In 2010, the burgeoning mobile payments company Square, co-founded by Jack Dorsey and Jim McKelvey, faced an existential threat from the most formidable competitor imaginable: Amazon. The e-commerce giant launched a direct copy of Square’s signature credit card reader, offered it for a lower price, and leveraged its colossal brand to siphon away customers. By all conventional business logic, Square should have been extinguished. Instead, it thrived, forcing Amazon to retreat from the market just two years later. The secret to Square’s survival wasn’t its visible hardware, but a hidden, interlocking chain of process innovations—a concept McKelvey would later christen the “Innovation Stack”—that created a business model so unique and resilient that even a titan like Amazon could not replicate it.
What is the Innovation Stack?
The Innovation Stack is not a single brilliant idea, but a collection of interdependent innovations that combine to form a new, cohesive, and powerful business model. It is a strategy born of necessity, not foresight. Entrepreneurs don’t sit down and design an Innovation Stack from scratch; they build it piece by piece, solving one unprecedented problem after another until they have created something entirely new.
Think of it as a chain. A single innovative link—like Square’s card reader—is interesting but ultimately fragile and easy for a competitor to break or copy. However, when that link is connected to another (simple pricing), and another (instant onboarding), and another (a new risk model), the result is a chain of immense strength. The entire system becomes the product, and its complexity serves as a powerful defense.
This stands in stark contrast to the typical startup strategy, which often involves copying a proven business model and applying it to a new market or adding a minor feature. The Innovation Stack is for true pioneers who are addressing a problem that has no existing solution, forcing them to invent not just a product, but also the entire ecosystem required to support it.
The Birth of the Stack: The Square vs. Amazon Story
To fully grasp the power of this concept, one must understand the crucible in which it was forged. The story of Square is the quintessential case study of an Innovation Stack built under fire.
The Problem: A Lost Sale
The journey began not in a Silicon Valley boardroom, but in a St. Louis art studio. Jim McKelvey, a successful glass artist, lost a potential $2,000 sale because he was unable to accept an American Express card. He realized that millions of other small merchants—plumbers, artists, food truck owners—were effectively locked out of the digital economy by the high costs and complexity of traditional credit card processing systems.
The established financial industry saw these small businesses as too risky and too insignificant to serve properly. This was the “perfect problem”: a real pain point for a large, underserved community that incumbents were actively ignoring.
The First Invention: The Square Reader
McKelvey took this problem to his friend, Jack Dorsey, who was then the CEO of Twitter. Together, they developed an elegant first solution: a small, white plastic reader that plugged into the audio jack of a smartphone, turning it into a point-of-sale terminal. This was the visible, headline-grabbing invention that put Square on the map.
It was simple, accessible, and solved the most immediate part of the problem. For a time, this single piece of hardware was the company’s identity. But its simplicity was also its greatest vulnerability.
Enter the Goliath: Amazon’s Attack
In 2014, Amazon decided to enter the market. It launched “Amazon Register,” a service featuring a nearly identical card reader. Amazon then leveraged its immense scale to undercut Square on price, offering a lower transaction fee to merchants who signed up early. With its globally recognized brand, massive marketing budget, and reputation for logistical excellence, Amazon appeared unstoppable.
The financial press and industry analysts largely wrote Square’s obituary. How could a small startup possibly compete with a company that had perfected the art of dominating markets?
Why Square Survived: The Hidden Innovations
Square didn’t just survive; it flourished. The reason was that Amazon had only copied the first, most obvious link in the chain. It failed to see—or chose not to replicate—the entire Innovation Stack that Square had painstakingly built around its reader. This hidden stack included several non-obvious but critical components.
First was simple, transparent pricing. Square offered a flat 2.75% fee for all transactions. This was revolutionary in an industry notorious for its confusing interchange fees, monthly charges, and tiered rates that penalized small merchants. Amazon copied the low fee, but it missed the profound trust this simplicity built with customers.
Second, Square offered no contracts and no hidden fees. Traditional merchant services locked businesses into multi-year agreements with steep penalties for early termination. Square’s pay-as-you-go model was a radical departure, giving merchants unprecedented freedom and control.
Third was instant and frictionless onboarding. A small business could sign up for Square online and begin accepting payments within minutes. This bypassed the weeks-long, paper-intensive application and underwriting process required by banks, which demanded business plans, credit histories, and extensive documentation.
This speed was enabled by the fourth and perhaps most critical innovation: a new model for risk and fraud management. To approve merchants in minutes, Square had to invent its own underwriting system. It used sophisticated algorithms and data analysis to manage risk for a population that banks had deemed “unbankable.” Amazon, with its more conventional corporate structure, was unwilling or unable to take on this perceived risk.
Amazon copied the hardware, but it couldn’t copy the trust, freedom, and access that the full stack provided. It had cloned the product but failed to replicate the business. In 2016, Amazon discontinued its Register service, conceding the market to Square.
Applying the Innovation Stack to Your Own Venture
The story of Square offers a powerful blueprint for entrepreneurs and business leaders. The principles of the Innovation Stack can be applied to any industry by those willing to solve problems in a fundamentally new way.
Step 1: Find a Perfect Problem
Start by identifying a “perfect problem”—a significant issue faced by a specific group that is being ignored by the dominant players in the market. Often, incumbents see this group as too small, too difficult, or not profitable enough to serve. This neglect is your opportunity.
Step 2: Create the First Solution
Develop an initial, elegant solution to the most pressing aspect of the problem. This is your wedge into the market. Don’t worry if this first innovation is copyable; its purpose is to get you started and to reveal the next set of challenges.
Step 3: Solve the Problems Your Solution Creates
Your first innovation will inevitably create a cascade of secondary problems. For Square, making a simple reader led to questions like: “How do we approve merchants instantly?” and “What pricing model makes sense for them?” Each answer to these new questions becomes another link in your Innovation Stack. This reactive, problem-solving process is what builds your defensible moat.
Step 4: Embrace Being an Outsider
Innovation often comes from those who are not constrained by an industry’s established dogmas. McKelvey was an artist and Dorsey was a software engineer; neither were bankers. Their outsider perspective allowed them to question every assumption the financial industry held dear. Don’t see a lack of industry experience as a weakness; it can be your greatest strength.
The Case of Twitter: A Different Kind of Innovation
Given Jack Dorsey’s involvement in both companies, it’s natural to ask if Twitter was also built on an Innovation Stack. While undeniably revolutionary, Twitter’s innovation path was different from Square’s. Its core innovation was the product itself—a new medium for public, real-time conversation—and the network effect it generated.
Twitter did not face a direct, existential threat from an incumbent trying to copy its business model in the same way Square did. Its challenges were primarily technical (how to scale a global, real-time service) and social (how to manage a new form of public discourse). While it certainly required a stack of technical innovations, it did not need to build the same kind of interlocking business process stack that Square created for its defense.
This distinction is important. The Innovation Stack, as defined by McKelvey, is a specific strategy for competing in a market where you are the underdog facing a powerful, established foe. It’s a defensive strategy that becomes a powerful offensive weapon.
Conclusion
The enduring lesson from Square’s victory over Amazon is that true, sustainable competitive advantage rarely comes from a single idea. It emerges from building an entire system that works in a fundamentally different way. The Innovation Stack is a testament to the power of solving problems from the ground up, creating a chain of interdependent solutions that are nearly impossible for a competitor to unravel. For any entrepreneur looking to not just enter a market but redefine it, building your own stack—one necessary, interlocking innovation at a time—is the path to creating a business that lasts.
