How I Built This with Guy Raz

Square: Jim McKelvey. He Lost a $2,000 Sale, Then Built a $10 Billion Company

February 23, 2026

Key Takeaways Copied to clipboard!

  • Jim McKelvey's relentless drive stems from a personal tragedy—his mother's suicide—which instilled in him the necessity of taking action rather than remaining passive. 
  • Square's initial success hinged on a 'headphone jack hack' that bypassed Apple's strict hardware access rules by disguising the magnetic stripe reader's signal as audio. 
  • McKelvey used radical candor, presenting investors with a list of 140 reasons why Square might fail, to change the defensive tenor of VC pitches and build trust. 
  • Square's ability to withstand competition from giants like Amazon stemmed from building an 'innovation stack' of necessary, non-obvious components that competitors could not easily copy. 
  • Jim McKelvey consciously stepped away from day-to-day operations at Square after his son was born, believing in delegating roles to those more skilled in specific areas, a pattern he has followed with every successful company he started. 
  • Having achieved financial success, Jim McKelvey now focuses his efforts on tackling difficult, high-risk problems, such as drug testing inefficiency, viewing it as a responsibility enabled by his financial freedom. 

Segments

Early Life and Textbook Writing
Copied to clipboard!
(00:08:50)
  • Key Takeaway: Jim McKelvey wrote and published a computer science textbook as a freshman out of stubbornness to improve a poor course text.
  • Summary: McKelvey wrote ‘The Debugger’s Handbook’ from a student’s perspective to document tricks for fixing common programming mistakes in early, poorly implemented languages. He used a professor’s passcode on an expensive laser printer to create a professional-looking first draft, earning him a publisher and a reputation as a good engineer.
Balancing Art and IBM
Copied to clipboard!
(00:13:11)
  • Key Takeaway: McKelvey funded his early ventures by simultaneously working remotely for IBM and selling high-value glass art pieces.
  • Summary: After graduating, McKelvey became a glassblower, selling pieces for around $500 (earning him half), which subsidized his $1,000-a-day income from a temporary remote writing job at IBM in Los Angeles. He leveraged the flexibility of his IBM role to work in his glass studio during the day.
Trauma and Motivation Shift
Copied to clipboard!
(00:16:30)
  • Key Takeaway: The sudden suicide of his mother at age 24 fundamentally rewired McKelvey’s approach to life, driving him toward action and away from perceived mediocrity.
  • Summary: The trauma made him realize he could have done more to save his mother, leading to a commitment to never stand by when he feels something needs to be done. This event spurred him to quit his mediocre jobs (IBM, CD business, glassblowing) to focus on building a significant computer-related company.
Pivoting from Software to CD-ROMs
Copied to clipboard!
(00:24:31)
  • Key Takeaway: When Adobe Acrobat rendered his document imaging software (Mira) obsolete, McKelvey pivoted Mira into a profitable CD-ROM publishing service for trade show literature.
  • Summary: Observing the irony of companies handing out paper literature about going paperless at imaging trade shows, McKelvey charged competitors $10 per page to include their brochures on a CD-ROM created using his software. This new business model generated $70,000 in profit from the first trade show, despite the trade association actively suing to stop him.
Meeting Jack Dorsey
Copied to clipboard!
(00:28:05)
  • Key Takeaway: Jim McKelvey hired a 15-year-old Jack Dorsey after he helped the Mira team fix a last-minute CD-ROM production crisis.
  • Summary: Dorsey, the son of the coffee shop owner where Mira employees bought supplies, worked an all-nighter to help fix the project, impressing McKelvey with his consistent ability to over-deliver on increasingly difficult tasks. McKelvey recognized Dorsey’s potential, leading to him working at Mira before eventually co-founding Twitter.
The Birth of Square Idea
Copied to clipboard!
(00:36:37)
  • Key Takeaway: The concept for Square—a mobile credit card reader—was born from McKelvey losing a $2,000 sale because he couldn’t accept an American Express card.
  • Summary: McKelvey realized the iPhone, which he viewed as a magic device capable of anything, lacked the functionality to process credit cards, sparking the idea to turn it into a reader. He insisted on hardware to enable ‘card present’ transactions, which was necessary for merchants to avoid high chargeback risks associated with ‘card not present’ transactions.
Bypassing Apple and Regulators
Copied to clipboard!
(00:47:08)
  • Key Takeaway: Square circumvented Apple’s restrictive hardware access policies by routing the magnetic stripe data through the iPhone’s headphone jack, disguised as audio.
  • Summary: Apple would not permit hardware that drained the poor battery life of early iPhones via the dock connector, but the headphone jack offered a loophole. The initial prototype, made of brushed aluminum (not polished, to avoid offending Steve Jobs), worked by attenuating the magnetic stripe signal into a sound wave that the phone could decode.
Pitching with Radical Candor
Copied to clipboard!
(00:56:31)
  • Key Takeaway: McKelvey presented investors with a list of 140 reasons Square might fail to establish candor, which successfully shifted the pitch dynamic from defense to problem-solving collaboration.
  • Summary: By openly listing legitimate risks—including regulatory violations and potential attacks from competitors like Amazon—McKelvey disarmed VCs who were accustomed to entrepreneurs lying about projections. This transparency prompted investors to offer help on specific risks, such as leveraging board seats to ward off Amazon.
Valuation and Fixed Costs
Copied to clipboard!
(00:58:45)
  • Key Takeaway: Square required significant scale to cover high fixed costs before achieving profitability.
  • Summary: The discussion touched upon Square’s $45 million valuation early on. The company incurred substantial fixed costs, including many employees, necessitating a certain level of scale for the business model to function.
Lawsuit from Former Advisor
Copied to clipboard!
(01:00:11)
  • Key Takeaway: Square faced a six-year legal dispute with a former friend and advisor, Robert Morley, who claimed invention rights over the card reader.
  • Summary: A lawsuit arose from a professor Jim McKelvey had consulted, who claimed he invented the reader and was subsequently shut out of the business. McKelvey noted that the core concept was publicly described in a ‘Make Magazine’ issue prior to his consultation with the professor. The dispute was eventually settled, though it was stressful due to the prior friendship.
Stepping Away from Operations
Copied to clipboard!
(01:02:04)
  • Key Takeaway: Jim McKelvey prioritized fatherhood and delegated operational roles to professionals better suited for accounting and management.
  • Summary: By mid-2010, McKelvey felt Square had momentum and stepped away from being an officer to focus on being a father, recognizing he was not the best professional in areas like accounting. He has a history of leaving the day-to-day management of his successful startups to others who excel in running them.
Product-Market Fit Confirmation
Copied to clipboard!
(01:03:20)
  • Key Takeaway: True product-market fit for Square was realized when a taxi driver enthusiastically pitched the product to McKelvey, despite getting details wrong.
  • Summary: The moment Square became ‘real’ to McKelvey was witnessing a taxi driver in New Orleans passionately promoting the product to him, unaware he was the co-founder. This demonstrated the product’s magic unlock for small businesses, confirming its massive potential beyond the billion-dollar valuation milestone.
Board Role and Company Ecosystems
Copied to clipboard!
(01:04:20)
  • Key Takeaway: McKelvey remains on the board as the ‘voice of the merchant’ and champions the powerful synergy between Square and Cash App ecosystems.
  • Summary: McKelvey continues to serve on the board, maintaining a strong connection to small merchants. He views the combined Square and Cash App ecosystems as empowering, especially as the company works to integrate these consumer and merchant platforms.
Surviving Amazon’s Entry
Copied to clipboard!
(01:06:28)
  • Key Takeaway: Square survived Amazon’s cheaper entry into payments processing because Amazon only copied a few visible features, missing the 11 underlying innovations that formed Square’s protective stack.
  • Summary: When Amazon launched a cheaper payment processing product in 2014, Square’s strategy was to ignore the price war, as they lacked the balance sheet to compete on cost. Square’s success was attributed to inventing a deep ‘innovation stack’ of about 14 interconnected elements, only three of which Amazon copied, leaving the other 11 to defeat the competitor.
Post-Square Focus and Philanthropy
Copied to clipboard!
(01:10:12)
  • Key Takeaway: McKelvey now uses his resources to tackle problems requiring high risk, such as lowering the prohibitive cost of drug testing to increase life-saving research.
  • Summary: Having achieved significant wealth, McKelvey is giving his money away and seeks out problems that are unsolvable without the ability to walk away from large buyouts or take extreme risks. His current focus is on drug testing, aiming to reduce the multi-million dollar cost per test to increase the number of ‘shots on goal’ for new life-saving compounds.
Luck Versus Hard Work
Copied to clipboard!
(01:12:48)
  • Key Takeaway: McKelvey attributes his success heavily to luck and would not alter his past, even painful events, due to the risk of disrupting the chain of events that led to his current life.
  • Summary: McKelvey states he has been incredibly lucky throughout his life. He would not use a time machine to change anything, including saving his mother, because altering the past is too dangerous and might negate the luck that led to his current position. Since money is no longer a motivation, he feels compelled to keep starting new things.