Alex Blumberg (4:47)

So give us a call or send

Guy Raz (4:49)

us a voice Memo and to Hibt d.wondery.com and tell us how we can help you.

Jim McKelvey (5:07)

If you've ever been to a VC pitch, they're really weird things because they're basically the VCs that are up there playing defense. They're like goalies. And the entrepreneurs, the people who are pitching are just lying to them right now. They're telling some truths.

Alex Blumberg (5:20)

This is our hockey stick growth year. This is our projections and this is

Guy Raz (5:24)

what we're gonna do in year two and five.

Jim McKelvey (5:26)

And yeah, they have no idea. So the game is sort of attack and defend. You're attacking, they're defending. We changed the entire tenor of the room by saying, look, here's all the stuff that we don't know. Here's all the stuff that might blow up in our face here are legitimate reasons to not invest in this business.

Guy Raz (5:54)

Welcome to How I Built this, a show about innovators, entrepreneurs, idealists and the stories behind the movements they built. I'm Guy Raz and on the show today, how Jim McKelvey joined forces with his former intern and revolutionized credit card payments with Square today a multi billion dollar business. A lot of people think that regulations that make it frustrating to run or even start a business are put in place by anti business politicians. And in some cases that may be true. But a lot of regulations exist because, well, big businesses want to protect their monopoly. Economists sometimes call this regulatory capture. You see it in food, in healthcare, and as you'll hear in today's story, in banking, whenever you use your credit card, it goes through several middlemen. The point of sale provider, the payment processor, the merchants bank, the card network, and then the issuing bank. It's a highly complex and highly regulated transaction. And it's also why stores end up paying up to three and a half percent in fees every time you buy something. Those fees, by the way, are passed back to you in the price you pay for the thing you're buying. Now imagine trying to get into that chain of middlemen. Why would anyone with a monopoly allow you to take a piece of the action? This was the exact challenge that the founders of Square faced back in 2009 when they had the idea to simplify the process. At the time, Jim McKelvey, who you'll hear from in a moment, was a moderately successful glassblower in St. Louis. He had previously founded an early Internet business that was focused on web and publishing tools. Sort of like an early version of Adobe Acrobat. Back in the 1990s, when Jim was building that company, he hired a local intern, a teenager who would later go on to co found Twitter. And that would be Jack Dorsey. And when Jack Dorsey was fired as CEO of Twitter many years later in 2008, Jim reached out with an ICE. That idea came to him like so many ideas we've had on this show, from a personal frustration. Jim couldn't accept all credit cards for the glass art he sold. So together, the two of them came up with something completely new. Not just a payment system, but a physical reader that you plugged into your smartphone's audio jack. And why the audio jack? Well, we'll get there. Square's rise was not without huge challenges from the credit card industry, from tech companies, and even from a major competitor that tried to put it out of business in 2014. But today, Square's parent company, Block, is a behemoth with gross profits of over $10 billion last year. A big part of how Square not only survived, but thrived is because of Jim McKelvey's restlessness. His relentless willingness to just dive into problems stems in part from a personal tragedy that struck when he was in his mid-20s. As you'll hear, it turned him into someone who has a hard time just standing by when he feels like there's something he should do. Jim grew up in the suburbs of St. Louis in the 1960s and 70s. His dad was a professor at Washington University and his mom was a journalist turned stay at home mom. Jim studied economics and computer science, also at Washu, where he actually got published at an unexpectedly young age.

Jim McKelvey (9:37)

I took a beginning computer science class, and it was taught by a professor who wrote the book for the class. And the book was terrible, but it was the book that he wanted to sell, and he sold it at a high price to these students who were forced to buy it. I was indignant about that and I was mouthing off. Cause I've always sort of. I'm a hard guy to shut up. So I was saying that I could write a better book than this piece of crap. And one of my buddies said, well, why don't you? So freshman year, out of stubbornness, I wrote what was basically a spite book. I rewrote the textbook for my Intro to Computer Science class from the perspective of a student. And that book turned out to be pretty popular and actually got me a publisher.

Alex Blumberg (10:23)

And this was a book. It was called the Debugger's Handbook.

Jim McKelvey (10:26)

Yeah, yeah. The problem with these early languages was that they were poorly implemented. And the products had a lot of gotchas, they had a lot of mistakes. And if you would encounter one of these, unless you knew this sort of trick, well, you were stuck. And so I spent many hours unnecessarily stuck because nobody would explain these tricks to me. And you just had to know somebody who knew the trick and they could fix it. And I thought, well, this is stupid. Somebody should write down all these tricks. And that was my book. I mean, it wasn't so much a how to program, it was how to fix every mistake that you're about to encounter.

Alex Blumberg (11:03)

Hmm. I mean, this is early word processing. Did you, like, print it out on

Guy Raz (11:07)

a dot matrix printer and photocopy it?

Alex Blumberg (11:09)

I mean, how did you even make the first version of it?

Jim McKelvey (11:11)

Yes. In fact, the first laser printers had just come out.

Alex Blumberg (11:16)

Right. And they Were expensive. It was very expensive.

Jim McKelvey (11:19)

Oh, they were insane. It was like 10 cents a page. And it was this thing that the computer science department had one of. And if you were a senior professor, you could, like print five pages a day. And one of my professors actually gave me his passcode so I could print my book on this magic device that made it look like a book. Like, it didn't look like I'd typed it out. It looked like some publisher had published it. Whereas, in fact, I was publishing it myself for the first rounds until I got a real publisher.

Alex Blumberg (11:47)

All right, so this ends up being used on college campuses and high schools. How much money do you think you made from publishing this book?

Jim McKelvey (11:56)

I made thousands. I didn't know what I was doing.

Alex Blumberg (12:00)

Like, more than $10,000, $20,000.

Jim McKelvey (12:03)

Probably less than 20. I was a real deal for the publisher. You know, I was 19.

Alex Blumberg (12:09)

So, I mean, clearly you were a precocious student and you graduated in 87.

Guy Raz (12:15)

But were you.

Alex Blumberg (12:16)

Did you get recruiters sort of seeking you out, saying, hey, come work at our computer company, you know, whatever that meant in 1987?

Jim McKelvey (12:24)

No, no. There was one interesting side effect. Because I was published, I ended up having a reputation that I didn't really deserve as a good programmer, as a good engineer. So what I learned was that as long as I shut up and always associated with people who were actually better than me, I could sort of hide in this crowd. Super achievers. And that's probably the thing I learned best in college, which was I can go into a group of people who are way better than me and I can make them more productive.

Guy Raz (13:00)

Yeah.

Alex Blumberg (13:00)

Which is a hugely important superpower.

Jim McKelvey (13:03)

Right.

Alex Blumberg (13:03)

And this will come up later when we're gonna talk about this, because later on, in some of your best known businesses, you admit you're not. You were not the programmer. You were not coding this stuff. This was not your.

Jim McKelvey (13:15)

I'm good at explaining stuff because I have a pretty simple brain and I don't understand things that are too complex. But to your original question, which was, did I have any job offers after school? So I actually had this job possibly working for a giant accounting consulting firm. And I thought about it. I was like, oh, this is like death. Because they had this thing called method one, which was this massive multi ring binder tome of how to solve every problem. And it was like, you didn't have to think. You just had to go to method one. And I was like, I can't do that. So I had this computer science degree, but nobody was hiring programmers at the time. So I didn't really have the ability to just go out and get a job. But I had this glassblowing skill, and I thought, well, maybe I could sell my work. I became a glassblower, basically.

Guy Raz (14:05)

Yeah.

Alex Blumberg (14:05)

So this is interesting because I have a lot of questions about this. I guess in your senior year, you took a glassblowing class at WashU, and what drew you to glass? Because when I think of glass, certainly like in the late 80s or sort of the mid to late 80s, when you took it, I'm thinking like the people who would go to Renaissance fairs or.

Guy Raz (14:24)

Right.

Alex Blumberg (14:25)

Like, it is a. It's like something you would see it, like ye olde, you know. Right. Like some reconstructed, you know, English village from the 15th century. Like, what was it about glassblowing? Were you just like, this sounds cool.

Jim McKelvey (14:40)

The thing that captivated me about glass was the material itself. It is this amazing material. And especially when it's hot, it's like it's alive. So the glass blowing is sort of like dance, except it's this technical dance where you have to manage heat and you gotta manage. But what was also super interesting about glass at the time that I got into it was that nobody was doing it because glass factories, which are these big industrial furnaces, did not let artists come in and just play with the stuff. This was like, you know, going into Ford Motor Company and saying, hey, can I borrow the assembly line? You know, I want to make some car, and I don't know what it is, you know. So there was none of that until these two guys in Ohio basically created this small furnace. And we had one at Wash U, but it was this little junky furnace. And so nobody was doing. Was a completely open field, which means there was no competition. So I could sell work.

Alex Blumberg (15:34)

Yeah.

Jim McKelvey (15:34)

Because even if my work was garbage, it was the only glass in the gallery.

Guy Raz (15:39)

What were you making?

Jim McKelvey (15:40)

Like, bowls and bowls and vases and anything that would sell. And then through luck, I actually got a job at IBM in St. Louis? Well, no, it was IBM in Los Angeles. So this was the original remote work. I'd met some people at Washu who knew about my book and they needed some writing done at IBM. So they hired me temporarily at IBM in Los Angeles, but I was living in St. Louis, and I impressed them enough that they said, hey, can you just stay on and keep working with us? And then I quickly realized that IBM didn't know when I did the work, so I could work in the glass studio during the day and then do my IBM Work at night.

Guy Raz (16:20)

Nice. And I guess eventually they started to send you to do work around the country, and you were able to actually connect with galleries in different cities and

Alex Blumberg (16:31)

sell your work, right?

Jim McKelvey (16:32)

Oh, yeah.

Guy Raz (16:32)

So I'm just curious, like, how lucrative was this business? Like, how much would these galleries sell a vase, for example?

Jim McKelvey (16:39)

I mean, 500 bucks was a pretty good price. I'd get half of that, typically.

Alex Blumberg (16:43)

But you were. You were making a decent living. I mean, if you were selling a piece for 500 bucks and you're getting half of that and you're in a couple of galleries and, you know, you were probably subsidizing your income from IBM.

Jim McKelvey (16:55)

My role was $1,000 a day. Every day I work in the studio, I make $1,000.

Guy Raz (16:59)

Wow.

Jim McKelvey (16:59)

Thousand dollars a product.

Alex Blumberg (17:00)

Okay. That's a lot of money for that time.

Jim McKelvey (17:03)

Yeah. Well, I mean, that's allowed me to start my other company. Right. My venture capital came out of the studio.

Alex Blumberg (17:13)

I want to ask you about. I don't even know how to approach this, because it's a difficult moment in your life. You're 24 and your mom passes away just before Christmas, I think.

Jim McKelvey (17:29)

Well, she committed suicide just before Christmas. So, I mean. Yes, that was December 18, 1989. That was. My world exploded.

Alex Blumberg (17:43)

Yeah. Did you had your mom. Had she struggled with depression for as long as you knew?

Jim McKelvey (17:52)

Yes and no. Yes, she had struggled with it. I did not know this severity. She never got over the postpartum with my brother and struggled with it. Electroconvulsive therapy, like, a lot of heavy stuff that I had no idea was happening. Mom hid it very, very well.

Alex Blumberg (18:08)

Cause you had a happy childhood. You were an Eagle Scout.

Jim McKelvey (18:11)

I had a great childhood. I never knew anything was wrong with my mom, you know. And then towards the end, she had been through a bout of depression, which she had sort of fought through. Like, there was. It was not a situation where my mother, you know, attempted suicide and failed. My mother's suicide was so well planned that nobody could have caught her or stopped it. And she did not telegraph her punch at all. She planned it. My dad and I were just caught by total surprise, and it just destroyed my world.

Alex Blumberg (18:46)

And most of us don't want to talk about that also, because there's all kinds of, you know, baggage connected to that.

Jim McKelvey (18:57)

Yeah. Yeah, it is, but it's. I mean, it's. Losing my mom completed my education. Maybe it didn't complete it, but, boy, did it. It was. There was so much that I would not know. But for having to deal with the Sudden death of my mom. I mean, it's a lot of the energy that I have comes from the feelings that are stirred up when I think about what I could have done to save my mother. Part of me knew that mom was in trouble and that I could have done more, and I didn't. Hell, I could have just gone home and taken a walk with my mother every night. That could have saved her life. I didn't do that. To this day, I regret the inaction. And so when I find myself in a situation where I think something needs to be done, I no longer sit there and say, well, someone else will probably do it. My attitude is like, you gotta be the one to do something.

Alex Blumberg (19:57)

You know, it's natural, it's instinctive for us to say, what could I have done more? When, in fact, in many cases, it's beyond anything that we could do.

Jim McKelvey (20:12)

Yeah. Yeah. I mean, that's. But that's like, you don't know, right? To me, if you try and it doesn't work, well, you tried, but if you don't try, well, that seems wrong. If I care about something and I don't try to fix it, then I question whether or not I really cared.

Alex Blumberg (20:39)

Do you remember how long it took you before? I mean, you're 20. You were so young, right? I mean, it's.

Jim McKelvey (20:45)

I was a kid. Yeah.

Alex Blumberg (20:46)

Do you remember how long it took you before you were able to just even pick yourself up? I mean, I can't imagine dealing with something so traumatic.

Guy Raz (20:56)

Like.

Jim McKelvey (20:56)

I mean. Depends what you mean by pick yourself up. What it did was it put me in touch with this entire world that I didn't know. So here I am thinking I've got this idyllic existence with no problems. I've never even had a cavity, okay? I've never even had a tooth filled, okay? That's how easy my life was. And then all of a sudden, this happens and I lose Mom. And, I mean, it was all of a sudden as if, you know, somebody turned on black light on the hotel room and you see, what, stuff on the bedspread? Sorry about the analogy, guy.

Alex Blumberg (21:36)

No, it's probably better out there, but it's a very good analogy.

Jim McKelvey (21:39)

The point is, because it just woke me up. And all of a sudden I started seeing pain in people, like pain in my friends. I was trying to make up for 24 years of obliviousness by just being in touch with people who were suffering. And, my God, they're everywhere. We are everywhere. It's not.

Alex Blumberg (22:02)

They.

Jim McKelvey (22:03)

It's a weird.

Alex Blumberg (22:07)

So in Sort of the midst of this. I mean, I think around this time you had been working on another business, you'd been doing glassblowing work and IBM wasn't that interesting to you. And I guess you started to think about starting your own company, which would become a company called mira. It was a document imaging company. Tell me a little about how that came about. That idea came about.

Jim McKelvey (22:31)

So I already had my own company. I had a company that built CD storage cabinets.

Alex Blumberg (22:35)

Like carpentry?

Jim McKelvey (22:36)

Yes, carpentry. Although I had a factory do these things. It was mostly marketing and sales.

Alex Blumberg (22:40)

I see.

Jim McKelvey (22:40)

We were in premium catalogs and whatnot.

Alex Blumberg (22:42)

We should explain to people that there was a time where people would store their CDs like books on a shelf.

Jim McKelvey (22:47)

Yes, this is correct. And it made money. But it was a mediocre business. And I was a mediocre glassblower and I was a mediocre IBM employee. And then my mom dies and I realized that my mother has seen nothing but mediocrity out of her son.

Alex Blumberg (23:02)

I don't know. You have three businesses and you're 24. I don't. That doesn't sound mediocre to me.

Jim McKelvey (23:06)

I have three businesses, but they all kind of suck.

Alex Blumberg (23:09)

Yeah, I mean, you're a super motivated 24 year old. I mean, that seems like a little bit of a stretch to say that you're mediocre.

Jim McKelvey (23:18)

So having your own business was not as cool then as it is now.

Alex Blumberg (23:22)

Right, right.

Jim McKelvey (23:23)

And I looked at what my mother got to see and she saw her son as this kind of mediocre weirdo. At least that's how I saw it. And then I thought, well, this is not who I want to be. So I quit IBM, I closed my CD business and I stopped glassblowing. I just, I said I'm going to focus. And what am I going to focus on? Well, I'm going to focus on the thing that creates fortunes, you know, computers, because I've got a computer degree. So my friend and I started a company called Mira.

Alex Blumberg (23:53)

And this was. It was like what Adobe Acrobat would become. It was a document reader.

Jim McKelvey (23:59)

Exactly. Yes. You know, it seemed like this visual thing was going to be important on computers that they weren't going to be just text. So we started building this thing that was very similar to Adobe Acrobat, except that there was then Adobe Acrobat, which kind of wiped the floor with our product.

Alex Blumberg (24:16)

I want to ask you about that in a second, but before that happened, because I think it happened in the first year or two after you launched?

Jim McKelvey (24:23)

Yeah. That'd be about 91, 92.

Alex Blumberg (24:24)

Did you make any money before that time?

Jim McKelvey (24:27)

Very little. Very little.

Alex Blumberg (24:28)

Okay. And you had been able, from what I understand, to fund this because you had made money from working at IBM and glassblowing. You actually. I mean, this kind of nuts. In 1990 or 89, you're 25, you had 50 grand. I mean, that's a ton of cash that you saved up.

Jim McKelvey (24:46)

I saved a lot of money, yeah.

Alex Blumberg (24:47)

Presumably you could bring some people on and hire them and I did.

Jim McKelvey (24:51)

Yeah. I had the capital, but it was more than just the capital. I'm also cheap. Like, I can live on air. My budget was $25 a week. Food, clothing, and transport. That was what I lived on.

Alex Blumberg (25:05)

All right, so you're working on this product, but actually Adobe, which is a much more powerful, much bigger business, they come out with the Acrobat reader. And that just kind of syncs your entire business model.

Jim McKelvey (25:17)

Yep.

Alex Blumberg (25:18)

So you guys have to change what you do. So what do you do? I mean, that's it. Mira's dead at this point.

Jim McKelvey (25:26)

So Mira's dead. But we had attended one trade show when we had a product. The trade show was the association for Image and Information Management. I don't know if they're still around, but they were the trade show for imaging. And I was struck by the irony of people leaving the imaging trade show with bags of literature on how to have a paperless office.

Alex Blumberg (25:48)

Physical literature. Physical literature from these companies about how to have a paperless office. Okay.

Jim McKelvey (25:55)

So I came up with this idea. What I wanted to do was take all my competitors products and charge them to put their brochures on my software. So we did use my software to create the first CD ROM for the imaging trade show.

Alex Blumberg (26:10)

Basically meaning. Explain. You would take scans of.

Jim McKelvey (26:14)

We would take scans of all their literature and we charged them 10 bucks a page to put it on our software.

Alex Blumberg (26:19)

Oh. So the base of the pitch was, hey, we're gonna give a CD ROM to everybody going to this trade show. Do you want to be on it?

Jim McKelvey (26:27)

Yes.

Alex Blumberg (26:27)

It's like fomo, like, you have to. And so everybody would want to be on it. So they'd have to pay you to have their literature on the CD rom.

Jim McKelvey (26:35)

Correct. And then the trade association tried to stop me from doing it because they said, well, this is our trade show, you can't do it. And I was like, well, I'm hard to kill and you can't stop me. And so then they sent the lawyers after me, but I laughed at them, because what are you gonna do, take my car? Like, good luck trying to start it. So. But the problem guy was that I made so much money putting my competitors literature on my cd. I was like, why am I trying to sell software? And I just made 70 grand producing a trade show CD.

Guy Raz (27:09)

Yeah.

Alex Blumberg (27:09)

I mean, it's an amazing. I mean, at the time, it sounds like printing money. It's like owning a classified newspaper. Right at the time, that was great. And then you would have to. How would you distribute the CD to every. Every exhibitor or every attendee?

Jim McKelvey (27:24)

Well, in the first trade show, since we were prohibited from attending it ourselves, we had to get companies who wanted more booth traffic to distribute it. So I got all the major companies to distribute for me.

Alex Blumberg (27:35)

They just have a stack of them on their tables.

Guy Raz (27:37)

Okay.

Jim McKelvey (27:38)

Oh, yeah. It was a reason to go to their booth. I mean, it was the best thing they. And again, I charged them for that. Like, we made so much money on that.

Alex Blumberg (27:45)

I mean, there was a period of time where I can imagine this was a great business, because how many trade shows? You know, thousands of trade shows a year.

Jim McKelvey (27:53)

There are 5,000 trade shows. And the first one I did, I

Alex Blumberg (27:56)

made 70 grand on one product, on one CD, on one. 70 grand profit.

Jim McKelvey (28:02)

$70,000 of profit. And that was with the trade association actively suing me and trying to stop me. So imagine how much I could make if we cooperated with the trade associations, which is what we did for the next two years. We made friends. I'm not going to pick a fight. So we did all the other trade shows.

Alex Blumberg (28:24)

I want to just break into this story for a moment because from what I understand, something happens during this time where you're transitioning from being an imaging software company to a CD ROM literature company. And that is you would meet somebody who would factor very prominently in your life. And it starts with a coffee shop in St. Louis. So tell me about this coffee shop and why it was relevant to what you were doing.

Jim McKelvey (28:52)

There was a lady named Marcia Dorsey who owned a coffee shop called Shenandoah Coffee. And we were building a trade show disc and had screwed it up so badly that. That we were in a fire drill to redo, you know, probably 200 hours of work.

Alex Blumberg (29:08)

How many people were working with you?

Guy Raz (29:10)

Like 10?

Jim McKelvey (29:11)

It was probably 10, but that weekend it was probably 20. It was everyone we could find.

Guy Raz (29:17)

Yeah.

Jim McKelvey (29:18)

And one of my colleagues went in to buy some chocolate covered espresso beans to keep the workers awake. And Marcia said, well, what do you guys do? And he's like, oh, we work with computers. And she's like, oh, my son loves computers. And he's like, well, how do you like to make 50 bucks? The hard way. So this 15 year old kid comes over, middle of the afternoon and he introduces himself and he's like, hi, I'm Jack. And Jack pulled an all nighter with us that first day. Jack, this is Jack. Jack Dorsey.

Alex Blumberg (29:49)

Dorsey, yeah. And he was a 15 year old kid and he knew enough about computers that he could help you guys fix this CD ROM problem.

Jim McKelvey (29:58)

I mean, he wasn't doing a program, he was running a scanner. It was, take this page, scan it, scan it, save, type this file name correctly and do it 3,000 times in a row. But what I quickly noticed was Jack came to work for us. Then afterwards, I mean, after he got out of trouble with his mom, got

Alex Blumberg (30:15)

out of trouble because we sent him

Jim McKelvey (30:16)

home at 5am or something.

Guy Raz (30:18)

I see.

Alex Blumberg (30:18)

Okay.

Jim McKelvey (30:18)

And then what I discovered was that whenever I gave Jack a project, he would always do it better than I was expecting. And I got curious about how deep that river ran. So I kept giving him harder and harder projects and he kept delivering every one of them. And I was like, oh my God, what can this kid do?

Alex Blumberg (30:38)

Tell me about him. At 16, was he, was he like a savant? I mean, was he like a programming just genius?

Jim McKelvey (30:45)

No, he was very good. We called him Jack the Genius, that was his nickname. But you know, he was not a genius. He was just very good. Yeah. And so finally we started doing some, you know, more serious work together. And then I saw the train coming to hit the company, which was the Internet. So this was 95. It was absolutely clear to me that the World Wide web was going to wipe out the CD ROM trade show business. And so I told the whole company, well, look, we need to pivot into conference publishing, you know, using the same tools that we have. But instead of publishing trade show literature, we're going to do, you know, boring technical papers. And everyone was like, yes, Jim, yes, yes, yes. And they all said yes. But none of them did anything differently. And so the only person who would listen to me was Jack Dorsey. So his second summer at Mira, I took Jack aside and I said, look, none of these other people are going to be here in six months. You and I have to go off and save the company in the meantime.

Guy Raz (31:52)

Okay, so you are seeing the handwriting on the wall.

Alex Blumberg (31:54)

You know that most companies are going to start making their own websites and

Guy Raz (31:58)

they will not need your services anymore.

Alex Blumberg (32:00)

And so you guys decide to Pivot

Guy Raz (32:03)

away from trade conferences to, I guess, academic conferences. Like you launch a publishing platform for research papers that people would present at these conferences.

Jim McKelvey (32:14)

Yeah, we took large boring books and made them into small boring CDs.

Alex Blumberg (32:20)

So you basically, you're still in the CD ROM business. It was just you shifted to academic conferences.

Jim McKelvey (32:26)

Yes.

Alex Blumberg (32:26)

Where you saw more opportunity, at least for a longer period of time. Because the Internet would have killed that business too.

Jim McKelvey (32:32)

Oh, actually the Internet is. I mean, that business is still going today.

Alex Blumberg (32:35)

Oh, wow.

Jim McKelvey (32:36)

Yeah, yeah, yeah.

Alex Blumberg (32:37)

Mirror still makes money, but not on CD ROMs.

Jim McKelvey (32:39)

I mean, no, it's web publishing. But I mean like the core tech is still. You gotta collect these papers and verify them and jury them and rank them and publish them and.

Alex Blumberg (32:50)

Yeah, okay, so you guys have this product within a product and that ends up kind of saving.

Jim McKelvey (32:57)

Saves the company. Yeah, yeah.

Alex Blumberg (32:59)

And when, you know, having this kid, Jack, I mean, did you say to him, hey, you know, don't bother going to college, just come work, come work here?

Jim McKelvey (33:08)

No, no, no, I'm not going to talk somebody out going to college. I mean, my father was a professor. He's a dean of the engineering school. College is. That's the family business.

Alex Blumberg (33:18)

Fair enough.

Guy Raz (33:18)

All right.

Alex Blumberg (33:19)

All right. So Jack Dorsey goes away. He kind of leaves your world, right?

Jim McKelvey (33:24)

Yeah.

Alex Blumberg (33:25)

And he goes on to college. I think he drops out.

Jim McKelvey (33:29)

Yeah, yeah, he went to college, then we did different college and then he drops out.

Alex Blumberg (33:32)

Okay, but you, you continue to run Mira into through the 90s and then you step away in 2001. Yeah, but you had enough money. I mean, you were able to build a glass blowing studio in St. Louis.

Jim McKelvey (33:48)

Yes, yes. Built a world class glass studio in St. Louis.

Alex Blumberg (33:52)

This is what you were doing?

Jim McKelvey (33:53)

Yeah.

Guy Raz (33:54)

Full time.

Jim McKelvey (33:54)

Yeah. Blown glass. And I mean, I did some other stuff. You know, I built some apartments, but I was not full time at Mira anymore. Mira was still paying me, but I wasn't the boss.

Alex Blumberg (34:06)

All right, you have been keeping in touch with Jack Dorsey when he comes back to St. Louis and he would go on to co found Twitter, right?

Jim McKelvey (34:14)

Yes.

Alex Blumberg (34:15)

And become the CEO. Many people know the basic outline of the story and we told some of it when we had had Williams on. But the basic story is he was a very young CEO and for a variety of reasons, he was pushed out by the board. They pushed him out after two years. Yeah, in 2008. And Twitter that time was still very new. It was like really niche. Not that many people were using it, but it still made some news. And I guess he had come Back around Christmas in 2008. And you guys reconnect at that time, from what I understand, you start talking about maybe doing something together. Tell me why that was interesting to you in 2008 when you had this really nice business and life, like, what? Sounds like you had some itchy feet. You wanted to do something, something new.

Jim McKelvey (35:06)

I mean, I was a little bored.

Alex Blumberg (35:08)

Got it.

Jim McKelvey (35:08)

I was comfortable, but not, you know, fully engaged. And what they did to Jack seemed wrong to me. They not only kicked him out of Twitter, they tried to write him out of the history. And I know this very well because I was reading at the time, the reports, and they would mention biz, and they would mention Ev as the founders of Twitter, and they would omit Jack and they would omit another guy, Noel Glass, I think.

Alex Blumberg (35:40)

Yeah. I will say, to his credit, Ev Williams did not do that in our interview. He certainly gave Jack Dorsey credit where credit was due, because he really did invent Twitter. I mean, he was the one who coded this thing and who came up with this thing.

Jim McKelvey (35:52)

Well, had you asked Ev that question in 2009, I wonder what kind of answer you would have gotten.

Guy Raz (35:59)

Right?

Alex Blumberg (35:59)

It was a different story.

Jim McKelvey (36:00)

Yeah.

Alex Blumberg (36:00)

They've all grown up. Right. But you felt like it was unfair. Okay, I get that. But the idea of starting a business, you had itchy feet, you were bored, as you say. And here was this guy that you knew for a long time, and what, you thought, wait a minute. This could be a cool opportunity to

Guy Raz (36:15)

do something with him.

Jim McKelvey (36:16)

No, that wasn't it. It was Jack's idea to start the company. Because my original idea was, let's just go out to California and make, you know, make war on the Twitter. Guys.

Alex Blumberg (36:30)

Wait, sorry, what do you mean? You. You. What did that mean?

Jim McKelvey (36:33)

It was spite, you know, I don't know what we're gonna do.

Alex Blumberg (36:36)

Wow. In hindsight, it seems very unusual. I mean, it's, like, not a great use of your time, so.

Jim McKelvey (36:43)

Guy. In point of fact, that was probably an idea in my head for 30 seconds.

Alex Blumberg (36:47)

Right. Okay.

Jim McKelvey (36:48)

And that was not fully serious. It was not fully. But that was what I said. And then Jax said, well, why don't we build something new? It just can't involve social media. And I was like, okay, well, that still leads to a lot of stuff. We had to figure it out. So we decided that we wanted to do something with mobile phones, because mobile phones are just, you know, the iPhone had just come out.

Alex Blumberg (37:08)

Right.

Jim McKelvey (37:08)

Let's figure out what to do with it. And then off to California to come up with ideas. And then we hired Tristan atierney, the first iPhone engineer, and he was gonna be starting in a couple of weeks, and we didn't have a really good idea to do with this iPhone, but Tristan was starting, so we had to come up with something.

Alex Blumberg (37:26)

You go to San Francisco, you hire this guy who had been an engineer on the iPhone.

Jim McKelvey (37:30)

Yeah.

Alex Blumberg (37:30)

Obviously, Jack had a reputation already, being at Twitter, and you had experience. You probably weren't as well known in the bay area.

Jim McKelvey (37:39)

I was nobody, and Jack was somewhat nobody.

Alex Blumberg (37:44)

Right. But you had hired this guy without exactly knowing what you were gonna do, which is very typical. I mean, it was then. It still is now.

Jim McKelvey (37:51)

Yeah. And I was fishing for other ideas, but hadn't come up with anything. And then I went back to St. Louis to sort of pack up my stuff. Okay. I'm going to move to California and take my fiance with me. And that's how committed I was. And I was in my studio trying to sell a piece of glass. I mean, I was there, and I got this phone call from this lady in Panama who wants to buy this ridiculous thing that I'd made. It was a Bathroom faucet. 2,000 bucks. Ugly as can be. It's been sitting on the shelf for years. But I need the two grand. Like, $2,000 is really going to help me with the cash flow and moving out. And I lost the sale because I couldn't take an amex card.

Alex Blumberg (38:34)

You only accepted visa and mastercard?

Jim McKelvey (38:36)

Yeah, yeah.

Alex Blumberg (38:37)

Which was very less common today, but it was Super Common in 2008, 2009.

Jim McKelvey (38:42)

Yeah. Amex charged too much, so we didn't take it. In my studio, we'd always successfully been able to get people to have a visa or mastercard, but this lady didn't have one. And I am sitting there talking to this lady on my iPhone, and I look at my iPhone, and my attitude towards the iPhone was it was this magic device that should become anything I wanted it to. It turns into a book or a TV or a map or a flashlight or a phone or, like, that's what this device is supposed to do. And it didn't turn into a credit card reader. And I thought, well, that's what we should do. We should make the iPhone turn into a credit card reader.

Guy Raz (39:19)

When we come back in just a moment, Jim reaches out to investors with 140 reasons why his exciting new idea just might fail. Stay with us. I'm Guy Raz, and you're listening to how I built this. Right now, every business is asking the Same question. How do we make AI work for us? No more waiting. With NetSuite by Oracle, you can skip the guesswork and put AI to work. Today, NetSuite is the number one AI Cloud ERP trusted by over 43,000 businesses. It's a unified suite that brings your financials, inventory, commerce, HR and CRM into a single source of truth. And with NetSuite AI connector, you can use the AI of your choice to connect to your actual business data. Plus automate those tiresome manual processes. Let's see your competitors do that. Whether your company earns millions or even hundreds of millions, NetSuite helps you stay ahead of the pack. If your revenues are at least in the seven figures. Get their free business guide demystifying AI at netsuite.com built the guide is free to you at netsuite.com built netsuite.com built

Jim McKelvey (40:54)

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Guy Raz (41:30)

Hey, welcome back to How I Built this. I'm Guy Raz. So it's around 2008, 2009, and Jim McKelvey has an idea that could be a game changer for small business. Using an iPhone to help read credit cards. And one of the first people he runs this by is Jack Dorsey.

Jim McKelvey (41:47)

They said, that's interesting. Those were his exact words. And he said nothing else.

Alex Blumberg (41:53)

Yeah, I want to jump into this.

Guy Raz (41:55)

Right.

Alex Blumberg (41:55)

Seems like a pretty great idea because, you know, at the time, people would have these, like, credit card like, like these sort of boxes that were plugged into the Internet and connected to a register, and you would swipe the card through this thing.

Jim McKelvey (42:09)

Right.

Alex Blumberg (42:09)

But it was big and heavy. It was like a brick.

Jim McKelvey (42:11)

Yeah. And expensive. They were a thousand bucks.

Alex Blumberg (42:13)

And so you're. You were saying, let's make something that works with an iPhone that we can plug into the iPhone.

Jim McKelvey (42:19)

Yeah. I mean, hardware was my idea because Jack wanted to do software only and just use the phone. And I'm like, no, we need a piece of hardware.

Guy Raz (42:26)

Right.

Jim McKelvey (42:27)

And then we quickly realized that there are two ways to process a card. One is called card present and the other is called card not present. And Card not present is way more expensive and way more risky for the merchant. So you want to do card present. You want to prove that the person buying the thing is there and has a credit card. Otherwise you're vulnerable to a chargeback anytime. So it's no protection for the merchant. So the merchant needs card present. And the only way to get card present was to read the magnetic stripe. And I said, jack, we need to read the mag stripe. And Jack said, no, you're crazy. We need to read the number using the camera that's already on the iPhone.

Alex Blumberg (43:03)

We just scan the number. That seems to make more sense. Right? Because then you have to have another device connected to it.

Jim McKelvey (43:09)

Well, yes, his way makes more sense, except for the fact that it doesn't work. Yeah, like you can't just tell the credit card industry, just accept an image. Because think about it. I can take a picture and mail it to Singapore. Does that mean my credit card's in Singapore?

Alex Blumberg (43:26)

Right.

Jim McKelvey (43:26)

So you can scan your card, but you don't get card present protection.

Guy Raz (43:31)

I see.

Jim McKelvey (43:32)

All you've done is saved yourself typing 16 digits.

Alex Blumberg (43:35)

So you knew that it had to be read by the magnetic strip in order for it to work.

Jim McKelvey (43:39)

Yes, my attitude was that we're not going to get the credit card monopolies to change. Yeah. They had rules specifically preventing exactly what we were trying to do among a bunch of other laws at the state and local level that were preventing what

Alex Blumberg (43:55)

we were trying to do, which meant that. And just let's just break it down for a minute. The laws prevented a merchant from accepting a credit card payment outside of this existing system.

Jim McKelvey (44:06)

Correct.

Alex Blumberg (44:07)

So then if the system controls who pays for credit cards, if Visa, MasterCard, Dynamics control the system, how do you change that system? If they are the rule makers and they own the businesses and they actually make the rules about the business, well,

Jim McKelvey (44:24)

you have to get them excited to change their rules. I mean, it was clear in the first day that there were. I counted 17, there were probably more, but I stopped counting at 17 rules or various regulations that we were breaking in some way. Some of them were laws, some of them were network rules, like ofac, kyc. You have to know your customer. Well, we could figure that out eventually. That's a banking regulation, but we were certainly in violation of that in the early days.

Alex Blumberg (44:49)

But I guess the question I have is what would their incentive be to do it? I mean, when you looked at this world of credit card transactions in 2000, let's say eight, were most small businesses accepted? I'm assuming Most small businesses.

Jim McKelvey (45:03)

No, no. The reason they should change their rules, that we would bring them millions of new merchants.

Alex Blumberg (45:09)

Why would this system bring in more merchants?

Jim McKelvey (45:11)

Basically, if you didn't have $100,000 of business, you would not take credit cards. That was sort of the cutoff because it was too expensive. You had to have a sponsoring bank, you had to have a certain level of accounting, you had to have a physical location, you had to have a business that had a certain stature. Like, none of the small businesses could make those requirements.

Alex Blumberg (45:32)

So if you're like a farmer's market business, you just take cash.

Jim McKelvey (45:35)

Yeah, forget it. The system was built for merchants who had $100,000 or more in transactions. It was never designed to serve a little guy. Basically, they didn't have very good negotiating positions, so they would get screwed individually. And companies like Walmart and Target, who had big, you know, departments of lawyers and lots of ability to, you know, sort of negotiate on their behalf, paid lower fees.

Alex Blumberg (46:02)

So if you were a small business owner, you're going to be paying all kinds of transaction fees that could eat in like 5, 6% of the sale.

Jim McKelvey (46:09)

Oh, yeah, tremendous amounts of fees and hidden fees, like tricks. It was just vile.

Alex Blumberg (46:15)

So this is, I go back to my question, which is if a credit card company is making 6,7% on a small business transaction, I would think they would have an incentive to try and block what you were trying to do.

Jim McKelvey (46:28)

Well, what we were doing was we were telling them, basically, open up the market to all these people. You don't get to exploit yet. You know, we didn't say it like that, but they were. I mean, if, you know, the understanding was, you guys are making so much off these little merchants, I'll bring you even more of them, you know, and we never argued with the network fees. So remember The Visa and MasterCard fees, they're fees fairly straightforward. Where the crazy abuse is, is all the middlemen in those transactions. So Visa, MasterCard, they don't really abuse the merchant, but the abuse happens with all their partners, like the, the independent sales organizations that work for the banks that work for Visa and MasterCard. You know, there's this chain of people, and in that chain, everyone takes a huge cut of the little merchants. So Visa, MasterCard were the guys who had the rules. They weren't negatively impacted by anything that square was going to do, so it was easier to convince them to change it.

Alex Blumberg (47:31)

And there was, I remember, I mean, even small business, like there was, it was an opportunity for even a small business person to do credit Card processing. Like, I know of people who had businesses, but, like, had a side hustle where they would do credit card processing and make, like a few hundred grand a year just from that business.

Jim McKelvey (47:49)

Yeah, yeah.

Alex Blumberg (47:49)

And going back to the credit card companies for a sec, I mean, I understand why they would be interested. Because you're basically saying we can bring

Guy Raz (47:55)

in an order of magnitude more businesses

Alex Blumberg (47:58)

into the world of credit card transactions because if we can reduce the fees, cut out the middlemen, you guys make more money, and basically square this company, we will be the only middleman.

Jim McKelvey (48:11)

Correct.

Alex Blumberg (48:13)

And I guess my next question is, why wouldn't the credit card companies just think, well, why don't we just do this ourselves?

Jim McKelvey (48:18)

Well, that's not what they do. They don't deal with the credit card networks. You say credit card companies. The technical term is networks. And what they do is maintain the brand, write the rules.

Alex Blumberg (48:29)

So we're talking about Amex, Visa.

Jim McKelvey (48:30)

Yes, Amex, Visa, MasterCard, Discover, you know, Dynasty, JCB. Like, you name any credit card system, and they are a rulemaking brand body.

Alex Blumberg (48:41)

Okay?

Jim McKelvey (48:41)

Their job is not to deal with merchants. Their job is not to take any risk. Their job is not to push any paperwork. Their job is to keep the system running. They're taking 25 basis points or 15 basis points off a Walmart transaction or a square transaction. So they're getting paid either way.

Alex Blumberg (48:58)

So they were incentivized actually to see this work.

Jim McKelvey (49:01)

Oh, yeah.

Alex Blumberg (49:01)

Because you guys are basically saying, look, we're gonna do the work for you. For all intents and purpose. We're gonna be the signup, you know, a store, a shop. They're just gonna deal with us.

Jim McKelvey (49:12)

Yeah.

Alex Blumberg (49:13)

And we'll pay you guys. We'll handle everything else.

Jim McKelvey (49:15)

Yeah, we'll pay your rack rates.

Alex Blumberg (49:18)

So there were all these. There's all these things along the chain. Okay, so this is one challenge. The second challenge is that hardware, right? You've got to build something that is going to scan or read a stripe and somehow connect to an iPhone. But the iPhone is proprietary. Like, you need Apple to agree to let you plug into the iPhone, let the thing work.

Jim McKelvey (49:46)

Well, yes, you did need Apple's permission. That was the thought of the dock connector. They had this little port at the bottom. They still do.

Alex Blumberg (49:53)

Right.

Jim McKelvey (49:53)

And at the time, it was this big port at the bottom, and you had to pay Apple for access to that port. You had to pay Apple for a special chip that allowed you to build your hardware. And then you had to convince them to let you do it. And at the Time, the iPhone had a terrible battery, and so they wouldn't let you do anything that sucked power from the device because that just made the battery performance worse. So there was almost zero chance of us getting permission from Apple to connect a credit card reader to their device.

Alex Blumberg (50:26)

So that seems like a pretty big problem if you want to use the iPhone as the main tool.

Jim McKelvey (50:33)

Yeah. So fortunately, I'm a nerd. There's a magazine called Make Magazine.

Alex Blumberg (50:38)

Yeah.

Jim McKelvey (50:38)

And if you open up the first issue of Make Magazine, there's this dude who hacked a cell phone and put a credit card reader in through the microphone jack. So I'm thinking, oh, well, we can read. We can build a reader and go through the headphone Jack. And I had a friend in St. Louis who was a professor at the university who actually had done work processing credit cards and doing sort of security systems for credit cards. So I called him and I was like, hey, can you help me build this card reader? He was like, oh, we'll just go for the headphone Jack. And I was like, oh, hey, good idea.

Alex Blumberg (51:13)

So the headphone jack could be the way into the iPhone. But you didn't need permission from Apple to use that.

Jim McKelvey (51:21)

Well, you did and you didn't. They could have easily blocked us from the App Store. Apple could have stopped us, and if we had offended them or made them felt threatened in any way, they would have shut us down.

Alex Blumberg (51:36)

All right, so what was your process to, like, walk through those raindrops?

Jim McKelvey (51:41)

Oh, get Steve Jobs to bail us out.

Alex Blumberg (51:44)

Sounds really easy.

Jim McKelvey (51:46)

Yeah. So Jack emailed Steve. Steve was a fan of Twitter. Jack got a meeting with Steve, which was canceled because of Steve's health. And you gotta understand, Steve was this larger than life deity at Apple. So anything that Steve was interested in, the upper management at Apple was also interested in. So I think the fact that Steve was willing to meet with us even though the meeting didn't happen, may have kept their lawyers at bay.

Guy Raz (52:18)

And what were you gonna show him

Alex Blumberg (52:20)

if you had that meeting?

Jim McKelvey (52:21)

So we had to show him hardware, which terrified me, because he is a notorious design snob. So much that when Bill Gates tried to show him the Microsoft Zune, he refused to touch it because it was too ugly.

Alex Blumberg (52:34)

Right.

Jim McKelvey (52:34)

So I've got this really ugly credit card reader, and I'm about to go in front of Steve Jobs, and I'm like, oh, my God, I need to build something pretty and I need to do it fast. And so I went to the Apple Store to steal Steve's idea. Like, well, what does Steve like? Well, there's a room full of it. It's called the Apple Store. So I went down there and looked all around the Apple Store, and I was like, oh, he likes aluminum.

Alex Blumberg (52:55)

Yeah. Like a MacBook. Yep.

Jim McKelvey (52:57)

Yeah. And I take all the electronics I've got, and I jam it into this little block of aluminum, polish it up. Well, brush it. No, we don't polish it. Steve likes brushed aluminum, not polished aluminum, Guy. Or you'll piss Steve off and he'll throw it at it. Like, if Steve doesn't like your product, there's a physical mark on your body from where it hits you. That's what we had been told to expect. So I'm terrified. I build this reader, and it works. And Jack's getting ready to. Actually, he had a demo with Michael Bloomberg before the Jobs thing. So he was going to try it out on Michael Bloomberg. And I hand him the reader, like, fresh out of the lab. And he tries it, and it doesn't work.

Alex Blumberg (53:39)

It doesn't scan the magnetic strip, doesn't scan the magnetic.

Jim McKelvey (53:43)

He hands it back to me. It works perfectly. I hand it back to him. And what we noticed after three or four of these rounds was that I didn't touch the reader with my finger when I swiped a card. But Jack would hold it so that it wouldn't rotate in the microphone. Jack.

Alex Blumberg (54:00)

Yeah.

Jim McKelvey (54:02)

And because he was holding it and because aluminum is conductive and because Jack has a heartbeat, it was picking up his heartbeat, and the heartbeat was screwing up the reed.

Alex Blumberg (54:12)

Right.

Jim McKelvey (54:13)

So it was a cardiac monitor. So that was the last time I built anything out of aluminum. But the good news is Apple let us do it. Apple approved it.

Alex Blumberg (54:22)

How complicated was it to make a physical reader?

Jim McKelvey (54:27)

It's a pretty simple device. It was a read head, and if you put a resistor in it, it sort of attenuated the signal to a point where it could be sort of interpreted as sound. You. What you tried to do was make a credit card swipe look like a sound.

Alex Blumberg (54:42)

Got it.

Jim McKelvey (54:43)

And then you would decode the sound,

Alex Blumberg (54:45)

I guess, to get people to adopt it. You also had to give these readers out for free.

Jim McKelvey (54:49)

Yeah.

Alex Blumberg (54:49)

And each reader cost you how much?

Jim McKelvey (54:51)

97 cents.

Alex Blumberg (54:52)

Oh, wow.

Jim McKelvey (54:53)

I'm cheap. Well, I basically lived in China until I figured out how to build everything at the absolute lowest cost that I could figure out. And I would argue about fractions of a cent with people in Chinese.

Alex Blumberg (55:06)

And I read that you wanted it to be a square. You call it square, but you want it to be very small. You didn't want it to be, like, chunky. You had a very specific idea of how you wanted it to look.

Jim McKelvey (55:16)

Yeah. So originally the company was called Squirrel because we thought squirrels were cute and saved nuts and thought that was a good payment name. Turns out it was a good payment name. And another company had a payment system called Squirrel. So we pivoted to square. But I designed the square reader to be the shape of an acorn. It was supposed to be the acorn. And if you look at the original hardware, it's designed to fit in the shape of an acorn, but it also happened to fit well within a small square device. The square device was not very good at reading cards because it was so small that cards would wobble. And I built two devices, one that had a long track and one that had a short track and discovered something very interesting if I tested them both together. People preferred the long track device because it worked perfectly. But if I tested them separately, which I often did, because the long track device didn't fit in my pocket, whereas the short thing, you know, would fit in that. You know, that little pocket in your jeans that nobody knows what to do with. That thing in the upper right corner of your blue jeans. That's where my square reader lived. And I always had it with me, and I would try it with people. And if I didn't have the big device with me, the reaction I would get for the small device was just mind blowing. Like, people had never seen anything that small read a credit card. It was like this magic trick, and they were like, let me see that. Show me that. Do that again.

Alex Blumberg (56:42)

Okay, I want to just jump into how into, like, division of labor. Jack was making the. He was creating the interface for this thing.

Jim McKelvey (56:53)

Jack was mostly working on the server. Tristan was mostly working on the iPhone client. We had a few other people that were joining and working on various components of the software stack.

Alex Blumberg (57:03)

And you were working on the hardware. That piece. Because you were a glassblower, you had some.

Jim McKelvey (57:07)

I was hardware because I was the weakest programmer. So I was relegated to everything else. So dealing with the banks, Jim figured out furnishing the office. Figuring out how to incorporate the business. Like, everything but programming fell to me.

Alex Blumberg (57:26)

Okay, so from what I gather, about six months after you guys start working on this, you are ready to meet with investors, you've got a working prototype, and you are actually able to transact, like, from what I read in these pitch sessions, you would pitch these VCs, and you would say, here, give me your credit card, and you would charge them like a DOL $5.

Jim McKelvey (57:49)

We would charge them the amount to which Jack disliked them.

Guy Raz (57:52)

Fair.

Jim McKelvey (57:53)

Jack had a list of VCs he liked and didn't like, and depending on where you were in that list, he charged you more. One guy paid 40 bucks at that point.

Alex Blumberg (58:02)

Had you had the permission from credit card companies or not yet?

Jim McKelvey (58:05)

Oh, God, no. No, no, no.

Alex Blumberg (58:06)

So you were able to still transact and use the reader, but it was technically not legal what you were doing.

Jim McKelvey (58:13)

Everything worked, but it was breaking many, many laws and rules.

Alex Blumberg (58:17)

Breaking rules because you were not allowed to charge people using an iPhone or because you weren't going through the bright processors. Why was that illegal?

Jim McKelvey (58:26)

Yes and yes and yes and yes. There were so many rules, from the banking rules to the hardware rules, to the network rules, to the money transmitter rules that vary from state to state, probably to some accounting rule. There were just so much stuff that we did not pay attention to. But we built a system that worked

Alex Blumberg (58:48)

so you could get away with it. As long as it was a few small transactions, nobody would notice. So you had this, and you're pitching this to VCs. And also another thing you do, and you write about this in your book. You have a slide and it says, 140 reasons why this business will fail. Which from one perspective sounds really bold and funny. But I also think that in a sense, it's basically you saying, we're so confident this is going to work, I'm going to tell you why it's going to fail.

Jim McKelvey (59:16)

It wasn't confidence, it was candor. It was basically saying, look, this might not work. And here's all the reasons we could think of that it might not. And it changed the tenor of the room. If you've ever been a VC pitch, they're really weird things because they're basically the VCs are up there playing defense. They're like goalies. And the entrepreneurs, the people who are pitching are just lying to them right now. They're telling some truths.

Alex Blumberg (59:45)

This is our hockey stick growth here. This is our projections, and this is

Guy Raz (59:49)

what we're gonna do in year two and five.

Jim McKelvey (59:51)

And yeah, they have no idea. So the game is sort of attack and defend. You're attacking, they're defending. We changed the entire tenor of the room by saying, look, here's all the stuff that we don't know, here's all the stuff that might blow up in our face here are legitimate reasons to not invest in this business. And so because we put that up instead of playing defense the entire time, Most of the VCs, looked at our list and said, well, we can help you with that one. And I remember one guy telling me, oh, Amazon's going to attack you. Don't worry. I'm on the board of Amazon and I developed Amazon prime, and we can get them to leave you alone. Like, if you take our money, we'll guarantee that Amazon doesn't attack you.

Alex Blumberg (60:37)

So while you're pitching this, there are people who are saying, oh, we can help you fix this problem with the credit card companies. We can help you with that. No one thought that was going to be a challenge.

Jim McKelvey (60:46)

Oh, no, they knew it was a challenge. I mean, you have to have a certain bold investor to back what we were doing. But there are a lot of bold investors, and we had several dozen term sheets. I mean, I don't think we had more than three pitches that didn't result in offers.

Alex Blumberg (61:04)

Yeah, so you guys raised $10 million?

Jim McKelvey (61:08)

Yeah, 11, I think, but.

Alex Blumberg (61:10)

Yeah, 11. $45 million valuation. But I have to imagine that you needed a certain critical mass and momentum before you would see profit. Because probably the fees, the way the fee structure worked, at least initially, would mean that you were not going to make money for a long time.

Jim McKelvey (61:29)

Well, we had a lot of fixed costs. We had a lot of employees. We had a lot of things we had to pay for. And therefore, we needed a certain scale in order for the business to work. So, yes, we needed it to be big.

Guy Raz (61:42)

When we come back in just a moment, Jim faces a founder's worst nightmare when Amazon decides to break into the payment processing business. Stay with us. I'm Guy Raz, and you're listening to How I Built this. Hey, welcome back to How I Built this. I'm Guy Raz. So it's late 2009 Square launches, and within a year it has 50,000 customers in a pilot program. The company has also dealt with the first of many regulatory hurdles, but suddenly it's confronting a legal problem that it did not anticipate. So you guys get hit with a lawsuit. There's a guy named Robert Morley, and he's the guy that you mentioned a while back. This is a professor at Washington University that you had called up for advice when you were first trying to build the card reader. And then at this point, he claims that he actually invented the reader. Right. His name was on the patent. And that you and Jack had gone off and spun out a different business and shut him out.

Jim McKelvey (63:02)

Yeah.

Alex Blumberg (63:02)

And this is gonna be. This is gonna last for about six years, this legal dispute. There are probably things you can't talk about. Cause it was eventually settled. But I mean, clearly there's somebody you knew, right? And maybe even had a friendship with at a certain point.

Jim McKelvey (63:15)

Oh yeah, he was a friend of mine. If you want to know the real story, just get the first issue of make magazine. It's publicly available. It describes exactly what we were building. And I knew that when I went to Bob. Now what I didn't do, which I probably should have done, is say, hey, Bob, help me make this thing out of make magazine. But Bob decided that it was his idea.

Alex Blumberg (63:38)

And in fairness to him, and you know, this is not a documentary show, it's a one person interview. So I always try to be respectful of people we talk about, even protect that person too, because they're not here to defend themselves. But from what I understand, he claims it's his idea and this sets off a series of lawsuits back and forth for a while. Was that stressful? Was that like, did that distract you?

Jim McKelvey (64:03)

I mean, what was stressful was he was a friend. But I don't think anyone else in the company thought it was serious.

Alex Blumberg (64:09)

Well, I mean, you know, I think understandably, you know, there was money raised by the company and maybe, you know, he thought he was a consultant and deserved some compensation. Anyway, he received a settlement and that, that was that. But I think it took about six years.

Jim McKelvey (64:25)

Yeah, something like that.

Alex Blumberg (64:26)

Okay, so that's sort of in the back, but. But meantime, you in that time period, kind of step away from running operations day to day at Square. I think by middle of 2010 already, you feel like, okay, this thing's got legs. I don't actually need to be an officer in the company. I don't need to have direct reports.

Jim McKelvey (64:48)

Well, my son was born and it's pretty clear to me that I can't work a 14 hour day and maintain what I consider the duties of a decent father. Plus, I wasn't particularly great at any of the things that I was responsible for. I'm not a good accountant. I can do it, but I'm not as good as a professional. So we had professionals stepping in at every area that I was in. I've stepped away from every company that I've started that's successful and left it to people who are better at running it than I am.

Alex Blumberg (65:27)

I mean, just like a little over two years after Square's launched, it raises

Guy Raz (65:34)

money at a billion dollar valuation.

Alex Blumberg (65:36)

I mean, were you surprised by that momentum or by that point? Were you like, yeah, this is where

Jim McKelvey (65:44)

we've nailed this Thing, the moment square became real to me was when I was in a taxi with my wife. We're in the back of a taxi in New Orleans, and the taxi driver is using square. And he's so excited about it because he can get paid with a credit card. And he's telling me about it. He's like, you got to see this thing. It's the best thing in the world. And he's pitching me my own product. And he gets everything wrong. Okay, he gets all this stuff wrong, but he is so excited. You could see how it was just this magic unlock for him and his taxi business. And I turned to my wife, I was like, hold on, this thing's big. When I saw the impact, that was the thing for me. So, yeah, I guess it was surprising. I will say this. The billion dollar threshold is sort of a magic threshold. And it was kind of cool to cross it. And then none of the daily things changed. So I think you just ignored it.

Alex Blumberg (66:43)

Yeah.

Jim McKelvey (66:44)

Go forward.

Alex Blumberg (66:46)

So what did you.

Guy Raz (66:46)

Once you left.

Alex Blumberg (66:47)

I mean, did you leave leave or were you still. Did you still have kind of a foot in at square? Were you still.

Jim McKelvey (66:54)

Well, I'm still on the board. You know, I'm basically the voice of the merchant. I am probably of the board members, the most connected to people who get their hands dirty or, you know, bus tables or clean up after other people. I don't. Yeah. I won't say why I'm there, because that's not my choice. They have asked me and I've stayed. I love this company. I think it's really exciting what we're doing. And I like the fact that, you know, we've not just built Square, we've got Cash App. We've got these two sort of magical ecosystems that are empowering a lot of people. And now we're bringing them together, which is even cooler, you know. So you got one that's consumer and one that's merchant, and that's really powerful.

Alex Blumberg (67:37)

Yeah. I mean, Jack is still the CEO of the company.

Jim McKelvey (67:41)

Like, yes, he is.

Alex Blumberg (67:42)

You know, 15 years later. I mean, clearly he likes that role. I mean, he likes the operational side.

Jim McKelvey (67:48)

Yeah, clearly he's pretty good at it.

Alex Blumberg (67:50)

Do you guys talk regularly or not that regularly.

Jim McKelvey (67:53)

I mean, Jack's a little hard to find.

Alex Blumberg (67:55)

I guess you have to go to like an ashram in Tibet or something.

Jim McKelvey (68:00)

I am not allowed to tell you. I don't know where Jack is right now. I mean, I always liked my interactions with Jack. It was fun. Cause he's really smart.

Alex Blumberg (68:10)

Yeah.

Jim McKelvey (68:10)

And he's hard to get a laugh out of, but it's a really good laugh if you can get it. Like, he does have a sense of humor. He's just sort of buried there. And so I would always try to crack Jack up. And it's wonderful to be with somebody who's quiet because ideas can percolate. And I talk a lot, but I'm also deeply respectful of silence. And Jack and I together had these really great conversations. And, you know, he would sit there sometimes for a minute and then say something, and I wouldn't interrupt during that minute. Fascinating. It was so much fun.

Alex Blumberg (68:47)

Yeah.

Guy Raz (68:49)

All right, so you are on the

Alex Blumberg (68:50)

board, and Square is really growing. And then 2014, Amazon decides to get into this game. They decide to get into the payments processing business and really are going to undercut Square. They're going to charge a lot less.

Jim McKelvey (69:08)

Yes. They had a product that was basically copied Square.

Alex Blumberg (69:13)

It was a reader that you plugged into a phone. But they had a. Cheaper. It was cheaper, right, Because Square is free. But then if you want to have more features, it's more. But they were even charging less, lower processing fees, I think.

Jim McKelvey (69:26)

Yes, yes, yes, they were cheaper.

Alex Blumberg (69:28)

That's a race to the bottom at that point.

Jim McKelvey (69:30)

Well, yes. If you think of credit card processing as a commodity, which I think most people would, it's a logical thing to conclude that these guys give me the exact same money in my bank, except these guys will charge me less for that money in my bank. Why wouldn't I go with the lower cost alternative and the brand name on top of it? Amazon's got the brand name and lower cost. Why would you not use.

Alex Blumberg (69:53)

I mean, that 2014 square is huge. But I mean, Amazon, it's Amazon.

Jim McKelvey (69:58)

We're not huge. We're a spec compared to Amazon. Right, yeah.

Alex Blumberg (70:02)

And so what role did you play in sort of being involved in trying to, I don't know, batten the hatches?

Jim McKelvey (70:08)

Well, obviously I was very concerned. And the first thing I did was I looked for companies that had beaten Amazon while they were startups. And I found none of the Amazon victims that I had spoken to, and there were several. Most of them were still so traumatized and so scared that I'm not allowed to use any of their names. Okay, so that's how bad it is. Step two was a pretty awkward board meeting where we said, well, what can we do? There wasn't much we could do, so we decided to not do anything.

Alex Blumberg (70:40)

Yeah, I mean, the strategy, Square strategy was to essentially ignore Amazon when they release this product?

Jim McKelvey (70:46)

Yes.

Alex Blumberg (70:47)

They decided we're just not going to engage.

Jim McKelvey (70:48)

Like, what are you going to do?

Alex Blumberg (70:49)

Well, you could lower. You could have like tried to compete on price.

Jim McKelvey (70:52)

Right. We could have started a price war, but we didn't have the balance sheet for that.

Alex Blumberg (70:55)

You would have lost so much money.

Jim McKelvey (70:57)

That would not have lasted long. But the Amazon product failed. And it failed so badly that Amazon gave us all their soon to be former customers and mailed them a Square reader and said, we're out. Go to Square.

Alex Blumberg (71:13)

Why do you think that the Amazon product didn't work and Square was able to withstand that competition?

Jim McKelvey (71:20)

We were forced to invent something that had never been invented before. And when you're forced to invent, you end up building all sorts of stuff that's not obvious. And this is what I call an innovation stack. But you end up doing a dozen things. In our case, it was 14 things that I counted these things that you do because you have to and you know that you have to. But the only reason you know that is you've been forced to learn that because you are the guy who invented it. And we were doing 14 things and Amazon copied about three of them and the other 11 killed them. They didn't know what we did and they couldn't because they hadn't built it from the ground up. They just copied it from, you know, a boardroom somewhere. Oh, let's do what Square does. We'll make some software, make a hardware device, undercut their price. Yeah, it seems like it's going to work, but it turns out it's way more than that. If you invent something truly new, you're not inventing one thing, you're inventing a stack of things. And that invention becomes its own protection. And as long as you behave, I mean, it turns out there are a bunch of rules that if you follow these rules, you can preserve that monopoly for as long as you want. I mean, it is a really, really powerful defensive thing and it kept us alive against Amazon.

Alex Blumberg (72:38)

Jim, I know that there have been a bunch of different projects that you've worked on after you formally left Day to Day with Square. You worked on this idea of micropayments for journalism and a coding academy that you had and you were a director at the Fed, at the St. Louis Fed for six years. I mean, it seems like you are. You don't like to do the same thing for too long.

Jim McKelvey (73:02)

Well, yeah, look, I have tremendous resources now, stuff that I was never expecting to have, and my family and I live pretty modestly. So what are we gonna do with it? And, I mean, the answer is we're giving it away. I'm giving the money away. But I just go around and occasionally get attracted to problems. I say, well, who.

Guy Raz (73:25)

Who.

Jim McKelvey (73:25)

But a person who could afford to take tremendous risk could solve this problem. And that's. I sort of see it as a responsibility I have right now to tackle certain problems that are unsolvable if you don't have the ability to walk away from a giant buyout or to do something crazy.

Alex Blumberg (73:45)

What kind of problems are interesting to you?

Jim McKelvey (73:47)

Right now, my focus is drug testing. So it turns out that on a planetary scale, we get about 30 new drugs a year, and it's because the test costs hundreds of millions of dollars.

Alex Blumberg (73:59)

Yep.

Jim McKelvey (73:59)

So if you could lower the cost of a test from, let's say, $100 million to $10 million, you'd have a lot more tests, you would have a lot more shots on goal. You would do a lot more things that would save lives. So I've looked at this world and I've found some. What I think are very inefficient processes. And since I'm completely ignorant when it comes to the world of drug testing, I am using my own money to basically demonstrate that we can do it cheaper and faster and better.

Alex Blumberg (74:26)

I mean, you are what, 60?

Jim McKelvey (74:30)

60? Yeah. Turned 60 this year.

Alex Blumberg (74:32)

And so you've got a lot of life left in you, especially if these drugs work. Exactly. Keep going.

Jim McKelvey (74:38)

There may be a side benefit here. Yeah.

Alex Blumberg (74:40)

I have a suspicion that this is not the last thing that you're going to start. Is this something that you still just energizes you? You want to get out of bed and start something new?

Jim McKelvey (74:51)

Absolutely. I used to work for money, but it's weird. When money's not a motivation, there's no reason to stop. It used to be, oh, I'll earn enough, too. And then I would say, oh, now I can take a break now. Since money's not the goal, then I don't have any natural thing to stop me from doing the next thing. So I tend to do more.

Guy Raz (75:12)

Yeah.

Alex Blumberg (75:15)

If you look at where you are in life, how much of where you are now do you attribute to how hard you worked in your great ideas and your skill? And how much do you think has to do with luck?

Jim McKelvey (75:26)

I've been so lucky. I've been the lucky. I don't know how lucky I am. Like, if I went to go back and relive my life, I don't know that I would change a thing. Because I might not get the luck. And even with stuff like Mom's death, I mean, as hard as it was, it made me without that, I would not have. I don't know, I'm enough a nerd that I read science fiction and time travel and all this stuff and the Butterfly effect. If I had a time machine, I wouldn't use it. I wouldn't go touch a second of the past. Even though I've made so many mistakes, even though I've lost people. Like, I wouldn't even use it to save my mom. It's just too dangerous. Maybe I tried to save mom.

Guy Raz (76:19)

That's Jim McKelvey, co founder of Square hey, thanks so much for listening to the show this week. Please make sure to click the Follow button on your podcast app so you never miss a new episode of the show. And if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please sign up for my newsletter@guyraz.com or on substack. This episode was produced by Alex Chung, with music composed by Ramtin Arablouei. It was edited by Neva Grant with research help from Kathryn Cipher. Our engineers are Patrick Murray and Robert Rodriguez. Our production staff also includes Casey Herrmann, Chris Masini, John Isabella, Sam Paulson, Kerry Thompson, Rommel Wood, Nor Gill, and Delaine Coats. I'm Guy Raz, and you've been listening to How I Built this.