Keith Rabois has already lived several successful lives in Silicon Valley.
Now he’s helping to run one of the fastest growing startups in San Francisco: payments company Square.
In 2010, Square founder Jack Dorsey recruited Rabois to be the company’s Chief Operating Officer.
Since then, the company has grown from a few dozen to more than 250 employees and has reportedly been valued at more than $1 billion. More than 1 million customers are using the Square reader and apps, and Square will probably process more than $4 billion in payments this year. And that’s all with minimal advertising and no direct sales force.
But Square’s ambitions don’t stop at payments — the company wants to solve all sorts of pain points for small business owners.
We caught up with Rabois in Square’s ultra-modern offices in the old San Francisco Chronicle building. Here’s what we learned.
- Square is thinking beyond payments. “Square’s mission is to reinvent commerce on both sides of the counter …. We actually look at all of those pain points [small businesses face] and try to rank order them in terms of how much friction is there for that small business person, how much of a disadvantage do they have. We will try to find the solution for them over time. It won’t all happen overnight.”
- It’s harder to build great tech companies in great economic times. “One of the perverse things about a bubble in Silicon Valley is, it tends to fragment talent across too many companies, so you get sort of a suboptimal number of successful companies. If everybody starts their own companies you don’t wind up with a density of talent at one place, which is what really is required to build an amazing company, whether it’s PayPal or Apple back in the day, or Yammer or Square today.”
- Want to recruit great people in a talent crunch? Solve a real problem. “We have a mission of helping local businesses thrive so that they can grow their businesses so that they can hire people so that they can help the U.S. economy. It’s not social gaming — that’s a very good business, it can be a very creative exercise for the people who work there, but it’s not clear that it has any societal impact, and if it does it may be negative.”
- Mobile devices and apps are killing the web. “When I [first] said it, it was a little bit provocative. Now it is so obviously true that actually I find it boring. I don’t know any smart person in the Valley who doesn’t agree with that now …. Which is going to be more important to the future of society: a web site with www-dot-url or one of these?” [pulls out his iPhone.]
- Google SHOULD be nervous about mobile. “If every American is going to carry around a fully functional computer 24 hours a day with different censors and different pieces of information available, that radically transforms the type of content and the type of applications that are going to be most important. Steve Jobs famously said ‘people don’t go to Google on this [the iPhone], they go to Yelp.’ So search is a last resort on this, it’s not a first resort. On the web, before Facebook, search was pretty close to a first resort.”
- Physical credit cards aren’t going away — and forget NFC. “Every American of almost any age and certainly any demographic knows exactly how to use one of these pieces of plastic …. There’s absolutely nothing better about taking a phone and kind of waving it around than pulling out a credit card and swiping it. It’s actually more complicated because usually the phone is locked behind a password and there may be a separate password for your NFC app.”
- Why a lot businesses won’t give you a free cup of water. (It’s not because they’re cheap. To see the real reason, read on…)
Here’s a lightly edited transcript of our conversation:
Business Insider: I asked this question to Yammer CEO David Sacks as well, so I’m curious what your take is. What was so special about PayPal back in the day? Why did so many people at this relatively small company go on to such big things?
Keith Rabois: I think a decade ago, we had a group of very talented, wicked smart, entrepreneurially driven, ambitious folks that sort of banded together to try to revolutionise payments. It’s very rare to collect in one place a reasonable number of those people, they tend to fragment.
Part of the reason was at the time, 2000 to 2002, the rest of Silicon Valley [collapsed]. So we had something like an 85% acceptance rate on all of our offers.
One of the perverse things about a bubble in Silicon Valley is, it tends to fragment talent across too many companies, so you get a suboptimal number of successful companies. If everybody starts their own companies you don’t wind up with a density of talent at one place, which is what really is required to build an amazing company, whether it’s PayPal or Apple back in the day, or Yammer or Square today.
Also, we were quite contrarian and had — today it would be described as a missionary zeal — and I think that that’s one of the biggest reasons. We approached problems from scratch, rethought a lot of axioms.
BI: How does Square overcome the talent crunch now that everybody is running off and building their own startup?
KR: We started January of last year with 37 people, we started this year with 210. So we have done a great job of becoming a magnet for talent in the Valley.
First, we have a very clear vision of what we are trying to do, and it’s very ambitious, and that attracts the best people in the world. People who are really good at what they do, elite engineers, elite designers, are all motivated by difficult challenges and confronting them.
The second thing is that we have significant and substantial momentum in the marketplace, so it reinforces that vision.
Then the third is that we have a positive impact. We have a mission of helping local businesses thrive so that they can hire people, so that they can help the U.S. economy.
It’s not social gaming — that’s a very good business, it can be a very creative exercise for the people who work there, but it’s not clear that it has any societal impact, and if it does it may be negative.
BI: So, about a year ago you made an interesting comment that you thought the web was dying. Do you still think that’s true?
KR: When I said it, it was a little bit provocative. Now it is so obviously true that actually I find it boring. I don’t know any smart person in the Valley who doesn’t agree with that now.
The three biggest fans that have sort of proselytized this view in the Valley have been Marc Andreessen, Jack [Dorsey], and me. But Marc, Jack, and me sort of articulated this two years ago. So even by [a year ago] all of the evidence suggested this — like you guys are running graphs actually, just pull up Business Insider and see what consumption of the Web is on an iPad, it is already passing PC consumption and browsing, so that’s almost like a no brainer at this point.
BI: When you say the web is dead you mean the PC, desktop based browsing?
KR: Yes that’s dying, but even web sites as a whole arguably. So for example, which is going to be more important to the future of society: a website with www-dot-url or one of these? [pulls out his iPhone].
And in fact the original vision of Square was the proliferation of these devices, whether an Android phone or iPhone or an iPad, means the entire world of payments and commerce can be completely rearranged. Similarly, the reason why you see people investing in things like Instagram and photo sharing apps is because they believe you can reinvent social from a bottom up, from scratch, for a mobile device.
We do that for payments and commerce.
BI: Larry Page just said the other day that the Internet has a tendency to revert back to these balkanized walled gardens. (Exact quote: “It’s the tendency of the Internet to move into a well guarded state”). Do you think that’s a problem?
KR: I don’t know. Each of these apps [on his iPhone] is sandboxed. I actually find it to be a quite high quality user experience. I don’t have any problem opening an app for Twitter or opening an app for Facebook or opening Yelp, Square, or my calendar app. So I’m not sure about how much it matters.
I am more observing what the future is, not saying what is better or worse. But the truth is if every American is going to carry around a fully functional computer 24 hours a day with different censors and different pieces of information available, that radically transforms the type of content and the type of applications that are going to be most important. Steve Jobs famously said “people don’t go to Google on this [the iPhone], they go to Yelp.”
So search is a last resort on this, it’s not a first resort. On the web, before Facebook, search was pretty close to a first resort. But it’s not on this. It’s the thing you do when you can’t find the app for that.
Two other points.
If you are installed on a home screen, it’s not accidental. So being installed on a home screen encourages more use, whereas on the web you don’t necessarily have that home screen. Then secondly, what’s on my home screen here is self expressive. I know people are going to see my phone so I have Yelp here intentionally, and I have Twitter here intentionally, and Quora is here intentionally. So it’s not just a shortcut.
BI: It’s a personal statement.
KR: Exactly, but then it reinforces — which apps do I use the most? because by the time I start flipping around like here [to the third page of his iPhone’s screen], it’s like highly unlikely I’m going to use those apps.
BI: So you said you have a very clear vision. What is Square’s mission?
KR: Square’s mission is to reinvent commerce on both sides of the counter. Both the process of buying and the process of selling in the real world. Empowering local businesses to have the tools to compete with the elite.
So we started with credit cards. Historically in that space if you wanted to accept a credit card it was a privilege that you were afforded, if you were lucky enough to jump through certain hoops and hurdles without falling. You had to apply but usually it would take days to weeks to months. You had to submit to a credit check. And often you were disqualified if you had never run a business professionally before.
However, if you got access, it was highly likely that by processing credit card for the first time your sales would grow. So every new entrepreneur starting a business who couldn’t get access to credit cards was losing sales and was losing volume to big businesses like Target, Walmart, Starbucks. We stopped that and we said everybody is getting access, everybody is going to get to have that tool.
The next thing that big business have lots of information. Store managers are pushed all kinds of analytics, how to optimise sales, pricing, we give everybody that now for free. So you take your iPad, you install Square Register, and you have analytics that allow you to manage your business.
Traditionally, the businesses we serve were basically counting cups, and they would literally stack their cups up in their coffee shop that they would know the number of coffees that were being sold or cappuccinos that were being sold by the end of the day.
That’s exactly why they won’t give you water if you’ve ever tried — it screws up the inventory management system.
So with Square Register, every business now gets tools that help them manage their business. Should I open an hour earlier or should I stay open an hour later? Should I change the pricing on this Diet Coke Cherry Zero, should I raise it, lower it? What happens when it rains, what happens when it snows? Nobody whose been a sole proprietor or who has been a small business person has ever had analytics like this before.
BI: So in theory you could all of the other things that sole proprietors and small businesses struggle with, like financials and taxes.
KR: Yep. We actually look at all of those pain points and try to rank order them in terms of how much friction is there for that small business person, how much of a disadvantage do they have. We will try to find the solution for them over time. It won’t all happen overnight.
BI: The small business market is incredibly fragmented, it’s hard to reach all those business owners. How do you overcome that?
KR: I think it’s because the product speaks for itself. The Square card reader plus the experience basically creates an epiphany for people. They never thought they could do this before.
So if I am running a restaurant and you buy this Coke from me, you swipe your card through Square on the iPad or on the phone and then you sign and you say “what is that?” And I say “Square.” And you say, “I am a taxi driver, that would be perfect for me.” So our growth comes from people actually seeing Square in the real world. It turns out if I am running a coffee shop I have real world customers of every type like personal trainers, SAT tutors, maths teachers … journalists.
BI: Have you guys done any advertising?
KR: We occasionally test advertising in different channels but the primary driver of the Square option is actually seeing Square in the real word.
BI: So no sales force.
KR: No sales force, none whatsoever. We have bought an online ad here and there but not in any serious sense.
We do sell Square to retailers. So Square is available today in roughly 11,500 retail stores. There’s Apple, Walmart, Radio Shack, Best Buy, Office Max, Fed Ex stores, and UPS stores. A lot of people go to the store to get Square. They already knew about Square and they want to find one near their home then take it back tonight they don’t want to wait for us to ship them one.
BI: It seems like there’s still this thing, particularly in San Francisco and among some kinds of businesses, like small restaurants and coffee shops, where they take take cash only. It’s almost like a point of pride. Do you think that’s a reluctance to pay anything to anybody? Or do you think they don’t realise that they are losing of business from people like me who get annoyed and then walk out?
KR: One is that free is free. Free is attractive to lots of people.
That said, I think the knowledge about how much they are sacrificing isn’t obvious to everybody. So what I tell friends of mine who have small business I say, just run Square for one day. Just take out the Square, it’s free, the app’s free, try it for a day and see how much your sales go up. If you have just run a bar forever, a cash-only bar, do you know how much you’re losing? You may not. And so we have to frame that for them and explain that.
Visa [a Square investor] does a good job too. I mean Visa’s business for the last 40 years has been to communicate this. AmEx does a great job of this.
The second thing is, in San Francisco I would say a lot of businesses certainly know that Square exists, but across the United States, no. That’s what were working on.
BI: Are you guys going to move outside of the United Sates?
KR: This year we will launch outside of the United States. We haven’t specified yet the exact dates and in what order for new markets.
BI: Are different regulations the main challenge with that?
KR: Well a variety of things are different. Different currency, different language, sometimes different rules, different partners, different processing partners, so there’s definitely complexity to launching outside the U.S. when you move money around.
But we now have a lot of experience with all of this stuff in the United States so actually it’s incrementally easier to launch in new markets than people think. Launching Square from scratch was a Herculean effort by a very small team here. Now that we have a lot of expertise and a lot of traction and proven success it’s actually a lot easier.
BI: Will payments evolve to the point where a card reader is no longer necessary? Is that one of your goals?
KR: I don’t know. Every American of almost any age and certainly any demographic knows exactly how to use one of these pieces of plastic. Doesn’t have to be trained. You show them a card and they know what to do with it, they know what it can be used for, they know how to swipe. So I think physical cards like that are gonna be used by Americans for a very long period of time and we’re gonna embrace that.
Now we have started to shift a lot of users to pay with their name, pay with their real world identity. All a credit card is, in some ways, is just 16 digits uniquely identified with you.
PayPal figured out in 1998 into 1999 that email address is a very good unique identifier as well and that drove a lot of the magic behind PayPal. It sounds kind of trivial now but in fact it was fairly revolutionary.
So ultimately your name, your photo, and your phone are very good unique identifiers. So people will start finding out that this specific piece of plastic is not necessary, and in fact can actually be an incremental barrier.
But it is still tied back to a funding source, a payment source like Visa. There is still a relationship with a Visa or MasterCard, it just may not be presented with a piece of plastic.
BI: I still think there’s a sense of magic when you walk into a place say “I want that” and you can pay for it without using anything at all. Totally frictionless.
KR: We think it is magical to walk in and be treated like a VIP and just walk in and have someone treat you like a VIP where you walk in. They greet you by name, and say “would you like your normal?” And we’re the only company that can do that using your name, your photo, your real world identity, and a little bit of technology that ensures the whole system works really well.
That’s what forges authentic loyalty — I go back to bars and restaurants that recognise me and treat me well, not because they offer me some discount.
BI: Do you think there’s any purpose for like NFC or any sort of short range wireless technology, where you can use a phone or other device in place of a credit card?
KR: There could be some technology that we invent that other people invent that would be amazing, but NFC is certainly not that. NFC is a technology in search of a value proposition as I’ve said probably two years ago. It doesn’t help merchants and it doesn’t help buyers. The only people it helps as far as I can tell are people who want to have cocktail party chatter in the financial services world that makes their jobs feel cool.
BI: Or phone makers that want you to buy a new phone every two years?
KR: But actually the consumers don’t like using it, so I don’t think it drives purchases as a phone. There’s absolutely nothing better about taking a phone and kind of waving it around than pulling out a credit card and swiping it. It’s actually more complicated because usually the phone is locked behind a password and there may be a separate password for your NFC app and. It’s much better to be using your credit card.
Merchants hate NFC. They don’t want new, fancy, complicated, expensive, systems to read that.
Plus it’s actually post-purchase, unlike Square. When I walk in, we can have a conversation as I am approaching the counter and placing my order, and before I have actually checked out you can say “you know what goes well with that Diet Coke Cherry Zero? French fries. Would you like to order fries?” And a lot of people will say yes and I have not closed that transaction because you haven’t checked me out yet.
It’s sort of like what Amazon does with recommended books once you have started a cart. We are allowing that Amazon experience in the real world across all merchants which has never been done before.
BI: What kind of information does a merchant get about me when I walk in?
KR: [With the Pay With Square app], when you have favorited a merchant, there is a geographic trigger — there are actually two. Within a certain proximity it alerts them on the register that so and so has walked into your store. Then when you’re within 10 meters, you’re ready to check out, so you authenticate the face, name, click, checkout. If you want more information about that person, it will show you their last visit and their visit frequency, as well as in the future what the most likely orders are.
BI: So you are building that kind of Amazon recommendation engine, where people who buy french fries also like cherry Cokes.
KR: Absolutely, recommended items are basically suggestions. McDonald’s has perfected this. They know to offer fries. I am using that as a common phrase, I am using that as an example.
I don’t order coffee, so for example if I was ordering a sandwich for lunch, asking me if I want coffee is just going to infuriate me. If you said “would you like a Diet Coke with that?” I am like addicted, I am ready, I’m wired for it.
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