Decoding Digital

How Crises Initiate Transformative Change with Jim McKelvey

By Ideas @ AppDirect / May 10, 2021

Jim McKelvey on How Crises Initiate Transformative Change

Jim McKelvey is a leader in the digital payment space. In 2009, he co-founded Square, a merchant services and mobile payment platform, alongside the creator and co-founder of Twitter, Jack Dorsey. Today, the company sees almost $5billion in annual revenue.

Jim is a multihyphenate entrepreneur. Some of his notable endeavours include founding Invisibly—a technology company offering a platform built to collect consented, compliant data—maintaining his position as Director of Square, and writing his book, The Innovation Stack. Described as a “thrilling business narrative,” the book is a must-read for anyone looking to drive change within their organizations.

In this Decoding Digital conversation, Jim joins Daniel Saks to discuss what it takes to build a business, why consistent innovation is the key to success, and how to beat your competitors – even when your competitor is Amazon.

Jim’s journey to empowering entrepreneurs

Jim is living proof that necessity is the mother of invention. Believe it or not, one of Jim’s passions is glassblowing. It was during his experience as a small merchant glassblower that he first had the idea for Square.

At the time, credit card companies would commonly charge small merchants triple or quadruple the rates of medium sized businesses, knowing they couldn’t fight it. Jim became sick of it, so teamed up with former computer engineering colleague Jack Dorsey. Together, they would build a company that could make it fair for everyone.

The great commerce revolution

Jim and Jack founded Square in 2009. In the decade since, there’s been a commerce revolution. From the outside it almost looks as if they anticipated this digital shift. But Jim insists that it was already happening.

“Tools were becoming more available. The iPhone landed in mass around ’08, and it really sparked a revolution that had begun with Blackberry and was definitely going to continue.”

So, while the online revolution wasn’t necessarily a new trend, Square certainly rode the crest of the wave. Jim comments that with these tools came an accelerated rate of change. He believes that this increase has doubled again in the last year due to COVID.

“Right now, being in a pandemic, we're seeing a lot of change that probably we wouldn't see for another 10 years, happening immediately.”

But what does this mean for small business owners and merchants?

For the last year and a half, Square has been producing tools specifically designed to help small businesses to rapidly adapt in the current climate. Small businesses are usually very nimble, so adoption is quick in most cases. However, Jim notes that he’s seen first-hand the effects the pandemic has had on them, and how tough it continues to be for many to keep their businesses open.

How technology supports small businesses

As a whole, the technology industry is now making tools that were once only available to the elites suitable for everyone. Square is just one of hundreds of companies doing this. Jim is a big believer that technology businesses are generally more likely to bring opportunities to small companies than larger ones, which he sees as a good thing.

But there is a grey area around the giants in the industry, such as Amazon and Walmart. Jim points out that they do have programs and systems in place to enable small business to thrive in some ways. However, they’re simultaneously bulldozing them in other ways – which Jim experienced first-hand.

How crises affect innovation

Jim reasons there are two different classes of innovation. The first is transformative change that leads to new markets (the focus of his book). He states that this type of innovation is very rare and has a completely different set of rules to the second type of innovation, which is more iterative.

The primary reason Jim wrote The Innovation Stack is because, when he first started his career, he wasn’t aware that these two classes played by different rules.

“What we're seeing right now, in large part is the boring type of innovation, the stepwise innovation that is just being accelerated. Now, that's not to say it's not super important.”

Jim believes that we should all be embracing innovation in the sense that we need to get to grips with prominent technology. Get a website. Use social media. Learn how to host a Zoom meeting. In Jim’s opinion, you should already be keeping on top of tech trends so that you don’t get left behind.

But Jim’s passion lies in the other type of innovation. The class where you can’t copy what anyone else has already done.

“That sort of innovation, it turns out, is actually accelerated by crisis.”

The Innovation Stack is packed full of case studies illustrating where entire markets were born out of, or at the very least related to, some giant cataclysm. Jim studied the link between these markets and their associated crises to determine whether the links were coincidental or causative. His conclusion?

“Massive societal crisis goes hand in hand with transformative businesses that 10 years later, are the biggest in the world.”

Square vs. Amazon

There aren’t many businesses who’ve come up against a giant like Amazon and survived, but Square lived to tell the tale. Jim recalls how, when Amazon released a copy of Square’s product in 2014, he thought it would kill his company.

But a year later, Amazon retreated. Great news for Square, however it left Jim scratching his head. How had a start-up beaten Amazon? Especially when so many others had been crushed?

Jim’s “survivor’s guilt” led him to research other companies that survived big attacks. He found that, while this David vs. Goliath event was rare, it usually led to massive success.

“Not only had they survived this existential threat, but they then grew up to become the biggest in their business. The biggest bank in the world, the biggest furniture company in the world, the biggest airline in the United States, the biggest frozen foods company in the world, the biggest automaker.”

Jim took his research to Herb Kelleher, Co-Founder and CEO of Southwest Airlines and prominent entrepreneur. Southwest Airlines had experienced a similar attack in the past. This triggered a warrior instinct that would drive them to become one of the most successful airlines in the country. Herb was excited by Jim’s research and encouraged Jim to share it with the world. This is the origin of The Innovation Stack.

How transformative innovation happens

If you were getting ready to travel, you’d probably pack a suitcase, your passport, some currency, electronics, etc. But what if you got dropped in the middle of the jungle instead? This is how Jim sets up transformative innovation. His thesis boils down to the idea that this class of innovation happens when there is nothing to follow—and yet people don’t die, they thrive.

“If you are in a situation where you are unable to copy what everybody else is doing, you are forced to survive using a different set of skills.”

Jim’s research showed him that this process of not dying had a repeatable pattern, what he calls an “innovation stack.”

For start-ups, this survival mindset is almost second nature. It can be a battle to keep your small business running at the best of times. However, this fighting instinct builds up a resilience within the company culture. When times do get tough (or the unexpected, like a pandemic, happens), start-ups with this entrepreneurial mentality are more willing to adapt to survive.

The common traits innovators share

So, should all businesses be innovating? According to Jim, innovation is the last resort. He suggests that it’s a far better choice to copy something that already works, rather than taking a risk to innovate something new.

Jim notes that there’s an inherent bravery when it comes to innovating. It’s about taking a leap that nobody can guide you through because you’re the first person to try.

“Occasionally, life is going to give you some opportunity to do something where you don't get to copy the solution. And at that moment, you have a choice. You can either say, ‘Well, I'm going to do it, and use this totally different skill set that I've never been trained to use’, or you’re going to choose to not do it. Even though nobody has done it before you, that doesn't mean you can't do it.”

Despite originally creating The Innovation Stack in comic book style, Jim believes that the innovators and businesses he studied aren’t heroes. These people who led their companies through great change are normal people. They just learned how to survive in the jungle.

To hear more of Jim’s thoughts on innovation, the entrepreneur mindset, and The Innovation Stack, listen to his conversation with Daniel Saks on the Decoding Digital podcast.

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