00:00:00
we were in deep trouble at Netflix and we had losses of about $50 million we
00:00:05
have got to sell this sucker fast Mark Randol is an American Tech entrepreneur the co-founder and first CEO of Netflix
00:00:12
with a career panning numerous startups and Ventures marks expertise and Innovation leadership and business
00:00:17
strategy is unparalleled August 1997 Netflix was founded yes and the reality
00:00:23
is the idea was ridiculous it didn't work nobody would rent DVDs by mail but
00:00:28
with over 40 years of being an entrepreneur I've learned every idea is bad we just don't know why they're bad
00:00:34
yet the important thing is how clever can you be to come up with a quick and cheap way to test it for example we
00:00:41
thought let's just have a subscription and no late fees it was a ridiculous idea but when we tested it people loved
00:00:47
it the Netflix DVD service has changed the world you explored selling Netflix to Amazon 2 years after you'd launched
00:00:54
for probably 10 to15 million that's not a bad return for 12 to 18 months work
00:01:01
but I thought it was much more interesting to take the shot and see what Netflix could become but all of a
00:01:07
sudden in a matter of a week or two in Spring of 2000 we were going to go broke being successful we tried going to
00:01:14
Blockbuster for months but they weren't going to save us they were going to compete with us Netflix wouldn't have survived but there's a story which has
00:01:20
not really been told which took one of Netflix's biggest impediments and turned
00:01:25
it into one of its biggest assets so
00:01:31
the DI of AO raffle is about to close anyone that subscribes to the DI ofo
00:01:36
before we hit 7 million subscribers which is probably going to be in a couple of days time you will be included
00:01:41
in the raffle and on the day we hit 7 million subscribers we are giving away a lot of money can't buy prizes to all of
00:01:49
you so hit the Subscribe button get in before 7 million and I'll announce the prizes and the winners in the comments
00:01:55
below when we hit 7 million subscribers [Music]
00:02:01
Mark in this season of your life if you could consolidate your mission and the
00:02:08
work that you're doing across the content you produce the people you speak to your professional Endeavors if if you
00:02:13
could consolidate that into a singular focused Mission what exactly would that
00:02:18
mission be in this season of your life for me at this point in my life it's all about
00:02:24
mentorship um you know I've done seven startups I kind of recognized quite a
00:02:29
while go I do not have uh the appetite to do another one uh it's that 7 by
00:02:37
24 Focus that I don't want to do anymore I have other things that I would love to
00:02:43
have uh spending time on but you can't turn it off uh I've also realized that
00:02:48
over 40 years of being an entrepreneur I've learned a few things about how to
00:02:53
actually play this game and so my mission now is how do I pay that forward
00:02:59
how do I help other people um either have a shot at it like I did or if
00:03:05
they're already playing the game how do I try and increase their odds of success you wrote this book called that will
00:03:11
never work why books are painful and hard to write what is it that you want someone who gets to the end of this book
00:03:17
to walk away with I've come to believe that almost all of the information that
00:03:25
people receive from the General Media about entrepreneurship is wrong um it
00:03:33
glorifies entrepreneurship in what I think is a damaging way you watch these movies that are about entrepreneurship
00:03:40
and it's all about driving around in the fast cars and having the parties and that's not it it's a very lonely
00:03:46
profession so in a simple answer the reason I wrote the book is I wanted to give people a true story of what it
00:03:53
really means to come up with a crazy idea that everyone thinks is never going to work and the struggle to make it real
00:04:02
and if someone reads that book and gets to the end and goes this sounds great
00:04:09
then that's the exactly the right person who should be an entrepreneur if someone goes this sounds a lot harder than I
00:04:15
expected well then I've done a a service in that way as well which is I've kept someone from getting into this for all
00:04:20
the wrong reasons when you when you look back on your your journey to
00:04:27
Netflix do you you know I remember hearing in Steve Jobs speak about the
00:04:32
decisions he made in hindsight that in when he reflects on his life resulted in him starting apple
00:04:40
and the decisions he made within Apple so obviously you know things he's famous for saying is that he went to a typography class he dropped in and he
00:04:46
started learning about design and typography and that shaped him what are those early sort of experiences that in
00:04:52
hindsight fed into the creation of Netflix probably the meta thing was the
00:04:58
fact that most of these Endeavors were entrepreneurial so for example initially
00:05:05
my first foray into direct response marketing was when uh
00:05:10
I asked if I could run the mail order division of this sheet music company
00:05:16
that I was working for and so what it meant to run the mail order division was every day you got the mail and if you
00:05:22
found someone's asking for a list of great song books you'd make a copy and you'd mail it out and then if an order
00:05:28
came in you'd go to the warehouse and pick pack and ship it and that spoke to
00:05:33
me and I began experimenting and said okay now what happens if I do two pages
00:05:39
or do it in color what happens if I mail it out and I built this mail order division into a real mail order company
00:05:46
so it was this combination of direct response but more importantly it was
00:05:52
building something it was creating a company inside a company so there are
00:05:57
certainly those preparations from the direct response side hugely formative
00:06:03
for at least Netflix uh because if you think about it what direct response marketing is about
00:06:09
is all about testing it's all about analytics um and when the internet came
00:06:16
along and I saw what the internet was what immediately popped into my head was
00:06:22
oh my gosh this would is the power to do direct marketing but on steroids this is
00:06:27
so much more positive I'm doing this personalization but it's very Brute
00:06:33
Force personalization I mean it's it's dear Steven wouldn't your friends at 17
00:06:40
Crescent cir it's like this ridiculous personalization what the internet let me do is personalize every web page for one
00:06:46
person but one of the direct response Endeavors that I did was I was a circulation director for a magazine we
00:06:53
we launched a magazine and that's subscription and so you go okay well look at this you have someone who's
00:06:59
doing Direct marketing and there's someone who's doing subscription and then all of a sudden they're trying to figure out how to do video rental better
00:07:06
it's not that big of a leap to say okay it was subscription and it was direct response on the internet so yeah these
00:07:13
things were pretty formative so interesting so you on one hand you had this business where you were physically sending things in the post and then you
00:07:19
got involved in another business where you were doing subscriptions and these kind of I guess plant these sort of
00:07:24
seeds in your brain to IND industries that you start to understand and it's funny because when people think about
00:07:30
creativity I heard someone say before that creativity is essentially collecting lots of different clouds and then connecting them in new new ways so
00:07:37
getting lots of different points of inspiration in life and then connecting them in new ways which create a new thing and that kind of sounds like what
00:07:43
you're describing there it is and the thing is at the time you don't necessarily know um you're in the right
00:07:50
place at the right time because I certainly wasn't the only person who said wow the internet could be a powerful force for selling things uh
00:07:57
Jeff Bezos was one of the first people to recognize the power could have to sell things when did
00:08:04
Amazon which at the time was only books but there were a lot of different models
00:08:10
we could have looked at and so in terms of Netflix going into video rental and doing video rental by mail that was
00:08:16
entirely driven by the fact that I had worked for so long in a catalog business
00:08:22
where I had mailed things in boxes and I had seen I knew a lot about all the
00:08:27
shippers and I knew a lot about fast shipping I mean I had this huge
00:08:33
repository of of information and experience and I didn't know how it be used but all of a sudden you're looking
00:08:39
at a problem and you're kind of in your mind going through how could I possibly solve this in different ways and one of
00:08:45
the things that comes up is something you've experienced in the past you launched this company Integrity QA
00:08:51
between sort of 96 and seven and that's ultimately acquired by Reed Hastings by pure by Reed Hastings company yes and
00:08:58
that's where you and re Hastings met yes correct who's the other co-founder of Netflix what was that like that first
00:09:05
meeting with Reed Hastings meeting Reed was like this instant Junction of two
00:09:12
like Minds uh we both recognize something in
00:09:17
each other one is that we both approach problems very differently I was very
00:09:23
emotional about it I don't mean emotional like I'm running crying from the room I mean empathy that I'm a
00:09:28
marketing person uh when I put something out there I can almost intuitively sense how someone's
00:09:34
going to respond Reed his background is mathematics and computer science much
00:09:40
more logical much more methodical and we kind of realized as we begin solving
00:09:46
problems together how well those two integrated but at the same time as
00:09:51
having these differences and approaches we were very similar and that we both shared this commitment to honest y not
00:10:01
because we both swore an oath just was our nature that life was too short to shade the truth that if you had
00:10:07
something to say you say it and you say it in a respectful way in an empathetic way and you don't have ulterior motives
00:10:15
um and we both were like that and it allowed us to have these really intense
00:10:21
interesting conversations where we were trying to find the truth out of something but pushing each other and
00:10:28
challenging each each other and it ended up being a very very powerful way to solve problems and we were only at pure
00:10:37
Atria together for seven or eight months and then lightning happened to struck again where pure Atria was now being
00:10:45
acquired uh and this time um both Reed and I were going to lose our jobs they
00:10:52
already had a CEO they already had a senior VP of worldwide marketing so we
00:10:57
were going to be out of a job uh we had six months and Reed was going to go back to school get a higher degree in
00:11:04
education I was going to start my next company and Reed wanted to keep a finger
00:11:10
in the pie here and we came to an agreement that I would start the company
00:11:16
uh he would be my angel investor and he'd be my board chair and all we needed was the business
00:11:23
idea uh and all you needed was a business idea exactly and only that yeah
00:11:29
just this that small manner of of needing something to do and thus began this process which went on for months of
00:11:37
Reed and I kind of searching for a business idea and we we had a
00:11:42
methodology so don't uh don't think this is random um and Reed and I happened to
00:11:48
live in the same town we lived in Santa Cruz California together and we had gotten in the habit many months earlier
00:11:55
of commuting to work together and so once we knew we were selling the company once we were were losing our jobs we
00:12:01
still were commuting to work but now the conversation in the car shifted and what would happen is Reed would pick me up at
00:12:07
my house and we'd barely B my driveway and I get okay Reed I've got one for you
00:12:15
personalized shampoo you're going to cut off a lock of your hair you're going to mail it to
00:12:21
us and we're going to have a team of hair scientists who are going to formulate a custom blend and people are
00:12:27
going to subscribe to it and the same thing would happen no matter what I pitched is there'd be
00:12:34
silence re would be staring out the window just steering the car and you'd
00:12:40
think he hadn't even heard me but I knew that kind of behind that stoic face all
00:12:45
the calculations were taking place like you know the risk and reward and the costs and the benefits and it might take
00:12:52
five minutes 10 minutes of silence but then eventually he would turn to me and go that will never work and he would lay
00:12:59
into me with all the reasons such a bad idea but of course I could come prepared
00:13:04
and I'd come right back in him with all the research I had done all the reasons I was sure it was a good idea and we
00:13:10
would do one of these arguments all the way to the office and if need be all the way home and until we either decided
00:13:17
there was promise or no promise and almost all of the time there was very very little promise in these
00:13:23
ideas but next day I'd have another one I could read personalized pet food
00:13:29
Uh custom Sporting Goods vitamins I mean I pitched all those
00:13:34
ideas I pitched them on video rental by mail people are going to come to the
00:13:40
website they're going to pick out a movie we're going to mail them the movie and they'll keep it for a week and then they'll mail it back and at the time
00:13:48
though this was 1996 97 uh video rental you may remember
00:13:56
it was on VHS cassettes so there were too big and too heavy and too expensive
00:14:01
and so that idea got trashed the exactly the same way that the dog food and the personalized shampoo did and kept on
00:14:09
searching and then the Breakthrough if there was one came one morning or Reed picked me up and I'm on my way out the
00:14:15
door out at the driveway I got one for you and he stops me and goes I got to
00:14:21
tell you about something I read about there's this technology that came out it's called the DVD it's this little
00:14:27
disc that holds a movie and it's thin and it's light and we
00:14:33
brainstormed that a little bit and realized this could be the unlock for that old video rental by mail idea we
00:14:40
had talked about six or eight weeks ago and then we did this quintessentially
00:14:46
entrepreneurial thing which is midc commute we turned the car around and
00:14:52
drove the car back into Santa Cruz to try and validate this idea we did not go
00:14:58
to the office and do a business plan we did not work on a pitch deck we tried to collide the idea with real people that
00:15:05
day that day midc commute turned the car around went down into Santa Cruz tried
00:15:11
to buy a DVD couldn't find one settled for buying a used music CD same size
00:15:17
same weight then went two doors down and bought a little envelope like you'd put a greeting card in and put this CD in
00:15:24
the envelope addressed it to Reed's house bought a stamp and dropped it in
00:15:29
the mail and went to work and that very next morning when Reed picked me up he
00:15:35
held up a little pink envelope with an unbroken CD in it that had got into his
00:15:40
house in less than 24 hours for the price of a stamp and that was probably
00:15:46
the moment we said this actually might work we can use the post office um and
00:15:53
that shifted everything and that's the point we began saying this could be the idea that we do together so many
00:16:00
entrepreneurs and aspiring entrepreneurs are at that exact phase where they want to leave their corporate job their brain
00:16:07
everywhere they go now because they W they've wired themselves to be looking for an idea is finding lots of random
00:16:13
ideas their dog or like throw up and they'll be like oh new dog food or whatever and they're going through that process and I I think it's so important
00:16:19
to just pause there and try and interrogate what the framework is for knowing if you if you've got a winner or
00:16:25
not like how how did you CU presumably you had got yourself passionate about the um shampoo idea so like how do you
00:16:33
know when to drop an idea and how do you know when to commit to an idea what was the framework you're using the framework
00:16:39
is that every idea is stupid there is everyone you know listen you probably
00:16:44
haven't had a corporate job yet in your no thank God yes thank God is right
00:16:50
because there's this thing in corporate uh I say Corporate America corporate world and it's the brainstorming session
00:16:57
and they put everyone in a conference room and they go we're going to brainstorm and try to come up with an idea for whatever it is and he goes but
00:17:05
first some ground rules for the brainstorming rule number one there is
00:17:10
no such thing as a bad idea and I call there's plenty
00:17:17
of bad ideas in fact there's no such thing as a good idea every idea is bad
00:17:23
we just don't know why they're bad yet and so the framework I approach I assume
00:17:29
all these ideas are ridiculous I assume none of them are going to work but here's the difference the reason I start
00:17:36
from that that uh position is I don't want to commit the single worst thing
00:17:41
you can do as an entrepreneur which is fall in love with your idea and you talk about the person who
00:17:47
sees the dog throwing up and they go I've got a great idea and then what happens nothing they go home and they go
00:17:54
this is a great idea and they tell their partner and their partner goes oh that's brilliant I'd buy that
00:17:59
and so they go okay and they begin working on a business plan and they write this 10-page business plan and
00:18:04
they're dreaming about how they go They're how amazing it's going to be just think about we have this line of we
00:18:10
can do cats too and then giraffes you know they've they've built this incredibly ornate business in their head
00:18:18
all based on this feeling that this must be a good idea and you've got to nip
00:18:24
that in the bud and the way you nip it in the bud is you try rather than dreaming how amazing this idea is the
00:18:32
first thing you think about the only thing you think about is how can I quickly cheaply and easily Collide this
00:18:38
idea with a real person and find out is it in fact a good idea or a bad idea how
00:18:46
can I do some kind of hack that will allow me to quickly find out whether
00:18:52
customers actually would want this or not and almost always you build this quick cheap down and dirty I don't mean
00:18:58
minimal viable product I mean unviable something you can quickly do
00:19:04
like turn the car around and mail a CD
00:19:09
to yourself just to find out the the basic premise of can I actually use the
00:19:15
US mail to send movies back and forth because if that had failed well great on
00:19:21
to the next one and that's such a critical critical step that's the
00:19:27
framework that everyone has to to have it is not about having a good idea
00:19:32
having ideas is easy and trivial the important thing is how clever can you be
00:19:38
to come up with a quick and cheap and easy way to test it why because I know
00:19:44
you and me understand this but I didn't understand this when I started my career so I know that there's a lot of people
00:19:49
listening right now that are probably right in the moment you've described they've spent a year building up this
00:19:54
thing in their bedroom for anyone that can't see he's got his head in his hands um they' spent a year in their bedroom building and working on this project why
00:20:01
is that a terrible idea it's such a waste of time because what happens is two things happen one is this or idea
00:20:08
becomes so large and ornate and complicated in your head that you go
00:20:14
okay Mark I need to get started I need to raise $5 million because it's going to have to hire all these people to to
00:20:21
build this thing and they're probably building the absolutely the wrong thing
00:20:27
uh you you can't you you can't just go ahead and based on what you think is going to happen you've got to start from
00:20:33
a position of real information listen perhaps the cleanest way since we have a bit of time is to give you an example I
00:20:39
do a lot of work with University students and uh I was meeting with a young woman who uh at the University and
00:20:47
she goes okay Mark I've got this idea um what I want to do is peer-to-peer
00:20:54
clothing sharing in other words I've got all this clothing in my closet that I
00:21:00
never wear or I don't wear very often and I know my friends have a lot of clothing in their closet and other
00:21:06
friends have clothes in their closet it' be great if we had this website and we could all post what we have and we could
00:21:12
borrow each other's clothes and and I'm going okay that's interesting what can I
00:21:18
help you with she goes I'm trying to figure out should I drop out of college to do this uh how do I raise the money
00:21:24
to hire a team to build this for me and I went whoa you know slow down here okay
00:21:30
interesting idea but let's figure out if we can come up with a quick and cheap and easy way to collide this idea with
00:21:36
the reality I said do you have a piece of paper she goes yes smartass I'm a
00:21:42
college student I have a piece of paper I go great all right do you have a magic a marker she goes I have a marker do you
00:21:47
have a piece of tape she goes got a piece of tape I go all right I want you to write on the piece of paper would you
00:21:53
like to borrow my clothes knock and I want you to tape that to the
00:21:59
outside of your dormatory room and we're going to find out in the next 24 hours
00:22:05
whether the very very first principle behind your idea is real is anyone going to knock because if nobody knocks well
00:22:13
you've learned something very important right there this thing you think is so attractive might not be but let's let's
00:22:20
be optimistic let's assume a bunch of people knock great you've learned something but you're also going to learn
00:22:26
the next thing which is are there problems with fit are there problems with style are the people who knock and
00:22:33
look at your clothes actually going to want any of them all right let's be even more optimistic let's say they do find
00:22:39
out ones they want to borrow well you're going to find out the next piece how do you feel when your favorite blouse comes back stained or torn you're going to
00:22:46
find out about the cost of doing dry cleaning you're going to find out all of these things and you're going to find
00:22:52
about all this for a piece with a piece of paper a tape and a marker none of
00:22:59
this raising money dropping at a school and doing any coding you're going to do something very simple now is this
00:23:06
scalable no is this repeatable no but that's fine you're going to do it all
00:23:12
with 3x5 cards or on a pad you're going to do it manually and you're going to start losing your mind but when you
00:23:20
finally get to the point where you are ready to go and maybe raise money or
00:23:26
drop out of school you're going to know what you're dropping at a school for you're going to know what you're raising
00:23:31
money for you're going to be able to tell someone here's my acquisition cost here's my lifetime value here's my CAC
00:23:39
here's my you're going to know all of these metrics you're going to know the complexity you're going to a tried all
00:23:45
these different things you're going to know what demographic and you found out all of that for nothing except for your
00:23:51
time that's what I mean by figure out some way to validation hack and that is
00:23:59
the key to being an entrepreneur you have an idea quickly cheap and easy test it find out it's ridiculous abandon it
00:24:07
go on to the next one it's funny because uh obviously I'm a dragon on Dragon Den which is basically a show like Shark
00:24:12
Tank where we see 100 pitches a year from entrepreneurs and what I observe in some of those pitches especially when
00:24:17
they're a little bit early on and they haven't got product Market fit quite yet there hasn't been evidence that the
00:24:22
market actually cares is a huge amount of delusion to the point that you could give someone some feedback but because
00:24:29
they've spent one two years of their life and maybe mortgaged their house and invested it into this
00:24:34
business they're they're now in the sunk cost fallacy which is that sort of cognitive bias where you've invested so
00:24:40
much in something that you're basically Defending Your bad decision at all cost and you can't see the light of day and
00:24:46
um and that you know my first business was the death of my first business but for many entrepreneurs that I meet it's
00:24:51
quite clearly the death of them because if they don't have that humility if they've got romantic they can't take any feedback which is a con conflict with
00:25:00
what they want to believe it's it's you're Stephen you're absolutely right it is the single biggest reason that
00:25:08
either they don't start because they've built this thing up in their head and it's so big and complex that to get
00:25:13
started is almost impossible or they are so far along they can't stop it's it's
00:25:20
tragic in in a lot of ways that which is why you have to start from the belief that your idea is a bad one uh because
00:25:29
that makes it easier to walk away from it as soon as you realize you are right
00:25:34
um but what happens if you can get this discipline of taking your idea and immediately trying it is almost always
00:25:41
takes you in a New Direction yes your original idea was terrible but oh my
00:25:46
gosh did you see how this person did let's try this oh that doesn't work let's try this and that is
00:25:53
entrepreneurship it is just leaping from the back of one uh alligator to the next
00:25:58
and there those alligators just H long enough to before they sink or before they bite you and you jump to the next
00:26:03
one I I I think I found two sort of species of entrepreneur and the real
00:26:09
distinction between them is how long they've been doing it and one species of entrepreneur that I know they care
00:26:14
entirely about being right which is their initial hypothesis being correct and that's typically the young
00:26:20
entrepreneur and then the the more seasoned entrepreneur cares entire entirely
00:26:25
about being successful regardless of whether it's via their initial hypothesis or not they care entirely
00:26:32
about like saving time and being successful not being right and I think it's interesting that tenure as an
00:26:39
entrepreneur seems to determine which Camp you sit in it's also your personality jumping back to our
00:26:44
conversation earlier about What attracted Reed and I to each other was that both of us were in that camp that
00:26:50
said we don't care whose idea it was we just care about getting to the right answer and part of this culture that we
00:26:58
had with each other and we built with other people was you could argue like cats and dogs and eventually you'll
00:27:04
arrive at what you think is the right way to go and as soon as that happens you all fall in behind and no one says I
00:27:11
was right I was wrong and you don't even remember who was right and who was wrong it's a big piece August 29 1997 Netflix
00:27:19
was founded by yourself in Reed Hastings from from that day onwards did
00:27:26
did you know at the moment that Netflix was going to ever become what it went on to be what were you thinking it was going to
00:27:33
be I am completely astounded and amazed
00:27:39
at the direction that Netflix has gone never in a million years could I have
00:27:44
dreamed of the company that exists now being the same one that we were thinking
00:27:50
about in in August of 1997 it's astounding to me what's happened U and
00:27:57
it's the nature of Entrepreneurship you can't predict where these things are going to go uh that wasn't the point
00:28:04
though it wasn't like Reed and I were in the car going uh okay when do we enter
00:28:12
the streaming war and when how do we deal with ch no this was a very very
00:28:17
simple straightforward problem a video rental in the United States is8 billion a year um it's very unpleasant that the
00:28:26
P the company who has the The Lion Share of that market is doing things which customers hate there has to be
00:28:33
Blockbuster there has to be a better way that's where it starts from that's the
00:28:39
problem you're trying to solve and trying to solve the problem is this dual
00:28:44
thing which is how do you do something that a customer might want solve the problem for the customer but also how do
00:28:50
you make a business out of that and that's all consuming uh I remember we had a company
00:28:58
meeting early on maybe were two or three months in and I remember getting up in
00:29:04
front of the uh company and laying out what I thought was going to be this big
00:29:10
hairy audacious goal for us someday we're going to be one of the top 10
00:29:16
largest video chains in the United States which in retrospect was a
00:29:22
ridiculously trivial but from where we stood then it may as well have been saying we're going to ride our bicycles
00:29:29
up Mount Everest uh what hubris uh because even the 10th largest
00:29:35
chain was many many many millions of dollars a year bigger than we were at the time but something to aim for and we
00:29:43
actually passed that one way faster than we thought and then you set your goal you know eventually we're going to be as
00:29:49
big as Blockbuster in other words if you were to set your goals to
00:29:55
be what Netflix is now I would be locked up I would have been this most
00:30:01
ridiculous flight of fancy hallucination you can imagine they would have thought you were Psy gone psychotic or something
00:30:08
if you had ever done a presentation saying Netflix would be as big as it is now you um for people that don't know
00:30:14
because the world has moved on so much and there's a generation of people that are listening to this conversation right now that probably don't even know what a
00:30:20
like a vcr and a cassette player is but you launched the business at a time when Blockbuster was the big incumbent and
00:30:27
Blockbuster was was a store where you went to a physical location you rented a like cassette VCR what do they call it
00:30:33
like a VCR v VHS VHS tape you took it home and then you brought it back the next day and your real Innovation was
00:30:40
that you were going to send these DVDs to people in the post on a rental
00:30:45
basis that was the that was the Crux of the business right that was the Crux of the business and in fact when we
00:30:51
originally started there was not a lot of business model Innovation there either you know there was due dates and there was late fees the Innovation was
00:30:59
it was one centralized store on the internet that served the entire country
00:31:05
so that we could have every single movie that was available on DVD we had perfect
00:31:12
inventory uh and unlike a video rental store where you can picture it in like a
00:31:18
supermarket with rows of shelves each movie could be placed in one place you
00:31:24
could either put it in the mystery aisle or in the Alfred Hitchcock aisle or in the new Rel you had to pick where
00:31:31
it was whereas on the internet you could have that same movie listed in 30 different places based on finding movies
00:31:38
we thought finding movies would be easier too we had a bunch of things we thought would allow us to take on this
00:31:45
incumbent this huge huge huge company but yes it was very very focused there
00:31:50
was no streaming if you wanted a movie we mailed it to you we mailed it to you on a little plastic disc it's funny cuz
00:31:57
in hindsight when I think about a lot of these big breakthrough ideas that ended up changing their industry you you you
00:32:03
learn in hindsight that there was some big macro factors that caused the timing to be right and I think about in the
00:32:10
case of your business Netflix there's a bunch of big macro things that you've already described things like DVDs the
00:32:19
internet is there is there any other sort of big macro factors that made the timing right for Netflix those were the
00:32:26
two big ones right is that the internet was certainly the big one was that all of a sudden there was this way to have a
00:32:33
single store which served the entire country before for a bricks and mortar
00:32:39
as we call it business you want to serve the entire country you've got to build 9,000 different stores and Blockbuster
00:32:46
did just that they had 9,000 different stores and then you have to staff those
00:32:51
stores and they had 60,000 employees and we served the entire country with one inventory and with a
00:32:59
group of 12 to 15 people so that was certainly one big shift uh the DVD was a
00:33:07
bet which was at the time DVD was just getting started and if the DVD had not
00:33:15
worked if it had not reached a full household penetration this whole thing never would have worked how many people
00:33:22
were watching DVDs at the time when you launched Netflix there was fewer than 200 50,000 DVD players sold that was the
00:33:31
total addressable Market was 250,000 DVD players so is that like 1%
00:33:36
of America or something yeah there's 130 million households in the United States
00:33:42
so and of those 130 million households
00:33:58
movie uh but it was Tiny there it was really it created all kinds of interesting marketing challenges of how
00:34:04
do you launch a company when there's so few eligible customers in September 99
00:34:11
you explored selling Netflix to Amazon which is which is shy of two years after you'd launched
00:34:18
um what was was that the first time you met Jeff Bezos yes and how does that come to be you know because he's he at
00:34:25
the time I guess was was fairly early in the Amazon jour as well but yeah he was and at the time to show you how early
00:34:31
Amazon was in its Journey they were only a book seller so they sold nothing else
00:34:36
they were a bookstore but Jeff had made no secret of the fact that his
00:34:42
aspirations went way beyond that that he was going to be the everything store
00:34:47
that the things they had found about how powerful it was selling books in the internet applied to everything else and
00:34:54
it was pretty clear his next two categories we're going to be music and
00:35:00
movies and we got a call from uh the CFO
00:35:05
at Amazon basically saying hey Jeff we'd love to uh meet with you how about coming on up to up to Seattle and having
00:35:12
a little sit down and Reed and I didn't need to think too long to understand why
00:35:18
they might want to meet with us uh it was pretty clear they were going to be entering video and this was going to be
00:35:24
a make versus buy analysis would buying Netflix accelerate their entry into
00:35:30
video cuz we had done a tremendous amount of work about building out the content and making those things work so
00:35:36
there was some value there not to mention the people um and so we all flew up to Amazon and were ushered into this
00:35:44
building which was pretty hard to imagine that this was the headquarters
00:35:50
of this world changing e-commerce company because it was a mess you know
00:35:56
people were jammed in under stairs and in closets and there was pizza boxes
00:36:01
every place and dogs running around and the desks were all the same they were
00:36:06
all made from doors that had been laid supported by four wooden posts at Each
00:36:13
corner that everyone sat at these doors and uh and in comes Jeff Bezos and we
00:36:20
begin to have this conversation about what is Netflix and what's it all about
00:36:25
and uh it went went pretty well and as the CFO is showing us to the door at the end of the meeting um she Saidi
00:36:33
just want to set your expectations that in the event we decide to do something our offer is probably
00:36:41
going to be in the low eight figures and and we guessed that was
00:36:47
probably going to be1 to15 million and at the time we had launched
00:36:54
in April of 98 and so we were still pretty young and I
00:37:00
remember Reed and I kind of looking at each other and going that's not a bad return for 12 to 18 months
00:37:08
work but at the same time we felt we had already solved the big problems we had
00:37:15
built a functioning e-commerce website we had managed to Source every single
00:37:20
DVD that was available we had figured out how to make movies go out to
00:37:25
customers and bring them back and we weren't quite ready to let Jeff Bezos
00:37:32
take over and so in some ways it was less about us going up and deciding
00:37:39
whether to sell or not it really ended up being kind of like a commitment ceremony where Reed and I looked at each
00:37:45
other in the eyes and said we can get out if we want and I think both of us decided no let's uh let's go for this
00:37:52
would that money have changed your life at that point 1999 you know $400
00:37:59
million that's a hard to say it this is not like I was uh you know living in a
00:38:06
trailer uh and deeply in debt and you know I I'd been working I was in my late
00:38:13
30s I'd been working in Silicon Valley for a while and I'd had a number of
00:38:18
startups you know I had G through IPOs before um so I I had I was comfortable
00:38:25
don't get me wrong this would have been nice but I'm not sure this would have dramatically changed my life in some
00:38:31
profound way I thought it was much more interesting to take the shot and see what Netflix could become than to walk
00:38:40
away what was Jeff like what you remember in 1999 uh extremely unpolished really if
00:38:48
you see him now I mean he's really buff and he's really thoughtful and someone has definitely worked on his laugh it's
00:38:56
it's now very controlled uh back then it was this almost hysterical hyena like bark and
00:39:03
you could hear it from all over the building I'm not going to try and imitate it um but he was tremendously
00:39:10
enthusiastic like this bundle of energy and I remember that um the two of us
00:39:17
were just going back and forth on all this early startup stuff uh and one
00:39:23
thing I remember we had in common is that um uh at our launch we had rigged up a bell to ring every time an order
00:39:30
came in and I was telling him that he was going ah we too we had a bell that was ringing and we had we shared those
00:39:35
things and then we were also talking about names and Netflix had started out
00:39:40
with a strange name which was kibble kibble and he was saying oh yeah we
00:39:47
originally were called Kadabra which he meant to sound like
00:39:53
Abracadabra like magic but their lawyer said that Kadabra sounds a little bit too much like kadaver and so therefore
00:40:00
Amazon but in other words it was this really interesting us going back and forth and I know Reed was very impatient
00:40:07
he just kind of wanted to get down to business so finally I go okay Reed Reed
00:40:12
let's talk to the what we're really talking about here enough enough startup is the next big milestone in the Netflix
00:40:19
Journey the dot crash for you
00:40:24
uh because there's a there's a problem prob a more profound moment for me that
00:40:30
happened um before that uh and that was this trans that was
00:40:38
this leadership transition at Netflix uh and that was because the do
00:40:43
crash was in the spring of 2000 and this was probably in late
00:40:50
1999 um and Netflix was still young uh and as
00:40:57
I mentioned at the beginning the arrangement that Reed and I had was that
00:41:02
he'd be the angel investor he'd be the chair uh I'd be the CEO I'd start and run the company um and I did that and
00:41:10
Reed had a day job somewhere else um and one afternoon uh late that
00:41:17
year Reed poke his Pok his head in my office uh late afternoon and said Mark
00:41:23
we have to talk uh and as you probably can imagine that never bodess well when someone says
00:41:30
we have to talk and it was right and he came in and he had a PowerPoint slideshow and he sat across my desk and
00:41:37
spun his computer around and began walking me through a slideshow about how
00:41:43
he felt that I was doing as CEO strengths but perhaps a little bit
00:41:50
disproportionately weaknesses and I was a little taken back by this and I I I kind of stopped him
00:41:56
and go re I am not going to sit here and let you pitch me on how much I
00:42:02
suck um and I think he was taken back by that as well and so he closed the
00:42:08
computer but then proceeded to lay out that he was concerned that he had seen minor errors
00:42:16
in my judgment that he questioned some of the hires I had made I mean he had
00:42:21
seen a lot of the other things i' had done that were good but his point was that we have to execute lawlessly and
00:42:28
we're at a point now where things are beginning to accelerate and if there's smoke at this level he was worried there
00:42:36
was going to be fire later on and uh eventually he got to his point which is
00:42:41
that uh he wanted to come back to the company fulltime and be
00:42:48
CEO and for a moment I thought he was firing me uh CU Reed had more Equity
00:42:55
than I did since he was the uh uh original investor and but as I understood what he
00:43:03
was proposing it wasn't that he was proposing that he come in as CEO that I
00:43:08
stay as coo and that we essentially run the company together and I remember as he finally he
00:43:15
left the office and he quietly closed the door and I was so shocked that even
00:43:21
though the sun was going down I sat there in the dark like without the
00:43:26
strength to the lights on and just kind of crushed and all I could think at the
00:43:32
time was this is so unfair this is my company you know I started this it was
00:43:38
my idea I hired the people I got us going and how dare you you know all of a
00:43:43
sudden take this from me but as I thought more about it I kind
00:43:49
of realized that there was another Dynamic at work here and like most
00:43:57
entrepreneurs when we started Netflix I had this dream of being a successful CEO
00:44:05
of this big successful company and I think as I sat there I began to realize that maybe this wasn't
00:44:11
one dream maybe this was two different dreams and that the dream of the big
00:44:17
successful company might be a different dream than the one of me being CEO and I
00:44:23
had to really say to myself does Reed coming in full-time as CEO increase our
00:44:29
chances of that happening and it was really hard for me to argue with myself
00:44:34
otherwise and I'm not saying this was an easy decision and I you know I went home that night and sat outside in the porch
00:44:41
with my wife and we finished a bottle of wine and I think by the time I went to bed that night I kind of concluded that
00:44:48
he was right that if we really wanted to give ourselves the best chances of being
00:44:54
successful that I should move over I should step down as CEO and let Reed
00:44:59
come in as CEO and we should run the uh the company together
00:45:06
and looking back now this was 20 some odd years
00:45:11
ago that decision to kind of put my ego aside for a bit was probably the
00:45:19
smartest decision I ever made the entire time I was at Netflix because those years after that
00:45:25
when Reed and I did it together that was the Renaissance at Netflix so many of the things that shaped what the company
00:45:32
became over the next bunch of years came during those years and certainly looking
00:45:37
at what Reed has done with the company since then since I left the company was
00:45:43
uh even more astounding and it's funny because one of the roles of a CEO is you've got to make
00:45:51
sure the best people are in the right seats which means say goodbye to a lot
00:45:57
of people you'll have someone You Who Came at when you started the company and they were your head of marketing and
00:46:03
they worked tirelessly they worked weekend they work nights they did everything you asked but as you get to a
00:46:09
different scale you recognize that person is not the right person for what we have to do next but you never think
00:46:16
you're going to have to turn that lens onto yourself um and I think a lot
00:46:22
of Founders need to ask themselves that question question all the time I'm the
00:46:29
right person for yesterday I might even be the right person for today but am I
00:46:34
the right person for tomorrow and the number of Founders that I can think of
00:46:40
and I'll bet you you will Echo this when you think about all the founders you've spoken to who are great early stage
00:46:47
entrepreneurs and great late stage entrepreneurs it's a very very small set
00:46:55
um and in my case uh I was very very comfortable recognizing that this was
00:47:01
the right thing to do for the company when you when you think back to that moment and that conversation with Reed
00:47:07
where he comes into your office with your hindsight and wisdom now do you think there's a better way that he could
00:47:13
have approached the situation of course Reed as I mentioned
00:47:18
before what made Reed and I work so well together as we were left brain and right brain and that's not Reed's strong suit
00:47:28
um that's my strong suit you know I pitch I know how to frame things in the right way I know how to deliver bad news
00:47:35
I know how to uh communicate effectively and I can intuitively know what's going
00:47:40
to upset someone or not upset someone that's not what Reed's great at but what Reed has and what we share is he cares
00:47:50
Reed was doing this not with some ulterior motive this
00:47:55
was not I want to push Mark out and become CEO this was he genuinely
00:48:02
believed this was the right thing for the company and because we had this extremely strong relationship based on
00:48:09
trust I heard him that way and fundamentally that's way more important
00:48:14
than the style in which the message was delivered what was it that he thought he
00:48:20
had that would suit the company in the next phase of the company's Journey that he felt you didn't have he had already
00:48:28
taken a company through an IPO he had already scaled a company from two
00:48:34
employees up to a thousand employees from a local company to a multinational
00:48:40
company uh he had he had already shown that he could hire extremely talented
00:48:48
people to work for him he wasn't saying that he didn't think I it was impossible
00:48:55
for me to do this and who knows would have happened this was all about what increases our odds
00:49:02
for success and then perhaps if you want to drill down to something which in the
00:49:07
big scheme of things is small but in the time was large is we had to raise
00:49:14
money uh Netflix was a very very expensive company to get started we
00:49:20
required large amounts of venture money and Reed had this reputation of someone
00:49:26
who would already made a ton of money for some VCS because of taking his prior company public and they would bet on him
00:49:35
whereas I was a little bit more of an unknown one of the things you talk about in your book that he said to you in that
00:49:40
conversation is you don't appear tough and candid enough to hold strong people's
00:49:46
respect yeah it's um I'm better at that now does that count uh it is the empathy
00:49:54
um I as I said what makes direct marketing
00:50:01
Marketing in general is an interesting discipline because it requires you to send something out and you're not going
00:50:08
to ever see the person's face as they react to it you're not going to be there
00:50:13
as they're reading this and either getting confused or excited you have to imagine those things
00:50:20
and as you're writing a direct response letter you're picturing how is someone going to react when they read these
00:50:25
things how are they going to react when they're watching this direct response television commercial that's a it's it's a gift in
00:50:33
some ways and it's also a gift when it comes to salesmanship and negotiation is
00:50:39
before I say something I know how it's they're going to react and I can cater
00:50:45
that but what it does mean is that when something's going to really hurt somebody it's really hard for me it's
00:50:53
very painful for me to deliver very bad news I've never considered that before
00:50:58
but it does appear to be completely true that people who are great
00:51:04
marketeers um have therefore have empathy and therefore struggle more with delivering bad news because they just
00:51:10
have a better ability of putting themselves in the other person's shoes you feel it you feel it you know I've
00:51:16
and as I said I've gotten way better at it um I'd say I'm good at it now um I'm
00:51:22
I can be a complete ass when I how does someone train that muscle is there a way to go you know if you think about how
00:51:28
you went from where you were with that to where you are now is there anything that's helped you stop being I guess a
00:51:35
bit of a people pleaser or caring a little bit about people's feelings when there's a big I've stopped searching for
00:51:41
a way to do it that doesn't hurt and as as with most decisions a lot
00:51:49
of times people get caught in this paralysis where they're trying to come up with some Solution that's an Optimum
00:51:55
solution and this is one more example of that is that you go this is going to hurt it's going to hurt me I have to
00:52:02
just do it anyway there's no way to avoid this and for example you know jumping way ahead there was T after this
00:52:10
doc layoff which we'll talk about in just I mean doc com crash which we'll talk about maybe in a moment we had to
00:52:15
lay people off and I cry with every single one of them but I bring them in
00:52:21
and I gotten very very good at telling people uh it's time to go
00:52:27
but doesn't mean that I don't hurt hardest
00:52:32
thing let's hope that if you're a manager that's the hardest thing you ever have to do have you forgiven Reed
00:52:42
for that that moment that day the way he delivered what he said
00:52:48
100% uh this is going to sound silly but it came from love it didn't come from
00:52:56
Madness or jealousy or anger it as much as it was possible for
00:53:03
something to hurt Reed in delivering bad news that's got to have been one of the toughest things he's had to do is
00:53:12
have that conversation with me and I have so much respect for the fact that he had the courage and discipline to say
00:53:20
I've thought of something I could I've thought of a way to mail the DVDs more inexpensively I've thought of a way to
00:53:26
the no he goes I've thought of a way to make the company more successful but it's really going to
00:53:33
hurt what is it about Reed then that makes Reed successful because I asked
00:53:38
you the question about yourself but now to turn that on Reed what is it that makes him so unique see you used the
00:53:43
analogy for creativity earlier in our conversation about having all these clouds of information these clouds of
00:53:51
connections and seeing that there are these interconnectivities between them Reed sees that stuff so well I
00:54:01
consider myself really good at that he's even better than I am he will have a
00:54:08
very complicated problem with many moving pieces and he'll jump immediately
00:54:14
to we can do this and I won't see that until a little bit later and then even
00:54:20
everyone else sees it it's just an amazing ability to see how things might
00:54:26
shape about and which one is the right path to take uh extremely
00:54:32
analytical um extremely non emotionally driven can make very
00:54:40
very hard decisions because uh less driven by that by the emotional
00:54:47
piece of it he's he's a he's he's remarkable what about hard work does it
00:54:54
matter
00:55:00
well since you ask it so simply I'd say no or it certainly is not the most
00:55:06
important thing in fact I think hard work leading to success is a
00:55:13
myth that and let me let me give you two examples
00:55:20
okay um the first is to qualify what I mean um I work with a lot of as he spoke
00:55:28
earlier before we actually began the session um about how younger people are
00:55:34
different places in their life than older people especially with career and how they think about it and um earlier
00:55:41
in my life I used to do triathlons you know the races that combin swimming and then biking and then
00:55:47
running and back when I used to do them they don't do it quite the same way anymore it would be a mass water start
00:55:55
you have four or 500 people who with the gunun sounds and all 500 of them plow into the water
00:56:01
simultaneously not a phase start and as you can imagine it is a show you
00:56:07
mean you're getting kicked and your goggles are being knocked off and you're being held underwater and you quickly
00:56:13
realize that if you want to be able to survive in this Mass Dart you're going to Sprint for those first four five 600
00:56:21
yards to get yourself far enough in the front of the pack that you have open
00:56:27
water and in my opinion work life is kind of like that when you're younger
00:56:33
when you don't really know what you're doing when you have to go down a lot of false ends because you're not just
00:56:40
productive you better work your ass off you better Sprint you better work three times harder than everybody else in the
00:56:46
company so it's essential but ideally you get yourself far enough
00:56:53
ahead that you recognize I can't can't go at this pace for the entire te of the
00:57:00
triathlon I needed to to get myself some breathing room but now I can back off so
00:57:06
yeah at certain points in your career you need hard work at certain points in the trajectory of your business you need
00:57:11
hard work your fundraising you can't say oh we're closing around I'm taking vacation for
00:57:16
two weeks uh we're doing m&a I'm going to be uh I'm only going to work a couple
00:57:22
hour no you're going to have to grind it but that's not the answer all right one
00:57:28
more little story which is part two to this which is why I say that it's a myth for hard work um so during one part of
00:57:36
my career I lived in Europe uh I was doing International marketing for a big
00:57:41
software company we had an office in Paris uh I lived in Paris and but I was
00:57:47
meeting every week with the marketing people in our other branches so probably
00:57:54
four days out of five I was flying fly to Copenhagen one day then I'd fly down
00:57:59
to Milan then I might fly to London then I might fly to Madrid in one week so I spent a lot of time at the airport and
00:58:09
um because I'm sometimes not that organized uh I'd be late and you would
00:58:15
find me just sprinting Down The Concourse in my uh in my Blazer and my
00:58:20
wool coat trying to desperately make the plane and what I found out
00:58:26
was that probably 49% of the time I'd pull up to the gate and the plane was
00:58:34
delayed and i' have to wander onto the plane no problem at all I could have made it on crutches and instead I'd sit
00:58:41
there marinating in my sweat for another hour before the plane took off or the
00:58:46
other 49% of the time I'd come sprinting Down The Concourse and you'd see the plane halfway out in the runway about to
00:58:53
take off and what I realized is didn't make a difference whether you ran for a plane or not that you're either going to
00:59:00
make it or you weren't going to make it and that running didn't make the difference and I vowed then and there
00:59:06
I'd never run for a plane again and I never have and I'm telling you that
00:59:12
story because it's a metaphor in that so many entrepreneurs spend all this time
00:59:17
running for planes they are up all night polishing their deck they're reviewing
00:59:24
the work of people to make sure the spelling is correct they're double-checking every detail they are
00:59:29
working so hard but I know from experience that it's like running for
00:59:34
the plane most of the time doesn't make a difference you don't lose the deal at 2
00:59:41
o'cl that morning because you didn't check the fonts you lost that deal four weeks ago when you didn't have some
00:59:47
fundamentals right or you just weren't the right company to begin with no matter how hard you worked you weren't going to change the
00:59:53
outcome and that is the key to having some balance in your life as an entrepreneur
01:00:00
is this recognition that if you're smart about the things that you choose to focus on you make 99% of the difference
01:00:09
and that all that extra work does not really change the outcome any and in that analogy of running for
01:00:16
the plane is the is the key thing to have just better prepared further Upstream I you know if we stick to the
01:00:22
analogy just have made a better decision to leave the house at a better time yes it does absolutely I mean if you
01:00:28
want to make the plane you you know you leave earlier and again it's not sometime listen you're going to scroll
01:00:33
down The Concourse you not don't need to run and if if the plane left on time
01:00:39
running's not going to make the difference if the plane's late running didn't make the difference either way you made it or didn't make it the amount
01:00:45
of times that running for it was the gating item between whether you made it or not is like infantes so what's the
01:00:50
point of running and that's and I really fundamentally believe that is that
01:00:56
if I can be really smart about my which problems I choose to focus on I'll make
01:01:04
the difference I do not need to get everything right because most things don't make a difference some things do
01:01:11
some things do and some of the the small things that made a difference to your business seem to have been discovered through a process of sort of
01:01:17
experimentation and failure when I look back through your story at you trying to get sort of Netflix to work and get
01:01:22
product Market fit you referenced it a second ago this idea of no late fees
01:01:27
seem to be quite pivotal an idea you had to remove the late fees I I find this interesting because there's going to be
01:01:33
entrepreneurs that build their idea and then bang their head against the wall and it doesn't work and then I hear so often whether it's from Brian chesky at
01:01:40
Airbnb or from someone else Daniel at Spotify that there seemed to be this one
01:01:45
change that was quite pivotal to their business at some point so my question becomes like how do I know how do I find
01:01:52
the thing so can you explain to me why this no late fees thing and and any of these other small changes that change
01:01:57
the game and how what was the system that led you to them you know we're talking about really
01:02:04
finding product Market fit product Market fit if I have to give a definition is when you recognize you
01:02:10
finally have something that customers actually do want and it's recognized
01:02:16
because all of a sudden the momentum of your business dramatically shifts all of
01:02:22
a sudden things go into high gear all of a sudden iring customers is so much easier all of a sudden they're sticking
01:02:29
around it's just this instantaneous oh my God we found it and up until that
01:02:35
point it is this constant struggle of trying one thing after another trying to
01:02:42
increment your way closer and closer and closer you know when I mentioned that um you know at the beginning there wasn't a
01:02:48
lot of business model Innovation with Netflix we if you ordered a disc we mailed it to you we charge you a due
01:02:53
give you a due date if you missed the due date we had late fees and the reality is the idea was ridiculous it
01:03:01
didn't work um nobody would rent from us and if you did rent from us once you didn't rent from us again um and we kind
01:03:08
of had this realization that okay we got to begin figuring things out and thus
01:03:14
began this year and a half long process of trying to figure out some way to get
01:03:21
people to rent DVDs by mail from us and and we tried almost everything you could
01:03:29
think of um hundreds of things and um I kind of talk about this a bunch
01:03:36
that I had no shortage of ideas I mean I had lots of things I wanted to try and
01:03:42
if there was any if there was a problem that I had it was that I was a bit of a perfectionist back then and so all these
01:03:48
tests that I'd want to run I'd want them to be perfect so we would you know
01:03:53
lovingly argue over every word of copy and we would do custom photography and
01:03:59
we would check every link and we'd stress test the site and it might take us three weeks or a month to prepare for
01:04:06
this test and we' test this new idea and then it would not work wouldn't do
01:04:11
anything and we'd kind of look at each other and go we just wasted a month so okay faster and then we do a test in two
01:04:18
weeks and it would still fail okay okay faster and we do it in a week and faster we eventually started getting to the
01:04:25
point we could do do a test every day or multiple tests every day and it turns
01:04:30
out that um once you go that fast things get very very sloppy so we would have
01:04:37
the wrong image or it would have the watermark on it or the pages we had greed would still be greeked you know
01:04:44
not uh we'd have bad links we'd crash the site and then but that was such an
01:04:50
incredibly big insight for us because it turns out that it didn't make a
01:04:57
difference that if it was a bad idea even spending a month crafting this
01:05:03
perfect test wasn't going to make it a good idea but if it had even an inkling of being a good idea no matter how bad
01:05:10
the test was it shown through customers would immediately perk their head up they'd raise their hand they fight to do
01:05:18
it they'd call us they'd reboot the site it was this incredibly loud signal that
01:05:23
there was something there and it goes back to what we said before which is that it's not about having a good idea
01:05:32
it's about building this whole process and this culture and this system to try
01:05:38
lots of bad ideas and we got really really good at trying lots of bad ideas
01:05:45
one after another hundreds of them each one informing us to some little some
01:05:50
little bit about what to try next and eventually we got to this point where we had these two big Ideas left and one of
01:05:58
them was uh at that point uh Netflix was pretty big we had probably in our
01:06:06
warehouse several hundred thousand DVDs and I remember one day we were Reed and I were in the warehouse and looking at
01:06:12
all these DVDs and going it's such a shame that all these DVDs are here in the warehouse where they're not doing
01:06:19
anyone any good I wonder if there's a way to store them at our customers houses let them keep them and then when
01:06:25
they're done they mail it back we'll just replace it and rather than having them have to
01:06:33
pay each time they replace it let's just have a monthly fee a subscription and
01:06:38
they can rent as often as they want there's no due dates and no late fees and it was a ridiculous idea but when we
01:06:45
tested it it was that mythical product Market fit it it worked people loved it
01:06:53
they couldn't get enough of it they told their friends they did not cancel their
01:06:58
subscriptions what part of it worked and why did it work God knows yeah but in in
01:07:05
retrospect what it did was it took one of Netflix's
01:07:11
biggest impediments and turned it into one of its biggest
01:07:16
assets you know we referred to my book it's called that will never work and
01:07:22
there was two reasons it's called that's will never work work it it's because that's what every single person told me
01:07:28
when I pitched the idea and they had two reasons why they said it um and one of
01:07:34
course was uh streaming they said oh it's a digital medium it's just a matter
01:07:40
of days before everyone's streaming these who needs DVDs and we realized that was not the case it was inevitable
01:07:47
but it could be years but the other reason was was Blockbuster why on Earth
01:07:53
would anybody want to order a movie have it mailed to them get it 3 days later uh
01:07:59
and then keep it a week and mail it back when you can drive to a Blockbuster in 20 minutes and have the movie immediate
01:08:07
gratification and what happened when we did the no due dates no late fees is it
01:08:13
shifted because before with an all a cart system you would order it yeah you
01:08:18
get it three days later or you drive to Blockbuster in 20 minutes but now when it was no due dates no late fees you
01:08:25
could order your movies they'd sit on top of your TV you keep them as long as you want when you want to watch a movie
01:08:32
this lag time is zero compared to 20 minutes to go to Blockbuster because you could order a
01:08:38
couple I imagine three you could order three okay and so you always had something to watch when you're done you
01:08:44
put it in the mail and instantly you know two days later another one replaces it so all of a sudden we weren't two and
01:08:52
a half days slower than Blockbuster we were faster faster than Blockbuster and I think that was the
01:09:00
convenience and the thing is that when we did the analysis at the beginning about Blockbusters Achilles heel it was
01:09:07
the late fees everyone hated them uh that was the single biggest thing that
01:09:13
people would say about Blockbuster I hate the late fees and by being able to get rid of that it was a huge
01:09:20
competitive advantage and it was baked into the Blockbuster business model they couldn't easily
01:09:26
get out of it again so for someone that might not be aware of Blockbuster the late fees are if I didn't bring back this tape of this movie I would get
01:09:33
charged per hour or per day or something yeah it's usually three or four dollars a day okay which is a lot of money for a
01:09:39
DVD it's a huge amount of money for for that but it was also this feeling of uh
01:09:44
I was okay paying the initial fee to rent the movie because I want but now I've watched the movie and I just
01:09:50
couldn't get it back in time and now oh my God now I got to pay more just to return it it just felt like this
01:09:57
unwarranted unpleasant punishment for the customer I was thinking about something that Daniel conman the famous
01:10:04
sort of psychologist um talked about in his paper when he wrote about loss aversion and the tldr of it the too long
01:10:11
didn't read part of this is that Daniel Carman discovered that people have a real disdain for feeling like they've
01:10:17
lost something and in his studies he shows that if you drop $10 on the floor you don't need to find $10 to make up
01:10:23
for the pain of losing 10 you'd actually need to find 20 or 30 and and so he has
01:10:28
this wonderful graph where he talks about that we just loss to us is so much more painful than a gain so in the case
01:10:34
of Blockbuster a late fee is is is money I literally lost for nothing right so
01:10:41
it's not losing $4 in in the context of it's actually losing like $12 it's that painful exactly it was it was a really
01:10:48
really hated aspect of the video rental experience back then and also it made me
01:10:54
think about the peak and which is you remember the uh which Uber discovered in their Labs where they say that people remember the peak in the end of an
01:11:00
experience and so if my end of an experience with Blockbuster is getting charged getting punished that's really
01:11:06
interesting I've never heard that before but that fits entirely it was the perfect denoma to having an experience
01:11:13
with Blockbuster is to go in and have someone say thanks for returning your movie now you owe us $8 or $12 just like
01:11:19
a horrible end experience custom and that's why I think a no no due dates no late fees
01:11:26
was so profoundly game-changing for us and it marked the beginning of that that
01:11:32
was it that's what the company became for the next five or six seven years and
01:11:40
it was more than just no duties late fees but the transition to a subscription business was huge and this
01:11:48
is you know now everything's a subscription business every piece of software you buy is a subscription every
01:11:55
everything subscription back then that was not the case uh there was book clubs
01:12:00
which were subscription there was record and tape clubs of subscription there was magazines and that's all and in some
01:12:08
ways when you look back at what some of the huge Netflix Innovations were one of them was demonstrating you could apply
01:12:15
subscription to something which is reasonably unintuitive and it came from this fact
01:12:22
again this disconnected little piece of my past that I happen to had a year and
01:12:28
a half of experience really understanding subscription economics when you were looking forward so I I'm
01:12:35
so fascinated by this test that you did which which changed Netflix's fortunes there's a couple of them that you've described but when you did you know
01:12:42
looking forward that it would have that much of an impact and I'm saying this because that helps me to understand
01:12:47
whether I should just conduct a a lot more tests or I should do what I think most companies do where we sit in a
01:12:53
boardroom and we spend hours and hours trying to find the perfect test is the game just conduct more tests if I didn't
01:13:00
have to sit by the microphone I'd get up and hit you upside the head for that comment God no you should not be sitting
01:13:08
in the boardroom debating what to do you should be running more tests you should always be running more tests you don't
01:13:14
know you don't know I mean you don't your customers do but they even they don't know what they want and the
01:13:20
only way to figure it out is to throw all kinds of things at them and see what direction
01:13:26
they're interested in but so did I have any idea subscription was a big thing absolutely not and once it began to work
01:13:34
and it worked like crazy we still had no idea how to optimize it and we Netflix
01:13:40
still 20 plus years later spends ungodly amounts of time on testing all kinds of
01:13:47
things about subscription Dynamics what does it take to get someone to do it
01:13:52
what does it take to get someone to stay what influence is these it's unbelievably complex but it's
01:13:59
unbelievably important but subscriptions there's a reason why it's it's eating the world it's an incredibly compelling
01:14:05
business model and uh the fact that we stumbled onto it and that it worked so well just was a very very positive uh
01:14:13
thing you know it's interesting on the testing point just to close off there I embodying the position of most companies
01:14:18
or employees or Founders listening to this the reason why they don't want to run tests or don't have a culture of it
01:14:23
is because it involves failure and failure then in most companies results in blame and blame makes people feel bad
01:14:29
so it disincentivizes them but creating a culture where failing is a positive
01:14:35
and it's celebrated is quite a challenge I guess oh it certainly is it's it's a
01:14:40
career for me I mean I uh I do a lot of public speaking keynote speaking all over the world and a lot of them are big
01:14:48
companies who are going our whole world's being turned upside down our
01:14:53
whole Workforce is risk of Mark get in here and help us figure out how to make everyone a bit more risk
01:14:59
tolerant but you know what do they do uh they'll go okay Mark your theme today is
01:15:07
we're trying to get everyone to be bigger Risk Takers to take chances we want to celebrate
01:15:13
risk uh so but before you go on we're going to celebrate the sales leaders and
01:15:18
bring them up and reward them for the trips to Hawaii it it's like you said you have to let people know that
01:15:24
failling is not not only okay it's expected and it's a good thing and we found we we learn from it and I don't
01:15:31
even cons listen I don't even consider it failures they're not failures they're tests that didn't necessarily work but
01:15:39
they worked in the sense that you learn something from them and you just keep doing those over and over again and
01:15:44
again if you go back to this my first principle is how do you learn how to do tests which are quick cheap and easy you
01:15:52
can do tons of them talking about giving speeches there just a week before the do
01:15:58
com Bubble Burst you gave a speech in um New York City and your dad was there yeah my dad was the anti-
01:16:06
entrepreneur uh he was extremely risk
01:16:12
averse uh he was an investment adviser he worked for a uh managing money for
01:16:19
people in a company whose whole principle was fundamentals long
01:16:24
long-term value he had no clue whatsoever about why I was doing what I
01:16:31
was doing and this whole Venture world it was just completely made no sense to him um but that speech in New York City
01:16:38
was actually fairly interesting because what I was doing was speaking to the DVD
01:16:44
manufacturers Association I think it was about what we' learned about more effective ways to expand their
01:16:52
business and on one hand I think my dad was extreme ex proud to see that all the
01:16:57
stuff that I'd been saying which he thought was all a bunch of hooie was actually important and
01:17:03
interesting to people but unfortunately it was also um he happened to be in New York that time to get treatment for a
01:17:10
brain tumor which he had just realized he had and um so it kind of was this
01:17:17
beginning of this my dad understanding for the first
01:17:22
time what I was good at and at the same time the end
01:17:30
of not of our relationship but it marked the beginning of this saying goodbye to him so it was kind of this very very
01:17:37
Bittersweet uh Bittersweet time in 2000 at 42 years old when you
01:17:43
were 42 years old um he just just one week before the dot crash your father
01:17:49
passes away right I mean the timing is is um is is extremely unfortunate but also
01:17:56
just the impact that must have on one's perspective to lose their father at that that in that season of Life yeah I guess
01:18:03
it's part of you go well what else can go wrong and you find out
01:18:09
plenty but the tragic this is going to sound
01:18:16
tried I suppose but one of the tragic things about my father dying before the
01:18:21
dot collapse is he missed seeing that he was right he missed seeing that in fact this
01:18:28
was a lot of hooie that this apparent defying of Gravity by all of those do
01:18:37
companies commanding these ridiculous valuations with no revenues and even
01:18:43
even less profit um which he thought he could not understand how this could
01:18:49
possibly be real well as we all found out a week later it wasn't real
01:18:55
and I think he would have really loved seeing that in fact he was right
01:19:01
um but it was kind of this double hit for me you know reeling in fact from the
01:19:06
death of my dad and then all of a sudden having to worry now about the death of
01:19:11
my company did it change your perspective losing your father on what matters in
01:19:18
life
01:19:26
I'm gonna say no because what was great about my father
01:19:34
was that he was very true to himself he was very comfortable being an
01:19:40
iconic clast about holding different opinions uh even as we just mentioned
01:19:47
with the do bubble when everyone else was saying this was the next big thing and he's
01:19:53
going this makes no sense whatsoever and he held to it and he lived his whole
01:19:59
life that way and so in some ways when he died there was this sense that it is possible
01:20:08
to be true to yourself and um and be
01:20:14
fulfilled that you do not need to chase the trends was reminding me that
01:20:21
that can happen when I started my first job when
01:20:26
I was like um and I was probably 22 my first real job where I actually
01:20:32
had to go sit in an office uh my dad called me into the den um and tore a page off of a yellow
01:20:40
pad and on the page he had written in pencil the Randolph rules of
01:20:47
success and he goes this these are the things that I have learned over my career as a business person and I think
01:20:54
I want you to see these as you start your career as a business person and I
01:20:59
wasn't quite sure what to expect as I was looking at them and what was interesting was that these were not
01:21:05
business rules this wasn't like you know Buy Low and sell high or happiness is
01:21:11
positive cash flow or anything like that these were basically rules that said it's possible to be a decent person and
01:21:17
still be successful I mean it was simple things like you know do 10% more than you're asked it was um
01:21:25
be prompt it was um don't knock don't complain stick to constructive serious
01:21:32
criticism it was don't express opinions about things that you don't have the
01:21:39
facts for I mean that's who my dad was that he um
01:21:47
felt that those were the important things to communicate to me which is Mark be a mench
01:21:55
then the dotom bubble happens most of us can't remember I think I was how old was I must have been seven or seven or so
01:22:03
seven years old so I can't really remember what happened yeah but I know it was bad well it was especially bad for us I
01:22:12
we were talking a moment ago about subscriptions and how subscription economics are amazing and what makes
01:22:19
them amazing is that you acquire your customer and then that customer gives you money for months after afterwards
01:22:25
ideally for years afterwards but because a subscription customer is willing to give you money
01:22:31
for years afterwards you can invest more in acquiring that customer you can spend
01:22:38
$100 to bring that customer on board with the confidence they're going to give you $10 a month month after month
01:22:46
after month after month but it means in month one you spent 100 and you made
01:22:51
10 so when you have a subscription business which is booming which is going
01:22:56
crazy when customers are flooding in the door well money is flooding out the door
01:23:02
the cash required to service those bring those customers in for their first month
01:23:08
huge the revenue from them not so much not to mention we had a first month free
01:23:14
policy and that wasn't a problem in uh March of 2000 that was the era of irrational
01:23:23
exuberance that was where you had these companies where had no Revenue no real business model worth hundreds of
01:23:29
millions of dollars where I could go out on the highway with a green flag and
01:23:34
wave it and a dump truck of money would pull off and back up to my driveway and I just need to come out with the
01:23:40
wheelbarrows and bring the money in it was ridiculous until the dotom crash and
01:23:46
all of a sudden in a matter of a week or two completely dried up and all of a sudden having a.com on your name was no
01:23:53
longer the road to riches it was The Scarlet Letter um and we were in deep trouble we
01:24:01
were basically going to go broke being successful and when that happens as
01:24:08
you've seen with other entrepreneurs you do something called pursue strategic
01:24:14
Alternatives which is code for we have got to sell this sucker fast and we had an obvious strategic
01:24:22
alternative which was Blockbuster how you losing money at that point oh my God yes how much roughly uh at that point we
01:24:31
had accumulated losses of about $50 million and what were your revenues $5
01:24:37
million and you you you accumulated losses what was your sort of annual yearly burn rate how much money were you
01:24:43
burning every year uh well there we were only in business for we'd only been in business for 2 and a half years so it
01:24:51
most of that 50 had been in the previous 12 months I mean that's I mean on paper
01:24:56
that's not a good business well not just on yeah it's a terrible business you know they they say that one of the goals
01:25:02
of any startup is to receive a repeatable scalable business model that is not what we mean by repeatable
01:25:08
scalable business model um it's disastrous and you have lots of
01:25:14
businesses which go we're going to make it up in volume or once we just get the get the eyeballs then we'll monetize it
01:25:20
later so it's it when all of a sudden the opportunity for all those things
01:25:25
goes away it's disastrous we're just completely upside down our economics did
01:25:30
you go to Blockbuster or did they come to you no we tried going to Blockbuster for months we tried reaching out to them
01:25:36
but this was this ultimate listen we were doing five million a year they were doing $6 billion dollar a year okay so
01:25:43
you we had 150 employees they had 60,000 that we were like a gat you know
01:25:49
to them to an elephant they you know their tail flipped around what's this thing Buzz
01:25:55
no interest in US whatsoever it took months and finally we got the
01:26:00
call and as luck would have it we got the call we were at a corporate retreat
01:26:06
uh at a place called The alisol Ranch there's a a a city called Santa Barbara on the coast of California pretty rural
01:26:13
alisol Ranch is way back in the mountains it's a dude ranch you know horses so we're on Retreat and you also
01:26:21
know that in silic and Valley that we're pretty casual and when you're on Retreat you have to work at it to be even more
01:26:27
casual so all I had with me was shorts uh t-shirts uh thong sandals you know
01:26:34
that's that's all I had with me and that's when Blockbuster calls goes we'll like to see you tomorrow in
01:26:40
Dallas and I remember turning to Reed and going there's no way uh we can't fly
01:26:45
non-stop out of Santa Barbara uh the time zones are different we can't possibly get to Dallas by tomorrow and
01:26:53
so we did the prudent thing you do when you're $50 million in the hole and we chartered a corporate
01:26:59
jet uh a rounding error I think they call that uh we fly to Dallas um go up
01:27:06
to in the 27th 28th floor of this massive glass and steel skyscraper into
01:27:11
this huge cavernous conference room there's a big hardwood table made of I'm
01:27:18
sure out of some endangered Amazonian hardwood or something it was horrendous the whole thing and I'm there in shorts
01:27:25
and a t-shirt and your thong sandals and and the sandals and Reed I was jealous
01:27:32
he had a Hawaiian shirt he had buttons anyway in come the Blockbuster guys and we make our pitch we go we'll combine
01:27:39
forces um you'll run the stores we'll run the online business we'll build a blended model which our research has
01:27:47
shown is a GameChanger and everything will work out and it was going good you know they were
01:27:53
asking good questions they're leaning in they're and we're going okay this is this is rolling and then they asked the
01:27:58
big question you know how much and of course we'd rehearsed on the plane we
01:28:03
figured we're $50 million in the hole so $50
01:28:09
million and there's this silence in the room and I'm looking at uh Blockbuster
01:28:19
exec trying to piece together what the reaction is and it finally Dawns on me they're trying to suppress
01:28:25
laughter they're trying trying to keep a straight face at the hubris that this
01:28:31
little company $50 million in debt at the trough of the Meltdown could possibly be worth $50 million so as you
01:28:39
can imagine meeting goes downhill pretty quickly after that long quiet ride in
01:28:45
the cab back to the airport even quieter ride on the jet back to Santa
01:28:50
Barbara and I I so profoundly remember sitting there on the plane just my head
01:28:57
down like not talking just thinking ah I I was so
01:29:04
confident that if we just got the meeting that this Blended model was so self-evidently great that they'd save
01:29:12
us but now they weren't going to save us they were going to compete with us and we were in trouble did they make you an
01:29:20
offer uh no they just rejected the $50 million offer
01:29:26
and you know my Dad one of the things he sometimes to say to me is like you know
01:29:32
when I was struggling with some particularly nasty problem and came to him for the solution he' go you know
01:29:38
sometimes the only way out is through that you got to take these problems and just go right at them there's no no way
01:29:45
around and this was such a classic case of that there was no easy way out of this the only way we were going to
01:29:51
survive was be to compete with them that and we had a put ourself in a position we could do that when we laid people off
01:29:57
we dropped entire lines of uh adjunct little businesses completely focused it
01:30:03
in and and survived and eventually you know as eventually um passed Blockbuster
01:30:09
and eventually um Blockbuster went into bankruptcy I don't know how Blockbuster
01:30:17
couldn't have just looked over and seen your business succeeding at some point and gone okay we've got 6 billion
01:30:23
Revenue a year which will just destroy them will'll just you know overpower them with advertising or something it's
01:30:29
a big piece of innovators dilemma um in their case uh a couple things going on
01:30:36
um number one imagine you are the CEO of Blockbuster okay called John wasn't it
01:30:42
John antioco so you've got6 billion dollar coming in through your standard
01:30:48
business model which is serving these bricks and mortar stores all over the world $6 billion
01:30:54
and someone comes to you and goes we need to build an online component and John goes well what do you think that
01:31:00
could do in Revenue the first year and you go $2 million so would you say okay take our
01:31:09
very best Engineers let's put them on this project no you go okay figure here's a
01:31:17
hand figure it out and you could put the the B team is on it and of course it doesn't Netflix wasn't a movie company
01:31:23
company it was a software company I mean we had Silicon Valley we had people who
01:31:29
had spent their whole life building software you can't compete with that even with their a team it would have
01:31:34
been challenging but they put the B and the C team on it and they did that a second time and then a third time and finally each time we're stronger and
01:31:42
stronger and stronger and eventually they go we got to fix this and they pick a team they resource it adequately they
01:31:49
say get out of the building go across town set up here's the money come after these
01:31:56
guys and it's one of it's a story which has not really been told very well but they came really really close to taking
01:32:04
down um Netflix they were in a they that Blended model which we knew was a
01:32:11
killer which a blended model means you can rent from Blockbuster and you can
01:32:17
either return it in the mail or you can return it at the store or you can go pick it up at the store or you can have
01:32:22
it mailed to you and we couldn't compete with that we didn't know the stores and it really really came close
01:32:31
to taking Netflix down until all of a sudden they had all kinds of unrelated
01:32:37
corporate shenanigans that made them decide change CEOs we're going to dource this online
01:32:44
business and walked away from it what was I saw you talk about this on your Instagram recently um when John quit the
01:32:51
business so John was the CEO of Blockbuster and him quitting the bussiness for a
01:32:57
variety of reasons is much of the reason that you think Netflix actually ended up not getting killed by Blockbuster
01:33:02
correct can you explain that so and I'm not going to get this entirely right but there basically were people who are
01:33:10
corporate Raiders who would buy large amounts of a company's stock and take
01:33:15
seats on the board um take multiple seats on the board and begin to try and dictate
01:33:21
things to make a company more short short term profitable that happened to Blockbuster and one of the acts they did
01:33:30
was deny John ano's bonus he was the CEO of Blockbuster
01:33:36
yep and he said you can't do that and they go well we need to we're g to no we're not going to pay you the bonus
01:33:42
that we you were promised in your previous agreement and so he goes well in that case I
01:33:47
quit and then they went to find a replacement and they brought in a person
01:33:52
who had all of their experience at retail stores at convenience
01:33:59
stores and his vision was we have 9,000
01:34:04
stores in almost every community in the country in the world why aren't we
01:34:09
selling gum and clothing and and what are we wasting money on this digital
01:34:18
stuff and there's a this is super movie geeky so pardon me for the
01:34:25
segue um Step Spielberg who I'm sure you're familiar with his film school
01:34:33
project was a movie about a robot and the robot operates kind of on
01:34:39
a cost benefit analysis and there's the penultimate scene in the movie where the
01:34:45
robot is chasing somebody and he's getting closer and closer and closer and he's just about the obot to reach up and
01:34:51
grab the person's ankle and you see the sunk cost of the robot's time get to
01:34:57
break even and he stops and walks away an instant before he grabs the person
01:35:02
that's what blockbuster did they were within seconds of grabbing Us by the ankle and yanking us off the ladder when
01:35:10
something happened unrelated to that and they just turned and walked away and we just scampered to safety they lost
01:35:16
Focus yep so that's there's a lot of reasons Netflix Blockbuster didn't go
01:35:22
down because of Netflix only but Blockbuster went down because they
01:35:27
had a business model which was very very difficult to change and they didn't have
01:35:33
the courage and the persistence to be willing to do the things that would have made it change perfect Ted has quite
01:35:40
frankly taken the nation by storm a small green energy drink that you've probably seen popping up to a Tesco or
01:35:47
to a weight Ros they've grown by almost 10,000% in a very short period of time
01:35:55
because people are sick and tired of the typical unhealthy energy drinks and they've been looking for an alternative
01:36:01
perfect Ted is the drink that I drink as I'm sat here during the podcast because it gives me increased focus it doesn't
01:36:08
give me crashes which sometimes might happen if I'm having a 3 four five six hour conversation with someone on the
01:36:13
podcast and it tastes amazing it's exactly what I've been looking for in terms of energy that's why I'm an
01:36:19
investor and that's why they sponsor this podcast and for a limited time perfect ter have given Diary of a CEO
01:36:24
listeners only a huge 40% off if you use the code diary 40 at checkout don't tell
01:36:33
anybody about this and you can only get this online for a limited time so make sure you don't miss out you left the day
01:36:39
after the IPO in May 2002 the IPO happens the company is
01:36:46
valued at a big number um I guess your life has changed indefinitely from that point because it's a lot of money for
01:36:53
someone to have um and you go on you know leave the company for the reasons
01:36:58
you expressed earlier and you go on and do other things and I think at that point really the streaming War has been
01:37:04
has been now won by by Netflix and now many others as we sit here in 2024 but at that point was really when you know
01:37:10
Blockbuster are effectively dead I think they went oh they went bankrupt what eight years after the I didn't they was
01:37:16
those Wars raged for a while okay so you you go public in 2002 right they
01:37:21
continue pursuing you y um but ultimately they they ran out of steam eight years later and go bankrupt in
01:37:27
2010 you leave Netflix you leave Netflix you're a wealthy man you've achieved
01:37:33
success that almost everybody on planet Earth will never see in terms of
01:37:38
business at that point what matters what matters in
01:37:44
life uh the day of the IPO I remember we left the trading floor where we had gone
01:37:51
public New York City my young my son uh who actually with me today uh oh yeah in
01:37:57
the back was was with me he was a young much younger man and uh I remember the
01:38:03
two of us sitting in the in the taxi going downtown in New York we were going to get pizza because I figured he's a
01:38:08
California Kid he'd better experience New York Pizza uh and I was sitting
01:38:13
there going my life has changed you know I I do have the option if I want to to
01:38:21
not have to work again and I be in the cab seeing all these people who were going about their lives and going am I
01:38:27
different or not and part of it you then you realize I like what I do I I'll take
01:38:33
the day take a day or two but I'm going to be going back to work I still have problems to solve we still have to make this company successful and I did I went
01:38:42
back to work and it was not uh it wasn't as profound that my life changed like
01:38:47
the IPO is held up as this be all end all but it's just one more
01:38:54
Milestone along the way you know Netflix still had a lot to do and it it still
01:38:59
has a lot to do um the the more profound thing was was
01:39:05
actually leaving and realizing that I could be as I mentioned before could now begin spending my days doing the things
01:39:10
that I really loved doing and I have I've been incredibly lucky able to do that you know since leaving Netflix I do
01:39:16
get to spend every day working with other early stage companies I did start another company after uh Netflix which
01:39:23
did really really well um I have a great life and I still get a chance to spend
01:39:29
time with my family and I still get a chance to get out and do all the outdoors things that make me whole was
01:39:35
there grief associated with leaving and and that's sort of the months after you leave is there a grieving process
01:39:41
because you're surprisingly no there's uncertainty you know I I I've spent most
01:39:49
of my professional career in Silicon Valley and as most people there do I
01:39:54
know dozens if not hundreds of people who have economic outcomes there that
01:40:00
would allow them to not work another day in their life if they wanted to but it
01:40:05
if you do a simple survey of the friends of yours who've been put in that position the vast majority of them go
01:40:12
back to work they start another company and you realize that we are
01:40:19
entrepreneurs not because we have to do it to earn a living we do it because we love that process of
01:40:27
solving problems we love that process of making and building a company we love
01:40:32
that process as I described earlier of sitting around the table with really smart people solving really interesting
01:40:38
problems and if success is nothing else it's the ability to be able to do the
01:40:44
kind of things you want to spend your time doing and doing another company is
01:40:49
the most thrilling thing in the world and if I get a chance to do that why wouldn't I want to do that so in that
01:40:55
period after leaving I didn't say I'm retiring I didn't say I'm starting another company
01:41:01
I said I'm going to take some time and think about it and in my case I decided I didn't think I had enemy to start
01:41:06
another company um I was going to spend my time helping other people do it it
01:41:11
turns out that I was wrong I got sucked into starting another company that's a whole another podcast but uh this whole
01:41:19
thing is not about the IPO it's not about success uccess it's not about
01:41:25
money the thing that makes this the best job in the world is how cool it is to
01:41:30
take something which hasn't been done before and figure out how to do it and I just feel blessed and I imagine you do
01:41:37
too and the people you speak to are all blessed that we are allowed to spend our days doing that one of the things that
01:41:44
always inspired me and that I've mowed over for many years is the culture that was created in Netflix because it was so
01:41:50
pioneering and it's so sort of spad in the face of the way that we were told things were supposed to be done you know
01:41:56
cuz when we when I started my first business it was all about family and all of this stuff and then I remember that
01:42:02
day that I read Netflix's sort of culture handbook which is quite famous and viral now called freedom and responsibility and it was
01:42:09
everything that I it was the opposite of everything that I thought a business was supposed to be you know it was this
01:42:15
radical Freedom that people were given but then there was a really high bar and
01:42:20
I want I've always been curious like a where did that come from B is that for
01:42:26
every company is that the right way of company culture um and I guess see what is the
01:42:33
the unknown part because we all saw the deck but we don't get to see the actual Implement so I'll take your middle part
01:42:39
first which is this for everybody and the answer is no um culture as I often
01:42:46
say is not aspirational culture is observational culture is not something
01:42:53
that you dream up what you want it to be that you aspire to it to be it's not
01:42:59
brainstorming what our culture should be and now let's print up 40 posters and put them in the
01:43:04
breakroom that is not what culture is culture is how you as the founders
01:43:10
behave it's how you as the senior Executives behave people are watching
01:43:16
you and they're modeling off of you that is what culture is that's where culture comes from so if you aren't a certain
01:43:24
way you can't have your culture be that way and it's perfectly okay to say that
01:43:30
we're a family if that's really the way you behave and want
01:43:36
to build your company it's entirely appropriate that's not the way I wanted
01:43:41
to behave or build my company so I never said that but I'll get to that in just a minute but it comes from this so this
01:43:48
whole radical honesty thing at Netflix that just came from the way Reed and I always treated each other and the way we
01:43:54
treated our employees the way we wanted held them accountable to treat their
01:44:00
employees um so it has to come from how you genuinely are um you can police that
01:44:07
you can hold each other accountable you can say we want to hear from everybody and then have your HR person pull you
01:44:16
aside after the meeting and go Mark Reed you were always saying you really want
01:44:22
to hear from everyone of those meetings what percentage of the words do you think came out of your mouths then and
01:44:28
go be right Patty we'll do better next time I you want you want your actions to
01:44:34
match your words so that's the core thing of culture is it can't be something alien it means you have to be
01:44:41
accountable to it because it spreads Beyond you that the culture of the first
01:44:47
10 people is modeled off first two of you the next 90 is off the first 10 the
01:44:53
next 900 is off that first 100 and so on so if you let it slip if you say our
01:45:00
most one of our principles is no unless they're our best
01:45:05
salesperson or the Irreplaceable CFO well then then it's different no you've got to be consistent because everyone
01:45:11
sees that anyone with kids knows kids don't model what you say they model what you do the other piece this whole
01:45:17
freedom and responsibility thing is not novel it's almost every early stage
01:45:25
company has this because there's just aren't the resources to do otherwise you have let's say 10 people but you have
01:45:32
the work of a hundred there is not time to say okay Stephen here's what you have to do and here's here's what you have to
01:45:38
do and check you can't do that you just go all right here's what I need you see that mountain over there I'll meet you
01:45:45
there in two weeks and I need you to have this finished here's what you need
01:45:50
two weeks meet you there and then I'm not going to talk to you for two weeks and you're going to have to struggle and
01:45:56
figure things out and overcome obstacles based on what you have to accomplish it'll be different things and this
01:46:01
person has to accomplish but I trust that you're going to get to that Mountaintop with the
01:46:08
stuff done in two weeks that's the responsibility part but I'm giving you the complete Freedom how to get there so
01:46:15
that's an easy thing when you have 10 people it's a little harder when you have a hundred it's really hard when you
01:46:21
have a thousand and the reason is that there's an innocent thing that happens so get to a point and you're at
01:46:29
the mountain and someone shows up like three or four days late and you go oh
01:46:35
this isn't good I can't have this okay from now on I need everyone to give me a daily status report so I know in advance
01:46:42
if this problems and every person goes oh status reports okay and now everyone shows up
01:46:49
on time but then someone shows up and they spent too much money and you go oh
01:46:54
I can't have this okay everyone I need to pre-approve all expenses over $5,000 and all these people who you're
01:47:01
counting on to be responsible you're treating them like an infant you're going I'm giving you this you have a $10
01:47:08
million quarterly sales nut but I don't trust you to make a decision about what
01:47:14
type of Hotel you can stay in or what money you can spend to achieve come on
01:47:20
treat me like an adult that's free and responsibility is I I'm going to treat
01:47:26
you like an adult but most companies do is they put these guard rails in place
01:47:31
to keep people from making errors of judgment and the Netflix experiment is simply is rather than building guard
01:47:38
rails to protect ourselves from people with bad judgment let's build a
01:47:45
culture where there are no guard rails and only hire people with good
01:47:50
judgment and that's sit in a nutshell and you know I'm sure you you've seen
01:47:55
the deck but you know you know what the travel policy is there there isn't one you know the expense policy is there
01:48:02
isn't one you know what the vacation policy is you know there isn't there aren't any policies the policies are all
01:48:09
summed up as use your best judgment that's freedom and responsibility now that only works if
01:48:17
someone has the judgment to be treated that way so you have to to be diligent
01:48:23
about saying if you don't have the judgment to be able to make decisions effectively you shouldn't be here but it
01:48:31
turns out there's a magic to this I worked for a big multinational software
01:48:36
company back when I was doing direct response marketing and um we had a big
01:48:42
competitor with like Microsoft and we had a big corporate campus and it was beautiful had tennis courts had squash
01:48:49
courts it had a big Health Club really wonderful Cafe an Olympic swimming pool
01:48:56
and a hot tub and one day myself and Patty McCord
01:49:02
who was the HR person at Netflix we were walking back from lunch and we saw some of the engineers in the Hut tub and we
01:49:09
swung by to say hello and as we got close to the hot tub we could tell they were all bitching about the
01:49:15
company and we thought it was pretty funny that here they are sitting in this magnificent hot tub at the the company
01:49:23
complaining about it but it triggered this conversation which is if it's not
01:49:29
the amenities that make people want to work someplace what is it and the answer
01:49:35
is it's not the fireman pole and the nap pods and the kombucha on tap or any of
01:49:41
the other ridiculous thing that people throw at it's they want to be treated like adults they want to have agency in
01:49:48
their life and in their jobs they don't want to be told what they can and can't
01:49:54
do they want to be given a clear responsibility and given the freedom to achieve it and that is such a
01:50:03
huge unlock for Netflix it's more important than how much you pay someone
01:50:09
it's more important than almost anything I have been through this so I my first business started with the same set of
01:50:14
polic policies and rules especially as it relates like holiday so we've always had unlimited holiday even in the company that you're in you you're part
01:50:21
of now the 40 people that work for the ders now we have un limited holiday what I came to learn interestingly over time
01:50:26
is that the reason you end up changing these rules is because 5% of people it's
01:50:33
really like just a few people that don't exercise the Judgment you're talking about so what you end up doing is going
01:50:39
okay well I have to change a rule for everybody because of this small group maybe three or four people that can't
01:50:45
seem to execute really great judgment and and it's funny cuz I found myself at one point several times over my career
01:50:51
going right okay we have to get rid of the unlimited holiday because Tom and Dave and Nigel of 200 people in an
01:50:58
office can't make fair and responsible judgment and it's kind of just dawned on me as you speaking what what I actually
01:51:04
need to do is just address the three people you need to fire those people you're going to you're going to go the
01:51:10
opposite way you're going to start looking at all the other policies you have and go I'm going to take get rid of
01:51:16
those too I'm going to get rid of and little by little but again it's only if
01:51:22
that's you it has to match how you want the company to feel it can't be artificial no it is
01:51:28
it's always been because I've the reason why I'm an entrepreneur is because I'm impossible to employ because I'm I hate
01:51:36
jobs so I tried to create a company where I would want to work in which means that if you show up late good
01:51:42
because I'm probably going to be late too and but the maybe the reason I was late is because I was working late on something and that actually doesn't
01:51:48
matter so what time you arrive doesn't matter it's you know cuz responsible people someone like Jack you haven't got
01:51:54
to tell Jack when to work Jack is so focused on the mission Jack will figure out when he needs to get how and when he
01:52:00
needs to get his job done um and you don't end up making the rules for people like Jack job at Netflix for you no but
01:52:06
he's one of those people because he's like a Founder here he like founded this thing with me so we have that kind of mentality but yeah you're right you end
01:52:11
up making it's so interesting it is it's it's it's all about taking down the guard rails and and what happens
01:52:19
is taking the guard rails down great means those three people can't work here but it makes the other 97 really want to
01:52:27
work there it makes other people because most places don't do that it's like uh
01:52:34
doesn't make it I don't care when you work I don't care what hours you work I don't care whether you're home or in the office I do care that once we've agreed
01:52:42
what responsibilities you have that you achieve get those things done and if you can do it in six hours a week because
01:52:49
you're so smart and talented all power to you the last thing I wanted to talk to you about is
01:52:55
actually something that I read on on LinkedIn which went viral which was you talking about your relationship with your wife and your commitment to date
01:53:02
night on Tuesdays right the post went viral because I think it struck a cord with a lot of people who have really burnt themselves out because of their
01:53:08
job what is that principle you have with your wife and how long have you kept it for so right when I was you know in my
01:53:14
late 20s I was working like a dog I was working all the time nights weekends and not cuz I had a slave dropper boss but
01:53:20
because I CU I loved what I was doing I just was totally into it and I was in
01:53:27
a relationship at the time with the woman who's now my wife and it kind of slowly dawned on me perhaps with a
01:53:33
little bit of help from her that this wasn't as satisfactory for her as it was
01:53:39
for me and it kind of made me realize that if I really wanted to have a
01:53:44
sustainable long-term relationship I had to uh figure something out and
01:53:54
that I realized that I had to have more balance in my life uh and we began this
01:54:00
policy of saying I'm not I'm going to prioritize my relationship with my girlfriend and who's now my wife and
01:54:08
that has taken a lot of forms but the one that I referred to was I had this policy at Netflix before Netflix after
01:54:16
Netflix that every Tuesday uh I'd leave work at 5:00 sharp
01:54:21
my wife would get a sitter or before we had kids we' just go out and we'd spend the evening together had a date night
01:54:28
and this was sacren that I don't care what's going on I'm leaving at 5 um if there's a crisis
01:54:36
we're going to wrap it up by five if you have to talk to me well we're going to talk in the way to the car but I'm
01:54:41
leaving at 5: and um it was kind of
01:54:46
remarkable because after a while uh crisis stopped happening after o00 on
01:54:52
Tuesday and all of a sudden people were able to solve their own problems uh after 5:00 on Tuesday but there was a
01:54:59
secondary benefit which is that I did talk a lot about the importance of balance that I didn't want this to be
01:55:05
all encompassing that there were other aspects to what was important everyone's lives and by modeling this I was walking
01:55:12
the walk I was showing that in fact um you could run a company and have a
01:55:21
relationship and it wasn't easy this is a startup so a lot of times you know i'
01:55:26
have date night we get back late and I'd have to go back and into the office at 10 o'clock or uh a lot of times I'd come
01:55:33
home have dinner with my kids go back and work for a couple hours but I carved
01:55:38
out the time to be present and do those things and in my life um it's maybe even
01:55:45
a bit more challenging a startups are hard and I have a family but I also have
01:55:50
this passion for outdoor stuff you know I love Backcountry skiing and climbing
01:55:56
and kaying and mountaineering all this stuff that's really hard to do between
01:56:02
your five o'clock call and your 7 o'clock meeting so I had a really
01:56:08
structure my life in a way that I could have meaningful time in all three of these areas of my life and it's been
01:56:15
really really hard was there a risk of losing the relationship at some point yeah probably when I was in the my right
01:56:21
that that point when I was 2930 where am I I was becoming clear she was going I'm not going to put up with this you know
01:56:29
if you're not going to be here for me what's the point how did you take that at
01:56:35
first very sobering I mean it really makes you think how important is this to
01:56:43
me um and I know some people might say it's not that important my what my work is the most important thing it's the
01:56:49
only thing that's important to me I decided otherwise that um that having a relationship was
01:56:55
important to me and more importantly that I thought it was probably possible that I could do both um again it's part of the running
01:57:03
not running for planes it's saying I don't need to be there all the time I can prioritize well I can
01:57:10
um uh distribute work to other people I can make this work and not only that not
01:57:15
only can I do the work and have the relationship with my wife and my family I can get out and do outdoor stuff which
01:57:23
is what I need to make myself whole and listen this is a great way for me to wrap this in a way but you know
01:57:30
I've had a amazing entrepreneurial career as I you know I've had six seven companies depending upon how you count
01:57:36
it I've had a three IPOs you know two multi-billion dollar companies so proud
01:57:44
of that but um way more proud of the fact that I managed to do all that while
01:57:50
staying married to the same woman while having my kids grow up knowing me and as best I can tell liking me um and still
01:57:58
getting out to Backcountry ski mountain bike uh and all the things that I need to make me whole and that I'm proud of
01:58:06
in the grand scheme of your happiness you've got your business Endeavors you've got your fantastic
01:58:12
relationships with your wife and your family what does matter more oh it's a
01:58:17
trick question I mean it's so I guess I'll answer in the counterintuitive way way you need all
01:58:24
three you know I I think had I said had my wife said some ultimatum like I need
01:58:29
to quit and you know you were going to move to Montana and you're going to be a mailman and and we'll have a great I
01:58:35
would have been unhappy and I mean I've had a great relationship but she knows that she knows I can't turn this off I
01:58:43
can't turn it off there's something about seeing problems and wanting to fix them and having to pick one and say
01:58:51
that's all I'm going to do that's no life either um that's why I think you
01:58:57
know again before we started you said what do you what's your big focus and I said balance uh I think about it every day I
01:59:03
think about it every week they're all important and I do what I have to do to make that happen Mark we have a closing
01:59:10
tradition on the podcast where the last guest leaves a question for the next guest not knowing who they're leaving it for and the question that was left for
01:59:15
you is what in your life were you most wrong about and what did you learn from
01:59:20
it uh so one of my big regrets is I mentioned
01:59:27
before that I had all this Magazine subscription experience uh I knew circulation I knew
01:59:34
the subscription business and it took me more than almost two years to figure out
01:59:39
that maybe we could use this stupid thing for Netflix and I think of all the time and all the money that we wasted
01:59:47
because I never even occurred to me to try that and God I wish I could kick
01:59:52
myself and go back and say for God's sake try this sooner try this sooner hindsight's a wonderful thing it is
01:59:59
isn't it and it fills you with wonderful lessons and wisdom and all of that wisdom has been encapsulated in this wonderful book that will never work in
02:00:06
various ways as you go through the Journey of founding Netflix but also the life that's lived in amongst those pages it's one of the most interesting
02:00:12
fascinating Timeless books I've read because it's about true principles the true principles from your father from
02:00:17
your journey and from everything you've learned along the way so thank you so much for writing such an incredible book Mark um I'll link it down below it's
02:00:24
called that will never work the birth of Netflix and the amazing life of an idea and thank you so much for the work you
02:00:29
do for entrepreneurs across all your social channels across your your work and your mentorship because it really is
02:00:34
um looking back down the ladder and helping pull other people up with your wisdom and that's an incredibly incredibly generous thing for you to do
02:00:40
so thank you so much Mark thanks Stephen [Music]
02:00:52
oh
02:01:02
[Music]
