Square: Jim McKelvey. He Lost a $2,000 Sale, Then Built a $10 Billion Company
2Digest
This podcast features Jim McKelvie, co-founder of Square, detailing the company's inception and its revolutionary impact on credit card payments through hardware and software innovation. McKelvie explains the complexities of the payment processing industry, including regulatory capture and the strategic advantages of Square's "innovation stack" against competitors like Amazon. He also shares personal insights into his entrepreneurial drive, influenced by early successes and profound personal tragedy. Post-Square, McKelvie has shifted his focus to philanthropy, risk-taking ventures, and a passion for drug testing innovation, aiming to reduce costs and accelerate life-saving research, driven by a motivation beyond financial gain and a deep appreciation for the role of luck in his life.
Outlines
Introduction to the Advice Line and the VC Pitch Dynamic
The podcast begins by introducing the "How I Built This Advice Line" for entrepreneurs and then delves into the often adversarial nature of venture capital pitches, where VCs tend to be defensive and entrepreneurs overly optimistic.
The Genesis of Square: Revolutionizing Payments
This section introduces Jim McKelvie and Jack Dorsey's collaboration to create Square, a company that simplified credit card payments with a physical reader for smartphones, and discusses the regulatory landscape and the concept of regulatory capture in the banking industry.
Jim McKelvie's Early Life, Tragedy, and the Founding of Mira
The narrative explores Jim McKelvie's early entrepreneurial spirit, his success with a computer science textbook, a pivot to glassblowing, and the profound impact of his mother's suicide on his drive. It also covers the founding of his early company, Mira, and its subsequent pivot to CD-ROM publishing.
Meeting Jack Dorsey and Navigating the Internet's Disruption
This chapter recounts how Jim McKelvie met Jack Dorsey and hired him for Mira. It highlights Jim's foresight regarding the internet's impact on the CD-ROM business and Mira's successful pivot to conference publishing, with Jack being the only one to embrace the change.
Developing Square: Mobile Payments and Hardware Innovation
This section details the creation of Square, focusing on the idea of using iPhones for credit card payments, the challenges of hardware development, and the strategic decision to use the headphone jack for the reader.
Legal Battles, Stepping Back, and Market Resilience
Square faced a lawsuit from a former friend, and Jim McKelvie stepped back from daily operations. Despite Amazon's entry into the payment market with a cheaper product, Square's foundational innovations proved resilient, leading to Amazon's product failure.
Monopoly Preservation and Post-Square Ventures
This segment discusses strategies for preserving monopolies and Jim McKelvie's diverse projects after Square, including micro-payments for journalism, a coding academy, and his role at the Fed.
Philanthropy, Risk-Taking, and Drug Testing Innovation
McKelvie explains his current focus on philanthropy, tackling high-risk problems, and his passion for drug testing innovation to reduce costs and accelerate research, driven by a motivation beyond money and an acknowledgment of luck's role in his life.
Keywords
Square
A financial technology company known for its mobile payment products, merchants services, and small business platform.
Credit Card Processing
The system by which credit card transactions are authorized and completed, involving intermediaries and fees.
Venture Capital Pitch
A presentation by entrepreneurs to potential investors seeking funding, often characterized by a defensive stance from VCs.
Regulatory Capture
When a regulatory agency advances the interests of the industry it oversees, often benefiting established businesses.
Mobile Payments
Financial transactions conducted using mobile devices, revolutionizing commerce for small businesses.
Hardware Development
The process of designing, prototyping, and manufacturing physical electronic devices, crucial for Square's reader.
Innovation Stack
A term for a complex set of interconnected innovations creating a strong competitive advantage that is difficult to replicate.
Payment Processing Fees
Charges levied for processing credit and debit card transactions, a key area where Square aimed to provide savings.
Philanthropy
The act of using personal wealth to fund ventures with the potential for significant positive impact.
Drug Testing Innovation
Advancements in drug testing methods and technology to reduce costs, increase efficiency, and improve accuracy.
Q&A
How did Square revolutionize credit card payments for small businesses?
Square simplified the complex credit card processing system by creating a small, affordable hardware reader that plugged into smartphones, allowing even the smallest businesses to accept credit card payments at reduced costs.
What was the "innovation stack" that protected Square from competitors like Amazon?
The innovation stack refers to the numerous interconnected, non-obvious solutions Square developed from the ground up, including hardware, software, regulatory navigation, and business model innovations, making the entire system hard to duplicate.
How did Jim McKelvie's personal tragedy influence his approach to business?
The suicide of his mother instilled in him a strong sense of urgency and a reluctance to hesitate when action is needed, leading to a proactive and decisive approach in his entrepreneurial endeavors.
What is Jim McKelvie's current primary focus?
Jim McKelvie's current focus is on drug testing innovation, aiming to significantly reduce the cost of drug testing to enable more research and development.
How does McKelvie view the role of luck in his success?
McKelvie attributes a significant portion of his success to luck, stating he has been incredibly fortunate and would not change his past experiences for fear of altering his luck.
What is McKelvie's motivation now that money is no longer a primary driver?
With money no longer a motivation, McKelvie is driven by the desire to tackle new problems and start new ventures, lacking a natural stopping point.
What is regulatory capture and how does it relate to the credit card industry?
Regulatory capture occurs when regulatory bodies favor the interests of the industry they oversee. In the credit card industry, large players have influenced regulations to protect their market share, making it difficult for new entrants.
Show Notes
Most entrepreneurs think the hardest part of building a company is the product.
For Jim McKelvey — co-founder of Square — the hardest part was the system around the product.
Because Square wasn’t just competing with other startups …
It was competing with regulations, middlemen, entrenched networks, and monopolies designed to keep outsiders out.
In this episode, Jim shares the mindset and tactics that helped Square go from a tiny card reader that processed credit card payments … to a company—now known as Block— that generates over $10 billion in gross profit.
What You’ll Learn:
- Why the market is often “locked” on purpose
- How a simple hack can solve a seemingly complex problem
- How candor can sway investors more than confidence
- How Square survived by building something Amazon couldn’t copy
Timestamps:
- 00:12:26 – Engineering and art: Balancing an IBM job with glassblowing
- 00:15:46 – The family trauma that rewired Jim
- 00:36:26 – Losing a $2,000 sale — the moment Square was born
- 00:43:06 – Breaking into the credit card club: “We were violating 17 rules”
- 00:48:31 – The headphone jack hack that sidestepped Apple’s control
- 00:58:03 – The “140 reasons we might fail” pitch that won over investors
- 01:06:26 – The taxi ride that convinced Jim he had product-market fit
- 01:09:28 – Amazon attacks, and why copying doesn’t always work
- 01:13:18 – The founder’s job after success: choosing hard problems
***
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So—give us a call. We can’t wait to hear what you’re working on.
***
This episode was produced by Alex Cheng with music composed by Ramtin Arablouei. It was edited by Neva Grant with research help from Katherine Sypher. Our engineers were Patrick Murray and Robert Rodriguez.
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