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

17:44Jim McKelvey:Sorry about the analogy, guy. No, it's actually a very good analogy. The point is, it just woke me up. And all of a sudden, I started seeing pain in people, like pain in my friends. I was trying to make up for 24 years of obliviousness by just being in touch with people who are suffering. And my God, they're everywhere.

18:10Guy Raz:We are everywhere. It's not they. It's a we.

18:16Jim McKelvey:So in sort of the midst of this, I mean, I think around this time, you had been working on another business. You've been doing glassblowing 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 document imaging company. Tell me a little about how that came about, that idea came about. So I already had my own company.

18:41Guy Raz:I had a company that built CD storage cabinets. Like carpentry? Yes, carpentry. Although I had a factory do these things. It was mostly marketing and sales. I see. We were in premium catalogs and whatnot.

18:51Jim McKelvey:We should explain to people that there was a time where people would store their CDs like books on a shelf.

18:56Guy Raz:Yes, this is correct. And it made money. But it was a mediocre business. And I was a mediocre glassblower. 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.

19:11Jim McKelvey:I don't know. You have three businesses and you're 24. I don't – that doesn't sound mediocre to me. I have three businesses, but they all kind of suck. Yeah. I mean, you're a super motivated 24-year-old. I mean, that seems like a little bit of a stretch to say that you're mediocre.

19:26Guy Raz:So having your own business was not as cool then as it is now. Right. Right. And I looked at what my mother got to see and she saw her son as this kind of mediocre weirdo. At least that's how I saw it. And then I thought, well, this is not who I want to be. So I quit IBM. I closed my CD business and I stopped glassblowing. I just, I said, I'm going to focus. And what am I going to focus on? Well, I'm going to focus on the thing that creates fortunes, you know, computers, because I've got a computer degree. So my friend and I started a company called Mira.

20:02Jim McKelvey:And this was, it was like what Adobe Acrobat would become. It was a document reader.

20:08Guy Raz:Exactly. Yes. You know, it seemed like this visual thing was going to be important on computers, that they weren't going to be just text. So we started building this thing that was very similar to Adobe Acrobat, except that there was then Adobe Acrobat, which kind of wiped the floor with our product.

20:26Jim McKelvey:I want to ask you about that in a second. Before that happened, because I think it happened in the first year or two after you launched? Yeah, about 91, 92. Did you make any money before that time? Very little. Very little. Okay. And you had been able, from what I understand, to fund this because you had made money from working at IBM and glassblowing. Like you actually – I mean this is kind of nuts. In 1990 or 89, you're 25. You had 50 grand. I mean that's a ton of cash that you saved up. I saved a lot of money, yeah. Presumably you could bring some people on and hire them and – I did, yeah.

21:01Guy Raz:I had the capital, but it was more than just the capital. I'm also cheap. Like, I can live on air. My budget was$25 a week, food, clothing, and transport. That was what I lived on.

21:15Jim McKelvey: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 sinks your entire business model. Yep. So you guys have to change what you do. So what do you do? I mean, that's it. Mira's dead at this point.

21:35Guy Raz:So Mira's dead, but we had attended one trade show when we had a product. The trade show was the Association for Image and Information Management. I don't know if they're still around, but 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 having a 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.

22:12Guy Raz:So 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'd charge them$10 a page to put it on our software.

22:28Jim McKelvey:Oh, so basically the pitch was, hey, we're going to give a CD-ROM to everybody going to this trade show. Do you want to be on it?

22:36Guy Raz:Yes.

22:36Jim McKelvey:It's like FOMO. And so everybody will want to be on it, so they'd have to pay you to have their literature on the CD-ROM.

22:45Guy Raz: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 because what are you going to do? Take my car? Like, good luck trying to start it. But the problem, Guy, was that I made so much money putting my competitor's literature on my CD. I was like, why am I trying to sell software and I just made$70 ,000 producing a trade show CD?

23:18Jim McKelvey:Yeah, I mean, it's an amazing—I mean, at the time, It sounds like printing money. It's like owning a classified newspaper, right, at the time. Oh, it was great. And then you would have to – how would you distribute the CD to every exhibitor or every attendee?

23:33Guy Raz: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.

23:47Jim McKelvey:Oh, yeah.

23:47Guy Raz:It was a reason to go to their booth. I mean, it was the best thing. And again, I charged them for that. Like, we made so much money in that.

23:54Jim McKelvey:I mean, there was a period of time where I can imagine this was a great business. Because how many trade shows, you know, thousands of trade shows a year? There are 5 ,000 trade shows. And the first one I did, I made 70 grand.

24:06Guy Raz:On one product, on one CD? On one. 70 grand profit? $70 ,000 of profit. And that was with the trade association actively suing me and trying to stop me. So imagine how much I could make if we cooperated with the trade associations, which is what we did for the next two years. We made friends. I'm not going to pick a fight. So we did all the other trade shows.

24:34Jim McKelvey:I want to just break into this story for a moment because from what I understand, something happens during this time where you're transitioning from being an imaging software company to a CD-ROM literature company. And that is you would meet somebody who would factor very prominently in your life, and it starts with a coffee shop in St. Louis. So tell me about this coffee shop and why it was relevant to what you were doing. There was a lady named Marsha Dorsey who owned a coffee shop called Shenandoah Coffee.

25:07Guy Raz:and we were building a trade show disc and had screwed it up so badly that we were in a fire drill to redo, you know, probably 200 hours of work. How many people were working with you, like 10? I was probably 10, but that weekend it was probably 20. 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. And Marcia says, well, what do you guys do? And he's like, oh, we work with computers. And she's like, oh, my son loves computers. And he's like, well, how do you like to make 50 bucks the hard way? So this 15-year-old kid comes over, middle of the afternoon, and he introduces himself.

25:50Guy Raz:And he's like, hi, I'm Jack. And Jack pulled an all-nighter with us that first day.

25:56Jim McKelvey:Jack, this is Jack. Jack Dorsey. Dorsey. Yeah. And he's a 15-year-old kid, and he knew enough about computers that he could help you guys fix this cd-rom problem i mean he wasn't

26:08Guy Raz:doing a program he was running a scanner it was take this page 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 5 a.m or something i see okay and then what i discovered was that 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.

26:44Guy Raz:And I was like, oh my God, what can this kid do?

26:47Jim McKelvey:Tell me about him at 16. Was he like a savant? I mean, was he like a programming just genius?

26:54Guy Raz: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. 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 95. It was absolutely clear to me that the World Wide Web was going to 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 going to do, you know, boring technical papers.

27:31Guy Raz:And everyone was like, yes, Jim, yes, yes, yes. And they all said yes, 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, I took Jack aside and I said, look, none of these other people are going to be here in six months. You and I have to go off and save the company in the meantime.

28:01Jim McKelvey:Okay, so you are seeing the handwriting on the wall, you know that most companies are going to 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? Like you launch a publishing platform for research papers that people would present at these conferences?

28:23Guy Raz:Yeah. We took large, boring books and made them into small, boring CDs.

28:29Jim McKelvey:So you basically, you're still in the CD-ROM business. It was just, you shifted to academic conferences. Yes. Where you saw more opportunity, at least for a longer period of time, because the internet would have killed that business too. Oh, actually the internet is, I mean, That business is still going today.

28:45Guy Raz:Oh, wow. Yeah, yeah, yeah. Mirror still makes money. But not on CD-ROMs. I mean, no, it's web publishing. But I mean, like the core tech is still, you got to collect these papers and verify them and jury them and rank them and publish them.

28:59Jim McKelvey:And yeah. Okay. So you guys have this product within a product and that ends up kind of saving. Saves the company.

29:08Guy Raz:Yeah. Yeah. Yeah.

29:09Jim McKelvey: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 here.

29:18Guy Raz:No.

29:18Jim McKelvey:No.

29:18Guy Raz:No, I'm not going to talk so many out of going to college. I mean, my father was a professor. He's a dean of the engineering school. College is that's the family business.

29:27Jim McKelvey:Fair enough. All right. All right. So Jack Dorsey goes away. He kind of leaves your world. Right. Yeah. And he goes on to college. I think he drops out. Yeah, yeah. I went to college, then we did a different college, and then he drops out. Okay. But you continue to run Mira through the 90s, and then you step away in 2001.

29:50Guy Raz:Yeah.

29:51Jim McKelvey:But you had enough money. I mean, you were able to build a glassblowing studio in St. Louis.

29:57Guy Raz:Yes, yes.

29:58Jim McKelvey:Built a world-class glass studio in St. Louis.

30:01Guy Raz:This is what you were doing? Yeah. Full-time? Yeah, blown glass. And I mean, I did some other stuff. You know, I built some apartments. But I was not full time at Mira anymore. Mira was still paying me, but I wasn't the boss. All right.

30:16Jim McKelvey: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 become the CEO. Many people know the basic outline of the story and we told some of it when we had Williams on. But the basic story is he was a very young CEO and for a variety of reasons, he was pushed out by the board. They pushed him out after two years in 2008. And 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 I guess he had come back around Christmas in 2008. And you guys reconnect at that time.

30:58Guy Raz:Yeah.

30:59Jim McKelvey:From what I understand, you start talking about maybe doing something together. Tell me why that was interesting to you in 2008 when you had this really nice business and life. Like what sounds like you had itchy feet. You want to do something new.

31:15Guy Raz:I mean, I was a little bored. Got it. I was comfortable, but not, you know, fully engaged. 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. And I know this very well because I was reading at the time the reports and they would mention biz and they would mention Ev as the founders of Twitter. And they would omit Jack and they would omit another guy, Noel Glass, I think.

31:49Jim McKelvey:Yeah. I will say to his credit, Ev Williams did not do that in our interview. He certainly gave Jack Dorsey credit where credit was due because he really did invent Twitter. I mean, he was the one who coded this thing and who came up with this thing.

32:02Guy Raz:Well, had you asked Ev that question in 2009, I wonder what kind of answer you would have gotten. Right. It was a different story. Yeah.

32:09Jim McKelvey: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.

32:26Guy Raz:No, that wasn't it. It was Jack's idea to start the company. Because my original idea was let's just go out to California and make, you know, make war on the Twitter guys. Wait, sorry, what do you mean? You, you, you, what did that mean?

32:43Jim McKelvey:It was spite, you know? I don't know what we're going to do. Wow. In hindsight, it seems very unusual.

32:48Guy Raz:I mean, it's not a great use of your time. So, so, Guy, in point of fact, that was probably an idea in my head for 30 seconds. Right, okay. And that was not fully serious. It was not fully, but I, that was what I said. And then Jack said, well, why don't we build something new? It just can't involve social media. And I was like, okay. Well, that still leaves a lot of stuff. We had to figure it out. So we decided that we wanted to do something with mobile phones because mobile phones had just, you know, the iPhone had just come out. Let's figure out what to do with it. And then off to California to come up with ideas.

33:22Guy Raz:And then we hired Tristan O 'Tierney, the first iPhone engineer. And he was going to be starting in a couple of weeks. And we didn't have a really good idea to do with this iPhone. But Tristan was starting, so we had to come up with something.

33:35Jim McKelvey:You go to San Francisco, you hire this guy who had been an engineer on the iPhone. Obviously, Jack had a reputation already being in Twitter and you had experience. You probably weren't as well known in the Bay Area. I was nobody and Jack was somewhat nobody. Right. But you had hired this guy without exactly knowing what you were going to do, which is very typical. I mean, it was then, it still is now.

34:01Guy Raz:Yeah. and I was fishing for other ideas, but hadn't come up with anything. And then I went back to St. Louis to sort of pack up my stuff. Okay, I'm going to move to California and take my fiance with me. And that's how committed I was. And I was in my studio trying to sell a piece of glass. I mean, I was there and I got this phone call from this lady in Panama who wants to buy this ridiculous thing that I'd made. It was a glass bathroom faucet,$2 ,000. bucks, ugly as can be. It's been sitting on the shelf for years, but I need the two grand, like$2 ,000 is really going to help me, you know, with the cashflow and moving out.

34:40Guy Raz:And I lost the sale because I couldn't take an Amex card. You only accepted Visa MasterCard.

34:45Jim McKelvey:Yeah. Yeah. Which was very less common today, but it was super common in 2008, 2009.

34:52Guy Raz:Yeah. Amex charged too much. So we didn't take it in my studio. We'd always successfully been able to get people to have a Visa MasterCard, but this lady didn't have one. 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. 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.

35:28Jim McKelvey:when we come back in just a moment jim reaches out to investors with 140 reasons why his exciting new idea just might fail stay with us i'm guy roz and you're listening to how i built this

36:00Jim McKelvey:Hey, welcome back to How I Built This. I'm Guy Raz. So it's around 2008, 2009, and Jim McKelvey has an idea that could be a game changer for small business, using an iPhone to help read credit cards. And one of the first people he runs this by is Jack Dorsey. He said that's interesting. Those were his exact words.

36:22Guy Raz:And he said nothing else.

36:23Jim McKelvey:Yeah, I want to jump into this, right? It seems like a pretty great idea because, you know, at the time people would have these like credit card, like these 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.

36:41Guy Raz:Yeah.

36:41Jim McKelvey: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.

36:49Guy Raz: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. And then we quickly realized that there are two ways to process a card. One is called card present and the other is called card not present. And card not present is way more expensive and way more risky for the merchant. So you want to do card present. You want to prove that the person buying the thing is there and has a credit card. Otherwise you're, you know, vulnerable to a chargeback anytime. So it's no protection for the merchant. So the merchant needs to card present.

37:21Guy Raz: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. We just scan the number.

37:34Jim McKelvey:That makes, that would, that seems to make more sense, right? Because then you have to have another device connected to it.

37:39Guy Raz:Well, yes, his way 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 because think about it. I can take a picture and mail it to Singapore. Does that mean my credit card's in Singapore? So you can scan your card, but you don't get card present protection. I see. All you've done is saved yourself typing 16 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 going to get the credit card monopolies to change.

38:15Jim McKelvey:Yeah.

38:15Guy Raz: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.

38:26Jim McKelvey:Which meant that, and just let's just break it down for a minute. The laws prevented 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, if Visa and MasterCard dynamics control the system, how do you change that system if they are the rule makers and they own the businesses and they actually make the rules about the business?

38:54Guy Raz:Well, you have to get them excited to change their rules. I mean, it was clear in the first day that there were, I counted 17, there were probably more, but I stopped counting at 17 rules or various regulations that we were breaking in some way. Some of them were laws, some of them were network rules, something 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.

39:19Jim McKelvey:But I guess the question I have is what would their incentive be to do it? I mean, like when you looked at this world of credit card transactions in 2000, let's say, 8, were most small businesses accepted? I'm assuming most small businesses, no.

39:34Guy Raz:No. The reason they should change their rules is that we would bring them millions of new merchants. Why would this system bring in more merchants? Basically, if you didn't have$100 ,000 of business, you would not take credit cards. That was sort of the cutoff because 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. None of the small businesses could make those requirements. So if you're like a farmer's market business, you just take cash. Yeah, forget it.

40:06Guy Raz:The system was built for merchants who had$100 ,000 or more. in transactions. It was never designed to serve a little guy. Basically, they didn't have very good negotiating positions, so they would get screwed individually. And companies like Walmart and Target, who had big departments of lawyers and lots of ability to negotiate on their behalf, paid lower fees.

40:32Jim McKelvey:So if you were a small business owner, you're going to be paying all kinds of transaction fees that could eat in like 5%, 6 % 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.

40:58Guy Raz: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 – I mean, if – you know, the understanding was you guys are making so much off these little merchants. I'll bring you even more of them, you know. And 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 and MasterCard, they don't really abuse the merchant, but the abuse happens with all their partners.

41:36Guy Raz:Like the independent sales organizations that work for the banks that work for Visa and MasterCard. You know, there's this chain of people. And in that chain, everyone takes a huge cut of the little merchant. So Visa and MasterCard were the guys who had the rules. They weren't negatively impacted by anything that Square was going to do. So it was easier to convince them to change it.

42:01Jim McKelvey: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.

42:18Guy Raz:Yeah, yeah, yeah.

42:19Jim McKelvey:And going back to the credit card companies for a sec, I mean, I understand why they would be interested because you're basically saying we can bring in 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?

42:48Guy Raz: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. You know, Dynastical, JCB. 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. They're taking 25 basis points or 15 basis points off a Walmart transaction or a Square transaction.

43:26Jim McKelvey:So they're getting paid either way. So they were incentivized actually to see this work.

43:31Guy Raz:Oh, yeah.

43:31Jim McKelvey:Because you guys are basically saying, look, we're going to do the work for you. For all intents and purpose, we're going to be the signup, you know, a store, a shop. They're just going to deal with us. Yeah. And we'll pay you guys. We'll handle everything else. Yeah, we'll pay your rack rates. So there were all these things along the chain. Okay, so this is one challenge. A second challenge is the hardware, right? You've got to build something that is going to scan or read a Stripe and somehow connect to an iPhone. But the iPhone is proprietary. Like you need Apple to agree to let you plug into the iPhone to let the thing work.

44:16Guy Raz: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 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 almost zero chance of us getting permission from Apple to connect a credit card reader to their device.

44:56Jim McKelvey:So that seems like a pretty big problem if you want to use the iPhone as the main tool.

45:03Guy Raz:Yeah, so fortunately I'm a nerd. There's a magazine called Make Magazine. 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 and go through the headphone jack. And I had a friend in St. 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. So I called him and I was like, hey, can you help me build this card reader? He's like, oh, we'll just go for the headphone jack.

45:40Guy Raz:And I was like, oh, hey, good idea.

45:43Jim McKelvey:So the headphone jack could be the way into the iPhone, but you didn't need permission from Apple to use that?

45:51Guy Raz:Well, you did and you didn't. They could have easily blocked us from the app store. Apple could have stopped us. And if we had offended them or made them felt threatened in any way, they would have shut us down. All right. So what was your process to like walk through those raindrops? Oh, get Steve Jobs to bail us out. Sounds really easy. Yeah. So Jack emailed Steve. Steve was a fan of Twitter. Jack got a meeting with Steve, which was canceled because of Steve's health. And you got to understand, Steve was this larger-than-life deity at Apple. So anything that Steve was interested in, the upper management at Apple was also interested in.

46:39Guy Raz: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 going to show him 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 Zoom, he refused to touch it because it was too ugly. So I've got this really ugly credit card reader and I'm about to go in front of Steve Jobs. I'm like, oh my God, I need to build something pretty and I need to do it fast. And so I went to the Apple store to steal Steve's idea.

47:18Guy Raz:I was like, well, what is Steve like? Well, there's a room full of it. It's called the Apple store. So I went down there and looked all around the Apple store and I was like, oh, he likes aluminum.

47:25Jim McKelvey:Yeah, like a MacBook, yeah.

47:27Guy Raz:Yeah. 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. Yeah. Guy, you'll piss Steve off and he'll throw at it. Like if Steve doesn't like your product, 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. I build this reader and it works. and Jack's getting ready to, actually he had a demo with Michael Bloomberg before the jobs thing. So he was going to 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.

48:09Guy Raz:It doesn't scan the magnetic strip? Doesn't scan the magnetic. Okay. His hands it's back to me, 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 when I swiped a card, but Jack would hold it so that it wouldn't rotate in the microphone, Jack. And because he was holding it and because aluminum is conductive and because Jack has a heartbeat, it was picking up his heartbeat and the heartbeat was screwing up the read. Right. So it was a cardiac monitor. Right. So that was the last time I built anything out of aluminum.

48:48Guy Raz:But the good news is Apple let us do it. Apple approved it. But how complicated was it to make a physical reader? It's a pretty simple device. It was a read head. And if you put a resistor in it, it sort of attenuated the signal to a point where it could be sort of interpreted as sound. What you tried to do was make a credit card swipe look like a sound. Got it. And then you would decode the sound.

49:15Jim McKelvey:I guess to get people to adopt it, you also have to give these readers out for free. Yeah. And each reader cost you how much?

49:21Guy Raz:97 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. And I would argue about fractions of a cent with people in Chinese.

49:36Jim McKelvey:And I read that you wanted it to be a square, but you wanted it to be very small. You didn't want it to be like chunky. You had a very specific idea of how you wanted it to look.

49:46Guy Raz:Yeah. So originally the company was called Squirrel because we thought squirrels were cute and saved nuts and thought that was a good payment name. 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. 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. The Square device was not very good at reading cards because it was so small that cards would wobble.

50:25Guy Raz:And I built two 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 jeans. That's where my square reader lived. 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.

51:03Guy Raz:Like, people had never seen anything that small read a credit card. It was like this magic trick. And they were like, let me see that. Show me that.

51:10Jim McKelvey:Do that again. Okay, I want to just jump into division of labor. Jack was making the, he was creating the interface for this thing?

51:23Guy Raz:Jack was mostly working on the server. Tristan was mostly working on the iPhone client. We had a few other people that were joining and working on various components of the software stack. And you were working on the hardware, that piece, because you were a glassblower. You had some... I was hardware because I was the weakest programmer. So I was relegated to everything else. So dealing with the banks, Jim figured out, furnishing the office, figuring out how to incorporate the business, like everything but programming fell to me.

51:55Jim McKelvey: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 and you are actually able to transact. Like from what I read, like in these pitch sessions, you would pitch these VCs and you would say, here, give me your credit card. And you would charge them like a dollar or five dollars.

52:19Guy Raz:We would charge them the amount to which Jack disliked them. Fair. Got it. Jack had a list of VCC liked and didn't like, and depending on where you were on that list, he charged you more. One guy paid 40 bucks.

52:31Jim McKelvey:At that point, had you had the permission from credit card companies or not yet? Oh, God, no. No, no, no. 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 going through the bright processors. Why was that illegal? Yes, and yes, and yes, and yes.

52:58Guy Raz:There were so many rules. 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. There were just so much stuff that we did not 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. Correct. Nobody would notice. Yeah, yeah, yeah.

53:23Jim McKelvey:So you had this and you're pitching this to VCs. And also another thing you do, you write about this in your book. You have a slide and it says 140 reasons why this business will fail. Oh, yeah. Which from one perspective sounds really, you know, bold and funny. But I also think that in a sense, it's basically you saying, we're so confident this is going to work. I'm going to tell you why it's going to fail.

53:47Guy Raz:It wasn't confidence. It was candor. 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 VC pitch, 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. Now they're telling some truths. This is our hockey stick growth here.

54:17Jim McKelvey:This is our projections. And this is what we're doing year two and five.

54:21Guy Raz:And yeah, they have no idea. So the game is sort of attack and defend. You're attacking, they're defending. We changed the entire tenor of the room by saying, 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. And so because we put that up, instead of playing defense the entire time, most of the 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 going to attack you? Don't worry. I'm on the board of Amazon, and I developed Amazon Prime, and we can get them to leave you alone.

55:03Guy Raz:Like if you take our money, we'll guarantee that Amazon doesn't attack you.

55:06Jim McKelvey:So while you're pitching this, there are people are saying, oh, we can help you fix this problem with the credit card companies. We can help you with that.

55:14Guy Raz:Yeah.

55:14Jim McKelvey:Like no one thought that was going to be a challenge.

55:16Guy Raz:Oh, no. They knew it was a challenge. I mean, you have to have a certain bold investor to back what we were doing. But there are 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. So you guys raised$10 million.

55:38Jim McKelvey:Yeah. $11, I think. But yeah. $11. $45 million valuation. But I have to imagine that you needed a certain critical mass and momentum before you would see profit because probably the fees, the way the fee structure worked, at least initially, would mean that you were not going to make money for a long time.

55:59Guy Raz: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 for the business to work. So yes, we needed it to be big.

56:12Jim McKelvey: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 Raz, and you're listening to How I Built This.

56:46Jim McKelvey: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 in a pilot program. The company has 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 guy named Robert Morley, and he's the guy that you mentioned a while back. This is a professor at Washington University that you had called up for advice when you were first trying to build the card reader. And then at this point, he claims that he actually invented the reader, right?

57:25Jim McKelvey:That his name was on the patent and that you and Jack had gone off and spun out a different business and shut him out. Yeah. And this is going to be – this is going to last for about six years, this legal dispute. They're probably things you can't talk about because it was eventually settled. But clearly, it's somebody you knew, right, and maybe even had a friendship with at a certain point.

57:45Guy Raz:Oh, yeah. He was a friend of mine. But 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.

57:55Jim McKelvey:And I knew that when I went to Bob.

57:57Guy Raz: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 Bob decided that it was his idea.

58:08Jim McKelvey:And in fairness to him, and, you know, 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, because they're not here to defend themselves. But from what I understand, he claims it's his idea. And this sets off a series of lawsuits back and forth for a while. Was that stressful?

58:31Guy Raz:Was that like did that distract you? I mean, what was stressful was he was a friend. But I don't think anyone else in the company thought it was serious.

58:39Jim McKelvey:Well, I mean, you know, I think understandably, you know, there's there was 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. Yeah, something like that. OK, so that's sort of in the back. But but meantime, you in that time period kind of step away from running operations day to day at Square. I think by 2000, middle of 2010 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.

59:18Guy Raz:Well, my son was born and it's pretty clear to me that I can't work a 14-hour day and maintain what I consider the duties of a decent father. 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 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

59:58Jim McKelvey:like a little over two years after Square's launched, it raises money at a billion dollar valuation. I mean, were you surprised by that momentum or by that point, were you like, yeah, this is where we've nailed this thing?

1:00:16Guy Raz:The moment Square became real to me was when I was in a taxi with my wife. We're in the back of a taxi in New Orleans. And the taxi driver is using Square. and he's so excited about it because he can get paid with a credit card and he's telling me about it. He's like, you got to see this thing. It's the best thing in the world. And he's pitching me my own product and he gets everything wrong.

1:00:39Jim McKelvey:He gets all this stuff wrong.

1:00:41Guy Raz:But he is so excited. You could see how it was just this magic unlock for him and his taxi business. And I turned to my wife. I was like, hold on. This thing's big. when I saw the impact. 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 kind of cool to cross it. And then none of the daily things changed, so I think you just ignored it. Yeah. Go forward.

1:01:15Jim McKelvey:So once you left, I mean, did you leave leave, or did you still have kind of a foot in at Square?

1:01:23Guy Raz:Were you still? Oh, I'm still on the board. 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, bus tables or clean up after other people. I don't, yeah, I won't say why I'm there because that's not my choice. 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 ecosystems that are empowering a lot of people. And now we're bringing them together, which is even cooler, you know.

1:02:03Guy Raz:So you got one that's consumer and one that's merchant, and that's really powerful.

1:02:07Jim McKelvey:Yeah, I mean, Jack is still the CEO of the company, like, you know, 15 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. I mean, Jack's a little hard to find. I guess you have to go to like an ashram and, you know, in Tibet or something. I am not allowed to tell you.

1:02:31Guy Raz:I don't know where Jack is right now. I mean, I always liked my interactions with Jack. It was fun because 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. He's just sort of buried there. 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. 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.

1:03:11Guy Raz:And I wouldn't interrupt during that minute. Fascinating. It was so much fun.

1:03:17Jim McKelvey:Yeah. All right. So you are on the board and Square is really growing. And then 2014, Amazon decides to get into this game. They decide to get into the payments processing business and really are going to undercut Square. They're going to charge a lot less. Yes. They had a product that was basically copied Square. It was a reader that you plugged into a phone. But they had a cheaper, it was cheaper. They had cheaper, yeah. Right, because Square is free, but then if you want to have more features, it's more. But they were even charging less, like lower processing fees, I think. Yes, yes, yes, they were cheaper.

1:03:58Jim McKelvey:Yeah, I mean, that's a race to the bottom at that point.

1:04:00Guy Raz:Well, yes, I mean, if you think of credit card processing as a commodity, which I think most people would, 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. Like, why wouldn't I go with the lower cost alternative 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?

1:04:22Jim McKelvey:I mean, that 2014 square is huge. But, I mean, Amazon, it's Amazon.

1:04:28Guy Raz:We're not huge. We're a spec compared to Amazon. Right. Yeah.

1:04:32Jim McKelvey:And so what role did you play in sort of, you know, being involved in trying to, I don't know, batten the hatches?

1:04:38Guy Raz: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 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. Okay. So that's how bad it is. Step two was a pretty awkward board meeting where we We said, well, what can we do? There wasn't much we could do. So we decided to not do anything.

1:05:11Jim McKelvey:Yeah, I mean, the strategy, Square's strategy was to essentially ignore Amazon when they released this product. Yes. They decided we're just not going to engage. Like, what are you going to do? Well, you could lower, you could have like tried to compete on price, right?

1:05:22Guy Raz:We could have started our price war, but we didn't have the balance sheet for that. You would have lost so much money. That would not have lasted long. But the Amazon product failed. And it failed so badly that Amazon gave us all their soon-to-be former customers and mailed them a Square reader and said, we're out, go to Square.

1:05:43Jim McKelvey:Why do you think that the Amazon product didn't work and Square was able to withstand that competition?

1:05:50Guy Raz: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. And this is what I call an innovation stack. But you end up doing a dozen things. In our case, it was 14 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 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 other 11 killed them. They didn't know what we did.

1:06:25Guy Raz:and they couldn't because they hadn't built it from the ground up. They just copied it from, you know, a boardroom somewhere. Oh, let's do what Square does. We'll make some software, make a hardware device, undercut their price. Yeah, it seems like it's going to work, but it turns out it's way more than that. If you invent something truly new, you're not inventing one thing. You're inventing a stack of things and that invention becomes its own protection. And as long as you behave, I mean, 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.

1:07:02Guy Raz:I mean, it is a really, really powerful defensive thing and it kept us alive against Amazon.

1:07:08Jim McKelvey:Jim, I know that there have been a bunch of different projects that 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. I mean, it seems like you are, you don't like to do the same thing for too long.

1:07:32Guy Raz:Well, yeah. Look, I have tremendous resources now, stuff that I was never expecting to have. And my family and I live pretty modestly. So what are we going to do with it? And I mean, the answer is we're giving it away. I'm giving the money away. But I just go around and occasionally get attracted to problems. I say, well, who but a person who could afford to take tremendous risk could solve this problem? 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 or to do something crazy.

1:08:15Jim McKelvey:What kind of problems are interesting to you?

1:08:17Guy Raz:Right now, my focus is drug testing. So it turns out that on a planetary scale, we've got about 30 new drugs a year. Yeah. And it's because the test costs hundreds of millions of dollars. Yep. So if you could lower the cost of a test from, let's say,$100 million to$10 million, you'd have a lot more tests. You would have a lot more shots on Google. 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 basically demonstrate that we can do it cheaper and faster and better i mean you are uh

1:08:58Jim McKelvey:what 60 60 yeah turned 60 this year and so you've got you know a lot of life left in you right especially if these drugs work. Exactly. Keep going. There may be a side benefit here, yeah. I have a suspicion that this is not the last thing that you're going to start. Like, is this something that you still just energizes you? You want to get out of bed and start something new? Absolutely.

1:09:22Guy Raz:I used to work for money. 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, now I can take a break. now since money's not the goal then i don't 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 where you are in life

1:09:48Jim McKelvey: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 has to do with with luck i've been so lucky i've been

1:09:59Guy Raz:lucky i i don't know how lucky i am like if i went to go back and relive my life i don't know that i would change a thing because i might not get yeah the luck you know and even with stuff like mom's death i mean as hard as it was i it made me 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 effect. 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.

1:10:42Guy Raz:It's just too dangerous. Maybe I tried to save mom. That's Jimmy Kelvey, co-founder of Square.

1:10:57Jim McKelvey: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 gyros.com or on Substack. This episode was produced by Alex Chung with music composed by Ramtina Arablui. 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 Messini, John Isabella, Sam Paulson, Carrie Thompson, Ramel Wood, Noor Gill, and Elaine Coates.

1:11:32Jim McKelvey:I'm Guy Raz, and you've been listening to How I Built This.

1:11:51You