Introduction

I recently read a fascinating book by Jim McKelvey called “The Innovation Stack”. It is about the origin story of “Square” - the “payments startup”. Although this book is the story of Square, it is actually much more - part philosophy, part biography, part business book.

Here is my summary of it.

Entrepreneurship is different from building a business

The author says building a traditional business is not entrepreneurship. He talks of entrepreneurs as “rebels”, “explorers” and “risk-takers” who go deep into uncharted territory - a concept he calls “beyond the safety of the walled city”

One of the major milestones of entrepreneurship is the moment when you say, “So that’s why no one’s done this before.”

Traditional businesses differ from the entrepreneurship world because the formula for winning in existing markets is: Copy what everyone else does.

What exactly are “Innovation stacks”?

Having established this basic definition of an entrepreneur, it becomes easy to define an innovation stack

As an entrepreneur, you usually begin the journey in an area where there is no market. In this new market, you will have to try something truly new. This will inevitably force you to solve a series of problems and the solution to one problem leads to another problem or many problems. This “problem-solution-problems” cycle continues on and in the end, you will have a series of independent and interlocking inventions, which is an Innovation Stack. Or you will have failed.

For this reason, you cannot conceive or build an innovation stack, it has to evolve as you dive deeper into the problem space. Combining this Innovation Stack with your advantage of being the first-mover creates a world-changing solution.

Typically, Innovation Stacks tend to evolve unseen, hidden within small companies that someday become giants.

How to come up with your own “Innovation stack”?

Problem selection

Coming up with an Innovation Stack begins by choosing to solve a problem that nobody has solved before. In fact you should choose a problem where invention is the only solution.

This is easier said than done; it is more of an art and needs to be combined with your own life’s lessons. Much of how to do this cannot be taught beyond saying you would do well to remember the Serenity prayer at this point in time.

God grant me the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference…

Note that the “Wisdom to know the difference” only comes from repeated failures.

Understanding the market vs expanding the market

Life is easier when you serve the upper parts of the market, which are already established. As you seek your problem space, at some point, the market just ends. This is also the point where entrepreneurship begins and is the prime real-estate for the innovation stack to germinate.

Experimentation, Innovation, and control

As an entrepreneur, you must be willing to do what is right for the product, even if the broader industry is not ready for it yet. This means that it is important to control every aspect of your product.

It is not easy, however, as the early days call for rapid experimentation and innovation. Sometimes, You have to do only the absolute minimum amount of invention that allows you to survive.

Sometimes this means doing seemingly impossible things.

Connecting our software with the financial system was like sewing Kevlar to toilet paper

‐ Jim McKelvey, The Innovation Stack

In fact, being forced to invent creates an environment where new ideas could be born and evolve rapidly.

Necessity mothers invention. You don’t plan to innovate, you don’t want to innovate, you don’t aspire to innovate, you have to innovate. It begins by putting yourself in a situation where innovation is the only alternative.

‐ Jim McKelvey, The Innovation Stack

Square’s Innovation Stack

This is the most interesting part of the book, where you get to see the innovation stack in action. Below is the list of innovations that are part of Square’s innovation stack:

• Simplicity.
• Free Sign-Up
• Free is a magic price: you never have to explain free
• Cheap Hardware
• No Contracts
• No Live Support.
• Beautiful Software
• Beautiful Hardware
• Fast Settlement
• Net Settlement
• Low Price
• No Advertising.
• Online Sign-Up
• New Fraud Modeling: fight fraud using data science and game theory.
• Balance Sheet Accountability

If we reword the above list as a paragraph instead of a series of unrelated bullet points, we will see how this is actually a stack of innovations built on top of one other:

We want to allow millions of small businesses to accept credit cards for the first time, so we have to make it easy to sign up. We need easy sign-up, so we have to design simple software and eliminate paper contracts. We have millions of people signing up, so we have to keep our customer service costs down. We need to keep customer service costs down, so we have to have simple pricing, and net settlements, and no hidden fees, and no paper contracts. We need to have a low price, so we have to save money on advertising, so we have to have an amazing product, and hardware so cool that people talk about it, and a product that they can explain without our help.

‐ Jim McKelvey, The Innovation Stack

The solution to one problem leads to another which leads to another until eventually, you have the winning combination.

How does the “innovation stack” prevent competition?

Here’s the thing - every new company will eventually have fierce competition from copy-cats, who will attempt to copy your innovation stack. But this is easier said than done. The various blocks in the innovation stack are tightly integrated. Each block only works in conjunction with all the others. The entire Stack fails if one block is missing. The competition would have to copy them all successfully in order to win. The math involved in doing that gets very complicated.

Let’s say that a company has an 80 percent chance of copying any one of the elements successfully. So, with one element, it’s at 80 percent. To get two elements right, there is a 64 percent chance. And only a 51 percent chance of copying three correctly and so on… You see where this is going. The chances of copying all fourteen of these elements (0.8¹⁴) is about 4 percent.

So, the tougher the problem, the deeper the stack, which means the tougher it is for the competition.

Quotable quotes and witty quips

This book would have felt like any other business book, except that it is filled with so many quotes that make you go “why hasn’t anybody thought of it like this before” or “why hasn’t anybody said it like this before”.

Here are some that stood out to me:

Luck never feels like luck if you were working hard when you happened to get lucky

Caring about something is an audacious source of energy.

Change and innovation occur at constantly increasing rates. Once we become used to a rate of change, we are already thinking too slowly.

The book is not just full of serious corporate verbiage, but also is very funny at times. There are so many witty quips that make you want to clap, laugh and salute the author at the same time.

Some noteworthy ones are:

If you want to ruin the leather seats on a corporate jet, just tell the occupants that Amazon has decided to enter their market.

History is basically selection bias in written form.

Right feels early. If the timing feels right, you are probably too late.

Copying is nature’s answer to entropy.

Conclusion

I enjoyed reading this book. Wouldn’t it be wonderful if every founder should write a book like this - filled with details that are not known to the outsiders, with amazing insights, with brilliant ideas, and words from the heart!