The Synopsis — Interview: Jim McKelvey, Cofounder of Square (Block) on Competing Against Amazon

Main Theme & Purpose

In this episode, Drew Cohen sits down with Jim McKelvey, cofounder of Square (now Block), inventor, author of The Innovation Stack, and former chair of the St. Louis Fed, for a deep exploration of why Square survived and ultimately defeated Amazon’s competitive attack. The conversation thoroughly delves into the concept of the "innovation stack," the distinction between business people and entrepreneurs, and what it actually takes to build a business capable of thriving against giants. The dialogue also weaves in insights from other iconic companies (Southwest, Costco), and the practical implications for entrepreneurs and investors.

Key Discussion Points and Insights

1. The Amazon Attack: How Square Survived

• Setting the Stage (00:53):
  In 2014, Amazon entered Square's market with a similar product, undercutting Square's pricing (1.75% vs. Square's 2.75%), leveraging its massive brand, resources, live support, and merchant roster.
  Jim McKelvey: "At the time, no startup had ever survived an attack by Amazon... They didn't beat us. The fight lasted for about a year and then they gave up and mailed our readers to their soon to be former customers..." (01:43)
• Initial Reaction:
  McKelvey believed, “We were dead... But then the question was, why?” (01:43)
• Why Did Square Win?
  Key reason: Square’s "innovation stack"—a series of interdependent, novel solutions necessitated by doing what hadn’t been done before.
  ”It wasn’t just luck... It was this pattern... I called it an innovation stack, which was this crazy thing that results from basically not being able to copy.” (02:35)

2. Innovation Stack vs. Easy Copying

• Entrepreneur vs. Business Person (04:49):
  • Business people generally copy; entrepreneurs create. It's usually safer to copy—except when you can't.
    McKelvey: “All progress is made by unqualified people. All true human advancement is made by somebody who has no better credentials than anybody else.” (06:27)
• Cascading Solutions (Problem Chains):
  • Square’s features (e.g., fast signup, no live support, hardware necessity) were not independent choices but emerged to solve real, cascading problems.
    ”Solving the first problem creates a second or third problem and you get this problem solution, problem chain...” (07:57)
• Amazon’s Attempted Copying:
  Amazon replicated visible elements, but couldn’t see or replicate the interdependent, “invisible” foundations.
  “They just looked at Square and they said, 'oh, it's a credit card processing rate and this little piece of hardware,' and those two things they copied, but it didn’t work because they had 12 other things that they ignored.” (10:10)
• Analogy:
  Like making a poisonous root edible — “If you aren’t the person who’s actually building it ... it’s never going to have the same sort of all these other little elements that are really necessary to support it.” (12:20)

3. Why Amazon Gave Up, and the Limits of Copying

• Amazon Withdrew Quickly:
  McKelvey suspects fraud issues overwhelmed Amazon:
  “My guess is fraud. I think they probably did not expect the level of deceit that we encountered...” (13:27)
• Patterns in Innovation:
  True innovation often means you’re the only one who actually understands why your solution works:
  “That is one of the few rewards of actual innovation. You end up being the only person who knows why what you do works.” (13:10)
• Copying Can Only Go So Far:
  Even when a large company knows all the visible moves, it’s extremely difficult to recreate the necessity-driven, deeply integrated stack that makes everything work.

4. Path Dependency, Product Decisions, and User Experience

• The Square Reader Origin Story:
  McKelvey chose to launch the smaller, somewhat finicky Square reader because it was mesmerizing and remarkable—despite being less functional than a larger prototype:
  ”People always preferred the larger unit that was easier to use. But... if I carried the small unit only and gave somebody that and demonstrated it for them, they were just mesmerized.” (19:02)
  • Unintended Effect—users become skilled, proud, and organic advocates:
    “What are you going to do? You’re going to walk around and show everybody... This guy’s pitching me my own product.” (22:22)
• Critical Decisions Are Often Influenced by Constraints:
  Example: originally nearly launching with an iPhone-camera approach (as Jack Dorsey preferred) but succeeding with the hardware reader due to fast action and technical insight (24:22)

5. Lessons from Southwest Airlines and Herb Kelleher

• Innovation Stack in Airlines:
  McKelvey’s admiration for Herb Kelleher, founder of Southwest, who also built an innovation stack under harsh constraints (25:05):
  "They had a series of laws and restrictions and court orders restricting them from doing what the other airlines did... they absolutely couldn't [copy]." (30:40)
• Key Insight:
  Southwest’s ten-minute plane turnaround time led to radically lower costs, which Kelleher mostly passed to customers instead of padding profits—creating “super loyal customers.”
  “Herb said no, no, no, I’m going to give most of that profit back to my customers in the form of radically lower costs.. It changed the whole tenor of flying.” (33:55)
• Giving Profits Back as a Moat:
  Just as with Costco, the business structure builds consumer surplus and fortifies moats, making head-on attacks unattractive.
  “Nobody’s going to launch a business against Costco... Not with my money.” (36:17)

6. Innovation Stack vs. Competitive Moats

• Contrast with Warren Buffett’s “Moats” (36:32):
  McKelvey never set out to “build a moat” but to solve problems. The innovation stack becomes the moat.
  "If you do that, I will end up with a moat because I will have an innovation stack..." (37:03)
• History of Copying Failing:
  Examples from United’s “Ted” airline to Soviet attempts at microchips, copying is always a few steps behind:
  “Executing a copy strategy is different from executing an innovation strategy.” (37:52)

7. Advice for Entrepreneurs

• Don’t Set Out to Build an Innovation Stack for Its Own Sake:
  Solve real, unsolved problems from scratch; innovation will follow.
  “If I had to have one thing your listeners should understand is quitting is something you will feel like you should do if you start doing innovation. Right. That's the main message...” (41:01)
• On Innovation:
  All humans have the capacity—it's a “survival instinct,” not a glamorous goal. You don’t know if the world wants something truly new until you put it in front of them.

Notable Quotes & Memorable Moments

• On Facing Amazon:
  “At the time, no startup had ever survived an attack by Amazon. So when Amazon does that undercuts your price, adds the Amazon brand name ... They didn't beat us. The fight lasted for about a year and, and then they gave up and mailed our readers to their soon to be former customers, which was amazing.” — Jim McKelvey (01:43)
• On What Innovation Feels Like:
  “All progress is made by unqualified people. All true human advancement is made by somebody who has no better credentials than anybody else.” — Jim McKelvey (06:27)
• On Invisible Foundations:
  “They [Amazon] just looked at Square and they said, 'oh, it's a credit card processing rate and this little piece of hardware,' and that those two things they copied, but it didn’t work because they had 12 other things that they ignored.” — Jim McKelvey (10:10)
• On the Square Reader’s Real Value:
  “...if I carried the small unit only and gave somebody that and demonstrated it for them, they were just mesmerized. They were just blown away. They’d never seen anything like it.” — Jim McKelvey (19:02)
• On Southwest’s Secret:
  “...Herb said no, no, no, I’m going to give most of that profit back to my customers in the form of radically lower costs... which made super loyal customers...” — Jim McKelvey (33:55)
• On Copying Versus Innovating:
  “Executing a copy strategy is different from executing an innovation strategy.” — Jim McKelvey (37:52)
• On Quitting and Innovation:
  “Quitting is something you will feel like you should do if you start doing innovation. Right. Right. That's the main message…” — Jim McKelvey (41:01)

Timestamps for Key Segments

• [00:53] – The Amazon attack and Square’s existential threat
• [02:35] – The idea of the “innovation stack”
• [04:49] – Business person vs. entrepreneur distinction
• [07:57] – Cascading problems and innovation at Square
• [10:10] – Why copying Square didn’t work for Amazon
• [13:27] – Why Amazon ultimately quit: Fraud and hidden system complexities
• [19:02] – The deliberate choice of the flawed-but-memorable Square reader
• [25:05] – Herb Kelleher, Southwest Airlines, and protecting the innovation stack
• [33:55] – How underpricing builds customer loyalty and moats (Southwest, Costco)
• [37:03] – Moats vs. innovation stacks and the limitations of copying
• [41:01] – Final advice: Embrace not feeling qualified and perseverance in innovation

Conclusion

This episode presents a candid, detailed exploration of how true innovation—driven by necessity and relentless problem solving—creates enduring competitive advantage. Through ground-level anecdotes and practical wisdom (from Square, Southwest, and more), McKelvey and Cohen distill why copying is not enough, why successful “stacks” arise from real constraints, and how businesses that deliver outsized value become nearly unassailable. For entrepreneurs and investors alike, the key takeaway is to focus not on “building moats,” but on solving the problems nobody else will touch—and to recognize that every meaningful innovation will at times feel impossible and unqualified.

Recommended Listening:
If you found these insights valuable, McKelvey’s book The Innovation Stack is strongly recommended, as Cohen remarks, “it is not like other business books... This is something novel, interesting, and new.” (42:38)