Square’s Co-Founder on How Innovation Stacks Helped His Then-Startup Take on Amazon

It’s rare that a smaller brand can compete and win against a large company like Amazon. But that’s exactly what Square did when Amazon launched a nearly identical card reader for a fraction of the price of Square.

Still, without undercutting the price of its biggest competitor, Square has completely transformed and earned the digital payments and finance industries 4.68 billion in sales in the second quarter of 2021.

Why? Co-founder Jim McKelvey attributes the success of Square to its “innovation stack”.

In HubSpot’s first episode of The Shake Up, Alexis Gay and Brianne Kimmel sat down with McKelvey to learn how Square handled its competition with Amazon and to delve more into his book. The innovation stack: building an unbeatable business, one crazy idea at a time.

How to beat the competition like Square Beat Amazon

Below are just a few highlights from McKelvey as well as the podcast where you can listen to the entire conversation.

What is an innovation stack?

[20:13] Alex is gay: Before we dive in a little, can you tell us what the innovation stack is?

[20:20] McKelvey: The innovation stack is what I discovered while trying to answer a question that plagued me: This is how Square survived an attack by Amazon. … The Square was attacked by Amazon when we were a startup.

At that time, every company that was attacked by Amazon died, whether it was a startup or not. There was a 100% death rate or it had been listed on Amazon which I would consider too. … death or worse.

… We looked at this very bad situation and did some crazy things and it worked and then after it worked I was like, “Why did it happen?” And I couldn’t answer that question.

… I’m kind of a nerdy engineer and I’ve been looking for other companies that have been through similar situations. So I studied historical companies. … technology wasn’t the driving force, but this thing kept popping up in my research and it was something I called the innovation stack. And it’s just this very simple idea that invention isn’t just a thing or two. It’s usually this messy conglomerate of 10, 20, 30, 40 things.

Amazon takes over Square

[23:02] McKelvey: [In a board meeting], Jack [Dorsey] was dressed all in black and announced that Amazon had copied our product and would undercut our price, which they always do. And he told the board what happened – and we have very intelligent people on the board and we have a lot of experienced people – and we got stopped.

… We started going through the questions “What could we do?” One of the most basic was that Amazon undercut our price. We could lower our price and keep up with Amazon. And then here is the thing. These are as cheap as possible and still serve our customers.

… We actually didn’t do anything. That was different, that was the amazing thing. We wanted to do something because when you are attacked the hardest part is not to react, or maybe not to overreact.

[24:56] McKelvey: It was terrifying. And that made it even more interesting when we won to ask “Why?” to answer. What the hell happened because I was so happy we won, but then I thought, “Why did we win?”

Square beats Amazon

[27:02] Happy: So Jim, let’s talk a little bit about Halloween 2015. You got some pretty big news that day. Can you tell us a bit, well, first of all, let me ask you this: are you dressed? in costume?

[27:16] McKelvey: I was dressed as a joker. My wife was dressed up as Catwoman and my son as Batman. The best treat I got that evening was with Amazon announcing that they would be hiring their competitor from Square. And not only that, they wanted to email one of the little readers with white squares. The thing that I designed.

Why building an innovation stack is inconvenient

[34:43] McKelvey: The big takeaway from the book is that the innovation process is fundamentally different and feels different, and that’s what it feels like. What I am telling my readers or prospective readers is, “Look, the reason you are reading the innovation stack is that at some point in your life you will come to the edge of human knowledge.”

… When you’re in the process of building an innovation stack, it’s so bloody awkward. That’s why I want people to be recognized. So first recognize the limits. That is extremely helpful. Second, understand when to copy and when to need it.

[36:28] McKelvey: When you cross the line between the known and the unknown, it becomes uncomfortable. It won’t kill you. On the other hand, it might be really wonderful at some point, but … your focus is on figuring out something that no one else has figured out.

… How many parts do you have to think up before you have a really functioning innovation stack? By the way, there is no guarantee that you will ever hit that limit, but you do. And if yes. The world is changing. As if it were just incredibly powerful when you build [an innovation stack].

To hear the full interview, listen to the podcast embedded above, or Click here for a full list of episodes.