The Innovation Stack - Book Summary

Unearth the essence of true entrepreneurship.

While some may argue that anyone helming a business holds the title of an entrepreneur, the reality delves much deeper. True entrepreneurship is a brave and relentless quest. It's about identifying and resolving an issue that others haven't even noticed yet.

Take Jim McKelvey for instance. He didn't just co-found a company, he and Jack Dorsey—CEO of Twitter—radically changed the game for small businesses. Before their company, Square, came into the picture, smaller businesses were at a disadvantage simply because they couldn't process credit card payments. Through a series of ingenious initiatives, these two innovative minds birthed a groundbreaking card reader that revolutionized the entire realm of payment processing.

These subsequent sections will guide you through McKelvey's thrilling voyage of constructing an unbeatable innovation stack, a force so formidable that it could stare down the reigning titan of the industry: Amazon.

Stay tuned as we unravel:

- The concept that finding a solution often uncovers a new problem.

- The meaning and evolution of an innovation stack.

- The reason why humility should be a cornerstone trait in every entrepreneur's arsenal.

The voyage of entrepreneurship: Embracing the unknown.

Ever wondered what the secret recipe is to establishing a business? If you ask Jim McKelvey, you might find the answer startlingly straightforward: clone what others are doing.

While this may sound underwhelming, it's a well-observed fact! Numerous successful businesses are built on the foundation of an existing idea, slightly tweaked and repackaged.

Let's look at Shake Shack - one of America's most prosperous burger joints. Its celebrated menu is primarily inspired by other successful restaurants. The renowned burger and fries combo was modelled after Steak ’n Shake's offering, and its renowned frozen custard is a nod to the popular Ted Drewes' dessert in St. Louis.

But carving out a remarkable business demands a distinct approach – a venture into the enigmatic unknown.

Our crucial insight here is: True entrepreneurship involves charting unexplored territories.

While today's business scene is dotted with successful ventures that thrived on duplicating existing ideas, a true entrepreneur invents new solutions for unaddressed problems. In essence, imagine everything humankind knows encased within a gigantic circle. For impactful change, step outside this circle.

Picture medieval Edinburgh, encased within a formidable stone wall—quite similar to this metaphorical circle. Its dense population resulted in six-story buildings separated only by slender streets known as closes. Just about a meter wide, these closes served as communal sewers in the absence of internal plumbing. A slip could send you — or someone uphill — sliding down into a pool of waste, to be washed away into the stagnant Nor’ Loch lake.

Life within the wall wasn't particularly enviable. However, to most, it was a safer bet than the perilous wilderness that lay beyond, with its daunting beasts and promised death. But among these citizens, some intrepid explorers dared to gaze beyond the stone fortifications and ask, "What can I accomplish out there?" Despite being considered mad by their fellow citizens, these pioneers happily risked their lives in search of the new and unseen.

So how does this tie into our discussion of entrepreneurship?

Presently, the term 'entrepreneur' is used as a broad brushstroke to denote anyone with a business. However, akin to their medieval counterparts who dared to step beyond the city walls, true entrepreneurs are trailblazers, unafraid to venture into the unknown.

A perfect problem births the solution: Square.

In the year 2008, Jim McKelvey, a glass artist in St. Louis, received an exciting call at his studio. A customer had finally expressed interest in a peculiar orange-yellow double-twisted glass faucet that had been gathering dust on his shelves for years.

What seemed like a lucky break, however, went sour when the customer revealed her only mode of payment was American Express, while McKelvey’s studio could only process Mastercard and Visa payments. As fortune would have it, he lost the sale. But on a brighter note, it was this encounter that sparked the idea behind his venture, Square. It propelled him to make credit card payments accessible to all small-scale business owners.

The pivotal insight here is: The inception of Square was triggered by a perfect problem.

In the late 2000s, the landscape of credit card payments resembled a lawless frontier. Accepting credit card payments without registration was illegal. Yet, a majority of the small business owners couldn’t afford the registration, a pricey and complicated process, forcing them to rely heavily on cash and inadvertently limiting their sales.

Unbeknownst to him at that time, McKelvey had chanced upon what he would eventually label the perfect problem. It was an unsolved issue that only he and his co-founder, Jack Dorsey, had the unyielding determination to resolve.

Though they initially felt their way through the dark, McKelvey kept pushing, striving to understand credit card companies and the dynamics of money movement. His exploration unveiled a complex and unequal world.

He discovered that while credit card vendors were making a mere 0.04 cents on every dollar processed from large merchants, they were pocketing a whopping 1.8 cents from smaller ones. Astonishingly, the profit margin from small businesses was forty-five times greater than from billion-dollar enterprises.

At first, this fact was hard to swallow for McKelvey, compelling him to triple-check his calculations. However, the evidence was undeniable: the credit card system was flawed. McKelvey and Dorsey knew they had to step in to correct it.

Thus, in February 2009, Square was born. The name, inspired by the phrase “square up,” denoting settling debts or making things fair, perfectly encapsulated what Square aimed to do: level the playing field in the world of credit cards by ensuring payment accessibility for all.

However, it's important to note that perfect problems need not always be gargantuan challenges like those Square confronted. They could be small irritations too. The essential element that turns an issue into a 'perfect' problem is you.

Turning pitch conventions on their head ensured McKelvey and Dorsey secured investments.

Half a year into their journey with Square, it was time for McKelvey and Dorsey to land some cash injections. Their goal: to win over venture capitalists by demonstrating a functional prototype of a card reader that could plug into an iPhone's headphone jack and process transactions.

Their approach to demonstrating this prototype was as unusual as it was brilliant. They requested the credit card details of every prospective investor, swiped it through the card reader, and charged it an amount ranging from $1 to $40—depending on how much they liked the cardholder. This unconventional method not only provided investors with proof of a successful transaction in their bank accounts but also gave the co-founders some pocket money!

The critical takeaway here is: McKelvey and Dorsey's innovation in the pitch process played a pivotal role in securing their investments.

Their unique pitching strategies, unlike any seen before, managed to capture the attention of potential investors.

Besides charging venture capitalists to demonstrate their device's capability, the co-founders included a fascinating slide in their pitch deck titled "140 Reasons Square Will Fail". The risks listed spanned from practical challenges like fraud and bank regulations to absurd scenarios like a robot uprising.

Usually, company-investor pitches are flooded with graphs, statistics, and promises of exponential profits and unprecedented customer acquisition. Pointing out all the potential ways an investment could turn sour was far from the norm. Yet, contrary to expectations, it worked wonders with the investors. One of them, a managing partner at a top venture capitalist firm, lauded it as the best pitch he'd ever seen.

Despite the humor, the slide carried a powerful message. It signaled to the investors that Square's founders had thoroughly considered every possible reason their venture could fail. It highlighted their willingness to be open about and confront these potential challenges head-on.

The pitch deck of Square fundamentally altered the traditional dynamics between founders and venture capitalists. During a time when it was standard practice for companies to let potential investors dig for any hidden issues in their pitch, McKelvey and Dorsey chose to highlight the pitfalls transparently.

They turned the typical "attack and defend" undertone in such meetings on its head, placing them at an equal level with the venture capitalists. By the time the "140 reasons" slide was through, the investors were thoroughly impressed—all thanks to their audacity to think differently.

The challenges faced by Square in its early days led to an innovation cascade that revolutionized the world of payment processing.

When Square was in its infancy, the company's workforce was made up of three humans and a feline named Zoë, all sharing a compact apartment in San Francisco. Each member had a role: Dorsey was tasked with server software coding, Tristan, the only official employee, crafted the iPhone client software, and McKelvey managed everything else. Zoë's primary role was to provide moral support to Tristan, who was without health insurance.

However, within a day of Square's launch, the co-founders realized why no one had attempted to create a payment system like theirs before—it was illegal! Each transaction processed would contravene 17 credit-card laws and regulations. And as it turned out, legal complications were just the tip of the iceberg.

The essential takeaway here is: Square's initial hurdles set off an innovation avalanche that permanently transformed the landscape of payment processing.

When you venture into uncharted territory, you're bound to encounter a trail of unknown challenges. As you solve one problem, it often unfolds into another—or even several more.

This chain reaction of problem-solving births an intricate web of inventions, described by McKelvey as an "innovation stack". He views this innovation stack as a business's most potent weapon. Here's the genesis of Square's stack.

Both McKelvey and Dorsey were staunch advocates of simplicity in design. Given the labyrinthine regulations they had to navigate, they aspired to create a product that was intuitively comprehensible for users.

They kicked off with the simplest tweak possible: transparent and affordable pricing. Instead of aligning with prevailing industry standards, Square opted for a universal price—a modest 2.75 percent on every payment processed, independent of the nature of the business. There were no hidden charges like the outdated per-transaction fees that were still imposed by credit cards.

For the first time in the annals of payment processing, Square took a stand for small business owners. They not only brought an unprecedented level of trust and transparency to an industry notorious for its lack thereof, but they also offered a simplistic pricing model that clients could easily account for and justify to their customers.

However, the decision to bypass the customary transaction fees came with its own bitter pill—Square had to bear these fees themselves when dealing with credit card networks, which meant they were losing money on small transactions. This led them to their next challenge: How could they compensate for these losses?

The solution was quite straightforward—Square had to process a massive number of larger transactions. In other words, they needed to persuade millions of merchants to embrace their payment system.

Facing these obstacles head-on and resolving each new issue as it surfaced, forced Square down the path of relentless innovation. The result: a business more robust and resilient than ever before.

Innovation stacks emerge organically as a business strives to survive, not through meticulous planning.

Let's journey back in time and visit Orville and Wilbur, universally known as the Wright brothers. They engineered the world's maiden airplane, fittingly christened the Wright Flyer, in 1903. Since humanity had never witnessed a flying machine before, the brothers had to concoct many novel ideas from scratch.

They began with the necessity of a lightweight engine potent enough to operate the propellers. Subsequently, they had to design these propellers themselves. Thereafter, they had to grapple with maneuvering the airborne vehicle using a not-yet-conceived steering mechanism. And finally, they had to devise a fail-safe method to land the contraption.

By the time their aircraft was ready for its maiden flight, the brothers hadn't just constructed an airplane; they'd effectively assembled an expansive innovation stack.

The central takeaway here is: Innovation stacks don't materialize through strategic planning; they evolve gradually as a business grapples for survival.

While carving a new business, there are instances when there's no other option but to invent a solution to a hurdle—you innovate or you perish. Similarly, the founders of Square weren't consciously striving to innovate; they were battling to keep their venture afloat. Consequently, they came up with whichever inventions were needed to achieve that.

According to McKelvey, Square's innovation stack is composed of 14 integral elements. These encompass its simplistic design, its low-cost pricing model, its no-obligation policy, and its affordable yet aesthetically pleasing hardware. Each of these elements is critical and must operate in harmony with the rest; indeed, if even a single element goes awry, the entire stack collapses.

Consider Square's low-pricing policy: it incentivized customers to sign up for a trial period and was perfectly aligned with the company's mission to streamline credit-card payments for small businesses. However, to balance out the low prices, the company needed to minimize costs—just to break even. They achieved this by drastically reducing their hardware costs.

In the course of ceaseless problem-solving, McKelvey and Dorsey created a mobile card reader that was not just cheap—it was absurdly cheap. Back then, the most affordable card reader would set you back a hefty $950. In stark contrast, Square's reader cost a mere 97 cents to manufacture and was priced just as competitively.

The shockingly low price tag raised eyebrows, prompting questions about a potential hidden catch. But there was none. And there were no strings attached either—customers were free to exit whenever they wished, a novel concept for the time.

Like the Wright brothers' quest to soar the skies, every new creation by Square necessitated its own invention. In essence, they innovated out of sheer necessity.

Square held its ground against formidable rivals by staying true to its core values.

Picture the natural world, teeming with fierce predators—piranhas, grizzly bears, great white sharks, to name a few. Interestingly, the corporate jungle isn't so different. Each corner hides a competitor, ready to poach your clients and annex your market territory.

Square's encounter with a formidable adversary arrived in the form of the seemingly unconquerable Amazon. With its near-limitless resources and talent, combined with a track record of entering, and dominating, any market it fancied, Amazon posed a lethal threat to Square's existence. The retail behemoth innovated upon Square's card reader, igniting a deadly duel. Astonishingly, Square emerged victorious.

The salient lesson here is: Square held its ground against formidable rivals by staying true to its core values.

In the summer of 2014, Square was a rather simple enterprise. It had birthed a compact card reader and was levying a 2.75 percent fee for its services. A content clientele of small businesses was reaping the benefits of its reader. All was well until Amazon's CEO, Jeff Bezos, issued a veiled threat that could potentially obliterate everything Square had built.

Square found that Amazon had cloned its card reader—with enhancements. While Square's reader had a pleasing aesthetic, it faltered when compared to the functional superiority of Amazon's device. Given its small size, Square's reader resulted in the card oscillating during each swipe, which occasionally triggered inaccurate readings.

Amazon countered this flaw simply by doubling the size of the card reader. Despite its ungainly look, it performed flawlessly. To add to Square's woes, Amazon also offered a 30 percent price cut.

Square could have modified its reader to emulate Amazon's rival product, but that would mean forfeiting one of its fundamental values—striking design. Their card reader was so visually impressive that it found pride of place in illustrious institutions like the Smithsonian and the Museum of Modern Art. How could McKelvey and Dorsey simply discard that?

Instead of clashing with Amazon, Square opted for a surprising strategy. They did ... nothing. And this unanticipated move paid off. By Halloween in 2015, Amazon declared the discontinuation of its imitation reader.

Although McKelvey couldn't precisely decipher why Amazon's product flopped, he has a hypothesis regarding why Square triumphed in the card-reader conflict. Square refused to engage with Amazon and continued doing what they did best without compromising their values — and this steadfast resolution propelled them to victory.

A.P. Giannini established a robust innovation stack, leading to the creation of the world's largest bank.

Throughout his initial professional journey, McKelvey was constantly seeking a mentor—a bona fide entrepreneur. He yearned for someone who had constructed a successful, avant-garde business that addressed a facet of the world's issues. Yet, he could find no such individual in the contemporary marketplace.

In his quest for inspiration, McKelvey turned to the past, uncovering a plethora of models. One journey through time takes us back to 1901—a period when the banking industry was still in its infancy, and one enterprising man dared to challenge the norm, crafting a transformative innovation stack that forever altered the banking landscape.

Here's a pivotal revelation: A.P. Giannini established a robust innovation stack, leading to the creation of the world's largest bank.

In earlier times, banks were reluctant to assist small firms or offer them any meaningful services. Consequently, such entities often faced bankruptcy or fell prey to loan sharks—providers of credit at exorbitant interest rates.

Enter A.P. Giannini, an intrepid young Italian-American, in 1901. Disheartened by the unethical practices rampant in the banking industry, he decided to inaugurate his own bank in San Francisco.

His brainchild, the Bank of Italy, introduced numerous innovations that have since become standard features in modern banking—branches, savings and checking accounts, and small loans. By building the first innovation stack, it made the realm of finance accessible to countless individuals.

Here are the first two elements of this stack.

The first: concentrate on the everyday person. Giannini held the belief that small businessmen represented the most precious clientele for a bank. They were, after all, the most consistent savers.

The second: recognize that not all small business owners are men. Despite the prevailing belief in 1901 that finances were strictly men's territory, Giannini opened the doors of his bank to small businesswomen as well.

So, when the Nineteenth Amendment granted women the right to vote, the Bank of Italy launched the Women’s Banking Department, allowing women, for the first time, to manage their own accounts without their husbands' interference.

Evolving its innovation stack through relentless creativity, perseverance, and one man's ambition to revolutionize the system, the Bank of Italy—today known as the Bank of America—changed the face of the banking world. It was in this inspiring story that McKelvey found the role model he had been searching for.

While expertise is vital in imitation, it isn't necessarily a requisite in entrepreneurship.

Many aspiring entrepreneurs are held back by the belief that they lack the requisite expertise to launch a business. What they often overlook is the fact that numerous eminent innovators had no formal qualifications in their chosen field.

Consider Giannini as a prime example: from being a vendor of produce, he emerged as the owner of one of the world's largest banks. There's also the story of McKelvey, a glassblower who went on to establish Square, a feat he never envisioned possible.

If your intention is to refine an existing business concept, industry expertise is indeed valuable; it's the most effective way to duplicate something and enhance it marginally. However, in the realm of entrepreneurship, expertise can be surprisingly overrated!

The central insight here is: While expertise is vital in imitation, it isn't necessarily a requisite in entrepreneurship.

Recall how Shake Shack skyrocketed to fame? Its owner didn't invent anything new. He simply replicated the menu from other establishments and tweaked the presentation.

What he lacked in culinary originality, he compensated for with operational acumen; he had the know-how to run prosperous eateries and continually came up with strategies to thrust Shake Shack to the forefront. He knew, for instance, that attracting top talent for his restaurant—even if it meant poaching personnel from rivals—was critical to leveraging his team's expertise for success.

However, the desire to master everything often inhibits potential entrepreneurs from exploring new avenues. The notion "If only I knew more about X..." is typically followed by "So, I probably shouldn't try."

Neither McKelvey nor Dorsey had financial acumen prior to launching Square, nor did they have an assurance of success in their endeavor to revolutionize the payments sector. Yet, they mustered the courage to take the plunge anyway.

The rewards, as it turned out, were considerable. In 2015—just six years after it was founded—Square made its debut on the New York Stock Exchange. McKelvey was thrust into the limelight, rubbing shoulders with individuals he never thought he'd meet, such as movie celebrities and MVPs. He even received a personal invitation to a clandestine society gathering from a US president's kin.

So, expertise is useful only when you plan to tread the beaten path. In the pursuit of novelty, we all start on equal footing. What sets entrepreneurs apart is their readiness to act, to step into the unknown.

Summing it all up

The primary takeaway from this narrative is:

An innovation stack isn't born out of modest modifications to an established business blueprint. It's forged in the crucible of venturing outside your safe haven and embracing audacious, novel ideas. Each time a problem is addressed and solved, it gives rise to another issue. This perpetual cycle of problem-solving spawns relentless creativity in businesses. Innovation becomes an imperative, a necessary response to each new challenge that emerges.