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How to Disrupt Billion Dollar Industries | SXSW 2021

Jim McKelvey
Co-Founder at Square
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SXSW 2021
March 16, 2021, Online, Austin, USA
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About speakers

Jim McKelvey
Co-Founder at Square
James Altucher
Author/Investor/Entrepreneur/Podcast Host at The James Altucher Show

Jim is a serial entrepreneur, glassblower, philanthropist, and Independent Director of the St. Louis Fed. He is the cofounder of Square (along with intern turned Square cofounder, Jack Dorsey). McKelvey is also a master glass artist and author, having written the world’s most widely read text on the subject, The Art Of Fire. His industrial design work is part of the permanent collections of the Museum of Modern Art in NYC and The Smithsonian in Washington DC. His glass studio, Third Degree Glass Factory in St. Louis, one of the United States’ main hubs for the glassblowing arts. He is also the founder of LaunchCode, a nonprofit making it possible for anyone to learn programming and land a full-time job in under six months–for free. McKelvey's newest venture, Invisibly, is working to give people control of their online identities.

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James Altucher is a successful entrepreneur, angel investor, chess master, and the Wall Street Journal bestselling author of "Choose Yourself." You can find his best and most controversial advice in The Altucher Report, which provides you with James' personal research in business, finance, and entrepreneurship.

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About the talk

Many people think it’s too late to start an Internet business, or it’s too late to start a new billion dollar industry. The Innovation Stack is a guide towards not only the growth every business experiences as they deal with obstacles but also how to think about disruption. There are always new billion dollar businesses to start in every industry. There are always entrenched industries to disrupt. Jim McKelvey and Square did both. The Innovation Stack is a methodology and map towards navigating the constantly changing terrain of American entrepreneurship. We examine what it takes to navigate the constantly changing terrain of American entrepreneurship, learn to mitigate the risks, create new ideas, and new billion dollar businesses. It’s about the DNA of innovation, and the tools for anyone to succeed.

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I am James altucher, and please say to be interviewing a Jim McKelvey, the founder of square. And also the author of a book called The Innovation stack. Build an unbeatable business one crazy idea at a time and it really is one crazy idea at a time, like, just introduced them a little further Founder's Square. He's a deputy chairman of the st. Louis federal reserve and he is a glass blower. So before starting square with his co-founder Jack Dorsey, who is also the co-founder of Jim Jim's Focus

was creating art out of glass and it's probably the least likely person you would think the start not only a multibillion-dollar company but perhaps the most Innovative company to come out of a financial technology in the past 30 or 40 years, although maybe Jim would dispute that. But I love this title, The Innovation stack. But what do you even talk about in the book? Where it words, like Innovation and disruption? These are almost like just, like almost

meaningless. There you so much. And the one thing I hear over and over again in every industry, if people say, oh, it's too late, it's too late for me. Now, it's too late to build. A billion-dollar company in the internet is too late to build, a billion-dollar company using aair Bitcoin, or cryptocurrencies, whatever, you had this Glass Factory. And why did you think you could build one of the most Innovative companies out there again or something? Like a third of us businesses, use Square. Now, to process credit cards, what was going through

your head? It is a crazy idea. What's the first of all changed? We didn't think that we were going to be building this. You in a business we thought we were going to be solving a small problem and what it turns out is that? There's a certain formula if you try to do something that's never been done before your left without the tools that everybody else uses. So you have to invent your own stuff and that's what I described as an innovation stack. It's this series of invention that you have to do to do something that's totally new. And yeah, I mean I had the same feeling which is all the good

ideas. You've got you look around you and you say, I wish. I thought, I wish I'd thought of your whatever, you know, the hot idea this week is and It's easy to think that they're no good ideas left but the problem is that's that's the mentality. They were all sort of State in which is this mentality of copying and look. You and I and every human on the planet are really good. Copiers if, if we weren't going to copy, we would be alive. But the fact is, you're not going to build a significant disruptive business or significant sort of empowering business,

unless you do something unique. And unfortunately, you can't do something unique. If all you can do is copy. And so, just to clarify, what's an example of a copy business. Open Burger, King is a successful copy of McDonald's so I buy VC I invest in these companies and their the close of each other. We find companies that have the SAS model. They have a certain little expertise that we think some bank or financial institution is going to buy later. They have a certain annual revenue and you just crank and repeat. Now that's not to say, is that's not to say that success is

guaranteed. But there's a model you can follow. And if you ever get to the point where you don't understand something you can look at competitors or similar companies and just emulate what they did, and probably you'll get the same results that they got. So in a situation like that copying is really a great idea. If I'm not trying to not copying at all, as matter fact, I think copying is usually appropriately. The first choice for solving a problem, but occasionally you run against a problem that humankind has Call Jack. And in that situation you can't copy

and in that. So I should waste. And also you're going to have this almost physiological response which is fear. I mean, it's, it's basically fear in its it manifests in a bunch of wasted, but basically, as soon as you are unable to copy or unable to verify the what you're doing is sort of approved by the herd, you'll start feeling very nervous, you'll doubt yourself. And you'll tend to quit before you get the ultimate success which is that small mom-and-pop companies. Like let's take your your local

cafe or coffee shop or flower store or whatever small mom-and-pop companies weren't able to accept credit cards. Why were they able to accept it? And, and given the fact that credit card companies, specifically did not allow these companies to accept it. Why? Do you think you could break through? And again. I use the word disrupt or innovate, I don't know. But why did you think you would be able to do this and and solve a problem for tens of millions of businesses? So we can we were thinking that big at the beginning of the week, we sort of had

these dreams but we were really trying to solve the problem for a very specific small merchants and I was want, so it was really easy Obby. We had a focus group of me and it was like, what was Jim use? And then we found a flower vendor who sold flowers, literally in front of Jax apartment in San Francisco. So, she was our second user to Russian, stunt pilot to be our third years or so people. But the, the, the pattern that I saw, which led to this book was not just what happened square. But what's happened to you, literally hundreds of other companies throughout history

that have tried to enable small people to participate. So I'm squares a great example, but I think it probably a better example, Southwest Airline. Because if you look at the history of air travel before, Southwest Airlines in the United States, if you were not rich or you were not you know on a business account you are flying. You were taking a And tell her his team at Southwest really change that, but they changed it not by trying to build the biggest airline in the country, which they actually eventually did, or if I try to create the, the highest growing company for a decade

in the best performing stock in the NASDAQ, which I think they also did. But they were just trying to solve a problem for normal people. And when I say normal people, I mean people that aren't originally invited to the party and that sort of this pattern that I saw, which is that, these, these people who go out and try to create solutions for this unknown market, end up sometimes creating Innovations tax would spend lead to entirely. New industry is very powerful. Yes, not quite an unknown Market. It seems like a lot of these companies that you feature in The

Innovation, stack the book and as well as your own company Square, focus on the potential bottom or bottom 4th of an industry. So, again, huge companies were able to accept credit cards. It was the small companies that for whatever reason could not physically accept credit cards and and simile with Southwest Airlines. It was people who normally put enough for their travel that Southwest, it was like the bottom third of people who would like to travel. That was the industry that that Southwest sir. But but what are the problems that are results? One is you

have to provide the service cheaply. The other is there was an oligopoly of credit card companies. Maybe there are two or three credit cards that you had to focus on and they simply didn't want to process credit cards for small companies like what? In the first 5 minutes of considering I'm starting square. If it if it were me I'd probably say oh we will never be able to convey. What happens if we don't convince visa and MasterCard American Express to accept our card or to accept our card reader, we will be over. How do we how do we fight that? Like why did you think and again this is for

for everybody out there how do they how do they overcome the extreme doubt it with good reason. How do they overcome that in the beginning? So the extreme doubt is part and parcel of doing something that hasn't been done before. So I'm used to travel analogy, okay? If I'm going to take a trip which I wish I could travel right now and I was going to a different city or fly, go different country. I would have some expectations. I would expect there to be, you know, I transferred and food and maybe a hotel and I got the hotel light expect there to be a bed. You know, I have

these certain expectations. Now that's totally different from be taking a trip where, you know, I'm shoved out into some Uncharted jungle and have to survive, both our traveling. But in one case I assume a series of resources that I depend on any other case, I'm sort of on my own and imagine you're shocked. If somebody says, hey James, let's take a trip and I will get to go get over to this really cool Resorts and they shove you in a jungle. That's what it's like if you end up at the bottom of the market. So so what you described in your question was something my Illustrated the

book which is sort of like this this there's a pyramid in most markets where it'll pop you have you know super expensive products that are you know, sort of luxury Primo products and then it gets you no more more commoditize, you go down but it's some point the market stops and you'll see that for everything. So all right now I'm I'm fascinated with diapers, got a little kid, will use a lot of diapers, but if you look at the diaper, the diaper pretty much stopped at about 18%. Like, if you don't have $0.18 to spend on the disposable diaper, you're not going to use a diaper. And for poor

people. That's even worse for people are spending almost double that for diapers, but if you can't afford that, you your kid doesn't use diapers. Or if they do, they, they have you do. Because that basically where I'm all day till he look at any Market, there's a point where that market just can no longer affordably service the lower Edge and the market stop. So in the case of Southwest Airlines at the time, the way they were flying planes, prevented them from charging the race that Southwest did. So, what's up with had to do was they had to create an entirely new different series of

innovation? What, what was Southwest Innovation stack to allow them to provide that service for everybody? And then the same thing happened with square. Like, when we started trying to serve small, Merchants, like me, we realized that not only did the rest of the market sort of ignore that segment, but they had built their systems in a way that presume that, that segment was never going to be addressed. So Square. Couldn't Next to the bank. So why the other companies could we couldn't fight fraud the way everybody else if they were unavailable to it. So we were forced to invent all

these new tools and I go through the book and read it off 413 things differently. But it never been done to the credit card Market before and that Innovation stack allowed Square to become what it is today. And so a lot of these problems that you encounter, you don't necessarily know what these problems are going to be in advance. But it's through encountering problems and building the tools to solve those problems. That it seems like you have faith that you'll be able to build an innovation stack and solve these problems. And that's what will create the company. Do, do, do you have

faith in the beginning that you would solve the problems? Or did you completely have no clue that the problems would exist? It was both. We had no clue and we also had Faith so Jack and I both share a pretty stubborn streak. So when we would come up against something that couldn't be done. So, for instance, we want to do as an online user agreement. We thought, well, that's no, no, no. You have to have a 42 Page piped, 6 point type contract. He's got to be in a wet ink, signature. All this

crap. And, and we said, no, that's stupid, you know, but literally in the first day at in the office, we discovered several laws that square would be violated with each transaction. And by the, by the end of the second week, we had identified 17, different rules regulations, or in some cases, laws that prevented Square for doing what I wanted to do now where the naivete comes in. You neither Jack nor I were experts in payments. We thought the why the hell can't we do this? Like, what? Want to do seems like something you should be able to do. So we just kept going and we kept going in after

a year-and-a-half. We finally got either compliant with all those laws were in some cases. We got them changed. Right. So, so while solving these problems, you basically built kind of the framework that that built the whole company. So, each each step of the way you encountered a problem and being forced to solve it kind of soft many problems simultaneously like you mentioned diapers earlier, Amazon's a great example where diaper they were competing against or diapers.com, end up competing against Amazon. Amazon undercut them, so much that they eventually we're able to buy diapers. Calm,

and you encounter problems with amazon.com? You also had this huge giant say, hey, we're going to, we're going to attack this small company at the Time Square. Yeah, so the diapers suck it was terrifying, stories is pretty adjective like I talked to both founders of diapers because what you said exactly was the same thing to happen to square. So, the scariest thing that can happen to you, as a start-up, I think is Amazon decide. They want your market, and what they do is, they copy of products and they have the Amazon, Brandon expect you to die and that's exactly what they did

that to diapers.com. Amazon always wins when they do this and that we Found was Square itself. Like what Amazon did this to square for some reason, a year later Amazon gave up the fight. And, and that was amazing to me as if that's the whole reason, I wrote this book was because I couldn't explain why it happened like startups, don't be Amazon, like what happened to diapers.com and having to Zappos and having all these other companies? That's what's supposed to happen. But something happened differently in squares

case, I don't like what, what explains this. And so, I basically went on a research request for a couple years and I was like, oh my God, what happened to score was not An anomaly. But it was this very rare phenomenon and the reason it was so rare is the because most companies don't have to innovate and when I say have to innovate, I'm not the preaching Innovation, is this as a solution to everything, okay. It's unpleasant, it's scary but it's one of those things that I'm willing to do when forced to and most people

and most companies are able to avoid it forever. And so what I noticed was it was weird pattern because Square was not the only Survivor there were a bunch of other company, Southwest and Ikea. And I found dozens of them that had the same pattern, which is as a start-up, they were attacked by a much much larger organization. Sometimes it was a government phone cases but it is put in all cases. The start of survive, and they not only survive, but they, they grew to become the biggest company in their business. Also, like the biggest bank, in the world was started by a guy who was a produce

better do nothing about that was just pissed off the banking system because it didn't include the little table. So again, the pattern repeats APG needy, build built, the biggest thing in the world, by trying to include people who previously couldn't use Banks. Yeah, I think the biggest the one of the biggest things I learned from your book. Was this idea that hey, if you want to create a billion-dollar company find an industry where the bottom third of people are not being served by that industry, but would like to be. So you mention, Southwest catering to people who normally

come up for air travel and square, kid into people who normally couldn't accept credit cards, cuz they weren't big enough. And now that you're handling about a third of American businesses, was there ever a point and again, that's always going to create a multibillion-dollar company. If you can, create the right Innovations along the way and deal with the competitors like Amazon. Her going to try to squash it. Was there ever a poisonous? That was two questions. What is was there ever a point in this? Where you were like we put four years into this five years into this. And

now we're going to have to give up. I don't know how to solve this problem. I know, I will say that doesn't mean we weren't terrified when Amazon attacked us but by the time Amazon attacked us, we were growing so fast and we were so busy that we basically ignored and it's not that we were ignoring me. I couldn't think of anything to do. So we just kept doing what we were doing, lower our price match their price. We didn't we basically didn't change anything. We just kept plowing ahead. But what's your second question?

Do you think are so expensive? They cannot or they're so expensive for people that they're right for this type of innovation. Like, somebody should create a company to service the bottom one, third of this industry. I know some Industries benefit from like a Moore's Law type of protists. Like let's say, I want to use genomics, secure some disease. I have a Moore's Law Office. Telmex suggested eventually genomics will be cheap enough to solve millions of diseases that they don't currently stopped so

other than Industries like that that benefit from just increase in technology, what what industries are so ripe for disruption because they're not serving the bottom 1/3 of society. Well, I think it's almost every heart. I mean, I spend a lot of time in St. Louis Missouri. Miss my hometown and I sort of live and work on an area that's sort of on the edge. And so a lot of my friends their kids are in different situations. I've Got Friends on both sides of what we called the Del Mar to buy here in St. Louis so like if you don't think

diapers is a problem, then you don't understand diapers a third of Americans struggle to pay for diapers education Healthcare, my book. So carefully is that I chose the most boring commoditized as I could to just prove to the power of the Innovations. So I think everyone is Furniture, like you. Look at the biggest Furniture Company in the world is Ikea. What did I see? You do? Well, they they they they create a new process, the credit Innovation, sack to bring Furniture

to the masses. And you know, when you and I went to college with him. Furniture, like, weeding of stuff that you look really cool. We had like stolen milk crate, that's what I had and it's not a, it's not a sexy industry. Furniture is. Some cool Wars law for furniture, okay? But the power of innovation can even transform the furniture world that can create multi multi billion-dollar fortunes. I mean the activate Ikea. Fortune is is insanely valuable even though their private.

So I don't want to hear this, is this mosquitoes from Tech guy. Was telling me to go start a tech companies like I'd love to see the world, have a better diaper like I would love to see the world. Have you no more affordable sneakers? I believe there's opportunity at the bottom of most markets. It's just you have to open up your eyes to what it takes to not copy and that's really tough because you know your whole life you have been To copy an exit. The book is dedicated to somebody who I think is brilliant. I know is incredibly gifted a well-educated but everytime I

see her. Encounter problem where she has not previously been trained to thaw she quit. She said I'm not qualified to do this and my point to where which is the You're right, you're not qualified but the first time anything is done in human history. It's done by somebody who's not qualified to fly a plane because humans hadn't flown before You know, what's so interesting about the Wright brothers because at the same time that the right brother. So they owned a bicycle shop in Dayton,

Ohio, and I decided we're going to build a plane and fly through the air, and no one's ever done it before. And at the same time, the US government was, was devoting to million dollars in $1,900, to Samuel Langley to also create a plane, and it was kind of a race between them. And it was almost a fact that the Wright brothers weren't well-funded that force them to kind of crazy Innovations. They did like an end, the big kind of technical sort of insight. Was at Samuel Langley, was trying to find to, to build a plane that would have no turbulence. Would fly a straight as

possible and the Wright brothers because their experience with bicycles realize that when you learn to ride a bicycle, You Wobble a little bit and that's okay, that's how you find balance and so planes wobble and that was their big innovation and some cents. Innovation. It sounds like you have to be there. Probably 20 serious Innovation to the right before the Wright flyer, but you're absolutely right. And that is the Wright brothers also exhibit the pattern that I saw in the book which is that all of these industries are

are founded by people who not only are not experts because you can't be expert in something has been done, but they have full self. These were people who ended up through happenstance in this industry where they were forced to invent without the burden of too much knowledge to begin with. So they had this very open-minded and you know, if it's a dihedral on the wing or a aluminum engine or or a different way of working so you can see all of those things are Are things that people invent when the Forester. It also seems like again, this is

a great idea for a model for building a billion dollar company, find an industry. That's not serving the bottom third of society and you see it in the water cases with the access economy. Like, uber Zipcar cure, somebody with a lot of access cures people who need access to cars, or seats or houses, or whatever kind of cutting out. The middleman is a good way to reduce cost and and serve that bottom third. Look at yes, the interesting thing about Innovation is that you get a different tool set every day. So I will agree that certain things were absolutely

impossible to do 10 years ago. Are they impossible? Still? Is it still impossible? Because every day we got a new set of tools, somebody invents a new accelerometer, or a cheaper engine or a better way of transmitting power for a faster. Processor is the possible. Such an inspiration to think that. Hey, the only thing really stopping somebody from starting a billion dollar company is really just imagination and creativity. You have to find the industries where there's a problem, some portion of society is not being served by this

industry and then look at all the different ways and and the innovations that you could build to solve those problems. Jim McKelvey author of The Innovation stack, which really describes in detail how the sort of innovation occurs and how he did it with square. And again, Jim was a specialist in New York rating glass art blowing glass and then he created the largest financial company in the world. Congratulations Jim, it's a great book. It's such an interesting topic that we could talk for hours about this and we have in the past. Thank you for joining us. And thank you for doing this

interview. The Innovations back by Tim McKelvey founder of square. They check for the Fletcher and I love your podcast, man.

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