As the co-founder of Square, a company famous for retail point-of-sale software, Jim McKelvey is more attuned than most to the small-business carnage wrought by coronavirus.
“It’s really bad,” says McKelvey, who also serves as deputy chair of the St. Louis Fed. “What we are seeing now is unprecedented and absolutely terrifying—not just to businesses, but to people. We are seeing the disruption of lives at the most vulnerable levels.”
After much delay, Square and the other fintechs, including PayPal and Intuit, were finally given the green light last week to participate in the government’s Paycheck Protection Program. That would have allowed funds to get into businesses’ hands more quickly—but the approval came just before funds ran out, says McKelvey, who, in his role on the Fed, spoke with bankers this morning. “[They said] that all of the $350 million has been paid out, so the PPP program is currently without funding.”
The trouble with the first round is that the majority of funds went to companies that had existing relationships with banks, who prioritized their best customers, “as one would expect,” says McKelvey, “but the banks’ best customers are probably the least needy. So it was good to get this done, but the next round should be directed at more at-risk companies and individuals.”
McKelvey, whose book, The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time, hit shelves last month, took time out to talk to Chief Executive about the pandemic fallout, restarting the economy and why “innovation stack” companies fare best in volatile times.
You started Square in 2009, at the tail end of the last big recession. What’s the difference between that recession and this one?
Well, this one is self-imposed. The economy was doing very well. Markets were functioning, unemployment was low, everything was really healthy and we basically took a healthy economy and decided to voluntarily shut it down because of the health crisis. Now that was a good decision, and a smart decision. However, it’s unprecedented because if you look at most recessions, they occur for economic reasons. This is the equivalent of an induced coma. So yeah, you don’t want to be in a coma, being in a coma is terrible, but you could argue that if you had to be in a coma, better to be in one that your doctor voluntarily put you in for some therapeutic reason than to just be sort of an unresponsive piece of cabbage.
That analogy would indicate a better prognosis this go-round?
Right. But of course nobody knows. And I say that with the full gravity of saying, this is very serious economically–and of course medically. But we won’t know [the full extent] of what we’ve lost until we decide to wake the patient up.
And that debate is well under way—with one side arguing caution to save lives and the other arguing that too much delay could leave our economy in ruin. Which camp are you in?
So I donated $1 million last week to Washington University’s medical school for three programs working toward a vaccine. I am hoping desperately that the medical community—and I’m embarrassed that I only have money to give because I’m not a scientist—but those scientists are our greatest hope. And I believe we need to give them the time to be good scientists. That said, with my economist hat on, every day we’re losing businesses that will not reopen. And that’s terrifying because we don’t know how long we can keep the patient in a coma and still wake up.
For your book, The Innovation Stack, you researched dozens of companies, many of which either got started in, or survived through, very challenging times. What is “the innovation stack” and why are those kinds of companies best equipped to deal with crises like the one we’re in now?
The innovation stack is a series of interlocking inventions that come from solving a problem that hasn’t been solved before. So you start with a problem that does not have a known solution, which is really profound because most of the problems that we have in our lives have been solved by other people. For unsolved problems, we don’t have experts, we don’t have something that we can copy and because we can’t copy it, we are left to discover new solutions. The problem with those new solutions is that they tend to create new problems. So what happens—in these companies especially, but also just in general—is that you kind of solve the problem and then you create another problem, and that problem then requires the process to be repeated. In the cases that I profile in the book, certain companies create these innovation stacks where there are over a dozen independently derived different solutions that collectively create this business that is almost untouchable.
So these companies are creating solutions that then create problems that they then go on to solve?
Yes. And it’s this cascade of problems and some of them interlock with each other. So for instance, you know, the example I used at Square was that we had this mission of underwriting people who really didn’t have the necessary credit or credentials to participate in the credit card system—they just didn’t have the resumé. So all of a sudden, all the underwriting tools that the banks wanted us to use didn’t work. So we had to invent new underwriting tools. Well, inventing new underwriting tools meant inventing new signup, new customer service, new risk models, new ways of reaching our customers, new ways of communicating with them and all these things interrelated. And it was this big snarly mess of about 14 different inventions that collectively represented a totally different way of doing a new business. And that new business was created to solve a problem. In Square’s case, the original problem was illustrated by me and my friend Bob who were both artists who couldn’t sell our work because we couldn’t take credit cards.
How does the “innovation stack” insulate the company from hard times?
Let’s take the analogy of biodiversity. If you’ve only planted one crop and you get some bad weather, you could lose the whole crop. If you have 30 different little crops, some of them will actually thrive in the bad weather. Some plants like dry, some plants like hot, some plants like lots of water. If you plant enough, you will find resilience. Innovative companies, especially companies that have diverse innovation stacks, tend to benefit from that resilience. Innovation stack companies have fundamentally different customer relationships, pricing costs, employee relationships.
Plus, on top of that, they also tend to be more nimble and better able to adapt to quickly changing circumstances. So all of those things favor a company with an innovation stack in a moment of upheaval when normal processes and procedures fail. So you may have a perfectly sound successful company and then five things change at once that can kill a company that doesn’t have the ability to innovate quickly.
Is it possible that companies able to pivot could find unique opportunity in this environment?
Yeah, I mean, innovation stack companies by definition are more adept at handling the unknown. So in a world where everyone is suddenly thrown into an unknown state, they are gonna perform relatively better. Not that anyone would ever choose this. Nobody is high-fiving—except maybe Amazon and the people who make Purell are both ready to sponsor the next exotic animal food show—but a company that has an innovation stack is relatively better positioned and therefore these situations make them look better than everybody else.
How is Square adapting? You have all these customers who are not taking payments right now.
Well, look, our merchants are hurting and therefore Square is hurting. But in a crisis like this, the tools that Square builds are actually the stuff that’s helping. So yes, we have merchants who are suffering gravely and yes, many of our merchants will be put out of business by this no matter what we do. But we are also using our tools to bring them the loans the government is giving out and we are also giving them ways to adapt their businesses, sometimes within a day-to-day reality. And then we’re giving them free access to software. We’re also giving their customers Cash App so that the customers can actually function, because we’re talking about people here. So, I mean, it’s not rosy, but you know, a company like Square is—we’re getting it done. And our rails don’t crash 40 times like the SBA’s did last week. Oh—and we had a distributed workforce before it was cool.
So all your people are working remotely?
Yeah, but we’re working remotely really well. It’s not like all of a sudden we have to download Zoom and figure it out.
If Congress approves more funding for SBA loans and Square participates, will you be able to cut down the amount of time it takes for borrowers to get funds?
The process on Square’s side is less than a day, but we connect to other institutions—banks, the SBA—that may take longer. But Square’s side is lightning fast.
Could this change small-business lending going forward?
Absolutely. What you’re doing is you’re forcing systems that have been paper-based and relationship-based to be fairer and faster. You get rid of paper and it speeds things up. On top of that, there’s an inherent bias to these relationship-based financial systems. If it’s more automated, I think you’re going to see more fairness in the system.
Any optimistic last words for our readers?
Well, if I had to give some uplifting news, it would be that most of the world-class CEOs that I studied for the book were thrown into horrible situations and figured out how to thrive. They were not bold volunteers who went running into the burning city—they woke up in a burning city quite by accident. They were people who found themselves in a terrible situation and somehow figured out how to deal with it. That’s what we need to do.