1장
When Innovation Becomes a Lifeline
What happens when Amazon, the corporate behemoth that devours entire industries for breakfast, sets its sights on your fledgling company? For Jim McKelvey, co-founder of Square, this nightmare scenario became reality in 2014 when Amazon launched a competing product that undercut Square's price by 30%. Yet somehow, against all odds, Square not only survived but thrived. This unexpected victory sparked McKelvey's quest to understand why some innovative companies can withstand even the fiercest competition. The Innovation Stack, which hit The New York Times bestseller list in 2020 and became required reading at business schools nationwide, offers his compelling answer. With Bill Gates calling it "a must-read for anyone interested in entrepreneurship," McKelvey takes us on a journey that reveals how truly original businesses build interlocking systems of innovation that become virtually impossible to replicate-and how you might build one yourself.
2장
The Birth of a Perfect Problem
What makes a problem "perfect"? According to McKelvey, it's one that exists in the sweet spot between the impossible and the already-solved-a challenge that has a solution, but one that doesn't yet exist. Such problems aren't necessarily world-changing; they could be trivial annoyances. What makes them perfect is your unique ability to solve them when others haven't.
This insight came to McKelvey through personal experience. In 2008, he was primarily working as a glass artist in St. Louis when he lost a $2,000 sale because he couldn't accept American Express. This seemingly minor inconvenience sparked a question: why couldn't his iPhone-a magical device capable of becoming almost anything-process credit card payments? He called his friend Jack Dorsey, who had recently been forced out of Twitter, and together they began exploring the bewilderingly complex payments industry.
What they discovered was shocking. Credit card processors deliberately made their systems confusing, with contracts spanning dozens of pages of fine print. A Federal Reserve report revealed that vendors charged small merchants 45 times more per dollar than large corporations-a staggering disparity that created the perfect justification for their new company.
When pitching to venture capitalists, McKelvey and Dorsey began with a minor crime-using their crude prototype card reader to charge each investor between $1-$40 through their iPhone's headphone jack. This unprecedented demonstration immediately captured attention. They followed with a slide titled "140 Reasons Square Will Fail," listing every potential fatal problem from fraud to "robot uprising." This honest examination of risks transformed the typical adversarial VC meeting dynamic, creating an atmosphere where investors were eager to follow their vision.
But McKelvey admits they weren't being entirely honest about their true ambition. While they pitched helping existing small merchants, their real target was the invisible market of people completely excluded from the credit card system-people like McKelvey's glassblowing colleague Bob, who occasionally lived in his decrepit 1992 Chevy Corsica despite his remarkable skills, simply because artists "sell stuff nobody needs" and couldn't access payment processing.
"We never showed Bob's car photo or mentioned our true ambition to serve this invisible market," McKelvey confesses. "Venture capital funds expansion, not exploration, so we pitched the known quantity while secretly planning to build a massive new base for the Pyramids by including previously excluded merchants."
3장
Building Square's Innovation Stack
When Square began in 2009, the founding team consisted of three guys and a cat named Zoe in a San Francisco apartment. Jack Dorsey coded server software, Tristan wrote iPhone client software, Zoe sat in Tristan's lap as their "health insurance substitute," and McKelvey handled everything else. It took only a few hours of research before McKelvey turned to the others with their first major entrepreneurial milestone: "Guys, what we're doing is illegal."
They'd reached that crucial entrepreneurial moment-"So that's why no one's done this before." McKelvey identified seventeen rules, regulations, and laws they'd violate with each transaction. This was the border at the bottom of the market that kept others out. Beyond regulatory violations, they faced dozens of problems, five of which required solutions that didn't yet exist. Solving these five problems and their cascading consequences would build their Innovation Stack.
The first challenge was connecting to credit card networks-"like sewing Kevlar to toilet paper." The second-largest processor in the nation ran on such unstable systems they froze all development from Thanksgiving to New Year's. Square chose the costlier option for better user experience, deciding to fix the security and cost problems later-a pattern that would become crucial to their Innovation Stack.
For card reading, McKelvey and Dorsey disagreed about how to read credit cards-Dorsey favored using the iPhone's camera to read the sixteen digits, while McKelvey wanted to read the magnetic stripe for lower rates. Instead of arguing, McKelvey flew back to St. Louis to build a magnetic stripe reader. They decided to connect through the iPhone's microphone jack rather than the dock connector, circumventing Apple's expensive approval process.
When it came to getting attention, Square faced a fundamental problem: humans ignore most sensory input. Early demos showed people mistaking their revolutionary system for traditional credit card processing. Inspired by phone accessory culture in Tokyo, where businesspeople had charms dangling from their phones, McKelvey wondered if making their reader "cute" could help it stand out.
Accessing financial networks proved challenging. American Express came on board quickly after Square's pitch that they would bring them new small merchants. But Mastercard and Visa remained elusive until, through connections, they secured a meeting with Mastercard executives. During their perfectly executed demo, they charged $1 to Ed McLaughlin's Mastercard, prompting him to note they were violating their operating regulations. After a nerve-wracking silence, he simply said, "I guess we have to change our operating regulations."
Everyone warned Square about the fraud "dragon" lurking beyond the city walls. Payment industry veterans insisted their model would fail because small merchants like Bob were too risky. One payment company CEO spent an entire dinner explaining why McKelvey was an idiot for trying to serve this market. But Square had a crucial advantage: they weren't competing in his market-they were creating an entirely new one. When fraud attacks came, they weren't the sophisticated schemes expected but mostly clumsy attempts from small criminals. Their massive transaction volume revealed patterns that made fraud predictable.
By the time Square was finished, they had developed over a dozen industry-first innovations, including:
1. Simplicity: A single transparent percentage price with no hidden fees-the opposite of industry practice.
2. Free Sign-Up: An industry first that allowed millions of curious merchants to try Square without friction.
3. Cheap Hardware: While the cheapest portable card reader in 2009 cost $950, Square's reader cost just 97 to build-979 times cheaper.
4. No Contracts: Unlike every other processor with three-year contracts, Square let customers leave anytime.
5. Beautiful Software: Their elegant, easy-to-use interface boosted new users' confidence and reduced support needs.
6. Fast Settlement: Square broke industry speed records for payment settlement, often same-day.
7. Low Price: When small merchants typically paid over 4% for credit card services, Square's 2.75% rate spread through the small business community "like a cold in a kindergarten class."
This collection of interlocking innovations-what McKelvey calls an "Innovation Stack"-wasn't planned but emerged from responding to existential threats. It developed organically, like pioneers traveling without maps.
4장
The Amazon Showdown
Three days after launching Square, McKelvey and Dorsey made a pact to meet one year later on Valentine's Day. If Square failed, they'd celebrate with street hot dogs; if successful, with champagne. A year later, they celebrated with both-champagne in plastic cups and hot dogs from somewhere questionable. Square was growing 10% weekly, a pace that continued for almost three years.
Then, in summer 2014, five-year-old Square discovered Amazon had copied their hardware (as a black rectangle), undercut their price by 30%, and offered live customer support. With Amazon's brand and hundreds of millions of customer relationships, they threatened Square's market as they had countless others.
Fighting Amazon was like a child dressed as a soldier battling a real one. The tech giants have overwhelming advantages in money, talent, customers, and resources. During what McKelvey calls their "do nothing" battle, they witnessed the absurd scale of these companies when a competitor made an $8 million counteroffer to keep a single non-managerial programmer from joining Square.
Yet despite Amazon's attack, Square's energy level didn't change-they kept building products, supporting customers, and growing at nearly 10% weekly. On Halloween 2015, the monster retreated, even mailing Square's card readers to their customers. McKelvey couldn't explain their success for years, wondering what made Square different from other companies Amazon had crushed.
5장
The Power of the Innovation Stack
After a year of fruitless searching for what made Square unique, McKelvey tried a different approach-looking at the opposite of originality, which turned out to be everywhere around him.
The universal formula for success in any existing industry is simple: copy what everyone else does. Even in hypercompetitive markets like New York City restaurants, the path is clear-use the same suppliers, hire from the same talent pool, and follow established patterns with minor improvements. As Shake Shack's CEO Randy Garutti explained, "We didn't invent the hamburger"-they simply refined what already existed.
Copying is nature's answer to entropy-without replication of successful creatures, life would not exist. We begin life as copies of our parents' DNA, sharing over 70% with fish and even more with cats. Babies learn by recognizing and replicating sounds, with brains designed to copy.
The problem with perfect copying is stagnation. Nature requires sexual reproduction despite its mathematical inefficiency because perfect copies lose evolutionary adaptability. Similarly in business, companies must evolve to survive changing markets. The entrepreneur's dilemma is clear: copying is almost always right and comfortable, but it will never produce transformative change. Copy when you can; invent when you must.
McKelvey eventually realized that an Innovation Stack isn't just a list of independent changes-it's an integrated system where each block works only in conjunction with all others. With Square's fourteen elements, even if Amazon had an 80% chance of copying each one successfully, the probability of replicating all fourteen was just 4%. The complexity compounds further because each element affects every other element, creating a dynamic system nearly impossible to model or copy.
This insight explained why United's discount airline "Ted" failed despite studying Southwest for thirty years. Ted copied several elements-removing meal service, offering low fares, standardizing aircraft, creating a quirky brand-but couldn't replicate even half of Southwest's innovation. They kept two service classes, assigned seating, and different pilot contracts. As Herb Kelleher told McKelvey, "They all took one thing out of twenty and said, 'This is what is going to make us the next Southwest,' but actually it was our holistic mixture."
6장
Learning from History's Innovation Stacks
To further test his Innovation Stack theory, McKelvey looked to history for examples of companies that had built similar systems. His first case study was A.P. Giannini's Bank of Italy (later Bank of America), which became the world's largest bank by creating a revolutionary approach to banking.
After witnessing his father's murder over a $1 dispute, young Giannini grew into a legendary produce trader known for extraordinary dedication-once swimming across a river holding his clothes above his head to beat a competitor to a deal. By age 31, he had made his fortune and joined a bank board but quit in frustration when they refused to serve small businesses. He founded the Bank of Italy in 1901 to serve "people who don't use banks."
During the 1906 San Francisco earthquake, while other banks closed for six months, Giannini smuggled the bank's gold out in vegetable carts, hid it in his fireplace, and immediately began lending to rebuild the city. The Bank of Italy built an Innovation Stack with sixteen interrelated elements that transformed banking, including Branch Banking (which balanced risk across regions) and Distributed Ownership (selling small amounts of stock to employees and customers with no individual owning more than a few percentage points).
McKelvey's second case study was IKEA, founded by seventeen-year-old Ingvar Kamprad in 1943. For five years, Kamprad merely copied competitors, even following them into furniture sales, resulting in destructive price wars. Facing an existential threat when Swedish furniture sellers banned IKEA from trade fairs, Kamprad was forced to innovate.
IKEA's Innovation Stack began with Catalog Showrooms, using catalogs to attract customers to exhibition spaces. When Swedish suppliers boycotted IKEA, they developed Overseas Manufacturing in Poland. Quality issues led to Efficient Factories, redesigning production to improve quality while lowering costs. This evolved into Self-Assembled Furniture, keeping prices low by having customers assemble items themselves. Kamprad's vision crystallized after visiting the Milan Fair, where he noticed the stark contrast between elegant furniture displays and what ordinary Italians actually had in their homes, sparking his concept of "democratic design."
McKelvey's third case study was Southwest Airlines, founded by Herb Kelleher. The airline industry was deliberately designed to prevent competition, with federal regulations ensuring the same carriers controlled 90% of passenger miles from 1938 to 1978. As Southwest's lawyer, Kelleher fought for four years through both Texas and US Supreme Courts before the airline could make its first flight.
Southwest's Innovation Stack began with Maximized Aircraft Utilization-keeping planes in the air where they make money. When financial pressure forced them to sell one of their four planes, they implemented a Ten-Minute Turnaround, requiring innovations like a Standardized Fleet (using only Boeing 737s), Batch Boarding with reusable passes, Open Seating, and use of Fringe Airports to avoid congestion. These innovations allowed Southwest to remain profitable while other airlines went bankrupt.
7장
The Entrepreneurial Experience
Becoming an entrepreneur requires venturing beyond existing solutions into the unknown, which brings unique psychological challenges. While business statistics and amusing anecdotes abound in entrepreneurial histories, the emotional journey remains largely undocumented.
A.P. Giannini embodied humility despite his extraordinary achievements. Though he built the world's largest bank from scratch, he never put his name on the door, never became a millionaire despite ample opportunity, and died with a modest estate of $439,278 after donating most of his wealth. This humility wasn't weakness but strength-it allowed him to connect with ordinary people and see possibilities others missed.
Fear is an inevitable companion of innovation. As social creatures, humans feel safe conforming to the herd, and striking out alone triggers instinctive fear. Rather than eliminating fear, successful entrepreneurs learn to function effectively despite it. Fear, properly managed, can even become an advantage-it heightens focus and drives performance when channeled productively.
Entrepreneurs often face an eerie silence when innovating-positive feedback lags far behind innovation. Without the reassurance of external validation, the journey feels like walking into an anechoic chamber, which can drive some people crazy. Looking back from success, the path seems clear, but when standing at the beginning, every forecast is a wild guess. Ironically, all praise and admiration arrives only after success-"like receiving a Kevlar vest as a get-well present after you've been shot."
Among all entrepreneurs studied, perseverance-often displayed as stubbornness-is the most common trait. Giannini would befriend, bully, or buy those in his way, but they were getting out of his way. Herb Kelleher showed similar grit when Southwest was out of money and trapped in legal battles, offering to postpone his fees and pay court costs himself while delivering such a legal "smackdown" that local papers recommended attending court for entertainment.
What keeps entrepreneurs going outside the city walls? Not money or fame-these are weak motivators that we overvalue because they're easy to measure. A.P. Giannini was rich enough to retire at thirty-one but started a bank to help "the little fellow." Problems are beautiful motivators-when you care deeply enough about one, your motivation becomes infinite. The key is finding problems you personally experience, not ones you think others have.
8장
The Innovation Physics That Defies Conventional Wisdom
McKelvey discovered that entrepreneurial companies operate under different rules than traditional businesses-what he calls "innovation physics." These counterintuitive principles include:
1. Market Expansion, Not Disruption: Despite being labeled "disruptive," Square caused remarkably little actual disruption. Ten years after entering the market, all major credit card processors remained in business. Even competitors like PayPal grew substantially during this period. Square expanded the market rather than destroying existing players. Similarly, when Southwest entered the Dallas-Houston route, it jumped from the 34th largest market to the 5th largest in just one year.
2. Low, Not Lowest Pricing: While entrepreneurs often have the lowest prices in their markets, their focus is on maintaining consistently low prices that deliver maximum customer value. Southwest charged fares so low they stole traffic from bus lines, while maintaining the best on-time record and lowest customer complaints. Square set rates at 2.75% when competitors charged over 4% and didn't lower prices even when Amazon undercut them at 1.95%-their price was already as low as possible while maintaining their business.
3. Early Adapters, Not Early Adopters: Customers new to a market have few preconceptions, giving innovative companies a powerful advantage. Rather than "early adopters," these customers are better called "early adapters"-they learn your way of doing business and adapt to it. Square taught new customers to expect simple pricing, no fees, and beautiful design. Southwest taught passengers to board in groups and choose their own seats. IKEA taught customers to assemble furniture themselves.
4. The IKEA Effect: The frustrating act of assembling your own furniture causes you to value the final product more highly. That 6mm Allen wrench isn't just connecting laminated sawdust-it's rewiring your brain. Even imperfect furniture becomes treasured because you created it. IKEA has mastered making customers just uncomfortable enough to learn "the IKEA way," from original lines around buildings to modern ball pits for children.
5. Timing Matters More Than Method: Schools teach how to do things but rarely when to do them. Learning when is inherently more difficult than learning how, because we must first master the how before we can experiment with timing. While "now" is often the right answer in a competitive world where speed creates advantage, being first isn't always best. Sometimes critical elements of an Innovation Stack depend on each other, and launching too early can doom a venture.
9장
The Democratization of Innovation
After leaving Square's daily management, McKelvey returned to St. Louis and his glass studio. When his coworker's son Daniil was murdered delivering pizza, McKelvey fell into depression, eventually realizing the tragedy reflected systemic problems in parts of his city. After calculating that over 30,000 people living below poverty in St. Louis had the natural talent to become programmers, he founded LaunchCode.org to address both the lack of programming talent for businesses and lack of opportunity for people.
McKelvey found his money and contacts from Square provided little value in solving LaunchCode's challenges. The real challenge was that nobody had previously solved the tech shortage and opportunity gap simultaneously. LaunchCode evolved through innovation: starting with job placement, then addressing education when they ran out of coders. They discovered how to boost Harvard's online course completion rate from 1% to over 50%, though this increased costs from $100 to $1000 per person. They maintained free tuition despite this, understanding how price impacts entrepreneurial companies.
Innovation Stacks aren't just for billion-dollar companies-they work equally well for smaller problems, and are actually easier to implement. If a single invention solves your problem, that's perfect. Simple solutions are beautiful. McKelvey shares examples: his friend Greg who creatively solved his son's public tantrum by forming an impromptu "Tantrum Rating Committee" from onlookers, and another friend whose construction company developed a five-element Innovation Stack allowing him to successfully employ ex-offenders in an industry with chronic labor shortages.
Having read this book, McKelvey argues, you've lost the ability to say "Nothing can be done" or hide behind excuses. You can only choose between inaction or problem-solving, knowing that world-changing entrepreneurs had few qualifications when they began. The world has many problems, and some may be perfect for you-problems shared by millions that no expert can solve. By finding a problem you deeply care about, examining how others have solved similar challenges, and applying innovation when necessary, you can make the world better.
The power that built world-changing companies is available to all of us. We simply need to find our perfect problem and begin building our own Innovation Stack, one solution at a time.
10장
The Courage to Venture Beyond the Walls
The boundary between what humanity knows and doesn't know resembles a medieval city wall. Inside the walls of knowledge-like in medieval Edinburgh with its cramped, filthy closes and six-story buildings-life might be unpleasant but relatively safe. Outside those walls lies the unknown-dangerous territory where nature's harsh laws rule and failure often means death.
Those who venture beyond the wall are either entrepreneurs or corpses. The businesspeople McKelvey shuttled to airports were successful but remained safely within the walls, "singing the songs, not writing the music." True entrepreneurs leave this safety to explore the unknown.
The distinction is clear: stay within the walls of established knowledge and you're a businessperson; venture beyond to create something truly new and you're an entrepreneur (or you fail trying). For those who venture beyond the walled city of convention, two motivations matter. First is perseverance-the universally respected work ethic that powers us through tasks. Second is audacity-the entrepreneur's unique motivation to attempt what's never been done, often frowned upon except in hindsight after success.
Entrepreneurs inevitably feel unprepared for their tasks, challenging our cultural reverence for expertise. An expert is simply someone we aspire to copy, but expertise only exists within known territories. Outside established boundaries, there are no experts-just survivors and bones. The problem with worshipping expertise is the silent excuse that follows: "If I only knew more about..." which leads to "...and therefore I shouldn't try." Qualification matters only in copying, not entrepreneurship. If you're waiting for qualification, you can only ever be qualified to do something already done.
After Square's IPO, McKelvey suddenly found himself taller, more interesting, and with access to powerful people-even secret societies of the elite meeting in woods. Despite newfound money, experience, and connections, these advantages proved surprisingly unhelpful for solving new problems. Like Michael Jordan's failed baseball career showed, having piles of money and contacts only helps in games people already know how to play. For true entrepreneurship, everyone starts at zero-what differentiates entrepreneurs is simply their willingness to begin.
The world has many problems waiting for solutions. Some may be perfect for you-problems shared by millions that no expert can solve. By finding a problem you deeply care about and applying innovation when necessary, you too can build an Innovation Stack that changes the world. Square up.
