#279: Square – Thinking Inside The Box

Jim McKelvey looks at his iPhone and thinks this is a phone, a camera, a map, a music player and a camera… Why not a credit card machine?

Audio: Dave Young:

Welcome to The Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those.

[Seaside Plumbing Ad]

Dave Young:

Welcome back to The Empire Builders Podcast. I’m Dave Young and Stephen Semple is here with another fantastic story for us to intrigue us and entertain us, et cetera, et cetera. And he told me just before we started here that we’re going to be talking about Square. That wasn’t the Charlie Brown reference. He wasn’t square. No, we’re talking about the little credit card dongle. It’s a dongle company because I don’t think we’ve covered enough dongle companies.

Stephen Semple:

I think this is actually, have we covered anybody else who’s done something like that? I don’t think so.

Dave Young:

They probably didn’t… Well, I’m anxious to find out, because now the dongles are not a thing because you can tap-

Stephen Semple:

Right.

Dave Young:

For the most part. But let’s hear about Square.

Stephen Semple:

They were founded in 2009 by Jim McKelvey and Jack Dorsey. They’re both from St. Louis and Jack Dorsey, of course-

Dave Young:

Jack Dorsey of, yeah.

Stephen Semple:

Twitter.

Dave Young:

Twitter. Yeah.

Stephen Semple:

Yeah.

Dave Young:

Okay.

Stephen Semple:

Yeah. The co-founder of Twitter.

Dave Young:

So before Twitter or.

Stephen Semple:

After Twitter.

Dave Young:

After Twitter. Okay.

Stephen Semple:

So Jim McKelvey, he’s a computer programmer, an entrepreneur, and somewhat unusually, Dave, your heart is going to sing here, a glassblower.

Dave Young:

Oh, good for him. Yeah.

Stephen Semple:

Yeah, so-

Dave Young:

Well, now I’m surprised that it worked.

Stephen Semple:

And the interesting thing is, what we hear in the story is part of his glassblowing experience is actually what led to the birth of this idea.

Dave Young:

I get it. Probably selling it at art fairs and things like that where you can’t take people’s money.

Stephen Semple:

Right. So the original idea is, what he wanted to be able to do is allow almost anyone to accept a credit card payment using a mobile phone. And the original product was a tiny Square reader that plugged into the headphone jack of the iPhone that you would then swipe your credit card through.

Dave Young:

Right.

Stephen Semple:

Right?

Dave Young:

We had one for some reason.

Stephen Semple:

Oh, did you really?

Dave Young:

Yeah.

Stephen Semple:

Okay.

Dave Young:

Yeah.

Stephen Semple:

Yeah. So 2009, pretty radical idea, and it’s growing far beyond being a little reader. Today, Square has got payment processing, and point of sale, and invoicing, and payroll, and banking, and lending, and online commerce. It trades on the stock exchange under Block, is the company it trades under. They got 36 products, eight countries, and generated $3.9 billion in gross profit. That’s not just top line sales-

Dave Young:

Wow. Okay.

Stephen Semple:

Yeah, from Square. And this is where things get confusing because people will think because it’s under the company name Block. Block did not buy Square. Square went public in 2015 and in 2021, Square Inc. changed its corporate name to Block because the company had become bigger than Square because it had-

Dave Young:

Okay.

Stephen Semple:

A Cash App and Bitcoin related businesses and all those other things.

Dave Young:

It’s now cubed. Yeah.

Stephen Semple:

Yeah. So Block is the parent company and Square is a business with inside that ecosystem. To me, I always found that, oh, did Block buy them? And it’s like, no, they just changed the name.

Dave Young:

No, they became Block. Yeah.

Stephen Semple:

Yeah. So it’s this enormous financial technology company, but it didn’t actually begin with somebody saying, “Hey, let’s disrupt global payments.” It started with a guy who couldn’t sell an ugly glass faucet.

Dave Young:

Glass faucet?

Stephen Semple:

Yeah, so-

Dave Young:

He was making glass faucets?

Stephen Semple:

He was actually making a living doing the glassblowing and he’s in St. Louis and a woman from Panama contacts him because she wants one of his pieces. One of his pieces is this glass bathroom faucet. And Jim actually thought it was kind of ugly and had been sitting around forever. It was one of these ones that, and suddenly somebody wanted it, price, $2,000. And Jim is like, “I could use $2,000, especially when it’s something-“

Dave Young:

Sure.

Stephen Semple:

“That’s already sitting around there.” Right?

Dave Young:

Sure.

Stephen Semple:

She wants it, great, except she wants to pay with Amex, American Express, and Jim can’t take Amex, so he lost the payment.

Dave Young:

Okay. Yeah.

Stephen Semple:

And it kind of bugs him and he’s standing there holding an iPhone. He thinks the iPhone’s a phone, a camera, a map, a music player, a computer. Why can’t it be a credit card terminal?

Dave Young:

Sure.

Stephen Semple:

Right? And that’s beginning of Square. Now, before Square happens, we want to know a little bit about Jim. So Jim grows up in St. Louis, his dad’s professor at Washington University, and he’d studied economics and computer science at Washington U. When he was a freshman in computer science class, Jim thinks textbooks are terrible and he complains about them. And one of his friends says, “Well, if it’s so bad, why don’t you write a new one?”

Dave Young:

Fix it. Yeah.

Stephen Semple:

Right. So he does that. And basically when he creates a textbook called The Debugger’s Handbook, and it gets published, he makes thousands of dollars.

Dave Young:

All right.

Stephen Semple:

He’s 19 years old and this is the thing he’s doing. So he has this interesting character trait that when he sees something stupid, he gets annoyed and tries to fix it. Now remember that because this is what’s going to happen. Now, Jim also realizes he’s not necessarily the best programmer, but he’s good at finding people who are better, giving them a difficult problem and making them productive. This is also going to become important.

So Jim takes a glassblowing class, he falls in love with it, and there’s something interesting from a business perspective because at that time there’s very little competition. So he feels like even if my work is great, I’m going to be the only glass in a gallery. So he starts selling through galleries, doing computer work at night, glass during the day. And at one point he’s selling about $1000 worth of glass a day. He’s doing really well.

Dave Young:

That’s very good, yeah.

Stephen Semple:

Yeah. Yeah.

Dave Young:

For a glassblower. Yeah.

Stephen Semple:

Yeah. So basically then this leads him to this whole thing of getting into the glass business. Now we also need to know a little bit about Jack Dorsey. Okay. So when Jack Dorsey was 15 years old, he basically started working with Jim. Jim started another computer company called Mira. Mira basically scanned documents. There’d be all these documents that people would need scanned and Mira did that. So they’re working on this massive project. Thousands of pages need to be scanned. They’re working around the clock and someone goes into a coffee shop to buy chocolate covered espresso beans to keep people going. And the owner says, “My son likes computers. Maybe he could help you with all this scanning stuff that needs to be done.”

Dave Young:

Nice. Yeah.

Stephen Semple:

So they offer the kid 50 bucks to help. The kid shows up, his name’s Jack Dorsey.

Dave Young:

Okay.

Stephen Semple:

Right. So the first job isn’t glamorous. It’s scanning files, naming the file, repeat, doing it thousands of times. But what Jim notices is every time he gives a job to Jack, Jack does something with it unexpected that makes it better.

Dave Young:

Okay.

Stephen Semple:

Okay? So now eventually the whole scanning business dies. And what ended up happening, they pivoted to doing stuff for trade shows and things along that lines. I don’t want to go down that because really the important part is this is where Jack and Jim meet each other. So Jack goes off to create Twitter. He leaves St. Louis, goes to college, moves on. Eventually he’s a co-founder of Twitter, becomes the CEO and then gets pushed out. It’s 2008. 2008, Jack Dorsey’s pushed out of Twitter. In 2009, Jim is like, “I got this idea.” So he reconnects with Jack. And Jim thinks what happened to Jack is unfair and they joke about going to war with the Twitter guys, but Jack has another idea. Let’s build something new, right? The iPhone has arrived. They both believe mobile is going to be enormous. Let’s build something for the iPhone and there’s the problem, the loss of the $2,000 sale.

Dave Young:

Yeah.

Stephen Semple:

Bingo.

Dave Young:

Yeah.

Stephen Semple:

Worlds collide.

Dave Young:

Somebody’s got a credit card and you can’t take their money.

Stephen Semple:

Can’t take their money. Now, what they originally were going to do is you know how on the phones there was the plug at the bottom of the phone. Apple-

Dave Young:

Yeah, the headphone plug is what this thing went into, right?

Stephen Semple:

Well, no, but remember there’s two plugs. There was the headphone plug and then there was the plug on the bottom of the phone.

Dave Young:

The big 30 pin charging cable.

Stephen Semple:

Yes.

Dave Young:

Yeah.

Stephen Semple:

Which lots of people used to connect their software into. But what they discovered was Apple really controlled that because again, there was lots of things going on there. And so they then went, “Well, there’s an audio jack on the top. Is there a way to turn this mag stripe-“

Dave Young:

Into audio.

Stephen Semple:

“Into audio?”

Dave Young:

Yeah.

Stephen Semple:

Because that’s not controlled. No one cares about that. That’s basically what they did. Built this little device, plug it into iPhone, swipe a card. Sounds easy, right? Except Jim started to learn how the credit card industry works. You got banks, payment processors, card networks, merchant providers, rules, regulations, fees, middlemen, and none of it was designed for a guy like Jim. It was designed around established merchants, right, not small merchants, not farmer’s markets, not artists, not contractors, not side hustles.

Dave Young:

Yeah.

Stephen Semple:

Really, the idea got bigger. It wasn’t how do we build a better credit card terminal? It was really, why can’t almost anyone become a merchant?

Dave Young:

Yeah. Why can’t we put this in the little guy’s hands?

Stephen Semple:

Right. So Jim starts investigating and he finds there’s at least 17 rules and regulations standing in the way for banking requirements, and card network requirements, and know your customer rules, and money transmitter rules, and hardware. It’s enormous.

Dave Young:

But here’s the enormous opportunity, right? It’s like when we talk about as wizard of ads partners and marketing consultants, we like to do business with the little guys. So if you focus on the Fortune 500, your big problem is there’s only 500 of them.

Stephen Semple:

Right.

Dave Young:

Right. But there’s millions and millions of little guys trying to hustle, trying to sell something, and to come up with a product that makes it easier for them, that’s a good idea.

Stephen Semple:

Yeah. So what ends up happening is they decide to still push ahead and make this, and what they’re going to do is take it to Apple and show it to Apple. And the first design they did was hilarious because they knew Steve Jobs really loved design and the feel and things being durable and metal and all that. So the first one they made that was of metal and brushed aluminum everywhere. So they made this brush aluminum prototype and Jim gives it to Jack. Jack swipes it, doesn’t work. Jim tries, it works. Jack tries it, it doesn’t work. Jim tries it, it works. Jack tries it, it doesn’t work. They’re like, “What the hell?” And what they realized was because aluminum conducts electricity, the reader was picking up Jack’s heartbeat.

Dave Young:

Oh no. We need some plastic. Yeah.

Stephen Semple:

And it was interfering with the card signal, so they had accidentally created a cardiac monitor. So-

Dave Young:

Oh, that’s great.

Stephen Semple:

No more aluminum, which is why it’s plastic, why it’s not metal and it’s plastic. And now here’s another interesting thing. They experimented with different readers and they had a square one and they had a long thin one. And when they were testing it with people using it, everyone liked the long thin one, right? But when he was taking it out to trade shows and things like that, and he reached in his pocket and pulled the square one out of his pocket, people reacted to it differently and they liked the square one.

Dave Young:

Okay. Yeah.

Stephen Semple:

So when you’re doing focus group interview, this is the one that people liked. When you took it out into the field and actually used it with people, the square one is the one that they liked.

Dave Young:

Yeah. I mean, yeah. But that’s-

Stephen Semple:

No, but it’s this whole problem with focus group interviews, right?

Dave Young:

They may not actually be end users, right? They’re just people.

Stephen Semple:

And he was like, “It almost felt like this magic trick. I could pull this out of my pocket, stick it on the phone and do a swipe.” Right?

Dave Young:

The technology is so cool to me, that you think about early modems, right? We think about digital being as just all transmitting zeros and ones at its base, but early modems, you had to turn it all into sound.

Stephen Semple:

Right.

Dave Young:

And then turn it back from sound when it got to your computer. That’s what that modem noise was. That was just audio that all of the digits, all of the information was turned back into analog.

Stephen Semple:

Yeah.

Dave Young:

And so a little reader like that, all it really needs to do is turn a little bit like 16 digits, and a date, and a security code into a little snippet of audio that your phone can decode.

Stephen Semple:

Yeah, it was a brilliant idea.

Dave Young:

That’s not much.

Stephen Semple:

So they eventually figured out how to get the manufacturing down to 97 cents. And so they decided that they made the smart decision, we’re not going to sell. Initially they didn’t sell the readers, they gave them away. Now with tap and whatnot, readers become more expensive, but they’re still not expensive. Crystal, my daughter, for her art market, she bought a Square and it wasn’t all that much money. And they basically pounded away at these problems. Remember there was all these problems? Every time they ran up against one, they just removed it. They discovered the next barrier, they remove it, and finally they were at the stage where they were ready to go.

This is another interesting thing that they did. They’re now going to venture capitalists, right? And the normal pitch to a venture capitalist is, “We’re amazing. The market is enormous. Look at our hockey stick projections. We’re going to change the world.” And the investor’s job is find everything that’s wrong with it. This was Jack Dorsey’s-

Dave Young:

Sure. Yeah.

Stephen Semple:

Learning, right? And so basically Square and their pitch decide to do something different.

Audio: Dave Young:

Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.

[Using Stories To Sell]

Dave Young:

Let’s pick up our story where we left off, and trust me, you haven’t missed a thing.

Stephen Semple:

And so basically Square in their pitch decide to do something different. They put up a slide, 140 reasons Square will fail. Here are the problems. Here are the things we don’t know. Here are the things that could kill us. And that was basically how they presented it when they were doing investor presentations.

Dave Young:

It shows an amazing level of awareness though.

Stephen Semple:

The investor stopped discovering what was wrong. Square already told them. And instead, here’s the other interesting thing that happened. Investors would start going, “I know somebody who can fix that. I can help you with that. We can solve that.” So all of a sudden the investor goes from opponent to collaborator.

Dave Young:

Yeah.

Stephen Semple:

When they go to raise money, they got dozens of term sheets. Basically everyone they met with were like, “Oh yeah, we’re in.” A great lesson here is sometimes admitting a weakness often removes an objection, so they leaned right into the weakness. So 2009, Square launches. Within a year, about 50,000 customers in the pilot program. Reader becomes instantly recognizable. Small merchants can now suddenly accept credit cards from almost anywhere and the business explodes. Now, 2014, Amazon shows up coming after Square.

Dave Young:

Yeah.

Stephen Semple:

Amazon launches, Amazon Local Register, similar concept, similar reader, similar payment, but Amazon does Amazon and says, “We’re going to charge way less.” Now, think about this from Square’s perspective. Amazon has more money, more customers, more engineers, bigger brand, enormous balance sheet, and they’re cheaper. Square looks like a commodity. Swipe the card, money arrives. Amazon does exactly the same thing for less. Why would anybody shift? What do you do in that moment? Square, the board meets. What do we do? Should we match their price? Should we cut our fees? Should we fight? But here’s the problem. Amazon can sustain a price war longer than Square because Amazon is doing it.

Dave Young:

This is just the price for the dongle? No.

Stephen Semple:

No, no, this is for the processing price.

Dave Young:

The price, okay.

Stephen Semple:

Right. Because remember they charge a percentage on the processing.

Dave Young:

Oh, gotcha. Okay.

Stephen Semple:

But here’s the thing, this is where I really admire Square because what would most companies do? Amazon’s coming in offering something similar and doing it cheaper. Do we match the price? Amazon can kill you in that war. Square makes a surprising decision, do nothing. Don’t chase Amazon, don’t race them to the bottom, keep doing what they do. And eventually what happened was Amazon Local Register failed. Amazon shuts it down, and guess what? When Amazon shuts it down, Amazon sends its customer Square readers.

Dave Young:

Nice. Yeah. It was brilliant to do nothing, right?

Stephen Semple:

Yes.

Dave Young:

First, it’s not Amazon’s core business.

Stephen Semple:

Correct.

Dave Young:

Right. Never was.

Stephen Semple:

This was Jim’s big idea. So when Jim looked at Amazon coming in and decided not to match them, because Amazon looks at Square and here’s how Amazon sees it, reader, software, processing, price, copy those things, charge less, game over, except Square isn’t one innovation, it’s 14 interconnected ideas. What Jim understood was the number of things that they had to overcome, and it happened sequentially. You solve problem one, problem two came up. Solve problem two, led to three. So Jim basically looked at it and said, they see it as this thing. Jim looked at it as an innovation stack. And what he basically said is Amazon’s going to try to copy it and they’re going to just discover headaches.

Dave Young:

Yeah. They don’t have the 140 things.

Stephen Semple:

They don’t have the 140 things. And so they basically chose it, and I admire them. Look, Amazon’s coming in your market. What do they decide to do? Nothing, nothing.

Dave Young:

Everybody else would react like their hair was on fire and-

Stephen Semple:

Correct.

Dave Young:

Flee, run away.

Stephen Semple:

Correct. Correct. So to me, there was a couple of things that jumped out at me that was interesting. And of course it was how many businesses do we see that come from the solving of a problem? He’s a glassblower trying to solve a problem. Now, there was this magical moment of Jim and Jack coming together, that was cool. But the other thing that I just really liked was this whole idea that when they were testing the product with people sitting in a boardroom, “Oh, this is the one we like better because it’s easier to use.” But the moment it went out into the field, it was like, “No, this is the one that we like better.” The real world answer is sometimes different. I really like that. And then I love the fact that when faced with a competitor, they just held their own.

Dave Young:

The one thing that would’ve made Amazon’s product successful would’ve been these guys engaging with them, right?

Stephen Semple:

Right.

Dave Young:

Because then Amazon’s counting on all of the attention and fuss over the fight-

Stephen Semple:

Right.

Dave Young:

Right.

Stephen Semple:

Oh.

Dave Young:

That’s going to draw attention to it.

Stephen Semple:

That’s interesting. The fight would’ve drawn attention to it. Yeah, that’s interesting.

Dave Young:

If you do nothing, Amazon now has to tell the story on their own.

Stephen Semple:

Interesting. I have not thought about that. By you engaging in the fight, you draw attention to the fight, you draw attention to Amazon, you’re essentially promoting Amazon.

Dave Young:

And I tell clients that all time-

Stephen Semple:

Wow. That’s so interesting.

Dave Young:

“What if my competitor does this?” I’m like, “Okay, we know what we’re doing is the right thing to do, so you’re not going to build a business out of reaction to your biggest competitors.”

Stephen Semple:

Yeah, that’s really interesting. That’s a great observation, Dave. Yeah.

Dave Young:

No, thanks. Thanks.

Stephen Semple:

Yeah. Yeah. No, that’s cool. When I heard about that and that they chose to do it, I was like, “Hats off, dudes. Well done. Congratulations. Good for you.” Yeah.

Dave Young:

And there are probably people out there that would say that was a mistake. Well, obviously in retrospect it wasn’t.

Stephen Semple:

In retrospect, they won.

Dave Young:

Yeah. Right.

Stephen Semple:

But the other part is what Jack Dorsey understood was… See, what I thought was really interesting, Jack Dorsey understood, he was able to put the Amazon shoes on and say, “Amazon is looking at it this way, and that’s a mistake because it’s not this. It’s actually this.” And that was the brilliance of Jack Dorsey. And so Jack was then able to go, “They’re looking at this wrong. They’re looking at this wrong. We win.”

Dave Young:

Yeah.

Stephen Semple:

Yeah. So it was cool.

Dave Young:

Very cool story. The story of Square and Square up.

Stephen Semple:

The story of Square.

Dave Young:

Square up is just sort of their phrase, isn’t it? Or is it a…

Stephen Semple:

Yes. I think that’s just the device is called Square.

Dave Young:

Yeah. Yeah.

Stephen Semple:

It’s just Square. Yeah.

Dave Young:

All right.

Stephen Semple:

And it’s part of the company Block.

Dave Young:

We’ve all been swiped on a Square at some point.

Stephen Semple:

Yeah, and today tapped.

Dave Young:

Tapped.

Stephen Semple:

You tap a square today.

Dave Young:

You probably just tap a phone today, maybe.

Stephen Semple:

Yeah.

Dave Young:

I don’t know. You just hold your card up in the air and wish that the item you’re looking at is paid for and suddenly it is.

Stephen Semple:

That’s it. But the Square today no longer plugs into the phone. For example, it works to the phone. They’re connected. They’re Bluetooth connected now.

Dave Young:

Yeah. And I suppose once it got pretty popular, Apple found a way to make it work better too.

Stephen Semple:

I’m sure. Yeah.

Dave Young:

Yeah.

Stephen Semple:

I’m sure. That’s cool.

Dave Young:

All right. Thanks for the Square story.

Stephen Semple:

Thanks, David.

Audio: Dave Young:

Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app and leave us a big fat juicy five star rating and review at Apple Podcasts. And if you’d like to schedule your own 90-minute Empire Building session, you can do it at empirebuildingprogram.com.