Episode 110: True Innovation Is Rare with Jim McKelvey at Square

Mar 20

Jim McKelvey is a computer scientist by profession. He is also an accomplished glass blower. He’s even written an instructional book, “The Art of Fire — Beginning Glassblowing” to help new people attempting to learn the craft.

Sometime around 2008, he had a customer for one of his glass pieces. Unfortunately for Jim, that customer wanted to pay with American Express, and Jim didn’t have any way to process the card. He lost the sale.

Frustrated with the impossible red tape and regulations involved in accepting credit cards for small businesses, Jim decided to do something about it. He contacted his old friend Jack Dorsey, founder of Twitter, and they started Square.

Defeating Amazon

Square was revolutionary for small businesses. It was a simple, cheap way for anyone to accept credit cards without extensive background checks or high fees. The world took notice and Square spread like wildfire.

Amazon also took notice of the success of Square, and they set out to replicate the business. This was not good news for Square; when Amazon sets its sights on your company, that usually means they are going to put you out of business.

A team of engineers set about to reverse-engineer what Jim and his team had created at Square. Square was still a start-up, and Jim knew that they were in trouble. Start-ups don’t fend off companies like Amazon.

But they did fend Amazon off. Amazon’s team of engineers gave up, and Jim knew Square had won when Amazon sent all their customers a Square card reader to replace their Amazon card reader.

The Innovation Stack

Jim began to examine why Square was able to defeat Amazon’s attempt to take over its market. He looked for companies that were in a similar situation. Those companies were hard to find.

His research took him back through history. He found a few companies that had a similar type of success and he noticed an interesting pattern. The companies that successfully held off much bigger organizations trying to copy them, were so radically innovative that the larger organizations couldn’t figure out what they were doing.

The key was the smaller companies were doing something so unconventional, that when the big companies tried to copy them, they always failed. Square was founded on thinking about accepting credit cards in such a radically different way that the team of engineers at Amazon couldn’t figure out how they were doing it.

Jim knew he was on to something, and he wanted to learn more. There was a big problem, though — companies that fit the bill were incredibly rare. The only person he could find to talk to was Herb Kelleher, founder of Southwest Airlines.

He contacted Herb and spent an afternoon with him. As he was leaving, Herb got very excited about their conversation and asked Jim what his plan was to get out the information he discovered in his research. Jim didn’t have a plan. Herb told Jim the information he discovered was too valuable to keep to himself, and Jim set out to write a book, “The Innovation Stack”.

The rarity of true innovation

Jim had discovered that he had always misinterpreted what innovation was. Like most people, he was taught that innovation was a flash of insight or a stroke of brilliance that resulted in the creation of something new.

According to Jim’s research, true innovation is a collection of completely new and different thoughts on how to solve a problem. He calls it the innovation stack. He says innovation stacks are like icebergs, they’re only 10% visible, which is what makes them very hard to copy.

In the case of Square, there were 14 new innovations that had never been done before in the finance industry. Of those 14 innovations, only three were visible. It was such a radical new way of thinking about credit cards, that Amazon couldn’t get past the three that were visible. Square was impossible to copy using conventional thinking.

When Jim and his team set out to build a way to accept credit cards, they weren’t constrained by the traditional way of thinking that prevailed in big financial institutions. That ignorance turned out to be their biggest strength. They weren’t limited to doing things the way they’ve always been done.

Invisibly

Jim’s latest venture is a company called Invisibly. Jim is a voracious reader and he got fed up with, what he calls, “losing control of my eyeballs.” He would often hit paywalls on articles or breaking news that he wanted to read, and he knew there had to be a better way to manage that process.

He came up with a simple idea based on the premise that nothing is really free. If you don’t pay money to a publisher for an article you want to read, you have to pay with your time and attention in the form of advertising. That’s how TV has worked since it started, and that’s how content online works.

With Invisibly, customers control what personal data they’re willing to sell, data that is already being sold without their consent. For example, a customer can tell the app that it can sell data on where they live, their income, and where they bank. And nothing more.

Online marketers keep, on average, 85% of the money they make when they sell someone’s data. When Invisibly sells that data, the customer gets to keep 85% of that money in the form of credits they can use to consume premium content hidden behind paywalls in an ad-free setting.

Most of the other 15% of the money goes to the publishers or creators of the content, not middlemen. Jim’s example is that if you use Invisibly, and you read an article on Barron’s, they get ten times as much money as they normally make for that article, which is basically an upvote for that publisher to create similar content.

The customer doesn’t have to manage dozens or even hundreds of subscriptions, the Invisibly app does that for them. It’s a truly innovative approach. That’s pretty rare.