In 2009, Jim McKelvey and Jack Dorsey launched Square, a mobile payment platform best known for its small white square credit card readers that easily plug into a mobile device, such as an iPhone. The company is listed today on the NYSE with a market cap of $26 billion and 30 million businesses that use its services.

However in 2014, one year before going public, Square got news of something that would terrify any upcoming company. As co-founder McKelvey describes it in his new book, "Then the doorbell rang and Jeff Bezos delivered a severed horse head via free two-day shipping."

Amazon was doing to Square what it had done with many other companies large and small. It copied Square's technology with a product called Register. It was a much larger, less stylish, and more stable black device that was cheaper, offered credit card processing fees 30 percent lower than Square's, and came with customer support, which Square did not. 

If that scenario was a business school case study, even an undergraduate freshman would have been able to predict the most likely outcome. But they would have been wrong.

How could a tiny company such as Square possibly stave off Amazon? The answer is a lesson to every startup trying to survive in a market with larger, infinitely better funded companies staffed by countless smart people.

What did Square do? Almost nothing. Instead of trying to chase Amazon down the pricing rat hole, change the design of the product to make it less attractive and less wobbly, or spend truckloads of money mounting a campaign to show why its reader was the better option, Square chose to do what had made it successful so far: focus on serving the needs of its customers.

I've come across small companies in Square's situation many times. And each time their concern is how to compete with the benefits of scale. But that ignores something that almost no company of scale can do as well as a smaller startup, namely understanding the needs of its customers at an extraordinary level of intimacy and empathy. Square understood the market and its customers, and that's what it invested in. Recall I said the company did "almost" nothing. That's because the only thing it did change was to set up a customer support function.

The lessons here are some of the most important for founders:

  1. First, resist the natural response to take on the larger competitor in a public fist fight. In his book, McKelvey describes how irritating it was when he first saw Amazon's relatively clunky product. Square could have easily put its diminutive marketing muscle into attacking Amazon. That might have felt good at the time, but it would have taken resources away from the more important task of growing the business. 
  2. Second, if your product or service is solid, you are best served by continuing to innovate the product. I recall a conversation with a billionaire tech mogul on the topic of innovation and how hard it was for larger companies to be truly innovative. His response said it all: "I don't want to innovate a new product. That's too risky. I just need to make sure I have the cash to buy the innovators who prove they can survive that risk." 
  3. Third, even when you have a great product, the best way to differentiate yourself if you're a small player is by becoming obsessively focused on supporting your customer. At the end of the day, that is often your best -- and only-- investment and point of differentiation against larger competitors. The toughest thing to compete with is a relationship that creates an unbreakable bond of trust and loyalty with customers.

The end to this story is poetic. Amazon stopped offering its card reader after one year of lackluster performance. As McKelvey says, "To their credit, the people at Amazon were incredibly cool about the way they exited our market. Each of their Register customers received a smiling cardboard box containing a little white Square reader."