Mark: ‘The customer is always right.’ It's the first rule of business, right? Well, what if the most successful innovators built their empires by focusing on customers who didn't even exist yet? And what if their secret weapon was a series of 'crazy' ideas nobody asked for? Michelle: Customers who don't exist? That sounds like a recipe for bankruptcy, Mark. You’re telling me the path to success is to ignore the people paying you and build things for imaginary friends? Mark: It sounds absurd, but that's the provocative heart of the book we're diving into today: Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time by Jim McKelvey. Michelle: And this isn't just theory. McKelvey is the co-founder of Square. He lived this. He literally went head-to-head with Amazon and survived, which is what prompted him to figure out why. It’s a story born from a near-death experience. Mark: Exactly. He wasn't just a business guy either; he’s an accomplished glass artist and inventor. His card reader design is even in the Museum of Modern Art. That blend of art and engineering is all over this book. He starts by challenging the very definition of an entrepreneur. Michelle: I’m intrigued. Most business books tell you to follow a formula. This one seems to be saying the formula is to have no formula at all.

Mark: That’s a perfect way to put it. McKelvey uses this brilliant analogy of a 'walled city.' Inside the walls, it's safe. There are established rules, proven business models, and experts who can tell you exactly what to do. This is the world of normal business. You copy what works. Michelle: Right, like opening a coffee shop. You can look at what Starbucks does, find a good location, use the same suppliers for your cups, hire an experienced barista. There's a playbook. Mark: Precisely. And that’s a perfectly sane way to run a business. But McKelvey says a true entrepreneur is someone who decides to leave the city. They walk out into the wilderness where there are no maps, no rules, and a very real chance of becoming, as he puts it, "either an entrepreneur or a corpse." Michelle: Okay, but why would anyone do that? It sounds less like a business strategy and more like a diagnosis. What drives someone to abandon the safety of the city walls? Mark: It’s not the pursuit of a brilliant idea. It’s the obsession with what he calls a "perfect problem." A perfect problem is an issue that is currently unsolved, but that you, for some reason, have the power and the courage to fix. It’s a problem that just bothers you. Michelle: So it’s less about being a genius and more about being deeply, personally annoyed by something? Mark: Exactly. He tells this great personal story. Early in his career, he wanted to learn from successful businesspeople. So he’d go to their speeches in St. Louis and offer them a free ride to the airport afterward, just to pick their brains. Michelle: That’s clever. A captive audience. Mark: But he found that their advice was useless for him. They could tell him how to navigate the known world inside the city walls—how to optimize, how to manage, how to compete. But when he asked about the new, unsolved problems he was facing in his own ventures, they had nothing. Their maps were blank where he was walking. Michelle: Because they were businesspeople, not explorers. Mark: That’s the distinction. The entrepreneur is an explorer. And the journey starts with a perfect problem. For Square, that problem was embodied by his friend, a glassblower named Bob. Bob was a brilliant artist, but he was constantly broke. One day, he lost a $2,000 sale for a custom glass faucet because the customer only had an American Express card, and Bob, as a tiny merchant, couldn't get an AmEx account. The system had excluded him. Michelle: Ah, and that’s the perfect problem. It’s not some abstract market opportunity. It’s a real, tangible injustice. Your talented friend can't make a living because of a stupid, arbitrary rule. That would make you angry. Mark: It made McKelvey furious. And that's the fuel. He realized the world of payments was built for big companies, not for the millions of "Bobs" out there. The problem wasn't "how do we make a better credit card machine?" The problem was "how do we let Bob sell his art?" To solve that, he had to leave the walled city. Michelle: Okay, so you leave the city, fueled by righteous anger for Bob. You're in the wilderness. Now what? How do you survive, especially when a predator—a very, very big predator—shows up and decides it wants you for lunch?

Mark: And that is the perfect transition to the book's biggest idea: the Innovation Stack. This is what you build in the wilderness. It’s your shelter, your weapon, and your map, all rolled into one. But you don't build it according to a blueprint. Michelle: Wait, so it's not a strategy? What is it then? Mark: It's a chain reaction. It’s a series of interlocking, independent inventions that you are forced to create because you're solving a problem nobody has solved before. You solve the first problem—letting Bob take a credit card on his phone. But that creates a new problem: how do you get approval from the credit card networks, whose rules forbid what you're doing? Michelle: Okay, so you have to invent a new way to partner with them. Mark: Right. And once you solve that, you face another problem: fraud. How do you prevent criminals from using your new, open system? So you have to invent a new fraud detection model. And then another problem: hardware. You need a physical reader, but you want it to be cheap, or even free. So you have to invent a new manufacturing process. Michelle: I see. It's like a domino effect of problem-solving. Each solution creates the next problem you have to solve. Mark: Exactly. And at the end of this chain, you look back and you've created not one innovation, but a whole stack of them. For Square, it was fourteen distinct innovations. Things like: simple, transparent pricing at 2.75%. No contracts or monthly fees. Free, elegant hardware. A beautiful, simple software interface. Next-day deposits. Each one was a solution to a problem they encountered. Michelle: And you're saying that stack is what protects you? Mark: It becomes an accidental fortress. And this brings us to the ultimate test. In 2014, Amazon—the company that McKelvey calls "the perfect predator"—decided to enter their market. Michelle: Oh, that’s the kiss of death for a startup. I remember the stories about them crushing Diapers.com. They just bleed you dry. Mark: They did exactly what you’d expect. They copied Square's little white card reader, launched their own product called Amazon Register, undercut Square's price by nearly 30%, and offered 24/7 live customer support, which Square didn't have. The board at Square was terrified. Michelle: I would be. So what was Square’s big counter-move? Did they slash their prices? Launch a massive marketing campaign? Add a bunch of new features? Mark: They did nothing. Michelle: Come on. Nothing? Mark: Precisely nothing. They didn't change their price. They didn't change their product. They just kept doing what they were already doing. For over a year, Amazon relentlessly attacked them. And Square just... kept going. Michelle: That makes no sense. How do you survive an attack from the most dominant company on the planet by doing nothing? Mark: Because Amazon made a classic mistake. They thought they were competing against a product—a little white square. They could copy that. But they weren't competing against a product. They were competing against an Innovation Stack. Michelle: Explain that. What couldn't they copy? Mark: They could copy the hardware, sure. But could they copy Square's fraud model, which was built on years of data from serving merchants no one else would touch? Could they copy the elegant, simple user experience that was baked into the company's DNA? Could they replicate the trust Square had built with its merchants by having no hidden fees? Could they copy all fourteen interlocking pieces and make them work together seamlessly? Michelle: Huh. It's like they could steal a single brick from the fortress, but they couldn't replicate the entire structure, with its weird tunnels and hidden defenses that were all interconnected. Mark: That's the perfect analogy. The probability of a competitor successfully copying every single one of the fourteen elements of the stack was, by McKelvey's calculation, about 4%. Amazon is brilliant at copying, but they couldn't copy the whole system. And so, on Halloween 2015, Amazon quietly discontinued their product. They even sent their remaining customers a free Square reader. Michelle: Wow. They didn't just lose; they surrendered and sent reinforcements to the other side. That's incredible. But it raises a bigger question. Who was this fortress even for? It defended against Amazon, but who was it built to serve in the first place?

Mark: And that, Michelle, is the most profound insight in the book. The fortress wasn't primarily built to keep competitors out. It was built to let new people in. McKelvey challenges the whole Silicon Valley obsession with "disruption." Michelle: Oh, I know that word. Every startup pitch is about "disrupting" an industry. It sounds so aggressive, like you're a wrecking ball. Mark: McKelvey argues that focusing on disruption is a trap. When you focus on destroying the old thing, you end up looking at it so much that you start to copy it. The ball goes where you look. He says great entrepreneurs don't focus on the existing market. They focus on what he calls the "invisible army." Michelle: The invisible army? Who are they? Mark: They are the people who are completely excluded from the current market. For Square, it was the millions of Bobs—the craft fair artisans, the food truck owners, the piano teachers—who couldn't get a traditional merchant account. They were invisible to the big banks and credit card companies. They didn't show up in any market research because they weren't customers yet. Michelle: So you're not stealing customers from your competitors. You're creating customers that never existed before. Mark: Exactly! It’s not a zero-sum game. You're not taking a slice of the pie; you're baking a completely new, much bigger pie. He gives the example of Southwest Airlines. When they started flying in Texas with super low fares, they weren't just stealing business travelers from other airlines. Their main competitor, as their CEO Herb Kelleher said, was the automobile. They were getting people who would have driven to fly instead. Michelle: And what happened to the market? Mark: It exploded. In the cities Southwest entered, total air traffic would often triple or quadruple. And here's the crazy part: the incumbent airlines, the ones Southwest was supposedly "disrupting," often saw their own passenger numbers go up on those routes because the market itself had grown so much. Michelle: That completely flips the script on competition. The same thing happened with IKEA, right? The book mentions that when they entered South Korea, the local furniture companies were terrified. Mark: They were. But the year IKEA arrived, the entire South Korean furniture market, which had been flat for decades, grew by 7%. The local competitors saw their sales increase. IKEA created a new generation of furniture buyers. They served the invisible army of people who thought well-designed furniture was out of their reach. Michelle: This all sounds incredibly inspiring. But I have to ask the question some critics have raised. Is this a bit of a "startup fairytale"? It's a great story for Jim McKelvey, a well-connected guy in Silicon Valley. Does this model of finding a "perfect problem" and building a stack work for everyone, or is it just survivorship bias? Mark: That's a fair critique, and he addresses it. He argues the pattern holds across different industries and eras, from the Bank of Italy in the early 1900s, which served immigrants nobody else would lend to, to Southwest in the 70s, to IKEA. The common thread isn't money or connections. It's the willingness to serve an ignored group and the stubbornness to invent your way through the problems that arise from that choice.

Michelle: So, if there's one big idea to take away from all of this, what is it? It feels like it’s about more than just business. Mark: I think it is. The core idea is that true, world-changing innovation isn't about a single, brilliant 'aha!' moment. It's a messy, stubborn, and often desperate process of solving one problem after another. It’s a grind. But if you anchor that grind in a problem that truly matters—especially a problem that affects people who are being ignored—you don't just build a product. You build an interlocking system, an Innovation Stack, that becomes your greatest defense and your most profound contribution. Michelle: It really changes how you look at problems. They're not just obstacles to be avoided. They are the raw material. They're the starting point for... well, for everything. You can't build a stack without a problem that forces you to invent. Mark: And the beauty of the model is that it scales down. You don't have to be building the next Square. McKelvey tells a funny story about a dad who solved his son's public tantrum problem by forming a "Tantrum Rating Committee" of random mall-goers to critique the performance. The kid was so mortified he never did it again. That's a tiny, brilliant innovation stack. Michelle: That’s hilarious and so true. It leaves me with a final question, for myself and for our listeners. What's the 'perfect problem' in my own life or work that I've been ignoring because the solution isn't obvious or easy? Mark: A question worth pondering. This is Aibrary, signing off.