Hey there. It's financial expert, Nicole Lappin. And I'm Magnify, your AI investing assistant. We're working together on this new podcast, Money Assistant, where we talk to people about their money problems and then help them create an actionable plan to solve them. If we take a look at how that will impact future Paola. She will be dead free in under six years and have a million dollars in retirement. How does that sound? Wait, what? Meet Money Assistant, premiering September fourth, wherever you got your favorite podcast.

I'm.

Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. We're often told that imitation is the most sincere form of flattery. But let's be honest, everyone hates a copycat. Well, everyone except to my guest today, Jim McKelvy. Jim created the product Square, alongside his co-founder, Jack Dorsey. Square is a payment tool that has been a real game-changer for small businesses. You probably made a purchase through Square even if you didn't realize it at the time. And when Jim and Jack started Square, they did the unthinkable. They beat Amazon. In the early days of Square, Amazon made a competing tool, which in the case of most small businesses competing with the bohemist, means the beginning of the end. But not for Square. Jim and Jack beat Amazon. And today, Jim explains how they did it through what Jim calls Innovations Jack. Jim McAlfe, welcome to.

Money Rehab. Hey, Nicole. Thank you for having me.

You have written so much about an awesome phenomenon that you call Innovation Stack. You say it's an asset that Square used to beat what you call the scariest monster on the planet. Who is the scariest monster on the planet?

Well, if you're a startup, it's Amazon. And when Amazon decides that they want to take over your business while you're still a startup, they usually win. As a matter of fact, they always win. At least that was true in 2014 when Amazon came after Square. And a year later, we won. And that was fantastic. But it was also this thing that bothered me because I couldn't explain why. So it set me on a two year quest to figure out if that same thing had happened to other companies because I couldn't find any. Like when Amazon attacked us, we looked for other companies that had beaten Amazon because we wanted to copy what they were doing. But there were none.

Can you explain to us what you call the innovation stack?

Sure. So we asked ourselves, well, what can we do to beat back Amazon? The answer was terrifying, which is there was really nothing for us to do, which was what made the victory so much more surprising. And so to explain this phenomenon, what I did was I looked at history and I went back starting about a thousand years and just looked for other examples of these tiny little entities that had been attacked by much, much more powerful forces.

Like a David and Goliath situation.

Yeah, I was looking for David and Goliath throughout history and just to see if I could find a parallel to Square. I not only found a parallel, but I found a pattern. And the pattern always involved this thing, and I coined the term Innovations DataX because it had never been described. I studied Southwestern Alliance. I studied a bunch of banks. I studied, well, actually the history of banking is a perfect analogy to what happened at Square. And the same pattern always emerged, which was that for one reason or another, the underdog wasn't allowed to copy. There was something that prevented them from copying what everybody else was doing. And when you're not allowed to copy, you're forced to invent, you're forced to innovate. And that when I say forced, I mean it like, innovation is this thing that we're taught that we should always be doing. I think that's terribly bad advice. Let's just like, do not innovate. It is this messy thing. You solve a problem for the first time in human history. You're going to have to do not one, not two, not three. We don't know how many things. In Square's case it was 14.

In Southwest Airlines case it was 25. You don't know how many things you're going to have to do differently. I mean, take Tesla right now. Tesla is making motor cars. They're doing probably 40 things that are completely unique. Just look at the capacitors that are putting on the drive train, they're just doing new stuff. And if you don't do all that, you're likely to not have a car that's as good. So this innovation stack is this mess that arrives by solving a problem for the first time.

And that's what you were on the forefront of trying to do with Square.

That's what happened. We were just trying to fix this problem. The problem was small merchants couldn't get paid. And at the time I was a small merchant. So I was like, I'm pissed off. I need to fix this. I'm a glass artist, and I made this thing and I tried to sell it, and I couldn't sell it. I got pissed off because the lady had an American Express card, which had plenty of money on it. I just couldn't take the money. That set me off. And I called Jack and Jack and I decided we'd basically build a solution for me because I was a test case. And we didn't know if there was anybody like me. But then we found a flower vendor in front of Jack's apartment in San Francisco, and she wanted to get paid more for her flowers. And people didn't always have cash. So we built a little reader for her. And then the next guy was a stunt pilot. And pretty soon we had millions of people using this. But in the beginning, we were simply solving a problem for me, and that was the focus.

You talk about at least 14 elements of Square's Innovation Stack. So it's statistically very complicated for a competitor to replicate such a business. So if an entrepreneur thinks the lesson is that you need a complicated business with lots of elements to be successful, how would you correct them?

Oh, yeah. And thank you for reading in detail. I can just tell you read the book at a pretty high level of detail if you caught one of the one of the more subtle facts, which is that the math of an innovation stack, if you have a complicated one protects you very, very well. And I'll explain the math for people who are not going to read it very simply. If you do 14 things and every one of those things is necessary for success, then what are the odds of a competitor successfully copying you? And the answer is it's the chance of success to the 14th power. And so it's like take some easy math. Let's do it in our heads. Let's say a company has a 90 % chance of doing something right, which is very, very high. But let's say Amazon is 90 % chance. If they have to copy two things, that goes down to 82 %. And every time you drop another % off that total, pretty soon you're down in the single digits where even a mighty Amazon is not likely to succeed. So that's why having complicated innovation stacks is great.

But that's not to say that should be your goal. I'll give you an example. It's coming on dinner time in a couple of hours I'm going to eat dinner. I don't want any innovation in my dinner tonight. I don't want to go out and say, oh, I found this plant growing in the park, and I decided to cut it up to see if it's good to eat. I don't want any innovation. Food is a solved problem in my world. I want to copy what everyone else has figured out. Now it doesn't mean I've eaten everything in the world, but it just means that somebody else has before me. I'm pretty sure.

Yeah. You don't need to gamify it. You don't need to do anything interesting. You just need sustenance. I think about this a lot with personal finance. I don't want my money to do fun, sexy things. I just want it to be steady.

And safe. Yeah. If your money is doing sexy things, you're probably regretting what just happened to FTX. You are probably in a world of hurt when something goes wrong, because generally, innovation is bad. And I say that having written a book on innovation and dedicating my career to new things, I will tell you that birthing new things is deeply unpleasant, and it's probably a last resort. If you can copy, copy. But if you can't, then you need to innovate. And the problem, Nicole, is that we've been fed this lie. And the lie is that we should always be innovating and that innovating is cool. And if you're doing something cool, you should feel cool. Well, if you're actually doing innovation the right way, if you're doing it the way that all the companies that I've seen do it, it's a horribly painful process. There's a lot of failure. There's a lot of self doubt. There's almost no positive feedback because you're looking from... You get positive feedback when the rest of the world says, oh, yeah, good job. Well, the reason they're saying good job is because they all know what the formula is and you're following the formula.

Well, if there's no formula, if you're doing something for the first time, then you get no positive feedback. So innovation is this painful process, but I believe it's something that we should all be prepared to do a couple of times in our lives. And if you end up in a situation where you have a problem that you can't look up some YouTube video on and you can't just copy the solution from some expert, you're in that situation. You say, I want to fix this, and I don't know how to do it, and neither does anybody else. Okay, your last resort is innovation. And if you take that step, it's going to feel really weird. And if you read my book, you will understand how that weirdness feels.

I'm in the thick of starting a new company right now. Can you walk me through how to start working Innovations Stack into how I think about my biz dev?

Yes. So the first question is, ask yourself, does anybody else know how to do what I'm doing? So what's the company? And tell me, is this a secret thing?

No, it's existing right now. It's the CNBC for podcasting. So it's a money and business focused.

Podcast network. Well, I mean, I would say this. If it's just a podcast, there are thousands of them you can copy from the best. If it's a podcast network, now you're into a world where there are not that many good models of podcast networks. There are a few. And the question is, are you going to copy what everybody else is doing? And should you? And the answer is probably yes. You should probably copy if there's other successful podcast networks that are similar. And since you use CNBC as an analogy, I would say, okay, what is CNBC done? Copy that and apply it to you. The question is this, what problem are you solving? Like, okay, you're going to make this podcast network. I don't care about podcast networks. I care about good content in podcasts. I care about finding the podcast. I care about access. But the network is this thing that may give it to me or may not. But what I care about is the actual content on the other side. So you would have to identify a problem and then focusing on that problem, be willing if necessary to build something new.

But don't be eager to build it. Don't try to build something new. If there's a solution out there for God's sake, copy it, innovate is the last resort, but then be willing to do that if necessary.

Yeah. There's no massive innovation. We're not making a wheel for the first time.

Well, then you're likely to succeed.

Great.

The odds of succeeding from a copy strategy are very, very high, because if you don't know how to do something, you could find somebody who does. The odds of succeeding with innovation are very low, because if you don't know how to do something, you better figure it out because nobody else knows either. So it's a tougher road to be an innovator.

Hold onto your wallets. Money Rehab will be right back. And now for some more money rehab. So do you think competing with Amazon made Square better?

No, I don't. I don't think it changed just a bit. It's a great question because normally it would. So normally if you have two companies that are in competition, we're used to thinking of that competition as breeding excellence, right? So that's why you want to live in a competitive environment because it forces you to be better. In Square's case, we weren't doing anything that we weren't already doing after Amazon attacked us. So there was no net new behavior. So the question is, why is that? How does that occur? And the answer is Square was in this fairly unique position. And I say fairly unique because most businesses copy a known model. So they will do what everybody else knows should be done, and they'll largely synchronized with the other companies, i. E, their competitors. In Square's case, we had no competitors. We had no company that was doing what we were doing. Now we had Amazon come in and try to copy Square, but that's much different than another viable company competing with us. I mean, Amazon was just subsidizing what they were offering. And eventually they dropped the subsidy and the.

Thing died. So essentially they were losing money to try and kill Square.

Oh, well, Amazon always does that. That's part of their strategy. I mean, what Amazon will do if they want to take over market, at least this was true when I studied them, they'll cut the price by 30 %, add the Amazon brand name and just watch the competitor die because most companies don't have 30 % margin. So if Amazon undercuts you by 30 %, then they may be losing money, but they have more money than you do. And you eventually bleed out your death. And this has happened to dozens and dozens of companies that Amazon's attacked. In Square's case, Amazon was the one that relented, and that's why there's a book. I was just doing this research for me, trying to go, okay, I figured out writing a book is excruciating, at least it was for me.

It is excruciating. I can tell you doing it four times and having six more on the way. Yes, it's a painful birth.

And if you've done six books and for me, I rewrote my book eight times before I published it, I mean, that's 50 iterations. That's 50 full rewrites if you're as bad as I am.

I find it very fun that it's on Amazon.

The irony. Well, I'll tell you something. I don't hate Amazon because when they got out of competing with Square, they mailed all their soon to be former customers, one of our products. They basically said, we're out of the business, and they took all of the customers that they had accumulated and they gave them to us and said, great, we're out.

So let's say they never waved the white flag, so to speak, and they tirelessly worked to replicate Square and did it. What would the strategy have been for Square in that case? Or what's the lesson for entrepreneurs there?

So I don't know exactly I can only speculate. But my guess is that we would have come to this duopolistic truth where they couldn't steal our customers and we couldn't steal their customers and our prices started to converge around the same numbers. And they hire some of our employees and we'd hire some of theirs. So we had cross pollination of ideas and they'd have some advantages and we'd have other advantages and we'd try to lean into those and eventually differentiate the products somewhat. But that would have been that would have been brutal, both for us and for Amazon. For Amazon to copy their way into doing what Square was doing would have cost them almost as much effort as we spent. And in our case, it took us four years to get to where we were in 2014.

So you're now on the board of Block, which long story short for listeners, Block is the name of the company that was formerly known as Square. The product Square still has the same name, right? Only the operating company has the new name. So Block has acquired a lot of companies, mostly, of course, in the payments space. When you're vetting a company that Block might require, do you examine the company through the lens of Innovation Stack?

I do. I mean, I look at that because that to me, if you can buy a company that's got an innovation stack, you have bought this massive protection. In most cases, it's not true. Very few companies have these things. The typical company has something that looks like an innovation stack, but everybody else knows what it is. So there are 15 other to competitors that are doing the same playbook and they're all basically getting the same results. But if you can find a company that is doing something, solving a problem uniquely and using an innovation stack, then you buy that company. And I mean, you just buy it. You don't just go out and get their stock if you see it, because it is it is one of the surest bets in investing is that this thing is going to be a money machine. At least in all my research has always happened.

What I think is also cool about Jack too and you have these different backgrounds in art. I think he was a massage therapist for a while and made dresses or skirts or something. And so you don't need to have your MBA and your background in this to do this?

No, you don't. That's one of the interesting things back to the subject of innovation. If you're doing something for the first time, you will feel unqualified to do it. And the answer is you are. But the better answer is everybody, every human on the planet is unqualified to do something the first time. So the Wright brothers flew the first airplane. Were either of them qualified? Of course not. They weren't trained. They didn't have to read 500 pages like I have to do to become qualified. That's not the game we were playing. If you're an innovator, get over this idea of being qualified. And don't let the fact that your whole life you've waited to be qualified before attempting a task to be the reason you don't try something new.

Okay. How about one tip you can take straight to the bank? One financial tip?

This is a big one. I would eliminate any recurring costs, subscriptions or things you have to pay for if you don't use. And I do this over the course of the year. I'm like, oh, I'll subscribe to that and I'll sign up for this and I'll give you 10 bucks a month. And then in January, I just shut it all down.

So don't sign up for Netflix?

Well, I mean, you can sign up for Netflix, explicitly do it. If you sign up for Netflix and Hulu and Peacock and HBO Max and Disney Plus, do you really need all of them? I don't want to knock anybody's product. Frankly, I love Netflix. But if you don't love it, quit it.

Money Rehab is a production of Money News Network. I'm your host, Nicole Lapin. Moneyrehab's executive producer is Morgan LaVoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab@moneynewsnetwork. Com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram @moneynews and TikTok @moneynewsnetwork for exclusive video content. And lastly, thank you. Seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make. Hey there, it's financial expert, Nicole Lappin, and I'm Magnify, your AI Investing Assistant. We're working together on this new podcast, Money Assistant, where we talk to people about their money problems and then help them create an actionable plan to solve them. If we take a look at how that will impact future Paola, she will be dead free in under six years and have a million dollars in retirement. How does that sound? Wait, what? Meet Money Assistant, premiering September fourth, wherever you get your favorite podcasts.