Interview. Billionaire Square (Block) Cofounder Jim McKelvey on Competing Against Amazon

Summary

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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.

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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)

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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)

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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.

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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)

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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)

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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)

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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.

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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)

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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

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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.

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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)

Transcript

[A]

Foreign.

[B]

Welcome to the Synopsis, a business and investing podcast for professional and maybe not professional investors. My name is Drew Cohen and I'm really excited to welcome a phenomenal guest today who is the co founder of Square, but was an entrepreneur before starting Mira Software, is also a glassblower, a pilot and a director of the Fed. Jim McKelvey, welcome.

[A]

Thanks. Former director of the Fed I termed out after six years.

[B]

Okay, so we won't blame you for keeping rates high.

[A]

No, you could credit me for the soft landing. Actually, not me. I was the chair of the St. Louis Fed, so they're 12 regions, so I had a minimal impact on anything. But I do know my economics.

[B]

Yeah. Great. And that is kind of going to be part of the topic of today's podcast. We want to talk mostly about business and understanding. There was this key question you were facing when you wrote this book, the Innovation Stack. You wanted to figure out basically why Square one, when Amazon entered your market and had all of these advantages. And just so people know, the landscape at the time was it was 2014, square was around for a few years, you were starting to grow, starting to gain good traction. And Amazon enters the market with the product at 1.75%. So a cheaper fee versus your 2.75%. At the same time they had live support, they had a larger marketing budget, and they also had a very big roster of merchants they could send their device out to and market to. What was your thinking at the time? And ultimately the question we want to ask is why weren't you crushed?

[A]

I mean, our thinking at the time was were dead. You know, at least that was my thinking because 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 are, or I should say were 100% successful in killing the startup that they were competing with. 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. So that felt great. But then the question was, why? And so I spent several years looking for a pattern which is to say, had that ever happened to other companies, had that ever happened to other entities of any type, where you would see this, you know, this very small, you know, pretty, pretty defenseless little thing that's attacked by, you know, something giant and the little thing wins. So in our case, it turns out it wasn't an accident. It wasn't just luck. It was this thing that I Discovered it was this pattern I saw not just at Square, but in most, you know, most new industries had this thing I called an innovation stack, which was this crazy thing that results from basically not being able to copy. So if you think about most products and most people, we are all copies. You know, I'm copies of my parents and they were copies of my grandparents and so on and so on. You know, genetically we are copies, as is pretty much every decent idea in the world. You know, so we're, we're talking on computers. These were not the original computers. They're, you know, the, the, the, the OS that Macintosh used was actually copied from Next, which was copied from something that Xerox PARC cooked up, which in turn was inspired by some stuff that IBM did, you know. So most of the good stuff is not quote unquote original, but occasionally, and this was true in Square's case, you're forced to invent because you're doing something that hasn't been done before. And so what Square was doing was, was truly novel. And because of that, we weren't able to copy anything that worked. And I saw this pattern both at my company and then at, you know, all these other companies, and I was sort of surprised because nobody had ever explained it. So that was the genesis for the book. And the Innovation stack basically teaches you how to live in a world where you can't copy.

[B]

And you kind of talk a little bit about the difference between being a business person, which means you do copy, and being an entrepreneur, where you create.

[A]

Yes, go ahead. Yeah, much better to be a business person. Much higher likelihood of success. Copying for me is this thing you should always do, except when you can't. And the problem I saw in the world was that most people copied everything their entire lives. But then when they occasionally, and maybe you know, a couple times in somebody's life, they will come up with a problem that mankind doesn't have a YouTube video for. You know, but if you're in that situation, most people back down because they are so uncomfortable with this world of innovation and probably uncomfortable for very sound reasons, but they feel so uncomfortable they quit. And I thought that we were losing a bunch of talent to something that I've personally felt, which is this need to wait until I become qualified before I do something. And if you're going to go fly a plane, you'd be an idiot today to just jump in a plane and take off and say, well, I'll figure it out. And yet that is exactly what the Wright brothers had to do on the first flight, you know, they kind of knew what was going to happen, but they didn't really. And so Wilbur and Orville had to effectively become the first pilots. Even though they were not qualified to be pilots, they couldn't be trained because no human had flown. So there was no way for them to become qualified. So the way I try to put it to people who find themselves in this situation is yes, you are entirely right. You were not qualified to do what you're about to do. And there's certainly no guarantee that you're not going to get killed or that you are going to succeed or whatever. There are no promises made. But all progress is made by unqualified people. All true human advancement is made by somebody who has no better credentials than anybody else.

[B]

I am curious on the innovation stack and you know, you kind of describe it beautifully in your book. You basically want to go after kind of lower end SMBs and if you're going to have a mass market product, you're going to want a piece of hardware to enable that payment. You're going to want it to be cheap so that there's lower customer acquisition cost. You're going to want the sign up to be simple. And that also means that you cannot have any sort of live support at the time. It's because you couldn't really afford it. But it also may made it kind of forced you to have a simpler process. It also meant that you would have to be the master merchant and have submerged accounts because you would have to have quick sign up you that also though at the same time allowed you to mid funds daily instead of weekly or sometimes even longer at the time. And so all of these different elements of Square's business they kind of very neatly fell out for each other. And so I was wondering what your thoughts are on why that is. Why it is that when you do build this innovation stack the next sort of aspect of it seems to just come into place very nicely. And you know, Edwin Land, the founder of Polaroid also has a quote that's something to that effect that when you are being creative the next sort of innovation just falls out.

[A]

Well yes, it's, you know, it's problem solution, it's a problem solution chain. So what typically happens is you have this problem in our case say we need to make it easy to sign up and we go to the bank and the bank says no, you need a paper contract. So we say well that's stupid, we can't do that because we're a software company, we're not going to mail a contract to somebody, we're just going to have a software license agreement. The bank says, no, you can't do that. So then, okay, we'll go to another bank and we shop banks until we find some bank that says, okay, well you can do that. But now you have to post a bond to cover this guy's potential losses or you have to have some other thing. So solving the first problem creates a second or third problem and you get this problem solution, problem chain. In our case, just to make it possible to sign up, we had probably six or seven things we had to do differently. And because the financial system wasn't designed to underwrite small businesses like we were then we ended up building this stack of solutions that, I mean, I guess in hindsight it looks very organized as you're building it, it's chaos. I mean as you're building it. I am always surprised by how little I know when I'm solving a problem about what the actual solution is going to look like. Like I think I know and then I end up usually else. But if it works, you know, that's, that's proof you, you start off with a problem and if you solve the problem well then you succeeded.

[B]

And so let's go back to this idea of why you guys won out against Amazon. Because I can kind of understand your book. You talk about all these different elements and you need the full innovation stack. And the idea kind of being that you can maybe copy a couple, but you can't copy every single step in that. But from at least an outsider's perspective, looking at what Amazon did, it kind of seemed like they did try to copy. It's not apparent to me what they weren't able to copy. I guess I could say, well, they

[A]

weren't able to copy what they didn't know about. So in Square's case, there were probably three or four things that were publicly facing and then there was a bunch of stuff that we were doing for reasons that we knew were necessary, but from the outside wouldn't appear necessary. So our signup flow was very specific and it was designed to sort of pre screen customers because it turns out that we couldn't afford to have a customer who was really labor intensive. So if our potential user was too dim witted or lazy to figure out how to do our sign up, we were perfectly happy to lose them as a customer. That was not an accident, you know, and right now I'm actually building a product this week in fact, where I'm expecting the user to download this app, and it's not going to be super easy to do so because it's a recruiting app and I don't want to have to screen the candidates heavily once they're in the app. So I want the app itself to screen the candidates. So in other words, if you're too dumb or lazy or busy or distracted or add or like what, whatever the thing is, I don't care what the excuse is, but if you can't successfully download my app, I'm fine with that. That's just answered my first interview question, which is, you can't handle this task that I put in front of you, therefore I'm not going to employ you. You know, it's a trick. So. So we do stuff like that, and we did a bunch of stuff like that at Square that was, you know, some of it was accidental, some of it was intentional, but a lot of it was in service of some other need that we knew about that Amazon from the outside was. They 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.

[B]

Yeah. And it's interesting, it also kind of reminds me of this book, Secrets of Our Success, where these explorers were looking at how these South Americans would cook a poisonous tubular and they noticed that they would boil it for a while and then bury it in sand and then wrap it in leaves. And there was this very complicated process, and these explorers kind of decided that a lot of the things they were doing were just kind of ritualistic. And instead all you needed to do was boil it. And so they boiled it and ate it and died. Because it turned out when you put it in sand and wrapped it in leaves, believes it absorbed a lot of the poison. And so it gets back to this idea that sometimes things look, when you're on the outside, you can't really understand fully the process, the system. And so that is, I think, kind of one of your key insights is if you aren't the person who's actually building it and you're just copying from the outside perspective, it's never going to have the same sort of all these other little elements that are really necessary to support it.

[A]

Yes, yes. That is one of the few rewards of actual innovation. Do you end up being the only person who knows why what you do works?

[B]

So why do you think Amazon quit so quickly, though? Because it was only a year later

[A]

that they withdrew my Guess is fraud. I think they probably did not expect the level of deceit that we encountered, and that was probably it. I mean, I assume they quit because they were losing money. I assume they were losing money because of the fraud. And I know a bunch of fraud vectors that we had to specifically engineer against that. My guess is they probably would have eventually figured out, but just gave up early. Mm.

[B]

Yeah. And it's interesting because at the same time, they also had Amazon Web Store, which was kind of their version of Shopify, and they discontinued both of those within the same year. And then it was also the same year the Fire Phone flopped. And so I don't know if maybe there's an aspect that they lost a little bit of appetite for a lot of these experiments at the same time.

[A]

Yeah, I think. I mean, I obviously never worked at Amazon, but they. They definitely gave up when they realized they couldn't compete.

[B]

Yeah. Do you think. I mean, it kind of, I guess, jives with what you're saying, that the couple things Amazon did really well were things they entirely created themselves. Whether that was their retail platform, aws, that was their own creation. Even the Prime Program, even though it took inspiration from Sam's Club, you know, the idea of coupling video streaming with selling shoes, as Jeff Bezos says, was very much their own sort of innovation.

[A]

Yeah, I mean, I think they, like all companies, if they originate something, they understand it intimately, and if they copy something, they understand it superficially. But that statement itself was pretty superficial. So I think a better question if, you know, if I was a listener to this podcast and I was trying to apply any of these lessons, would be to ask myself, okay, when is it appropriate for me to invent? When is it necessary for me to do something that hasn't been done before? And if you look critically at that, you'll realize that, you know, a lot of businesses can be completely successful copying. So I'm not against that. You know, if I'm like, I've got a. That does online advertising. We haven't originated anything like, it's. It was just pretty derivative stuff. I don't spend a lot of time there. But the thing makes money and it serves a need. But most of the big inventions, the world changers, like aws, I mean, that was a great example of, you know, this thing that, you know, we now call cloud computing. But at the time, it was revolutionary. The idea that I could, you know, sort of buy piecemeal services and servers was not something that was, you know, available to everyone. And Amazon made it available to everyone. And what a great innovation. And they probably had to do 20 things differently. They probably have an innovation stack that I could only, you know, begin to comprehend. And if I, you know, stupidly thought I could just buy a couple of servers, you know, they get some fiber optic lines and go compete with Amazon, I would quickly discover perhaps not what their stack is, but certainly that I didn't know what it was.

[B]

Yeah. And I guess another way to kind of think about it is when you are an entrepreneur and you're starting from this fresh slate and you are going after a problem, you have the ability to optimize everything in your business just to solve that specific problem. And it's a little bit like a baker who wants to bake the best cake and being able to go out and pick out the best ingredients in the world to bake that best cake versus trying to do it from your existing position or in that case, do it from the ingredients in your cupboard. And so I think a little bit about, you know, Walmart trying to go after Amazon, for instance, where Walmart wants to have quick delivery, but it's just hard to do it from a store footprint instead of a warehouse fulfillment sort of area. And so is that kind of one of the advantages as an entrepreneur is that you have this fresh light that allows you to not have these constraints.

[A]

I mean, yes, any business that's optimized for what it does is going to have an advantage over somebody who's trying to adapt a different non optimized system. And again, my answer to that is yeah, so what? I mean, that seems pretty damn obvious. What do I do with somebody who's trying to build something new and has very limited resources? And I wouldn't say that you at least United Square's case, you know, we didn't optimize. What we did was as quickly as we could get something that worked. So, for instance, you know, there are 5,000 banks in the United States. I don't believe that the bank that we eventually went to market with was the best bank. Okay. They were just, I think the 12th bank, you know, the first 11 failed, the 12th succeeded. Now had we kept marching down that road and the 78th bank might have been optimal, but we weren't looking for that. We got somebody who could do what we needed to do, were reputable and knew enough about technology that we could communicate with them and that was good enough. And we went on to the next thing.

[B]

Do you think I'm just kind of curious because in your book you kind of talked about how people responded better to the original square device or which it turned out was a little harder to use and didn't always correctly scan the card versus a better engineered one. What do you think about that?

[A]

I mean, I'm very proud of that because I'm the guy that built it and made the, made the decision to release something that didn't work. So for those readers who don't remember, the original square reader was about a half inch long, half inch in width and you had to run a credit card mag stripe through it and over a half inch base. It's very easy for the card to wobble. And if it wobbles, the read is screwed up. Now it's not hard to learn how to swipe correctly, but it does take, you know, a couple minutes of practice. And so we were getting failures with early users on, you know, 1st through 10th swipes. They were just not getting a high yield. And as a good engineer, I designed a bigger, wider unit that read perfectly every time. So the question is, why did we not release the big wide perfect unit? And the answer was really funny because I tested them both and I got very interesting reactions if I would test the both together. People always preferred, preferred the, the larger unit that was easier to use. But I wasn't all, I didn't always carry the large unit with me. And what I noticed is 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. This was absolutely a moment where they fully paid attention. And the big device, when I tested it by itself did not have that effect. It was sort of rudimentary. It's like, oh yes, of course I'm swiping my credit card on a device that looks like everything else I've swiped my credit card through for my entire life. So it was, it was a non response versus this huge response. And you know, as a, well now as a parent, but certainly as somebody who, you know, sort of wanders through the world most of the time like most people not paying attention to stuff, it is rare that somebody is actually listening. It is rare that somebody is actually paying attention to the thing that you are concerned about. And I noticed that people paid attention to this little device, whereas the big one they ignored. So we shipped the little device and that was all we shipped. We never released the big one. And the reason I did that was because I thought it would get people's attention better than the more cumbersome uglier, but more functional unit. So that was intentional and I think pivotal because what happened, if you could imagine, people would get the little device and then they would try it and it would work a little bit, but, you know, basically works 80% of the time, but not 100 of the time. So you weren't always rewarded. So it was like this slot machine at the beginning, except it was a slot machine that you got really good at after, you know, a couple of minutes of practice. So now, after a couple of minutes of practice, what's happened? Well, first of all, you've played with my product for a couple minutes. Secondly, you've got a new physical skill and this really cool little thing that nobody else has seen. What are you going to do? You're going to walk around and show everybody in your family? Like, I remember, like the day I knew Square was going to be successful. My wife and I were riding in the back of a cab in New Orleans. This was like 2011 or 2010. It was really early. We had just released the product, and this cab driver was so excited to show me how he could take credit cards using my own device and gave me a full pitch on how signup was free. And then everything else he got wrong. Like, everything everything else he got wrong. He remembered free and he showed me the device and, and. But I could tell that this guy was just psyched. And I thought, this is it. I'm in a random cab in New Orleans and this guy's pitching me my own product. This company's gonna work like it's gonna succeed because we didn't know, like, when you build something new, that's the other thing. If you build something truly new, you have no idea if the world wants it because they've never seen it before.

[B]

Yeah, it is really interesting too, because in your book, you kind of talk about how you guys almost didn't go the card reader route, and you almost, you know, you had your own opinion on it. And Jack thought that the iPhone camera would be a better route to go. And it kind of gets to this idea of path dependency, but also decision clusters. I'm kind of reminded of Chipotle founder Steve Ells, who's basically couldn't open up a fancier restaurant. And so he rents out this small little place, and the only thing he could really serve was kind of a fast, fast food kind of product. And so he just thought, I'll do burritos. And then that decision led to, okay, well, I need to sell a lot of burritos. And if you're going to sell a lot of burritos, I need to re engineer sort of the production line of food, and I need to, you know, make all these other decisions that kind of optimize for that. And so it's kind of interesting to think too, because how different square would be if it would be around if instead you went with the iPhone camera sort of route instead of actually attaching a reader to it.

[A]

Yeah, I mean, Jack and I had a big disagreement. I was pro reader, he was pro camera. So I just figured I'd build my solution before he could build his. I mean, I know enough about software and OCR and the way the credit card systems work to still believe that his system would not have worked very well. So it was the first fight that we had at the company, and it literally happened on the first day. But, you know, instead of having a fight, just go back your bullshit and see. See what you can build. Right?

[B]

Yeah. Yeah. So maybe shifting topics a little bit. Why do you love Herb Keller so much? And why is he the only person who's ever been able to run an airline for 30 years profitably?

[A]

So Herb Kelleher was the founder or one of the founders of Southwest Airlines, and he was the reason I wrote the book. So the full story was I did all the research. I came up with this pattern. I saw this pattern, and the pattern was amazing. But the problem was the only people who I had data from were all dead. It's because it was historical research. I would love to have talked to apgianini or some of the other people that I'd studied, and there were a lot more people that I'd studied than I actually wrote about in the book. But there was this commonality, and that was they were all dead and Herb was alive, like the guy. Because I looked at Southwest Airlines like, oh, this is a perfect parallel. But I'm enough of a history student to know that, you know, selection bias is a big problem, and if you only look at things that support your thesis, you will often sometimes delude yourself. So I wanted to talk to somebody who could criticize my work and, you know, has. Has lived through it, but may have not seen it. So I went down, I met. I, you know, very graciously got an invitation from Herb to come down and visit him in Dallas, Texas. And he. I mean, he lived up to all the hype. Like he was one of my business idols growing up, but then to meet him in person and to spend a day with him and go out to Lunch. And, I mean, he smoked a pack and a half of cool menthols during our time together. And he was the reason I wrote the book, because towards the end of our meeting, he said to me, how are you going to share this information with the world? He said, I think you've got something here. This is important. Now. What are you going to do? And I was. Well, I mean, I can tell you because I was sitting on his couch, you know, and I was raised Catholic, not heavily Catholic, but, like, I was Catholic enough to believe that if. If God ever spoke to me, it wouldn't be in a deep male baritone voice cloud, right? So here's Herb Kelleher, and he's pacing around his office. He smoked a pack and a half of cool menthols. There's this stratocumulus layer of nicotine hovering through the office, and this booming voice comes down from this cloud, and it says, how are you going to share this with the world? And I was like, I'll write something or I'll make something, you know? So my original idea for the book was a graphic novel, which I wrote for, like, a year. And then I contacted Herb to do his chapter, and he said, I don't want to be portrayed as a cartoon character. You can leave me out. And I was not going to leave Herb Kelleher out of the book. So I rewrote the entire book without any cartoons for Herb. And he was right. And I'll tell you why he was so smart. Because I wanted to do as a graphic novel. And the reason I wanted to do that is I hate business books. Like, if you read my book, which, alas, many people will not, but if you read it, it will not read like a normal business book. It reads something like, I don't know what, but it's more like a story than a boring business book. And that's because the whole thing was a cartoon to begin with. But the protagonist of a graphic novel is a superhero. And my format of a graphic novel would have been so inappropriate because the message of the book is that there is this extremely powerful tool that, if you know it and recognize it, turns any normal person into what looks like a superhero to the rest of us. It's just some badass who gets all this stuff done and can do all these amazing things, and these are phenomenal results, but it's just a normal guy. And, like, what I kept finding under all these innovation stacks with just some normal dude who happened to have one of these things. And, you know, it was completely Inappropriate for me to portray my characters as superheroes. Whereas when I wrote the book, or I should say rewrote the book in text format, the tone changed and the person at the center of the story was just some schmuck like me. Like, I'm nothing special. I am not a guy who has any sort of superpowers. You know, I can't even concentrate for more than 20 minutes on anything. Like, I'm just so flawed. And yet with this thing, have been able to do amazing stuff. So I want more people to have this tool and I want fewer people to look at business heroes and say, well, that guy just has amazing discipline. Or he's an MIT grad and is super smart or like, you know, suit, like whatever sort of superpower you think they have, they don't. And I've met all of these guys. I mean, I have got no hero worship. I mean, except for Herb, whom I miss. But that was, that was because of his character, not because of his, you know, ability to fly.

[B]

So, so what was it that he kind of did differently that allowed him to succeed in the airline industry where all these other airlines have very mediocre profitability?

[A]

Well, what they did was they built an innovation stack because they had to. So it was the exact same thing that happened at Square. And at Square's case, we were trying to build financial services that didn't exist. And so we had to invent all these new things. In Southwest case, they had a series of laws and restrictions and court orders restricting them from doing what the other airlines did. So those other airlines were practicing this sort of business that Southwest Airlines was specifically prohibited from copying. Okay, so now they can't use the other guy's playbooks. Now you can argue, well, maybe they never wanted to in the first place, but they absolutely couldn't. And then one of the critical things at the core, at the core of the Southwest was they originally had four planes, but they were under so much financial pressure they had to sell one because they, they could only afford three. And they came up with this idea. They said, well, if we could turn our planes in 10 minutes. Now imagine this. The plane gets in, unloads all the baggage comes off, all the new baggage, all the new passengers comes on. There's a cleaning and an inspection that has to happen, and you got 10 minutes to do that. So Southwest Airlines realized that they could fly their routes with three planes if they could turn the planes in 10 minutes. And so they kept that 10 minute goal. And they re imagine the entire airline experience from the way you board to the way you buy your tickets, to the way the pilots interact to, you know, who they hire as flight attendants. Like they, they did everything basically in service of a 10 minute turn time which they then achieved. So now they've got this thing that, I mean an airplane is basically a thing that makes money when it's flying and it doesn't make any money when it's sitting on the ground and their planes are on the ground for 10 minutes and everybody else's is, you know, two, three, four hours. Like it's, it's, it's a stark orders of magnitude difference of how their equipment utilization varies compared to all the other airlines. Now there was other stuff they were doing too, but just that one example. Once they figure that out, they could turn a plane of tenements and nobody else on the planet could. So now they've got structurally lower costs. And this is the genius of Herb. Instead of just saying, oh well, therefore we'll make a huge profit and charge what everybody else is doing, but on a lower cost basis, 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. You know, a ticket price. Yeah. And he didn't put the money in his pocket. He basically put the money in his customers pockets which made super loyal customers who were, you know, tolerant of, of the airlines and like, wanted to help and like, it just changed the whole tenor of flying. Southwest Airlines, at least in the early days, were more fun. So all this stuff, this, this, this was his innovation. Stack protected southwest for like 20 years when her, when Herb ran Southwest, that, that business was untouchable. There was only one airline that was able to launch against Southwest and it was JetBlue. And that was only because Southwest was not in New York. And JetBlue has all these, you know, gates at JFK. So they had this, they had this, this, you know, 15 year period where they, they could get established and they ultimately didn't die. Every other company that launched against Southwest and there were like a dozen of them dead, dead then. And, and I predicted this in the book, which is weird because I didn't want to insult her, but he had already died by the time it went to print. So I felt it was okay to do. I called the demise of Southwest. Like you've seen what's happened with Southwest today. That was predicted. And the reason I knew, or I thought I knew that it was going to happen was because they changed the pricing metric from one that I saw Guaranteed success forever. To one that invited all this competition in and gave you, you know, maybe a decade of outsized profits. So what happened was, you know, Herb's replacement came in, jacked up the costs. I'm sorry, jacked up the profit by jabbing up the price. Looked like a hero because he was making way more money than Herb was. But during this time, Frontier launches, Spirit launches, like all these other airlines, there were about six of them, successfully launch against Southwest and compete Virgin America. Like, none of that would happen under Herb because Herb would have given the bulk of his efficiency over to his customers. And his successor, whose name I don't even know, like, who the hell cares? But whoever that was, messed up this beautiful thing that could have forever dominated the skies, but, you know, just outperformed Wall street for a decade. But who really cares about that?

[B]

Yeah, and it's interesting because we were talking a little bit. You're asking me what Speedwell Research is before we started. And I was saying we focus on a lot of companies that build this consumer surplus. And that's essentially what you're describing there with Southwest is the ability for them to have charged higher and then forgoing that profit has enabled them to be a better quality business, more sustainable. And it means that people just prefer to fly with them. And, you know, Costco has a similar aspect to that. They could very much raise their prices to 3% since they only have a 3% margin. That would be 100% increase in profit. But consistently foregoing that is kind of what allows them to be a company that people love so much.

[A]

Yes. And nobody's going to launch a business against Costco. Like, if you give me a business plan and it says, oh, we're going to take on Costco, that's like saying, oh, we're going to take on Ikea. Not with my money.

[B]

And it's interesting because Elon Musk had this comment a couple years ago where he said something like, because Warren Buffett always talks about competitive moats, this idea that if you have a business that has a high return on capital, you want something kind of protecting that whatever that's going to be, ip, a resource advantage, a scale advantage. Now, talking to actual entrepreneurs like yourself, you never think about something like a competitive moat. That never came up in your book once. But what you are describing is essentially that in many ways, yes, it becomes a moat.

[A]

I mean, to an investor, if you're building it. I'm not building stuff because I think, oh, good, my competition can't do this because I Don't have to. Like, I'm just trying to solve a problem nobody's solved before. If I do that, I will end up with a moat because I will have an innovation stack, which I guess is kind of the same thing, but it will be. I mean, it's perhaps different terms for similar ideas, but. Yeah, if you wanted to copy what any company with an innovation stack had and they were pricing their product right, you couldn't do it. It's just mathematically impossible.

[B]

What if the market was big enough to support more than one player and they were kind of early and they copied everything?

[A]

They copied everything, but. Well, first of all, you can't copy everything perfectly, and they'll bleed out before they can get it done. And look back to the airlines, which is sort of the perfect example. United had competed with Southwest for 30 years before they launched Ted, which was their competitor to Southwest. They knew exactly what Southwest was doing. They knew airlines. You know, why shouldn't United be able to do it? Well, they couldn't, you know. Why? Well, you know, it just turns out that executing a copy strategy is different from executing an innovation strategy, you know, and so it's. It's not something that I saw an ad the other day for some sort of male liposuction that's supposed to, like, suck your stomach fat out so that it looks like you have abs. But what they're really doing is they're just, like, drawing this eight pack on you and like, sucking the ridges out. So. So your fat gut has now these. But, like, that's what, to me, it looks like when somebody copies an innovation stack from the outside. So I'm not really interested in. I mean, call it what you want. What I care about is why am I building this? And the answer to me is never, because it's really going to mess with my competitors if I have this thing. No, the answer is because I need it. And if I don't need it, I'm not building it.

[B]

Yeah, and I think history supports you there, too, because I'm reminded of the microchip industry in the US And Soviet Russia was very much trying to copy it. They had all their resources towards it, and they're always just a couple years behind. But they were never able to take the lead because they were stuck in that position of copying. And it's a little similar, too, with, I believe, the names of the Samworth brothers. With wimdo. It was an Airbnb clone, and they launched in Europe before Airbnb was in Europe. And they just Kind of stuck around for a while, tried to copy as much as they could, and were quite aggressive, but ultimately they went bankrupt. Because I do think you're. You're correct in saying it's basically like they're drawing abs out of the fat.

[A]

Yeah, yeah. It's, you know, copy. Look, it works a lot of the time, but against an innovative competitor who is pricing correctly, you will die. Now, an innovative competitor who gives you enough space because their margins are so huge that you can get funding and endure well, then you have a chance because you can actually copy most of what they're doing, come up with a still higher price, cost of goods, but still profit because their margin is huge. And you're. You'll take a little bit less, and then you'll figure the rest out. Like, that's effectively what happened to all the copycat Southwest Airlines companies.

[B]

Yeah. And I know we're hitting time soon, so just as we wrap it up, would you kind of say that an entrepreneur or someone building a business shouldn't try to build an innovation stack, instead, they should try to solve a problem from a clean sheet of paper?

[A]

Yeah, if I had to. I mean, 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. Right. That's the main message. If you start doing things correctly. And I describe this in the book, and I probably don't have time to go. Go through it in great detail here, but I want people to be inoculated against that feeling of, I'm not qualified to do this. The other thing that I think is just critically important that people understand is that innovation is a thing that all humans are capable of, but it is a survival instinct, and it is not cool, and it is not something you should try to do because you think you should. It is this thing that will kick in as a last resort. Like, if you don't think you're innovative, wait until you're out of options, you know, and then you will see how innovative you are. You will come up with crazy shit. Now, you may argue that you don't live a life like that, and I wouldn't argue that that's bad, but. But that's sort of the message. And I'm hoping that people who listen to your podcast or read my book will at least come away with this idea that we should all be more open to solving problems that nobody else has solved.

[B]

And I think that is a great place to end it. Everyone should definitely read the innovation Stack. He is correct in saying it is not like other business books. I've read hundreds of business books. A lot of them, to be honest, are boring, and they're very redundant. And they say the same thing again and again. Again, this is something novel, interesting, and new. And I'm, you know, a little upset, to be honest, because I thought I was kind of coming upon a similar sort of realization. And then I read your book and you kind of already wrote it before I could come up with that, because I was seeing a similar parallel in a lot of successful businesses, whether that's, you know, Costco with the warehouse model. From the warehouse model comes the scale advantage, buying in bulk and then able to have everything in pallets and save cost in the store refurbishments and all that. So, anyway, it is a really interesting book and absolutely worth reading. And thank you, Jim. Really appreciate it.

[A]

Drew, thank you. I'm sorry I have to run, but this was good.

[B]

Thank you for listening. And until next time, bye.

[A]

Bye.

[B]

Bye.