Amazon. They were really cool when they got out of the market because they mailed a Square reader to all their customers. They said we're done. Use Square.
So they not only gave us a clear market but they gave us all their customers. They just handed them over.
That was really cool. Yeah. So I, you know, there's no malice for me towards Amazon, but I still remember how chilling it was to have to compete with such a great company. And so afterwards, first relief, and then secondly, this knowing question of why.
