Square: Jim McKelvey. He Lost a $2,000 Sale, Then Built a $10 Billion Company

0:01 Hey, just a quick message. If you're building a business right now. Imagine getting advice from the founder of Tart Cosmetics. or Airbnb or even Sir Richard Branson or Mark Cubin. Well You can get that advice. Every Thursday we drop an episode of the How I Built This Advice line. It's where I bring back a previous founder we featured on a past episode. And together we help real entrepreneurs, people selling skin care, dog toys, pottery, food, whatever.

0:32 We help them work through the challenges they're facing right now. And the best part This kind of advice world class battle tested? is completely free. All you have to do is call one eight hundred Four three three.

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1:04 And tell us how we can help you. 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. This is our hockey stick growth year, this is our projections, and this is what we're gonna do in year two and five and yep. They have no idea.

1:37 So the game is sort of attack and defend. You're attacking their defending. We Change the entire tenor of the room by saying

1:46 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.

2:03 Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements. They built. Guy Raz and on the show today How Jim McKelve joined forces with his former intern. Revolutionized credit card payments with Square.

2:22 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. 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.

2:58 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.

3:15 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.

3:44 At the time, Jim McKelvey, who you'll hear from in a moment, was a moderately successful glass blower 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

4:10 Jack Dorsey. And when Jack Dorsey was fired as CEO of Twitter many years later in 2008, Jim reached out with an idea. 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.

4:30 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.

4:56 But today, Square's parent company, Block, is a behemoth with gross profits of over 10 billion dollars 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.

5:27 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 Wash U, where he actually got published at an unexpectedly young age. I took a beginning computer science class. and it was taught by a professor who wrote the book for the class.

5:53 And the book was terrible. But it was this 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.

6:05 I'm a hard guy to shut up. Mm-hmm. I was saying that you know I could write a better book than this piece of crap. And um One of my buddies said, Well, why don't you?

6:15 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.

6:31 And actually got me a publisher. And this was a book, it was called The Debuggers Handbook. Yeah, yeah. The problem with these early languages was that they were poorly implemented and the products had a lot of gotcha, they had a lot of mistakes. And if you would encounter one of these

6:47 Unless you knew the 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, you know, 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.

7:12 Hm. I mean, this is early word processing. Did you like print it out on a dot matrix printer and photocopy it? I mean, how did you even make the first version of it? Yes, in fact the first laser printers had just come out. Right. And they were expensive. It was very expensive. Oh, they were insane. It was like ten cents a page. And it was

7:33 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.

7:57 All right, so this ends up being used on college campuses and high schools h how much How much money do you think you made f from from publishing this book? I made thousands. Like more than ten thousand dollars, twenty thousand? Probably less than twenty. I was a real deal for the publisher. You know, I'm nineteen.

8:18 So c I mean, clearly you were a like precocious student and uh you graduated in eighty seven, but were you Did you get recruiters sort of seeking you out saying, Hey, come work at our computer company, you know, whatever that meant in nineteen eighty seven. No, no, I

8:36 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.

8:50 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 of super achievers. And that's probably the thing I learned best in college, which was I can go into a group Way better than me.

9:07 And I can make them more productive. Yeah, which is a hugely important superpower, right? And 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 didn't were not the programmer. 'Cause I have a pretty simple brain. And I don't understand things that that are too complex. But to your original question, which was, you know, did I have any job offers after school?

9:36 So I actually had its job. possibly working for a giant accounting consulting firm. And I thought about it, I was like, oh, this is like death. 'Cause they had this thing called method one. Учвоє масів

9:50 multi ring binder tone of how to solve every problem. And it was like you didn't have to think, you just had to go to method one. Mm. And I was like, I can't do that. So I um you know, I had this computer science degree, but nobody was hiring programmers at the time, so I I I didn't really have the ability to just go out and get a job. But I had this glass blowing skill.

10:10 And I thought, well, maybe I could sell my work. I became a glass blower, basically. Yeah, so this is g interesting because I I have a lot of questions about this. I guess in your senior year, you took a glass blowing class at Washu, and I what drew you to glass, because when I think of glass blowing, certainly like in the Late eight or sort of the mid to late eighties when you took it, I'm thinking like the people who would go to Renaissance fairs or right, like it is a it's like something you would see at like ye oldy, you know, right, like

10:39 Some reconstructed, you know, English village from the fifteenth century. Like wha what was it about glass blowing? Were you just like this sounds cool? 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 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.

11:14 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 Model company and saying, Hey, can I borrow the assembly line? You know, I I want to make some car and I don't know what it is. So there was none of that until uh 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 that. It was a completely open field. Which means there was no competition, so I could sell work.

11:43 Yeah. Because even if my work was garbage, it was the only glass in the s in the gallery. Wha what were you making, like bowls and bowls and vases and anything that would sell. And then uh through luck, I actually got a job at IBM. In St. Louis. Yeah. Well no, it was IBM in Los Angeles. So this was this was the original remote work. I'd met some people at Wash U who knew about my book. and they needed uh some writing done at IBM, so they hired me temporarily at IBM in Los Angeles. But I was living in St. Louis.

12:15 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 Uh when I did the work. So I could work. in the glass studio during the day and then do my IBM work at night. Nice.

12:33 to do work around the country and and you were able to actually connect with galleries In different cities and sell your work, right? Oh yeah. So I'm just curious, like how lucrative was this business? Like how much would these galleries sell a vase, for example? I mean five hundred bucks was a pretty good price, I'd get half of that typically. But you were

12:53 you are making a decent living. I mean if you're selling a piece for five hundred bucks and you're getting half of that and you're in a couple of galleries and You know, you you were probably subsidizing your income from IBM. My role was a thousand dollars a day. Every day I work in the studio and make a thousand dollars. Wow. Thousand dollars a product. Okay. That's a lot of money. For that time.

13:13 Well, I mean I that's allowed me to start my other company. Right. My venture capital came out of the studio. Um I I wanna ask you about um

13:24 Um Uh uh I'm Don't even know how to approach this, but it's a A a difficult

13:31 moment in your life. You're twenty four and your mom Passes away. Just before Christmas, I think. Um Well, she committed suicide just before Christmas, so I mean Yes.

13:43 That was December eighteenth, nineteen eighty nine. That was My world exploded. Yeah.

13:54 Did you Had your mom had she struggled with depression for as long as you knew? Um 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

14:10 struggled with it. Electroconvulsive therapy, like a lot of heavy heavy stuff that I had no idea was happening. Uh mom hit it very, very well. Because you had a happy childhood. You're an Eagle Scout. I had a great job. I never knew anything was wrong with my mom. I d 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

14:33 you know, attempted suicide and failed. My mother's suicide was so well planned that nobody could have caught her or stopped it. Like and she did not telegraph her punch at all. She planned it. You know, but Dad and I were just Caught. By total surprise.

14:50 And um And it just it just destroyed my world. Mm. And most most of us don't want to talk about that also because There's

15:01 All kinds of You know Baggage connected to that. Yeah, yeah, it is. Uh but it's I mean it's Losing my mom completed my education.

15:12 Maybe it didn't complete it, but it 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.

15:24 I mean it's A lot of the energy that I have comes from the feelings that our startup 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.

15:40 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. I it it to this day I regret

15:51 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. Hm. My attitude is like, you gotta be the one to do something. You know it's natural, it's instinctive for us to say, What could I have done more?

16:13 When in fact In many cases it's Beyond anything that we could do. Yeah, yeah. I mean that's but that's like You don't know.

16:27 Right. To me If you try And it doesn't work. Well you tried.

16:33 But if you don't try Well that seems wrong. If I care about something. And I don't Try to fix it.

16:46 Then I question whether or not I really cared. Do you remember how long It took you before. I mean you're twenty for k so young, right? I mean it's a kid. Yeah. Do you remember how long it took you before you were Able to just even

17:00 Pick yourself up. I mean it. I I can't imagine. dealing with something so traumatic like I mean it 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.

17:16 Idyllic existence. with no problems. I've never even had a cavity. Okay. I've never even had a tooth fill. Okay, that's how easy my life was. Yeah. And then all of a sudden this happens and I lose mom. And I mean, uh it was All of a sudden as if

17:35 You know, somebody turned on the black light on the Hotel room. And you see what stuff's around the bed spread. Oh. Sorry about the analogy, guy. I know better out there, but very good analogy. The point is

17:50 It just woke me up, and all of a sudden I started seeing. Pain in people. Like Payne and my friend. I I was trying to make up for twenty four years of obliviousness. By just

18:05 Being in touch with people who are suffering. And my God. There everywhere. We are everywhere. It's not they.

18:12 It's a wick. Mm. So in sort of the midst of this, I mean I think around this time you had been

18:22 working on another business. You've been doing glass blowing 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 a document imaging company.

18:36 Tell me a little bit about how that came about, that idea came about. So I already had my own company. I had a company that built C D uh storage cabinets. Click Carpentry. Yes, carpentry. Um, although I had a factory do these things. It was mostly marketing and sales. Um I see. Yeah, we were in premium catalogs and whatnot. We should explain to people that there was a time where people would store their CDs like books on a shelf. Yes, this is correct. And it made money.

18:58 But it was a mediocre business. And I was a mediocre glass blower and I was a mediocre IBM employee. And then my mom dies, and I realize. That my mother has seen nothing but mediocrity out of her son. I don't know. You have three businesses and you're twenty four? I don't that doesn't sound mediocre to me. I have three businesses, but they all kinda suck. Yeah, but I mean you're you're a super motivated twenty four year old. I mean that seems like a little bit of a stretch to say that you're mediocre. So so so having your own business was not

19:29 As cool then as it is now. Right. And I looked at what I My mother got to see And she saw her son as this

19:39 Kind of mediocre weirdo. At least that's how I saw it. And then I thought well this is not Who I wanna be. So I quit IBM. I closed my uh C D business.

19:49 And I stopped glass blowing. I just I said I'm gonna focus. And what am I gonna focus on? Well I'm gonna focus on the thing that It creates fortunes, you know, computers'cause I've got a computer degree. So my friend and I started a company called Mira. And this was

20:03 It was like what Adobe Acrobat would become. It was a document reader. Exactly, yes. Іно, відсім лайтс візу. uh thing was gonna be important on computers, that they weren't gonna be just text.

20:16 So we started building this thing that was very similar to Adobe Acrobat. Uh except that there was then Adobe Acrobat, which kind of wiped the floor with our product. I wanna ask you about that in a second before that happened,'cause I think it happened in what, in the first year or two after you you launched? Yeah, about ninety one, ninety two. Did you make any money before that time? Very little. Very little. Okay. So y and you had and you had been able, from what I understand, to fund this because you had made money from

20:44 Working at IBM and glass blowing. Like you actually I mean this kinda nuts in in nineteen Ninety or eighty nine or twenty five, you had fifty grand. I mean, that's a ton of cash that you saved up. I saved a lot of money, yeah. Presumably you could hire you could bring some people on and hire them and I did, yeah.

21:01 I had the capital. But it w it was more than just the capital. It w I'm also cheap. Like I I can live on air. My budget was twenty five dollars a week. Food. Clothing.

21:12 And transport. That was what I lived on. 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. Yep. So you guys have to Change what you do. So what What do you do? I mean you're that's it. Your Mir's dead at this point. So Mira's dead, but we had attended one trade show when we had a product. The the trade show was the

21:42 Association for Image and Information Management. I don't know if they're still around, but they they were the trade show for imaging. Okay. 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. Physical literature. Physical literature. From these companies about hav how to have paperless office. Okay. 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 that we did use my software to create the first CD ROM. for the imaging trade show. Basically meaning explain, you would take scans of We would take scans of all their literature and we charge them ten bucks a page to put it on. Our software.

22:29 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 wanna be on it? Yes. It's like FOMO. Like you have to and and so every Everybody would want to be on it, so they'd have to pay you.

22:42 have their literature on the CD ROM. 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. Right. 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'cause what are you gonna do?

22:59 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 seventy grand? Producing a trade show CD.

23:18 Yeah, I mean it's it's an amazing I I mean, at the time, it sounds like printing money. It's like owning a classified newspaper, right, at the time. And then you would have to how would you distribute the C D to every every exhibitor or every attendee? 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. They just have a stack of them on their tables, okay. Oh yeah. It was a reason to go to their booth. I mean it was the best thing. They and I and again I charged them for that. Like we made so much money on that. I mean There was a period of time where I could imagine this was a great business because how many trade shows, you know, thousands of trade shows a year. There are five thousand trade shows.

24:04 And The first one I did I made seventy grand. On one product on one CD. On one seventy grand profit. Seventi thousand dollars of profit. And

24:15 That was with the trade association actively suing me and trying to stop me. Mm. So imagine how much I could make if we cooperated with the trade associations. Yeah. Which is what we did for the next two years. We made

24:29 We made friends. Pick a fight. So we did all the other trade shows. I wanna just break into this story for a moment because From what I understand, something happens during this time where you're transitioning from being a imaging software company to a CD ROM literature company.

24:47 And that is you would meet somebody who would who would factor very prominently in your life and it starts with A coffee shop. In Saint Louis. So

24:57 About this coffee shop and why it was relevant to what you were doing. There was a lady named Marcia Dorsey. who owned a coffee shop called Shenadel Coffee. And we were building a trade show. Disc.

25:10 and had screwed it up so badly. that we were in a fire drill to redo You know. Probably two hundred hours of work. How many people were working were working with you? Like ten? I was probably ten, but it that weekend it was probably

25:23 twenty It was everyone we could find. Yeah. And one of my colleagues went in to buy some chocolate covered espresso beans to keep the Workers awake.

25:36 And Marcia says, Well what what do you guys do? And he's like, Oh, we work with computers and and she's like, Oh, my son loves computers and he's like, Well, how d how do you like to make fifty bucks a hard way? So this fifteen year old kid comes over uh middle of the afternoon and he introduces himself and he's like, Hi, I'm Jack And Jack pulled it all night with us that first day. Jack, this is Jack. Jack Dorsey Dorsey. Yeah.

26:00 And he was a fifteen year old kid and he knew enough about computers that he could help you guys Fix the CD ROM problem. I mean he wasn't doing a program, he was running a scanner. It was take this page, scan it, scan it, save you know type this file name correctly and do it. Right. Three thousand 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 out of trouble because we sent him home at five AM or something. I see okay. And then what I discovered was that

26:30 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.

26:46 What can this kid do? Tell me about him at sixteen. Was he C was he like a savant? I mean was he like a programming just genius? 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.

27:01 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 ninety-five. It was absolutely clear to me.

27:16 That the World Wide Web was gonna 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 gonna do, you know, boring technical papers. And everyone was like yes, Jim, yes, yes, yes. And they all said yes.

27:34 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.

27:49 I took Jack aside and I said, look. None of these other people are gonna be here. And Six months. You and I have to go off and save the company in the meantime.

28:00 Okay, so you are seeing the handwriting on the wall. You know that most companies are gonna start making their own websites and they will not need your services anymore. And so you guys decide to pivot away from trade conferences to, I guess, academic conferences? Uh like you launch a a publishing platform for for research papers that people would present at these conferences?

28:23 Yeah, we took large boring books. And made them into small boring CDs. So you basically you you were still in the C D ROM business. It was just you shifted to academic conferences. Yes. Where you saw more opportunity, at least for

28:38 A longer period of time'cause the internet would have killed that business too. Oh, actually the internet is I mean, that business is still going today. Oh wow. Yeah, yeah, yeah. Mirror still makes money. But not on CD ROMs. I mean no, it's 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

28:59 Publish them and Yeah. Okay, so you guys have this product within a product, and that ends up Kind of. Pro lot saving. Saves the company.

29:08 Yeah. Yeah. 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 Work here? No. No.

29:19 No, I'm not gonna talk somebody out of going to college. I mean my father is a Yeah. Professor. He's a dean of the engineering school. College is that's the family business. Fair enough. goes away. He kind of leaves your world, right? Yeah. And he goes on to college. I think he drops out. Yeah, yeah, he went to college, then we did different college and then he drops out.

29:41 Okay. But you continue to run Mira into through the nineties. And then you step away. in two thousand one. Yeah.

29:51 But you had enough money. I mean you were able to Build a glass blowing studio in St. Louis. Yes, yes, built a world class class studio in Saint Louis. This is what you were doing. Yeah.

30:03 Full time. Yeah, blown glass and I mean I did some other stuff, you know, I built some apartments, I uh But I was not full time at Mira anymore. Mira was still paying me, but I wasn't. The boss.

30:15 Um 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? And and become the CEO. Many people know the basic outline of the story, and we told some of it when we had W Williams on, but The basic story is He was a very young CEO and

30:36 For a variety of reasons, he was pushed out by the board. They pushed him out after two years in two thousand eight. And um Twitter at 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 You had he I guess he had come back around Christmas in two thousand eight and um You guys reconnect. At that time. Yeah.

30:59 From what I understand You start talking about maybe doing something together. Tell me why that was interesting to you and two thousand eight when you had this really nice Business and life like what sounds like you had some it you'd itchy feet, you want to do something uh something new. I mean I was a little bored.

31:17 Got it. I Was comfortable, but not You know. fully engaged.

31:23 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.

31:35 And I know this very well because I was reading at the time. the reports and they would mention Biz and they would mention Eve. Yeah, the founders of Twitter and they would omit. Jack and they would Amen.

31:46 Uh another guy. Uh null glass, I think. Yeah. I will say to his credit I have Williams to not do that in our interview he certainly gave. Jack Dor Credit what credit was due.'Cause he really did Invent Twitter. I mean he was the one who coded this thing.

32:00 and who came up with this thing. Well had you asked Ev that question in two thousand nine. I wonder what kind of answer you would have gotten. Right. It was a different story, yeah. 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 do something with him. No, that wasn't it. It was Jack's idea to start the company. 'Cause I my original idea was let's just go out to California and make, you know

32:37 Make war on the Twitter guys. Wait, sorry, what do you mean? You you you what did that mean? It was spite. You know, I don't know what we're gonna do. Wow.

32:46 In hindsight, it seems very unusual. I mean it's It's like a not a great use of your time. So so guy, in point of fact, that was probably an idea in my head for thirty seconds. And that was not fully serious it was not fully adjust. But I well that was what I said. And then Jack's said, Well why don't we build something new? It just can't involve social media.

33:07 And I was like, Okay. Well, that still leads to a lot of stuff. We we had to figure it out. So we decided that we wanted to do something with mobile phones,'cause mobile phones had just you know, the iPhone had just come out. Right. Let's figure out what to do with it. And then off to California to come up with ideas. And then we hired Tristan O'Tyrny, the um first iPhone engineer. Uh and he was gonna be starting in a couple of weeks and we didn't have

33:29 a really good idea to do with this iPhone. But Tristan was starting, so we had to come up with something. You go to San Francisco, you hire this guy who had been an engineer on the iPhone. Obviously Jack had a reputation already have being in at Twitter and And you had experience, you probably weren't as well known in the Bay Area.

33:49 I was nobody and Jack was Mm somewhat nobody. Right. But you had hired this guy without Exactly knowing what you were gonna do, which is very

33:58 Typical. I mean it was then, it still is now. Yeah. And I was fishing for other ideas. uh but hadn't come up with anything and then went back to Saint Louis to sort of pack up my stuff. Okay, I'm going to move to California.

34:14 And take my fiance with me and we're like that's how committed I was. And I was in my studio trying to sell a piece of glass. I mean I was I was there and I got this phone call from this lady in Panama. Who wants to buy a This ridiculous thing that I'd made. It was a glass bathroom faucet. Uh two thousand bucks.

34:31 Ugly as can be. It's been sitting on the shelf for years. But I need the two grand. Like two thousand dollars is really gonna help me, you know. With the cash flow and moving out. And I lost the sale'cause I couldn't take an animex card.

34:43 You only accept it Visa MasterCard. Yeah, yeah. Which was very Less common today, but it was super common. In two thousand eight, two thousand nine. Yeah, Amex charged too much, so we didn't take it at my studio. We'd always successfully been able to get people to have a Visa Mastercard, but this lady didn't have one.

35:00 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.

35:18 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. Let me come back in just a moment.

35:30 Jim reaches out to investors and With a hundred and forty 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. Welcome back to How I Built This. I'm Guy Roz. So it's around 2008-2009 and Jim McKelvey has an idea that could be a game changer for small business.

36:10 Using an iPhone to help read credit cards. And one of the first people he runs us by? is Jack Dorsey. He said that's interesting. Those were just the exact words.

36:22 And he said nothing else. Yeah, I wanna jump into this, right? Seems like a pretty great idea. Cause, you know, at the time people would have these like credit card like sched sort of boxes that were plugged into the internet and connected to a register and you would swipe the card through this thing, right? But it was big and heavy, it was like a brick.

36:41 Yeah, and expensive. They were a thousand bucks. And so you're you were saying Let's make something that works with an iPhone that we can plug into the iPhone. 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. Right.

36:57 And then we quickly realize that there are two ways to process a card. One is called card present and the other's called card not present. And card not present is way more expensive and more way more risky for the merchant. So you wanna do card present. You wanna prove that the person buying the thing is there and has a credit card. Otherwise you're, you know, vulnerable to a chargeback. Any time.

37:18 So it's no protection for the merchant. So the n 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.

37:33 we just scan the number. That makes that that would That seems to make more sense, right? Because then you have to have another device connected to it. makes more sense except for the fact that it doesn't work. Yeah, like You can't just tell the credit card industry to accept an image.

37:50 Because think about it. I can take a picture. and mail it to Singapore. Does that mean my credit card's in Singapore? Right. So You can scan your card.

37:59 But you don't get card present. Protection. I see. All you've done is saved yourself typing sixteen digits. So you knew that it had to be read by the magnetic strip. In order for it to work. Yes. My attitude was that we're not gonna get the credit card

38:13 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 we were trying to do. Which meant that and just let's just break it down for a minute. The the laws prevented

38:31 a merchant from accepting a credit card payment outside of this existing system? Correct. So then If the system controls who pays for credit cards, a visa mastercard dynamics control the system. How do you

38:45 change that system if they are the rule makers and you know they own the businesses and they actually make the rules about the business. Well, you have to get them excited to change their rules. I mean it was clear in the first day. Yeah. That there were

39:01 I counted seventeen, there were probably more, but I stopped counting at seventeen rules or various regulations that we were breaking in some way. Some of them were laws, some of them were network rules, some like OFAC, KYC. Like 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. But I guess the question I have is why what would their incentive be to do it. I mean, like when you looked at this world of credit card transactions in two thousand let's say eight

39:30 were most small businesses accepted. I'm assuming most small businesses no. No. What w the reason they should change their rules that we would bring them millions of new merchants. Why would this system bring in more merchants? Basically if you didn't have a hundred thousand dollars of business. You would not take credit cards. That was sort of the cut off.'Cause 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

40:02 requirements. So if you're like a farmer's market business, you just take cash. Yeah, forget it. The system was built for merchants who had a th hundred thousand dollars or more in transactions. It was never designed to serve the little guy. Basically they didn't have very good n negotiating positions, so they would get screwed individually. Mm And companies like Walmart and Target who had big

40:26 you know, departments of lawyers and lots of ability to, you know, sort of negotiate on their behalf paid lower fees. So if you were a small business owner, you're gonna be paying all kinds of transaction fees that could eat in like five, six percent of the sale. Oh yeah. Tremendous amounts of fees. And hidden fees, like tricks. It was just Vile. So this is I go back to my question, which is if a credit card company is making six, seven percent on a small business transaction, I would think they would have an incentive to try and block what you were trying to do.

40:58 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 th I mean if if if if you know, the the the understanding was you guys are making so much off these little merchants, I'll bring you even more of them.

41:17 Mm. You know. And I we never argued with the Network fees. So remember the Visa and MasterCard fees, they're 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.

41:36 Like the the independent sales organizations that work for the banks, that work for Visa MasterCard. You know, there's there's this chain of people and in that chain Everyone takes a huge cut of the little merchant. So

41:50 Visa Mastercard were the guys who had the rules. they weren't negatively impacted by anything that Square was gonna do. So it was easier to convince them to change it. 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 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. Yeah, yeah, yeah. And going back to the credit card companies for a sec, I mean, I understand why they would be interested, because you're you're basically saying we can bring in

42:26 an order of magnitude more businesses 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. Correct. 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?

42:48 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. So we're talking about Amex Visa. Yes. Amex Visa MasterCard Discover. Mm-hmm.

43:03 You know, dinosaur J C B. Like you name any credit card system and they are a rulemaking Brand. Body. 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. The they're taking a

43:20 twenty five basis points. Right. Or fifteen basis points. Off. a Walmart transaction or a square transaction. So they're getting paid either way. So they were incentivized actually to see this work. Oh yeah. Because you were you guys are basically saying, look, we're gonna do the work for you.

43:34 For all intents and purpose. We're gonna be the The sign up. You know, a store or shop. They're just gonna deal with us.

43:42 Yeah. And we'll pay you guys. We'll handle everything else. Yeah, we'll pay your Rack rates. So there were all these there's all these things along the chain. Okay, so this is this is one challenge. A second challenge

43:55 is that hardware, right? You've gotta build something that is going to scan or read a stripe And somehow connect to an iPhone. But The iPhone is

44:07 proprietary. Like you need Apple to agree to let you plug into the iPhone to let the thing work. 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. Right. And at the time it was this big port at the bottom, and you had to pay Apple.

44:28 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

44:49 Almost zero chance of us getting permission from Apple to connect a credit card reader. Yeah. So that seems like a pretty big problem if you want to use the iPhone. Is the main tool. Yeah, so fortunately I'm a nerd. There's a th there's a magazine called Make Magazine.

45:08 Yeah. 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.

45:23 And go through the headphone jack. And I had a friend in Saint 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. Uh so I called him and I was like hey can you help me build this card reader?

45:39 He was like, oh, we'll just go for the headphone jack. And I was like, oh, hey, good idea. So the headphone jack could be the way into the iPhone, but you didn't need permission. from Apple to use that? Well, you did and you didn't. Uh, they could have easily

45:57 blocked us from the app store. Apple could have stopped us. and if we had offended them or made them felt threatened it anyway. They They would have shut us down.

46:06 Alright, so what was your process to Like walk through those raindrops. Oh get Steve Jobs to Fail us out. Sounds really easy.

46:16 Yeah, so um Jack emailed Steve. Steve was a fan of Twitter. Jack got a meeting with Steve. Which was canceled because of Steve's health.

46:27 And You can't understand. Steve was this larger than life. діє апл со ані да стів вотсте і

46:36 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. And what were you gonna show him?

46:50 if you had that meeting. 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'cause it was too ugly.

47:04 Right. So I got this. really ugly credit card reader and a about to go in front of Steve Jobs and like Oh my God, I need to build something pretty And I need to do it fast.

47:15 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 I looked all around the Apple store and I was like, Oh, he likes Aluminum. Yeah, like a MacBook, yeah. Yeah.

47:27 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. piss Steve off and he'll throw at it. Like if Steve doesn't like your product

47:43 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. Uh I build this reader. And uh

47:55 It works. And Jack's Getting ready to actually he had a demo with Michael Bloomberg. Before The jobs thing.

48:02 So he was gonna 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. It doesn't scan the magnetic strip. Does it scan the magnetic. Okay.

48:15 Works perfectly. I hand it back to him. Doesn't work. And what we noticed after three or four of these rounds was that I didn't touch the reader with my finger.

48:25 When I swiped a card, but Jack would hold it so that it it wouldn't rotate in the microphone, Jack. Yeah. And because he was holding it. And because aluminum is conductive. And because Jack has a heartbeat.

48:39 It was picking up his heartbeat and the heartbeat was screwing up the read. Right. So it was a cardiac monitor. Nice. So that was the last time I built anything out of aluminum, but

48:49 The good news is Apple let us do it. Apple. Approved it. How complicated was it? to

48:55 Make a physical reader. It's a pretty simple device. It was a reedhead. Mm-hmm. And uh If you put a resistor in it, it sort of attenuated the signal to a point where it could be sort of

49:07 Interpreted as sound. Swipe look like the same thing. A sound. Got it. And then you would decode the sound. I guess to get people to adopt it, you also have to give these readers out.

49:18 For free. Yeah. And each reader cost you how much? Ninety seven cents. Oh wow. 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.

49:31 And I would argue about fractions of a cent with People in Chinese. And I rare that you wanted it to be a s square, you call it square, but you want it to be very small. You didn't want it to be like chunky. Yeah, very specific.

49:44 idea of w how you want it to look. Yeah, so originally the company was called Squirrel because we thought Squirrel's You know, were cute and saved nuts and thought that was a good payment name. Uh 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.

50:07 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. Um the square device was not. very good at reading cards. Because it was so small that carts would ro would wobble. And I built two

50:27 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. That's where my square reader lived.

50:53 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 was like, let me see that. Show me that. Do that again.

51:13 Okay, I wanna I wanna just jump into how in into Like division of labor. Jack was making the he was creating the The interface for this thing. Uh Tristan was mostly working on the iPhone client. We had a few other people that were

51:30 You know, joining and working on various components of the software stack. And you were gonna hardware that piece because you were a glass blower. You had some. I was hardware Because I was the weakest programmer. So I was

51:43 relegated to everything else. So dealing with the banks. Jim figure it out. Furnishing the office. figuring how to incorporate the business, figure like everything but programming. Felt me.

51:56 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.

52:07 And you are actually able to transact. Like from what I read, like in these pitch sessions, you would pitch these V Cs and you would say h w here, give me your credit card and you would charge them like a dollar or five dollars. Jack disliked them. Right fair. Jack had add a list of V C C liked and didn't like, and depending on where you were on that list, he charged you more.

52:30 One guy paid forty bucks. At that point had you had the permission from credit card companies or not yet? No. So you were able to still transact and use the reader, but it was technically not legal what you were doing. Everything worked. But it was breaking many, many laws and rules. Breaking rules because you were not allowed to charge people using an iPhone or because you weren't you going through the right processors. Why why was that illegal? Yes and yes and yes and yes. There were so many rules.

52:59 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. I d w there were just so much stuff that we did not

53:15 Pay attention to. But we built a system that worked. So you could get away with it as long as it was a few small transactions nobody would notice. So you had this and um you're pitching this to V Cs and also another thing you do, and you write you write about this in your book

53:30 You've a slide. And it says a hundred and forty reasons why this business will fail. from one perspective sounds really you know, bold and funny, but I also think that it in a sense it's basically you saying, We're so confident this is gonna work, I'm gonna tell you why it's gonna fail.

53:47 It wasn't Confidence. It was Candor.

53:52 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 V C pitch They're really weird things because they're basically

54:07 The VCs are up there. Plant 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. This is our hockey stick growth year, and this is our projections, and this is what we're going to do in year two and five, and yeah. They have no idea. So the game is sort of attack and defend. You're attacking their defending.

54:28 We Changed the entire 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

54:40 Reasons to not invest in this business. Mm. And so because we put that up. Instead of playing defense the entire time, Most of the

54:50 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 attack gonna attack you? Don't worry, I'm on the board of Amazon. And I developed Amazon Prime and we can get'em to leave you alone. Like if you take our money, we'll guarantee that Amazon doesn't attack you.

55:07 So while you're pitching this, there are people are saying, Oh, we can help you fix this problem with the with the credit card companies can help you with that. Yeah. Like no one thought that was gonna be a challenge. Oh no, they knew it was like a challenge. I mean, you have to have a certain bold investor to back what we were doing.

55:23 But there were 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. Yeah.

55:35 So you You guys raised ten million dollars. Yeah. Eleven, I think, but yeah. Eleven. forty five million dollar valuation. But I have to imagine that you needed a certain

55:47 critical mass and momentum and before you would see Profit because probably the fees the way the fee structure worked, at least initially, would mean that you were not gonna make money for a long time. 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

56:06 For the business to work. So yes, we We needed it to be big. 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 Raj, 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 on a pilot program.

56:57 The company is 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 a guy named Robert Morley, and uh he's the guy that you mentioned a while back. This is a professor at Washing University. That you had called up for advice. when you were first trying to build the card reader, um And then at this point, he claims that he actually invented the reader, right? That his name was on the patent and

57:28 And that you and Jack had gone off and spun out a different business and shut him out. Yeah. And this is gonna be this gonna last for about six years, this legal dispute. There are probably things you can't talk about because it was eventually settled. But I mean clearly it's somebody you knew. Right, and maybe even had a friendship with at a certain point.

57:45 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.

57:55 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

58:05 Bob decided that it was And and in fairness to him, and you know, we 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'cause they're not here to to defend themselves. But from what I understand, he he claims it's his idea And this sets off a series of lawsuits back and forth for a while.

58:28 Was that um Was that stressful? Was that like did that distract you? I mean, what was stressful was he was a friend. Mm. But I don't think anyone else in the company thought it.

58:38 Was serious. Well, I mean You know, I think understandably mu you know, there's there's m 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.

58:55 Yeah, something like that. Okay, so That's sort of in the back. But but meantime, you In that time period. Gotta step away from running.

59:05 operations day to day is square. You I think by two thousand middle of two thousand ten 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.

59:18 Well my son was born. And it's pretty clear to me. that I can't work a fourteen hour day. and maintain. what I consider the duties of a decent father.

59:31 Plus I wasn't particularly great at any of the things that I was responsible for. Like I was 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.

59:46 at every area that I was in. You know. 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. I mean just

59:58 Like A little over two years after Squares launched. It raises money at a big billion dollar valuation. Were you surprised by that that momentum or

1:00:11 By that point were you like, Yeah, this is Where we we've We've nailed this thing. The moment Square became Real to me.

1:00:19 was when I was in a taxi. With my wife were in the back of a taxi in New Orleans. And the taxi driver. Is using Square. And he's so excited about it,'cause he can get paid with a credit card.

1:00:31 And he's telling me about it. He's like, You gotta see this thing. It's the best thing in the world. He and he's pitching me my own product. And he gets everything wrong. Okay. He gets all his stuff wrong. But he is so excited. You could see how it was just. This magic. Unlock for him and his taxi business.

1:00:49 I turned to my wife, I was like Hold on. This things. Big. When I saw the impact.

1:00:57 That was 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 kinda cool to cross it. And then

1:01:10 None of the daily things change, so I think you just Ignoring it. Yeah. Go forward. So what did you once you left, I mean, did you leave, leave, or were you still did you still have kind of a foot in

1:01:23 At Square, were you still Well still on the board. Mm-hmm. 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, bust tables or clean up after other people.

1:01:39 Um I don't yeah, I I won't say why I'm there,'cause that's not my choice. Uh 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

1:01:57 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. Yeah, I mean I mean Jack is still the CEO of the company. Like.

1:02:12 You know, fifteen years later. I mean clearly he likes that role. I mean he likes the operational side. Yeah, clearly he's pretty good at it. Do you guys talk regularly or not that regularly. Yeah. I guess you have you have to go to like a an ashram and

1:02:28 You know, in Tibet or something. I am not allowed to tell you. I d 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. Yeah. 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, it's just sort of buried there.

1:02:47 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.

1:03:02 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.

1:03:14 Fascinating. It's just it was so much fun. Yeah. Um Alright, so you are on the board and Square is really Growing and then

1:03:25 Two thousand fourteen. Amazon. decides to get into this game. They decide to get into the payments processing business. And really are gonna undercut.

1:03:36 Square. They're gonna charge A lot less. They had a product that was basically copied square. It was a reader that you plugged into a phone.

1:03:45 But they had a cheaper it was cheaper. Like it was right,'cause Square is free, but then if you want to uh have uh more features, it's more, but they were even charging less Like lower processing fees, I think. Yes, yes, yes, they were cheaper. Yeah, I mean that's a race to the bottom at that point. Well yes, I mean if you think of credit card processing as a commodity Which I think most people would.

1:04:06 I mean it's a logical thing to conclude that oh 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 and the brand name on top of it. I mean Amazon's got the brand name and lower cost. Why wouldn't you not use them? Um, I mean that two thousand fourteen square's huge.

1:04:26 But I mean Amazon. It's Amazon. We're not huge. We're a spec compared to Amazon. Right. Yeah. And so what role did you play in sort of You know, being involved in trying to, I don't know, batten the hatches.

1:04:38 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. I 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.

1:04:56 Mm. Okay. So That's how bad it is. Step two was a pretty awkward board meeting where we said, Well what can we do?

1:05:05 There wasn't much we could do. So we decided to not do anything. Well yeah, I mean the strategy Square strategy was to ign essentially ignore Amazon when they release this product. Yes. They decided we're just not gonna engage. Like what are you going to do? Well you could lower your you could have like try to compete on price, right? We could have started a price war, but we didn't have the balance sheet for that. You would have lost So much money.

1:05:28 that would not have lasted long. But The Amazon product. Failed. And it failed so badly that Amazon gave us all their

1:05:38 Soon to be former customers. and mailed them a square reader and said, We're out. Go to Square. Why do you think that the Amazon product didn't work and and Square Was able to withstand that.

1:05:49 Competition. 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.

1:06:00 And this is what I call an innovation stack, but you end up doing a dozen things. In our case it was fourteen 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

1:06:14 You've been forced to Learn that. because you were the guy who invented it. And we were doing 14 things and Amazon copied about three of them. And the el other eleven killed him.

1:06:23 They didn't know what we did. And they couldn't'cause they hadn't built it from The ground up. They just copied it from You know, a boardroom somewhere.

1:06:32 Oh, let's do what Square does. We'll make some software, make a hardware device. Undercut the prize. Yeah, it seems like it's gonna work, but it turns out it's way more than that. If you Invent.

1:06:42 Something truly new. You're not inventing one thing, you're inventing a stack of things. And that Invention becomes It's own protection. And as long as you behave

1:06:55 It I mean th 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.

1:07:09 Jim, I know that there have been a bunch of different projects that you you've worked on after you formally left day to day with Square. You worked on this idea of like micropayments for journalism and a coding academy that you had and You were a director at the Fed, at the St. Louis Fed for like six years. Yep. I mean it seems like you are You don't like to do the same thing for too long.

1:07:32 Well, yeah, look, I uh I have tremendous resources now. Stuff that I was never expecting to have. And my family and I believe pretty modestly. So

1:07:44 What are we going to do with it? And I'm you know the answer is we're giving it away. I'm giving the money away. Um but I just go around and occasionally get attracted to problems. I say, Well who Who but a person who could afford to take tremendous risk could solve this problem?

1:08:00 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.

1:08:14 Or to do something crazy. What kind of problems are interesting to you? Right now my focus is uh drug testing. So it turns out that On a planetary scale, we've got about thirty new drugs a year.

1:08:26 Yeah. And just'cause the test costs hundreds of millions of dollars. Yep. So if you can lower the cost of a test from let's say a hundred million dollars to ten million dollars. You'd have a lot more tests. You would have a lot more shots on goal.

1:08:38 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

1:08:54 Basically demonstrate that we can do it cheaper and faster and better. I mean you are uh what Sixty. Sixty. Yeah, turn sixty this year. And so you've got, you know, a lot of life left in you, right? Especially if these drugs work. Exactly. There may be a side benefit here, yeah.

1:09:10 I have a s suspicion that this is not the last thing that you're gonna start. Like you Is this something that you still just energizes you have to g you want to get out of bed and start something new. Absolutely. I used to work for money.

1:09:24 Yeah. But it's weird. When money's not a motivation, there's no reason to stop. Like it used to be, Oh, I'll earn enough too. And then I would say, Oh, I know I can take a break. Mm-hmm. Now Since money's not the goal, then I don't

1:09:37 Have any natural thing to stop me from doing the next thing. So I tend to do more. Yeah. If you had to if you look at at

1:09:46 Where you are in life. How much of where you are now do you attribute to to how hard you worked in your great ideas and your skill and how much do you think it has to do with with luck? I've been so lucky. I've been the lucky I I I don't know how lucky I am.

1:10:03 Like if I went to go back and relive my life. I don't know that I would Change a thing'cause I might not get a The luck. You know, and

1:10:12 Even with Stuff like Mom's death, I mean As hard as it was, I It made me

1:10:21 You know. Without that I would not have I don't know. Um I'm enough a nerd that I, you know, read science fiction and you know, time travel and all this stuff and the butterfly fact and d I

1:10:32 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. Just Too dangerous.

1:10:46 May maybe I tried to say more. That's Jimmy Kelve. 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 at guyros.com or on Substack.

1:11:13 This episode was produced by Alex Chung with music composed by Ramteen Arabui. It was edited by Neva Grant with research help from Catherine Seifer. Our engineers are Patrick Murray and Robert Rodriguez. Our production staff also includes Casey Herman, Chris Massini, John Isabella, Sam Paulson, Carrie Thompson, Ramel Wood, Norgill, and Elaine Coates. I'm Guy Raz and you've been listening. how I built this.

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