Marc Randolph: Every great idea looks bad on day one

1. 0:00 – 2:03

   Intro

   1. MRMarc Randolph0:00

      We were in deep trouble at Netflix. We had losses of about $50 million. We have got to sell this sucker fast.

   2. NANarrator0:07

      Mark Randolph is an American tech entrepreneur, the co-founder and first CEO of Netflix. With a career panning numerous startups and ventures, Mark's expertise in innovation, leadership, and business strategy is unparalleled.

   3. SBSteven Bartlett0:19

      August 1997, Netflix was founded.

   4. MRMarc Randolph0:21

      Yes. And the reality is, the idea was ridiculous. It didn't work. Nobody would rent DVDs by mail. But with over 40 years of being an entrepreneur, I've learned every idea is bad. We just don't know why they're bad 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 thought, "Let's just have a subscription and no late fees." It was a ridiculous idea, but when we tested it, people loved it. The Netflix DVD service has changed the world.

   5. SBSteven Bartlett0:50

      You explored selling Netflix to Amazon two years after you'd launched.

   6. MRMarc Randolph0:54

      For probably 10 to $15 million. That's not a bad return for 12 to 18 months' work. But I thought it was much more interesting to take the shot and see what Netflix could become. But all of a sudden, in a matter of a week or two, in spring of 2000, we were gonna go broke being successful. We tried going to Blockbuster for months, but they weren't gonna save us, they were gonna compete with us. Netflix wouldn't have survived. But there's a story which has not really been told, which took one of Netflix's biggest impediments and turned it into one of its biggest assets. So ...

   7. SBSteven Bartlett1:31

      The Diary of a CEO raffle is about to close. Anyone that subscribes to The Diary of a CEO before we hit seven million subscribers, which is probably gonna be in a couple of days' time, you will be included in the raffle. And on the day we hit seven million subscribers, we are giving away a lot of money can't buy prizes to all of you. So hit the subscribe button, get in before seven million, and I'll announce the prizes and the winners in the comments below when we hit seven million subscribers. Mark,

2. 2:03 – 3:11

   What’s your mission?

   1. SBSteven Bartlett2:03

      in this season of your life, if you could consolidate your mission and the work that you're doing across the content you produce, the people you speak to, your professional endeavors, if, if you could consolidate that into a singular focused mission, what exactly would that mission be in this season of your life?

   2. MRMarc Randolph2:21

      For me, at this point in my life, it's all about mentorship. Um, you know, I've done seven startups. I kind of recognized quite a while ago, I do not have, uh, the appetite to do another one. Uh, it's that 7 by 24 focus that I don't want to do anymore. I have other things that I would love to have, uh, spending time on. But you can't turn it off. Uh, I've also realized that over 40 years of being an entrepreneur, I've learned a few things about how to actually play this game. And so my mission now is, how do I pay that forward? How do I help other people, um, either have a shot at it, like I did? Or if they're already playing the game, how do I try and increase their odds of success?

   3. SBSteven Bartlett3:09

      You wrote this book called That Will

3. 3:11 – 4:24

   Why did you write this book?

   1. SBSteven Bartlett3:11

      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 to walk away with?

   2. MRMarc Randolph3:19

      I've come to believe that almost all of the information that people receive from the general media about entrepreneurship is wrong. Um, it glorifies entrepreneurship in what I think is a damaging way. You watch these movies that are about entrepreneurship, 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 profession. So in a simple answer, the reason I wrote the book is I wanted to give people a true story of what it really means to come up with a crazy idea that everyone thinks is never gonna work, and the struggle to make it real. And if someone reads that book and gets to the end and goes, "This sounds great," then that's exactly the right person who should be an entrepreneur. If someone goes, "This sounds a lot harder than I expected," well, then I've done a, uh, a service in that way as well, which is I've kept someone from getting into this for all the wrong reasons.

   3. SBSteven Bartlett4:22

      When you, when you look back on

4. 4:24 – 8:50

   Your journey to Netflix, what got you there?

   1. SBSteven Bartlett4:24

      your, your journey to Netflix, do you... You know, I remember hearing Steve Jobs speak about the decisions he made in hindsight that in a... when he reflects on his life, resulted in him starting Apple 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 started learning about design and typography, and that shaped him. What are those early sort of experiences that in hindsight fed into the creation of Netflix?

   2. MRMarc Randolph4:55

      Probably the meta thing was the fact that most of these endeavors were entrepreneurial. So for example, initially, my first foray into direct response marketing was when, uh, I asked if I could run the mail order division of this sheet music company 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 found someone's asking for a list of great songbooks, you'd make a copy and you'd mail it out. And then if an order came in, you'd go to the warehouse and pick, pack, and ship it. And that spoke to me. And I began experimenting and said, "Okay, now what happens if I do two pages 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. So it was this combination of direct response, but more importantly, it was building something. It was creating a company inside a company. So there are certainly those preparations. From the...... direct response side hugely formative for at least Netflix, uh, because if you think about it, what direct response marketing is about is all about testing. It's all about analytics. Um, and when the internet came along, and I saw what the internet was, what immediately popped in my head was, oh, my gosh, this would, is the power to do direct marketing but on steroids. This is so much more positive. I'm doing this personalization, but it's very brute force personalization. I mean, it's- it's, "Dear Stephen, wouldn't your friends at 17 Crescent Circle..." It's like this ridiculous personalization. What the internet let me do is personalize every webpage for one person.

   3. SBSteven Bartlett6:46

      Yeah.

   4. MRMarc Randolph6:47

      But one of the direct response endeavors that I did was I was a circulation director for a magazine. We, we launched a magazine, and that's subscription. And so you go, okay, well, look at this. You have someone who's 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. It's not that big of a leap to say, okay, it was subscription. (laughs) It was direct response on the internet. So yeah, these things were pretty formative.

   5. SBSteven Bartlett7:15

      So interesting. So you, on one hand, you had this business where you were physically sending things in the post, and then you got involved in another business where you were doing subscriptions. And these kind of, I guess, plant these sort of seeds in your brain, to indus- industries that you start to understand. And it's funny because when people think about creativity, I heard someone say before that creativity is essentially collecting lots of different clouds and then connecting them in new- new ways. So 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 you're describing there.

   6. MRMarc Randolph7:45

      It is. And- and the thing is at the time, you don't necessarily know, um, you're in the right place at the right time, 'cause I certainly wasn't the only person who said, "Wow, the internet could be a powerful force for selling things."

   7. SBSteven Bartlett7:57

      Mm-hmm.

   8. MRMarc Randolph7:57

      Uh, Jeff Bezos was one of the first people to recognize the power it could have to sell things when he did Amazon, which at the time was only books. But there were a lot of different models we could have looked at, and so in terms of Netflix going into video rental and doing video rental by mail, that was entirely driven by the fact that I had worked for so long in a catalog business where I had mailed things in boxes, and I had seen, I knew a lot about all the shippers, and I knew a lot about fast shipping. I mean, I had this huge repository of- of information and experience, and I didn't know how it'd be used. But all of a sudden, you're looking 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 the things that comes up is something you've experienced in the past.

   9. SBSteven Bartlett8:48

      You launched this company Integrity

5. 8:50 – 11:27

   Meeting your Netflix co-founder

   1. SBSteven Bartlett8:50

      QA between sort of '96 and '7, and that's ultimately acquired by Reed Hastings.

   2. MRMarc Randolph8:55

      By Pure Atria, yeah, by R- Reed Hastings' company, yes.

   3. SBSteven Bartlett8:58

      And that's where you and Reed Hastings met-

   4. MRMarc Randolph9:00

      Yes, correct.

   5. SBSteven Bartlett9:00

      ... who's the other co-founder of Netflix. What was that like?

   6. MRMarc Randolph9:04

      (laughs) Uh-

   7. SBSteven Bartlett9:05

      That first meeting with Reed Hastings?

   8. MRMarc Randolph9:07

      Meeting Reed was like this instant junction of two like minds. Uh, we both recognized something in each other. One is that we both approached problems very differently. I was very emotional about it. I don't mean emotional like I'm running, crying from the room. I mean empathy-

   9. SBSteven Bartlett9:27

      Mm-hmm.

   10. MRMarc Randolph9:28

       ... that I'm a marketing person. Uh, when I put something out there, I can almost intuitively sense how someone's going to respond. Reed, his background is mathematics and computer science, much more logical, much more methodical. And we kind of realized as we begin solving problems together how well those two integrated. But at the same time as having these differences in approaches, we were very similar in that we both shared this commitment to honesty. Uh, not because we both swore an oath, just was our nature that life was too short to shade the truth. That if you had 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. Um, and we both were like that. And it allowed us to have these really intense, interesting conversations where we were s- trying to find the truth out of something but pushing each other and challenging each other. And it ended up being a very, very powerful way to solve problems. And we were only at Pure Atria together for seven or eight months, and then lightning happened to struck again, where Pure Atria was now being acquired. Uh, and this time, um, both Reed and I were gonna lose our jobs. They already had a CEO. They already had a senior VP of worldwide marketing, so we were gonna be out of a job. Uh, we had six months, and Reed was gonna go back to school, get a higher degree in education. I was gonna start my next company, and, uh, Reed wanted to keep a finger in the pie here, and we came to an agreement that I would start the company. Uh, he would be my angel investor, and he'd be my board chair, and all we needed was the business idea. Uh, and-

   11. SBSteven Bartlett11:25

       (laughs) All you needed was a business idea?

6. 11:27 – 16:02

   Searching for a business idea

   1. SBSteven Bartlett11:27

   2. MRMarc Randolph11:27

      Exactly, and-

   3. SBSteven Bartlett11:28

      Only that. (laughs)

   4. MRMarc Randolph11:29

      Yeah, just a small manner of- of needing something to do. And thus began this process which went on for months of Reed and I kind of searching for a business idea. And we- we had a methodology, so don't, uh, don't think this is random. Um, and Reed and I happened to live in the same town. We lived in Santa Cruz, California together, and we had gotten in the habit, many months earlier, of commuting to work together. And so once we knew we were selling the company, once we knew we were losing our jobs, we still were commuting to work, but now the conversation in the car shifted. And what would happen is Reed would pick me up at my house.And we'd barely be out of my driveway. And I go, "Okay, Reid, I've got one for you. Personalized shampoo. You're gonna cut off a lock of your hair. You're gonna mail it to us, and we're gonna have a team of hair scientists who are gonna formulate a custom blend, and people are gonna subscribe to it." And the same thing would happen no matter what I pitched, is there'd be silence. Reid would be staring out the window, just steering the car. And you'd think he hadn't even heard me, but I knew that kind of behind that stoic face, all the calculations were taking place, like, you know, the risk and reward and the cost and the benefits. And it might take five minutes, 10 minutes of silence, but then eventually he would turn to me and go, "That will never work." And he would lay into me with all the reasons it's such a bad idea. But of course, I could come prepared and I'd come right back at him with all the research I had done, all the reasons I was sure it was a good idea. And we 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 there was promise or no promise. And almost all of the time, there was very, very little promise in these ideas. But next day, I'd have another one. Like, "Okay, Reid, personalized pet food, uh, custom sporting goods, vitamins." I mean, I pitched all those ideas. (laughs) Re- I pitched him one, video rental by mail. People are gonna come to the website, they're gonna pick out a movie, we're gonna mail them the movie, and they'll keep it for a week, and then they'll mail it back. And at the time though, this was 1996, '97, uh, video rental, you may remember, it was on VHS cassettes. So they were too big and too heavy and too expensive. And so that idea got trashed exactly the same way that the dog food and the personalized shampoo did. And kept on searching. And then the breakthrough, if there was one, came one morning where Reid picked me up and I'm on my way out the door, out, out the driveway. "I got one for you." And he stops me and goes, "I gotta tell you about something I read about. There's this technology that came out. It's called the DVD. It's this little disc that holds a movie, and it's thin and it's light." And we brainstormed that a little bit and realized this could be the unlock for that old video rental by mail idea we had talked about six or eight weeks ago. And then we did this quintessentially entrepreneurial thing, which is mid-commute, we turned the car around and drove the car back into Santa Cruz to try and validate this idea. We did not go 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.

   5. SBSteven Bartlett15:05

      That day?

   6. MRMarc Randolph15:06

      That day, mid-commute. Turned the car around, went down into Santa Cruz, tried to buy a DVD, couldn't find one, settled for buying a used music CD, same size, 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 the envelope, address it to Reid's house, bought a stamp, and dropped it in the mail and went to work. And that very next morning when Reid picked me up, he held up a little pink envelope with an unbroken CD in it that had gotten to his house in less than 24 hours for the price of a stamp. And that was probably the moment we said, "This actually might work. We can use the post office." Um, and that shifted everything. And that's the point we began saying, "This could be the idea that we do together."

   7. SBSteven Bartlett16:00

      So many entrepreneurs

7. 16:02 – 19:44

   How to know if you’ve got a winning business idea

   1. SBSteven Bartlett16:02

      and aspiring entrepreneurs are at that exact phase where they want to leave their corporate job. Their brain, everywhere they go now, because they're wi- they've wired themselves to be looking for an idea, is finding lots of random ideas. Their dog will, 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 to just pause there and try and interrogate what the framework is for knowing if you've, if you've got a winner or not. Like, how d- how did you... 'Cause presumably you had got yourself passionate about the, um, shampoo idea. So like, how do you know when to drop an idea? And how do you know when to commit to an idea? What was the framework you're using?

   2. MRMarc Randolph16:38

      The framework is that every idea is stupid. There is, e- you know, listen, you probably haven't had a corporate job yet in your, uh...

   3. SBSteven Bartlett16:47

      (laughs) No, thank God.

   4. MRMarc Randolph16:48

      Yes, thank God is right, because there's this thing in corporate, uh, I would say corporate America, but corporate world, and it's the brainstorming session.

   5. SBSteven Bartlett16:57

      Mm-hmm.

   6. MRMarc Randolph16:58

      And they put everyone in a conference room and they go, "We're gonna brainstorm and try and come up with an idea for whatever it is." And he goes, "But first, some ground rules for the brainstorming. Rule number one, there is no such thing as a bad idea." And I call bullshit. There's plenty of bad ideas. In fact, there's no such thing as a good idea. Every idea is bad. We just don't know why they're bad yet. And so the framework I approach, I assume all these ideas are ridiculous. I assume none of them are going to work. But here's the difference. The reason I start from that, that, uh, position is I don't want to commit the single worst thing you can do as an entrepreneur, which is fall in love with your idea. And you've talked about the person who 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, "This is a great idea." And they tell their partner and their partner goes, "Oh, that's brilliant. I'd buy that." And so they go, "Okay." And they begin working on a business plan and they write this 10-page business plan and they're dreaming about how... They're going, they're, how amazing it's gonna be. "Just think about when we have this line of, of fa- We can do cats too, and then giraffes." You know, they've, they've built this incredibly ornate business in their head.All based on this feeling that this must be a good idea. And y- you've got to nip 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 first thing you think about, the only thing you think about is, how can I quickly, cheaply, and easily collide this idea with a real person and find out is it in fact a good idea or a bad idea? How can I do some kind of hack that will allow me to quickly find out whether customers actually would want this or not? And almost always, you build this quick, cheap, down and dirty, I don't mean minimal viable product, I mean unviable, something you can quickly do like turn the car around and mail a CD to yourself just to find out the, w- the basic premise of can I actually use the US mail to send movies back and forth? Because if that had failed, well, great, on to the next one. And th- that's such a critical, critical step. That's the framework that everyone has to have. It is not about having a good idea. Having ideas is easy and trivial. The important thing is how clever can you be to come up with a quick and cheap and easy way to test it.

   7. SBSteven Bartlett19:42

      Why? Because I know

8. 19:44 – 24:10

   The importance of stress testing your idea

   1. SBSteven Bartlett19:44

      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 listening right now that are probably right in the moment you've described. They've spent a year building up this thing in their bedroom. (laughs)

   2. MRMarc Randolph19:56

      Oh.

   3. SBSteven Bartlett19:56

      For anyone that can't see, he's got his head in his hands. Um, they've spent a year in their bedroom building and working on this project. Why is that a terrible idea?

   4. MRMarc Randolph20:03

      It's such a waste of time, because what happens is, two things happen. One is this r- idea becomes so large and ornate and complicated in your head that you go, "Okay, Mark, I need to get started. I need to raise $5 million 'cause I'm gonna have to hire all these people to, to build this thing." And they're probably building the absolutely the wrong thing. Uh, you, you can't, you, you can't just go ahead and base it on what you think is gonna happen. You've got to start from a position of real information. L- listen, perhaps the cleanest way, since we have a bit of time, is to give you an example. I do a lot of work with university students. And, uh, I was meeting with a young woman who, uh, at the university, and she goes, "Okay, Mark, I've got this idea. Um, what I want to do is peer-to-peer clothing sharing. In other words, I've got all this clothing in my closet that I never wear or I don't wear very often. And I know my friends have a lot of clothing in their closet and other friends have clothes in their closet. It'd be great if we had this website and we could all post what we have and we could borrow each other's clothes and..." And I'm going, "Okay, that's interesting. W- what can I 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 to hire a team to build this for me?" And I went, "Whoa, you know, slow down here. Okay, interesting idea. But let's figure out if, if we can come up with a quick and cheap and easy way to collide this idea with reality." And I said, "Do you have a piece of paper?" She goes, "Y- yes, smart-ass, I'm a 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 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 like to borrow my clothes? Knock.' And I want you to tape that to the outside of your dormitory room. And we're gonna find out in the next 24 hours whether the very, very first principle behind your idea is real. Is anyone gonna knock? 'Cause if nobody knocks, well, you've learned something very important right there. This thing you think is so attractive might not be. But let's, let's be optimistic. Let's assume a bunch of people knock. Great, you've learned something. But you're also gonna learn the next thing, which is, are there problems with fit? Are there problems with style? Are the people who knock and look at your clothes actually gonna want any of them? All right, let's be even more optimistic. Let's say they do find out ones they wanna borrow. Well, you're gonna find out the next piece. How do you feel when your favorite blouse comes back stained or torn? You're gonna find out about the cost of doing dry cleaning. You're gonna find out all of these things, and you're gonna find about all of this for a piece, with a piece of paper, a tape, and a marker. None of this raising money, dropping out of school, and doing any coding. You're gonna do something very simple. Now, is this scalable? No. Is this repeatable? No. But that's fine. You're gonna do it all with three by five cards or on a pad. You're gonna do it manually, and you're gonna start losing your mind. But when you finally get to the point where you are ready to go and maybe raise money or drop out of school, you're gonna know what you're dropping out of school for. You're gonna know what you're raising money for. You're gonna be able to tell someone, 'Here's my acquisition cost. Here's my lifetime value. Here's my CAC. Here's my...'" You're gonna know all of these metrics. You're gonna know the complexity. You're gonna have tried all these different things. You're gonna know what demographic... And you found out all of that for nothing except for your time. That's what I mean by figure out some way to validation hack, and that is the key to being an entrepreneur. You have an idea, quickly, cheaply, and easily test it. Find out it's ridiculous, abandon it, go on to the next one.

   5. SBSteven Bartlett24:08

      It's funny, 'cause, uh, obviously I'm a dragon

9. 24:10 – 27:18

   Being too romantic about your idea

   1. SBSteven Bartlett24:10

      on Dragon's Den, which is basically a show like Shark Tank where we see 100 pitches a year from entrepreneurs. And what I observe in some of those pitches, especially when they're a little bit early on and they haven't got product market fit quite yet, there, there hasn't been evidence that the market actually cares, is a huge amount of delusion.To the point that you could give someone some feedback, but because they've spent one, two years of their life, and maybe mortgaged their house and invested it into this business, they're, they're now in the sunk cost fallacy, which is that sort of cognitive bias where you've invested so much in something that you're basically defending your bad decision at all costs, and you can't see the light of day. And, um, and that f- you know, my first business was the death of my first business. But for many entrepreneurs that I meet, it's 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 conf- conflict with what they want to believe.

   2. MRMarc Randolph25:02

      It's, it's ab- You're, Steven, you're absolutely right. It is the single biggest reason that 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 started is almost impossible. Or they are so far along, they can't stop. It's, it's tragic in, in a lot of ways. That, which is why you have to start from the, the belief that your idea's a bad one, uh, because that makes it easier to walk away from it as soon as you realize you were right. Um, but what happens, if you can get this discipline of taking your idea and immediately trying it, is almost always takes you in a new direction.

   3. SBSteven Bartlett25:43

      Yeah.

   4. MRMarc Randolph25:43

      Yes, your original idea was terrible, but oh my gosh, do you see how this person did? Let's try this. Oh, that doesn't work. Let, let's try this. And that is entrepreneurship. It is this leaping from the back of one, uh, alligator to the next. And there are those alligators, just hop l- long enough to, before they sink or before they bite you, and you jump to the next one.

   5. SBSteven Bartlett26:04

      Uh, I've, I, I think I've found two sort of species of entrepreneur, and-

   6. MRMarc Randolph26:08

      (laughs)

   7. SBSteven Bartlett26:08

      ... the, the real distinction between them is how long they've been doing it. And one species of entrepreneur that I know, they care entirely about being right, which is their initial hypothesis being correct.

   8. MRMarc Randolph26:19

      Ugh.

   9. SBSteven Bartlett26:19

      And that's typically the young entrepreneur. And then the oth- the more seasoned entrepreneur cares entir- entirely about being successful regardless of whether it's via their initial hypothesis or not. They care entirely about, like, saving time and being successful, not being right. And I, I think it's interesting that tenure as an entrepreneur seems to determine which camp you sit in.

   10. MRMarc Randolph26:41

       It's also your personality. Jumping back to our conversation earlier about what attracted Reed and I to each other was that both of us were in that camp that said, "We don't care whose idea it was. We just care about getting to the right answer."

   11. SBSteven Bartlett26:55

       Mm-hmm.

   12. MRMarc Randolph26:55

       And part of this culture that we had with each other and that we built with other people was, you could argue like cats and dogs, and eventually, you all 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 was right. I was wrong." And you don't even remember who was right and who was wrong. It's a big piece.

   13. SBSteven Bartlett27:16

       August 29, 1997,

10. 27:18 – 34:11

    Netflix’s early years

    1. SBSteven Bartlett27:19

       Netflix was founded by yourself and Reed Hastings. From, from that day onwards, did, 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 be?

    2. MRMarc Randolph27:31

       (laughs) Uh, I am completely astounded and amazed at the direction that Netflix has gone. Never in a million years could I have dreamed of the company that exists now being the same one that we were thinking about i- in August of 1997. It's astounding to me what's happened. Uh, and it's the nature of entrepreneurship. You can't predict where these things are going to go. Uh, that wasn't the point though. It wasn't like Reed and I were in the car going, "Uh, okay, when do we enter the streaming war, and when, how do we deal with Chi..." No, this was a very, very simple, straightforward problem. Uh, video rental in the United States is $8 billion a year. Um, it's very unpleasant that the pers- the company who has the lion's share of that market is doing things which customers hate.

    3. SBSteven Bartlett28:32

       Blockbuster.

    4. MRMarc Randolph28:32

       There has to be a... Blockbuster. There has to be a better way. That's where it starts from. That's the problem you're trying to solve. And trying to solve the problem is this dual thing, which is how do you do something that a customer might want, solve the problem for the customer? But also, how do you make a business out of that? And that's all-consuming. Uh, I remember we had a company meeting early on, maybe we were two or three months in. And I remember getting up in front of the, uh, company and laying out what I thought was gonna be this big, hairy, audacious goal for us. Someday, we're gonna be one of the top 10 largest video chains in the United States, which (laughs) in retrospect was ridiculously trivial. But from where we stood then, it may as well have been saying, "We're gonna ride our bicycles up Mount Everest." Uh, what hubris. Uh, because e- even the 10th largest chain was many, many, many millions of dollars a year bigger than we were at the time.

    5. SBSteven Bartlett29:41

       Mm-hmm.

    6. MRMarc Randolph29:41

       But something to aim for, and we actually passed that one way faster than we thought. And then you set your goal, you know, eventually, we're gonna be as big as Blockbuster. Uh, in other words, if you were to set your goals to be what Netflix is now, I would be locked up. I would-

    7. SBSteven Bartlett30:00

       (laughs)

    8. MRMarc Randolph30:00

       I would've been this most ridiculous, uh, flight of fancy hallucination you can imagine.

    9. SBSteven Bartlett30:06

       They would've thought you were psy- gone psychotic or something 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, because th- 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, like, a VCR and a cassette player is. But you launched the business at a time when Blockbuster was the big incumbent, and Blockbuster was a store where you went to a physical location, you rented a c- like, cassette VCR. What do they call it, like a c-

    10. MRMarc Randolph30:34

        A V- a VCR.

    11. SBSteven Bartlett30:34

        A VCR.

    12. MRMarc Randolph30:34

        A VHS.

    13. SBSteven Bartlett30:35

        VHS tape. You took it home, and then you brought it back the next day. And your real innovation was that you were gonna send these DVDs to people in the post-

    14. MRMarc Randolph30:43

        Yes.

    15. SBSteven Bartlett30:43

        ... on a rental basis.That was the, that was the crux of the business, right?

    16. MRMarc Randolph30:48

        That was the crux of the business. And in fact, when we 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, was one centralized store on the internet that served the entire country, so that we could have every single movie that was available on DVD. We had perfect inventory. Uh, and unlike a video rental store, where you can picture it being like a supermarket with rows of shelves, each movie could be placed in one place. You could either put it in the mystery aisle, or in the Alfred Hitchcock aisle, or in the new relea- You had to pick where it was. Whereas on the internet, you could have that same movie listed in 30 different places, based on Finding Movies. We thought Finding Movies would be easier too. We had a bunch of things we thought would allow us to take on this incumbent, this huge, huge, huge company. But yes, it was very, very focused. There was no streaming. If you wanted a movie, we mailed it to you. We mailed it to you on a little plastic disc.

    17. SBSteven Bartlett31:56

        It's funny, 'cause in hindsight, when I think about a lot of these big breakthrough ideas that ended up changing their industry, you, you, you learn in hindsight that there was some big macro factors that caused the timing to be right. And I think about in the case of your business, Netflix, there's a bunch of big macro things that you've already described, things like DVDs, the internet. Is there, is there any other sort of big macro factors that made the timing right for Netflix?

    18. MRMarc Randolph32:25

        Those were the two big ones.

    19. SBSteven Bartlett32:27

        Right.

    20. MRMarc Randolph32:27

        Is that the internet was certainly the big one, was that all of a sudden, there was this way to have a single store which served the entire country. Before, for a bricks and mortar, as we call it, business, you wanna serve the entire com- country, you've got to build 9,000 different stores. And Blockbuster did just that, they had 9,000 different stores. And then you have to staff those stores, and they had 60,000 employees. And we served the entire country with one inventory, and with a group of 12 to 15 people. So that was certainly one big shift. Uh, the DVD was a bet, which was, at the time, DVD was just getting started. And if the DVD had not worked, if it had not reached a full household penetration, this whole thing never would've worked.

    21. SBSteven Bartlett33:22

        How many people were watching DVDs at the time when you launched Netflix?

    22. MRMarc Randolph33:25

        There was fewer than 250,000 DVD players sold.

    23. SBSteven Bartlett33:30

        Yeah.

    24. MRMarc Randolph33:30

        That was the total addressable market, was 250,000 DVD players.

    25. SBSteven Bartlett33:36

        So what is that, like 1% of America or something?

    26. MRMarc Randolph33:37

        Yeah, there's 130 million households in the United States. So, and of those 130 million households, 129.9 of them had the ability to watch a VHS movie. So this was a real bet that they'd eventually be willing to buy this whole new machine to play a whole different type of movie. Uh, but it was tiny. There were, it was really, it created all kinds of more, interesting marketing challenges of how do you launch a company when there's so few eligible customers?

    27. SBSteven Bartlett34:09

        In September '99,

11. 34:11 – 38:43

    Exploring the potential of selling to Amazon

    1. SBSteven Bartlett34:11

       you explored selling Netflix to Amazon, which is on- which is shy of two years after you'd launched. Um, what was, was that the first time you met Jeff Bezos?

    2. MRMarc Randolph34:21

       Yes.

    3. SBSteven Bartlett34:22

       And how does that come to be? You know, because he's, he at the time, I guess, was, was fairly early in the Amazon journey as well, but...

    4. MRMarc Randolph34:28

       Yeah, he was, and at the time, to show you how early Amazon was in its journey, they were only a book seller.

    5. SBSteven Bartlett34:35

       (laughs)

    6. MRMarc Randolph34:35

       So they sold nothing else. They were a bookstore. But Jeff had made no secret of the fact that his aspirations went way beyond that, that he was gonna be the everything store, that the things they had found about how powerful it was selling books on the internet applied to everything else. And it was pretty clear his next two categories were gonna be music and movies. And we got a call from, uh, the CFO at Amazon, basically saying, "Hey, Jeff would love to, uh, meet with you. How about coming on up to S- up to Seattle and having a little sit down?" And Reid and I didn't need to think too long to understand why they might want to meet with us. Uh, it was pretty clear they were gonna be entering video, and this was gonna be a make versus buy analysis. Would buying Netflix accelerate their entry into video? 'Cause we had done a tremendous amount of work about building out the content and making those things work. So there was some value there, not to mention the people. Um, and so we all flew up to Amazon, and were ushered into this building, which was pretty hard to imagine that this was the headquarters of this world-changing e-commerce company, 'cause it was a mess. You know, people were jammed in under stairs and in closets, and there was pizza boxes every place and dogs running around. And the desks were all the same. They were all made from doors that had been lay- supported by four wooden posts at each corner, that everyone sat at these doors. And, uh, and in comes Jeff Bezos, and we begin to have this conversation about, what is Netflix and what's it all about? And, uh, it went, went pretty well. And as the CFO was showing us to the door at the end of the meeting, um, she said, "I just want to set your expectations that in the event we decide to do something, our offer is probably gonna be in the low eight figures." And, and we guessed that was probably gonna be 10 to $15 million.And at the time, we had launched in April of '98, and so we were still pretty young. (laughs) And I remember Reid and I kind of looking at each other and going, "That's not a bad return for 12 to 18 months' work." But at the same time, we felt we had already solved the big problems. We had built a functioning e-commerce website. We had managed to source every single DVD that was available. We'd figured out how to make movies go out to customers and bring them back. And we weren't quite ready to let Jeff Bezos take over. And so, in some ways, it was less about us going up and deciding whether to sell or not. It really ended up being kind of like a commitment ceremony, where Reid and I looked each 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."

    7. SBSteven Bartlett37:52

       Would that money have changed your life at that point? 1999, getting, you know-

    8. MRMarc Randolph37:58

       Y-

    9. SBSteven Bartlett37:58

       40 odd million dollars?

    10. MRMarc Randolph38:00

        Y- Uh, that's, uh, hard to say. It, this is not like I was, uh, you know, living in a trailer, uh, and deeply in debt, and, you know... I, I'd been working... I was in my late 30s.

    11. SBSteven Bartlett38:13

        Mm-hmm.

    12. MRMarc Randolph38:14

        I'd been working in Silicon Valley for a while, and I'd had a number of startups, you know, that had g- gone through IPOs before. Um, so I, I had... I was comfortable. Don't get me wrong, this would have been nice, but I'm not sure this would have dramatically changed my life in some profound way. I thought it was much more interesting to take the shot and see what Netflix could become than to walk away.

    13. SBSteven Bartlett38:41

        What was Jeff like?

12. 38:43 – 40:28

    What was Jeff like in 1999?

    1. SBSteven Bartlett38:43

       What do you remember in 1999?

    2. MRMarc Randolph38:46

       Uh, extremely unpolished.

    3. SBSteven Bartlett38:48

       Really? (laughs)

    4. MRMarc Randolph38:48

       If you see him now, I mean, he's really buff, and he's really thoughtful, and someone has definitely worked on his laugh.

    5. SBSteven Bartlett38:56

       (laughs)

    6. MRMarc Randolph38:56

       It's, it's now very controlled. Uh, back then, it was this almost hysterical, hyena-like bark, and you could hear it from, uh, all over the building. I'm not gonna try and imitate it. Um, but he was tremendously enthusiastic, like, this y- bundle of energy. And I remember that, um, the two of us were just going back and forth on all this early startup stuff. Uh, and one 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 came in. And I was telling him that, and he was going, "Ah, we too, we had a bell that was ringing." And we had, we shared those things. And then we were also talking about names, and N- Netflix had started out with a strange name, which was Kibble.

    7. SBSteven Bartlett39:44

       Kibble?

    8. MRMarc Randolph39:45

       And he was saying, "Oh, yeah, we originally were called Cadabra," which he meant to sound like abracadabra, like magic, but their lawyer said that Cadabra sounds a little bit too much like cadaver.

    9. SBSteven Bartlett39:59

       Yeah. (laughs)

    10. MRMarc Randolph39:59

        And so therefore Amazon. But in other words, it, it was this really interesting, us going back and forth, and I know Reid was very impatient. He just kind of wanted to get down to business.

    11. SBSteven Bartlett40:09

        Mm-hmm.

    12. MRMarc Randolph40:09

        (laughs) And so finally, I go, "Okay, Reid, Reid, let's talk through the, the, what we're really talking about here, enough, uh, enough, uh, startup."

    13. SBSteven Bartlett40:16

        Is the next big milestone in the Netflix journey the dot-com crash for you?

    14. MRMarc Randolph40:22

        Uh... M-

    15. SBSteven Bartlett40:25

        Becaus-

    16. MRMarc Randolph40:26

        There's a, there's a probably a more

13. 40:28 – 48:20

    Stepping down as CEO

    1. MRMarc Randolph40:28

       profound moment for me that happened, um, before that. Uh, and that was this trans- that was this leadership transition at Netflix. Uh, and that was... 'Cause the dot-com crash was in the spring of 2000, and this was probably in late 1999. Um, and Netflix was still young. Uh, and as I mentioned at the beginning, the p- uh, arrangement that Reid and I had was that he'd be the angel investor, uh, he'd be the chair, uh, I'd be the CEO, I'd start and run the company. Um, and I did that. And Reid had a day job somewhere else. Um, and one afternoon, uh, late that year, Reid poked his, poked his head in my office, uh, late afternoon, and said, "Mark, we have to talk." Uh, and as you probably can imagine, that never bodes well when someone says, "We have to talk." And, uh, it was right, and he came in, and he had a PowerPoint slideshow, and he sat across from my desk and spun his computer around and began walking me through a slideshow about how he felt that I was doing as CEO. Strengths, but perhaps a little bit disproportionately weaknesses. And I was a little taken back by this, and I, I, I kind of stopped him and go, "R- Reid, I am not gonna sit here and let you pitch me on how much I suck." Um, and I think he was taken aback (laughs) by that as well. And so he closed the computer, but then proceeded to lay out that he was concerned, that he had seen minor errors in my judgment, that he questioned some of the hires I had made. I mean, he had seen a lot of the other things I had done that were good, but his point was that we have to execute flawlessly. And we're at a point now where things are beginning to accelerate, and if there's smoke at this level, he was worried there was gonna be fire later on. And, uh, eventually, he got to his point, which is that, uh, he wanted to come back to the company full time and be CEO. And for a moment, I thought he was firing me. Uh, 'cause Reid had more equity than I did, since he was the, uh, original investor.And, but as I understood what he was proposing, it wasn't that. He was proposing that he come in as CEO, that I stay as COO, and that we essentially run the company together. And I remember a- as he finally, when he left the office and he quietly closed the door, and I was so shocked that even though the sun was going down, I sat there in the dark, like, the, the strength to turn the lights on. And just kinda crushed. 'Cause, and all I could think at the time was, "This is so unfair. This is my company. You know, I started this. It was my idea. I hired the people. I got us going. And how dare you, you know, all of a sudden take this from me." But as I thought more about it, I kinda realized that there was another dynamic at work here. And like most entrepreneurs, when we started Netflix, I had this dream of being a successful CEO of this big, successful company. And I think as I sat there, I began to realize that maybe this wasn't one dream. Maybe this was two different dreams. And that the dream of the big, successful company might be a different dream than the one of me being CEO. And I had to really say to myself, "Does Reid coming in full-time as CEO increase our chances of that happening?" And it was really hard for me to argue with myself otherwise. And I'm not saying this was an easy decision. I, you know, I went home that night and sat outside on the porch 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 had concluded that he was right. That if we really wanted to give ourselves the best chances of being successful, that I should move over. I should step down as CEO and let Reid come in as CEO, and we should run the, uh, the company together. And looking back now, this was 20 some odd years ago, that decision to kind of put my ego aside for a bit was probably the smartest decision I ever made the entire time I was at Netflix. Because those years after that, when Reid and I did it together, that was the renaissance at Netflix. So many of the things that shaped what the company became over the next bunch of years came during those years. And certainly looking at what Reid has done with the company since then, since I left the company, was, uh, even more astounding. And it's funny, 'cause one of the roles of a CEO is you've got to make sure the best people are in the right seats, which means saying goodbye to a lot of people. You'll have someone you, who came when you started the company, and they were your head of marketing, and they worked tirelessly. They worked weekends, they worked nights, they did everything you asked. But as you get to a different scale, you recognize that person is not the right person for what we have to do next. But you never think you're gonna have to turn that lens onto yourself. Um, and I think a lot of founders need to ask themself that question all the time. "I'm the right person for yesterday. I might even be the right person for today, but am I the right person for tomorrow?" And the number of founders that I can think of, and I'll bet you'll, you will echo this when you think about all the founders you've spoken to, who are great early stage entrepreneurs and great late stage entrepreneurs, it's a very, very small set. Um, and in my case, uh, I was very, very comfortable recognizing that this was the right thing to do for the company.

    2. SBSteven Bartlett47:03

       When you, when you think back to that moment, and that conversation with Reid where he comes into your office, with your hindsight and wisdom now, do you think there's a better way that he could've approached the situation?

    3. MRMarc Randolph47:15

       Of course. Reid, as I mentioned before, what made Reid and I work so well together is we were left-brain and right-brained. And that's not Reid's strong suit. Um, it'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. I know how to, uh, communicate effectively and I can intuitively know what's gonna upset someone or not upset someone. That's not what Reid's great at. But what Reid has and what we share is he cares. Reid was doing this not with some ulterior motive. This was not, "I wanna push Marc out and become CEO." This was he genuinely believed this was the right thing for the company. And because we had this extremely strong relationship based on trust, I heard him that way. And fundamentally, that's way more important than the style on which the message was delivered.

    4. SBSteven Bartlett48:18

       What was it that he thought

14. 48:20 – 49:40

    What was it that he had that he thought was better?

    1. SBSteven Bartlett48:20

       he had that would suit the company in the next phase of the company's journey that he felt you didn't have?

    2. MRMarc Randolph48:26

       He had already taken a company through an IPO. He had already scaled a company from two employees up to 1,000 employees, from a local company to a multinational company. Uh, he had, he had already shown that he could hire extremely talented people to work for him. He wasn't saying that he didn't think I, it w- that it was impossible for me to do this. Um, and it, it, who knows what would've happened? This was all about what increases our odds for success?And then perhaps, if you want to drill down to something which in the big scheme of things is small, but in the time was large, is we had to raise money. Uh, Netflix was a very, very expensive company to get started. We required large amounts of venture money, and Reid had this reputation of someone who had already made a ton of money for some VCs because of taking his prior company public. And they would bet on him, whereas I was a little bit more of an unknown.

    3. SBSteven Bartlett49:38

       One of the things you talk about in your book

15. 49:40 – 53:36

    Having tough conversations

    1. SBSteven Bartlett49:40

       that he said to you in that conversation is, "You don't appear tough and candid enough to hold strong people's respect."

    2. MRMarc Randolph49:47

       Yeah, it's, um, I'm better at that now. Does that count? Uh, it is the empathy. Um, I, as I said, what makes... Direct marketing, marketing in general, is an interesting discipline because it requires you to send something out, and you're not gonna ever see the person's face as they react to it. You're not gonna be there as they're reading this and either getting confused or excited. You have to imagine those things, and as you're writing a direct response letter, you're picturing, "How is someone going to react when they read these 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 some ways.

    3. SBSteven Bartlett50:34

       Yeah.

    4. MRMarc Randolph50:34

       And it's also a gift when it comes to salesmanship and negotiation, is before I say something, I know how it's, they're gonna react, and I can cater that. But what it does mean is that when something's gonna really hurt somebody, it's really hard for me. It's very painful for me to deliver very bad news.

    5. SBSteven Bartlett50:56

       I've never considered that before, but it does appear to be completely true that people who are great marketeers, um, have, therefore have empathy, and therefore struggle more with delivering bad news, because they just have a better ability of putting themselves in the other person's shoes.

    6. MRMarc Randolph51:13

       You feel it.

    7. SBSteven Bartlett51:14

       Yeah.

    8. MRMarc Randolph51:14

       You feel it. You know, I've, and like I said, I've gotten way better at it, um, I'm, I'd say I'm good at it now. Um, I'm, I can be a complete ass when I need to.

    9. SBSteven Bartlett51:25

       How does someone train that muscle? Is there a way to go, you know, if you think about how 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 bit of a people pleaser or caring a little bit about people's feelings when there's a bigger...

    10. MRMarc Randolph51:39

        I've stopped searching for a way to do it that doesn't hurt, and as, as with most decisions, a lot of times people get caught in this paralysis where they're trying to come up with some solution...

    11. SBSteven Bartlett51:55

        (laughs) .

    12. MRMarc Randolph51:55

        ... that's an optimum solution, and this is one more example of that, is that you go, "This is gonna hurt. It's gonna hurt me. I have to just do it anyway. There's no way to avoid this." And for example, you know, jumping way ahead, there was time, after this dotcom layoff, which we will talk about in just, I mean, dotcom crash, which we'll talk about maybe in a moment, we had to lay people off, and I cry with every single one of them. But I bring them in, and I've gotten very, very good at telling people, uh, "It's time to go," but it doesn't mean that I don't hurt. Hardest thing. Let's hope that if you're a manager, that's the hardest thing you ever have to do.

    13. SBSteven Bartlett52:38

        Have you forgiven Reid for that, that moment, that day, the way he delivered what he said?

    14. MRMarc Randolph52:47

        100%. Uh, this is gonna sound silly, but it came from love. It didn't come from madness or jealousy or anger. It, as much as it was possible for something to hurt Reid in delivering bad news, that's got to have been one of the toughest things he's had to do, is have that conversation with me, and I have so much respect for the fact that he had the courage and discipline to say, "I've thought of something." I c- he could have, "I've thought of a way to mail the DVDs more inexpensively. I've thought of a way to make the..." No, he goes, "I've thought of a way to make the company more successful, but it's really gonna hurt."

    15. SBSteven Bartlett53:34

        What is it about Reid then

16. 53:36 – 54:54

    What makes Reed so successful?

    1. SBSteven Bartlett53:36

       that makes Reid successful? 'Cause I asked you the question about yourself, but now to turn that on Reid, what is it that makes him so unique?

    2. MRMarc Randolph53:42

       So, you used the analogy for creativity earlier in our conversation about having all these clouds of information, these clouds of connections and seeing that there are these interconnectivities between them. Reid sees that stuff so well. I consider myself really good at that. He's even better than I am. He will have a very complicated problem with many moving pieces, and he'll jump immediately to, "We can do this," and...

    3. SBSteven Bartlett54:17

       Yeah.

    4. MRMarc Randolph54:17

       ... I won't see that until a little bit later, and then (laughs) even anyone else sees it. It's just an amazing ability to s- see how things might shape out and which one is the right path to take. Uh, extremely analytical, um, extremely non-emotionally driven, can make very, very hard decisions because, uh, less driven by that, by the emotional piece of it. He's, he's a, he's remarkable.

    5. SBSteven Bartlett54:52

       What about hard work?

17. 54:54 – 1:01:13

    Hard work: does it matter?

    1. SBSteven Bartlett54:54

       Does it matter?

    2. MRMarc Randolph55:01

       Well, since you ask it so simply, I'd say no.Or it certainly is not the most important thing. In fact, I think hard work leading to success is a myth that, and let me, let me give you two examples, okay? Um, the first is to qualify what I mean. Um, I work with a lot of, as we spoke earlier before we actually began the session, um, about how younger people are at different places in their life than older people, especially with career and how they think about it. And, um, earlier in my life, I used to do triathlons, you know, the races that combines swimming and then biking and then 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. You have 400 or 500 people who the gun sounds and all 500 of them plow into the water simultaneously, not a phase start. And as you can imagine, it is a shit show. You mean, you're getting kicked and your goggles are being knocked off, and you're being held underwater. And you quickly realize that if you want to be able to survive in this mass start, you're gonna sprint for those first 400, 500, 600 yards to get yourself far enough in the front of the pack that you have open water. And in my opinion, work life is kind of like that. When you're younger, when you don't really know what you're doing, when you have to go down a lot of false ends 'cause you're not

    3. SBSteven Bartlett56:39

       Yeah.

    4. MRMarc Randolph56:40

       ... productive, you better work your ass off. You better sprint. You better work three times harder than everybody else in the company. So it's essential. But ideally, you get yourself far enough ahead that you recognize, I can't go at this pace for the entirety of the triathlon. I needed to, to get myself some breathing room, but now I can back off. So yeah, at certain points in your career, you need hard work. At certain points in the trajectory of your business, you need hard work. Your fundraising, you can't say, "Oh, we're closing around, I'm taking vacation for two weeks. Oh, we're doing, uh, M&A. I'm gonna be, uh, I'm only gonna work a couple hour." No, you're gonna have to grind it. But that's not the answer. All right, one more little story, which is part two to this, which is why I say that it's a myth for hard work. Um, so, uh, during one part of my career, I lived in Europe. Uh, I was, uh, doing international marketing for a big software company. We had an office in Paris, uh, and I lived in Paris. And, but I was meeting every week with the marketing people in our other branches. So probably four days out of five, I was flying, fly to Copenhagen one day, then I'd fly down 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, um, because I'm sometimes not that organized, uh, I'd be late, and you would find me just sprinting down the concourse in my, uh, in my blazer and my wool coat, trying to desperately make the plane. And what I found out was that probably 49% of the time, I'd pull up to the gate and the plane was 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 there marinating in my sweat for another hour before the plane took off. Or the 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 take off. And what I realized is it didn't make a difference whether you ran for a plane or not, that you're either gonna make it or you weren't gonna make it, and that running didn't make the difference. And I vowed then and there I'd never run for a plane again, and I never have. And I'm telling you that story because it's a metaphor, in that so many entrepreneurs spend all this time running for planes. They are up all night polishing their deck, they're reviewing the work of people to make sure the spelling is correct, they're double checking every detail. They are working so hard, but I know from experience that it's like running for the plane. Most of the time, doesn't make a difference. You don't lose the deal at 2:00 that morning because you didn't check the fonts. You lost that deal four weeks ago when you didn't have some fundamentals right, or you just weren't the right company to begin with. No matter how hard you worked, you weren't gonna change the outcome. And that is the key to having some balance in your life as an entrepreneur, is this recognition that if you're smart about the things that you choose to focus on, you make 99% of the difference, and that all that extra work does not really change the outcome any.

    5. SBSteven Bartlett1:00:14

       And in that analogy of running for the plane is the, is the key thing to have just better prepared further upstream? I, you know, if we stick to the analogy, just have made a better decision to leave the house at a better time?

    6. MRMarc Randolph1:00:26

       Yes, it does. Absolutely. I mean, if you wanna make the plane, you, you know, you leave earlier. And again, it's not, sometimes, listen, you're gonna stroll down the concourse, you're not, you don't need to run. And if, if the plane left on time, running is not gonna 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 of times that running for it was the gating item between whether you made it or not is like infinitesimal. So what's the point of running?

    7. SBSteven Bartlett1:00:51

       Mm-hmm.

    8. MRMarc Randolph1:00:52

       And that's the se- And I really fundamentally believe that, is that if I can be really smart about my, which problems I choose to focus on-... I'll make the difference. I do not need to get everything right because most things don't make a difference. Some things do.

    9. SBSteven Bartlett1:01:11

       Some things do, and some of the-

18. 1:01:13 – 1:06:10

    How to find the perfect product-market fit

    1. SBSteven Bartlett1:01:13

       the small things that made a difference to your business seem to have been discovered through a process of sort of experimentation and failure. When I look back through your story, uh, you trying to get sort of Netflix to work and get product-market fit, you referenced it a second ago, this idea of no late fees seemed to be quite pivotal, an idea you had to remove the late fees. I, I find this interesting because there's gonna be 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 Airbnb or from someone else, Daniel at Spotify, that there seemed to be this one change that was quite pivotal to their business at some point. So my question becomes like, how do I know? How do I find the thing? So can you explain to me why this no late fees thing and- and any of these other small changes that changed the game, and how- what was the system that led you to them?

    2. MRMarc Randolph1:02:02

       You know, it, we're talking about really finding product-market fit. Product-market fit, if I have to give a definition, is when you recognize you finally have something that customers actually do want, and it's recognized because all of a sudden, the momentum of your business dramatically shifts.

    3. SBSteven Bartlett1:02:22

       Yeah.

    4. MRMarc Randolph1:02:22

       All of a sudden, things go into high gear. All of a sudden, acquiring customers is so much easier. All of a sudden, they're sticking around. It's just this instantaneous, "Oh my God, we found it." And up until that point, it- it's this constant struggle of trying one thing after another, trying to increment your way closer and closer and closer. You know what I mentioned that, um, you know, at the beginning, there wasn't a lot of business model innovation with Netflix. We, we- if you ordered a disc, we mailed it to you. We charged you a due, gave you a due date. If you miss the due date, we had late fees. And the reality is the idea was ridiculous. It 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 of had this realization that, okay, we gotta begin figuring things out. And thus began this year and a half long process of trying to figure out some way to get people to rent DVDs by mail from us. And we tried almost everything you could think of, um, hundreds of things. And, um, I kind of talk about this a bunch that I had no shortage of ideas. I mean, I had lots of things I wanted to try, and if there was any- if there was a problem that I had was that I was a bit of a perfectionist back then. And so all these tests that I'd wanna run, I'd want them to be perfect. So we would, you know, lovingly argue over every word of copy, and we would do custom photography, and we would s- check every link, and we'd stress test the site. And it might take us three weeks or a month to prepare for this test, and we'd test this new idea, and then it would not work, wouldn't do anything. And we'd kind of look at each other and go, "We just wasted a month." So okay, faster, and then we'd do a test in two weeks, and it would still fail. Okay, okay, faster, and we'd do it in a week, and faster, and we eventually started getting to the point we could do a test every day or multiple tests every day. And it turns out that, um, once you go that fast, things get very, very sloppy. So we would have the wrong image, or it would have the watermark on it, or the pages we had greeked would still be greeked, you know, not... Uh, we'd have bad links. We'd crash the site. And then, but that was such an incredibly big insight for us because it turns out that it didn't make a difference. That if it was a bad idea, even spending a month crafting this perfect test wasn't gonna make it a good idea. But if it had even an inkling of being a good idea, no matter how bad the test was, it shone through. Customers would immediately perk their head up. They'd raise their hand. They would fight to do it. They'd call us. They'd reboot the site. It was this incredibly loud signal that there was something there. And it goes back to what we've said before, which is that it's not about having a good idea. It's about building this whole process and this culture and this system to try lots of bad ideas, and we got really, really good at trying lots of bad ideas, one after another, hundreds of them, each one informing us to some little- uh, some 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 them was, uh... At that point, uh, Netflix was pretty big. We had probably, in our warehouse, several hundred thousand DVDs. And I remember

19. 1:06:10 – 1:12:35

    The moment Netflix turned on subscriptions it changed everything

    1. MRMarc Randolph1:06:10

       one day, we were, Reid and I were in the warehouse and looking at all these DVDs and going, "It's such a shame that all these DVDs are here in the warehouse where they're not doing anyone any good. I wonder if there's a way to store them at our customers' houses. Let them keep them, and then when they're done, they mail it back. We'll just replace it. And rather than having them have to pay each time they replace it, let's just have a monthly fee, a subscription, and they can rent as often as they want, and there's no due dates and no late fees." And it was a ridiculous idea, but when we tested it, it was that mythical product-market fit. It, it worked. People loved it. They couldn't get enough of it. They told their friends. They s- did not cancel their subscriptions. And then-

    2. SBSteven Bartlett1:06:59

       What- what part of it worked, and why did it work?

    3. MRMarc Randolph1:07:02

       God knows.

    4. SBSteven Bartlett1:07:03

       Yeah.

    5. MRMarc Randolph1:07:04

       But i- in retrospect, what it did was it took...... one of Netflix's biggest impediments and turned it into one of its biggest assets. You know, y- we refer to my book, it's called That Will Never Work, and there was two reasons it's called (laughs) That's Will Never Work. It's because that's what every single person told me when I pitched the idea. And they had two reasons why they said it. Um, and one, of course, was, uh, streaming. They said, "Oh, it's a digital medium, just a matter of days before everyone's streaming these. Who needs DVDs?" And we realized that was not the case. It was inevitable, but it could be years. But the other reason was, was Blockbuster. Why on earth would anybody wanna order a movie, have it mailed to them, get it three days later, uh, 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 gratification? And what happened when we did the no due dates, no late fees, is it shifted. Because before, with an à la carte system, you would order it, yeah, you'd 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 could order your movies, they'd sit on top of your TV, you keep them as long as you want. When you wanna watch a movie, its lag time is zero-

    6. SBSteven Bartlett1:08:35

       Mm-hmm.

    7. MRMarc Randolph1:08:35

       ... compared to 20 minutes to go to Blockbuster.

    8. SBSteven Bartlett1:08:37

       'Cause you could order a couple, I imagine.

    9. MRMarc Randolph1:08:39

       Three.

    10. SBSteven Bartlett1:08:40

        You could order three? Okay.

    11. MRMarc Randolph1:08:41

        And so you always had something to watch. When you were done, you put it in the mail, and instantly, you know-

    12. SBSteven Bartlett1:08:47

        Mm-hmm.

    13. MRMarc Randolph1:08:48

        ... two days later, another one replaces it. So all the sudden, we weren't two and a half days slower than Blockbuster. We were faster than Blockbuster.

    14. SBSteven Bartlett1:08:57

        Mm-hmm.

    15. MRMarc Randolph1:08:58

        And I think that was the convenience. And the thing is that when we did the analysis at the beginning about Blockbuster's Achilles' heel, it was the late fees. Everyone hated them. Uh, that was the single biggest thing that people would say about Blockbuster, "I hate the late fees." And by being able to get rid of that was a huge competitive advantage. And it was baked into the Blockbuster business model. They couldn't easily get out of it.

    16. SBSteven Bartlett1:09:26

        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 charged per hour or per day or something?

    17. MRMarc Randolph1:09:35

        Yeah, it was usually $3 or $4 a day.

    18. SBSteven Bartlett1:09:38

        Okay, which is a lot of money for a DVD.

    19. MRMarc Randolph1:09:40

        It's a huge amount of money for s- for that. But it was also this feeling of, uh, I was okay paying the initial fee to rent the movie-

    20. SBSteven Bartlett1:09:48

        Mm-hmm.

    21. MRMarc Randolph1:09:49

        ... 'cause I wa- but now I've watched the movie, and I just couldn't get it back in time, and now, oh my God, now I gotta pay more just to return it. It just felt like this unwarranted-

    22. SBSteven Bartlett1:09:58

        Punishment.

    23. MRMarc Randolph1:09:59

        ... unpleasant punishment for the customer.

    24. SBSteven Bartlett1:10:01

        I was thinking about something that Daniel Kahneman, the famous sorta psychologist, um, talked about in his paper, when he wrote about loss aversion. And the TLDR of it, the too long; didn't read part of this, is that Daniel Kahneman discovered that people have a real disdain for feeling like they've 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 for the pain of losing 10. You'll actually need to find 20 or 30.

    25. MRMarc Randolph1:10:27

        (laughs) Yeah.

    26. SBSteven Bartlett1:10:28

        And, and so he has this wonderful graph where he talks about that l- we just, loss to us is so much more painful than a gain. So in the case of Blockbuster, a late fee is, is, is m- money I literally lost for nothing.

    27. MRMarc Randolph1:10:40

        Right.

    28. SBSteven Bartlett1:10:41

        So it's not losing $4. In, in the context of it, it's actually losing like $12. It's that painful.

    29. MRMarc Randolph1:10:46

        Exactly. It was a, it was a really, really hated aspect of the video rental experience back then.

    30. SBSteven Bartlett1:10:53

        S- and also, it made me think about the peak-end rule, which is you remember the, uh, which Uber discovered in their laps, where they say that people remember the peak and the end of an experience.
20. 1:12:35 – 1:14:15

    How many tests should we be conducting?

    1. SBSteven Bartlett1:12:35

       I- I'm 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 looking forward that it would have that much of an impact? And I'm saying this because that helps me to understand whether I should just conduct a lot, a lot more tests, or I should do what I think most companies do, where we sit in a boardroom and we spend hours and hours trying to f- find the perfect test. Is the game just conduct more tests?

    2. MRMarc Randolph1:12:59

       If I didn't have to sit behind the microphone, I'd get up and hit you upside the head with that comment.

    3. SBSteven Bartlett1:13:03

       (laughs)

    4. MRMarc Randolph1:13:04

       (laughs) God. No, you should not be sitting in the boardroom debating what to do. You should be running more tests. You should always be running more tests. You don't know f- you don't know shit.

    5. SBSteven Bartlett1:13:16

       (laughs)

    6. MRMarc Randolph1:13:16

       I mean, you don't. Your customers do, but they, even they don't know what they want. And the only way to figure it out is to throw all kinds of things at them and see what directionally...... they're interested in. But y- so did I have any idea the subscription was a big thing? Absolutely not. And once it began to work, and it worked like crazy, we still had no idea how to optimize it.

    7. SBSteven Bartlett1:13:38

       Mm-hmm.

    8. MRMarc Randolph1:13:39

       And we St- Netflix still, 20-plus years later, spends ungodly amounts of time on testing all kinds of things about subscription dynamics.

    9. SBSteven Bartlett1:13:51

       Mm-hmm.

    10. MRMarc Randolph1:13:51

        What does it take to get someone to do it? What does it take to get someone to stay? What influences these? It's unbelievably complex, but it's unbelievably important. But subscriptions, there's a reason why it's ta- it's eating the world. It's an incredibly compelling business model. And, uh, the fact that we stumbled onto it, and that it worked so well, just was a very, very positive, uh, thing.

    11. SBSteven Bartlett1:14:13

        Do, you know, it's interesting on the testing

21. 1:14:15 – 1:15:57

    Getting employees to conduct more tests

    1. SBSteven Bartlett1:14:15

       point, just to close off there, I, uh, embodying the position of most companies or employees or founders listening to this, the reason why they don't wanna run tests or don't have a culture of it is because it involves failure. And failure then in most companies results in blame, and blame makes people feel bad, so it disincentivizes them, but creating a culture where failing is a positive and it's celebrated is quite a challenge, I guess.

    2. MRMarc Randolph1:14:38

       Oh. (laughs) It certainly is. It, it, it's, it's a career for me. I mean, I, uh, I do a lot of public speaking, keynote speaking all over the world, and it's surp- a lot of them are big companies who are going, "Our whole world's being turned upside down. Our whole workforce is risk-averse. Marc, get in here and help us figure out how to make everyone a bit more risk-tolerant." But (laughs) you know, what do they do? Uh, they'll go, "Okay, Marc, your theme today is, well, we're trying to get everyone to be m- bigger risk-takers, to take chances. We wanna celebrate risk. Uh, so, but before you go on, we're gonna celebrate the sales leaders and bring them-"

    3. SBSteven Bartlett1:15:19

       (laughs)

    4. MRMarc Randolph1:15:19

       "... up and reward them for trips to Hawaii." It, it's like you said, you have to l- let people know that failing is not only okay, it's expected, and it's a good thing. And we've found, we, we learn from it.

    5. SBSteven Bartlett1:15:30

       Mm-hmm.

    6. MRMarc Randolph1:15:30

       And I don't even cons- listen, I don't even consider it failures. They're not failures. They are tests that didn't n- necessarily work, but they worked in the sense that you learn something from them, and you just keep doing those over and over again. And it's, 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 can do as, tons of them.

    7. SBSteven Bartlett1:15:55

       Talking about giving speeches there, just a week

22. 1:15:57 – 1:21:57

    Your dad passing away

    1. SBSteven Bartlett1:15:57

       before the dot-com bubble burst, you gave a speech in, um, New York City, and your dad was there.

    2. MRMarc Randolph1:16:03

       Oh, yeah (laughs) . My dad was the anti-entrepreneur. Uh, he was com- extremely risk-averse. Uh, he was an investment advisor. He worked for a, uh, managing money for people in a company whose whole principle was fundamentals, long-term value. He had no clue whatsoever about why I was doing what I was doing, and this whole venture world. It was just completely made no sense to him. Um, but that speech in New York City was actually fairly interesting, because what I was doing was speaking to the DVD Manufacturers Association, I think it was, about what we'd learned about more effective ways to expand their business. And on one hand, I think my dad was extremely proud to see that all the stuff that I'd been saying, which he thought was all a bunch of hooey, was actually important and interesting to people. But unfortunately, it was also, um, he happened to be in New York that time to get treatment for a brain tumor, which he had just realized he had. And, um, so it kind of was this beginning of this, my dad understanding for the first time what I was good at, and at the same time, the end of, uh, not of our relationship, but th- it marked the beginning of this saying goodbye to him. So it was kind of this very, very bittersweet, uh, bittersweet time.

    3. SBSteven Bartlett1:17:40

       In 2000 at 42 years old, when you were 42 years old, um, he, just, just one week before the dot-com crash, your father passes away.

    4. MRMarc Randolph1:17:49

       Right.

    5. SBSteven Bartlett1:17:51

       I mean, the timing is, is, um, is extremely unfortunate, but also just the impact that must have on one's perspective to lose their father at that, that s- in that season of life.

    6. MRMarc Randolph1:18:03

       Yeah, I guess it's part of you go, "Well, what else can go wrong?" And (laughs) you find out plenty.

    7. SBSteven Bartlett1:18:09

       Mm-hmm.

    8. MRMarc Randolph1:18:10

       But th- the tragic... This is gonna sound s- s- trite, I suppose, but one of the tragic things about my father dying before the dot-com collapse, is he missed seeing that he was right. He missed seeing that, in fact, this was a lot of hooey, that this apparent defying of gravity by all of those dot-com companies commanding these ridiculous valuations with no revenues and even (laughs) even less profit, um, which he thought he could not understand how this could possibly be real. Well, as we all found out a week later, it wasn't real. And I think he would've really loved seeing that, in fact, he was right. Um, but it was kind of this double hit for me, you know, reeling, in fact, from the death of my dad, and then all of a sudden having to worry now about the death of my company.

    9. SBSteven Bartlett1:19:15

       Did it change your perspective, losing your father, on what matters in life?

    10. MRMarc Randolph1:19:26

        I'm gonna say no, because...What was great about my father was that he was very true to himself. He was very comfortable being an iconoclast, about holding different opinions. Uh, even, as we just mentioned with the dot-com bubble, when everyone else was saying this was the next big thing, and he's going, "This makes no sense whatsoever." And he held to it. And he lived his whole life that way. And so, in some ways, when he died, there was this sense that it is possible to be ... true to yourself and, um, and be fulfilled, that you do not need to chase the trends. It was reminding me that that can happen. When I started my first job when I was like, um, I don't know, I was probably 22, my first real job where I actually had to go sit in an office, uh, my dad called me into the den, um, and tore a page off of a yellow pad. And on the page, he had written in pencil, "The Randolph Rules of Success." And he goes, "This is, this is the things that I have learned over my career as a business person, and I think I want you to see these as you start your career as a business person." And I wasn't quite sure what to expect as I was looking at them. And what was interesting was that these were not business rules. This wasn't like, you know, buy low and sell high, or happiness is positive cashflow, or anything like that. These were basically rules that said it's possible to be a decent person and still be successful. I mean, it was simple things, like, you know, do 10% more than you're asked. It was, um, be prompt. It was, um, don't knock, don't complain, stick to constructive, serious criticism. It was, don't express opinions about things that you don't have the facts for. Uh, I mean, that's who my dad was, that he, um, felt that those were the important things to communicate to me, which is, "Mark, be a mensch."

    11. SBSteven Bartlett1:21:55

        Then the dot-com bubble happens.

23. 1:21:57 – 1:25:00

    The dot-com crash

    1. SBSteven Bartlett1:21:58

       Most of us can't remember. I think I was ... How old was I? Must've been seven or, seven or so, seven years old.

    2. MRMarc Randolph1:22:04

       (laughs)

    3. SBSteven Bartlett1:22:04

       So I can't really remember what happened-

    4. MRMarc Randolph1:22:06

       Yeah.

    5. SBSteven Bartlett1:22:06

       ... but I know it was bad. (laughs)

    6. MRMarc Randolph1:22:09

       (laughs)

    7. SBSteven Bartlett1:22:09

       (laughs)

    8. MRMarc Randolph1:22:09

       Well, it was especially bad for us. I, uh, we were talking a moment ago about subscriptions-

    9. SBSteven Bartlett1:22:15

       Mm-hmm.

    10. MRMarc Randolph1:22:15

        ... and how subscription economics are amazing. And what makes them amazing is that you acquire your customer, and then that customer gives you money for months afterwards, ideally for years afterwards. But because a subscription customer's willing to give you money for years afterwards, you can invest more in acquiring that customer. You can spend $100 to bring that customer on board with the confidence they're gonna give you $10 a month, month after month after month after month. But it means in month one, you spent 100 and you made 10. So when you have a subscription business which is booming, which is going crazy, when customers are flooding in the door, well, money is flooding out the door. The cash required to service those, bring those customers in for their first month, huge. The revenue from them, not so much. Not to mention, we had a first month free policy.

    11. SBSteven Bartlett1:23:14

        Mm-hmm.

    12. MRMarc Randolph1:23:15

        And that wasn't a problem in, uh, March of 2000. That was the era of irrational exuberance. That was where you had these companies where it had no revenue, no real business model, worth hundreds of millions of dollars, where I could go out on the highway with a green flag and wave it, and a dump truck of money would pull off and back up to my driveway, and I'd just need to come out with the wheelbarrows and bring the money in. It was ridiculous until the dot-com crash. And all of a sudden, in a matter of a week or two, completely dried up. And all of a sudden, having a dot-com on your name was no longer the road to riches. It was the scarlet letter. Um, and we were in deep trouble. We were basically gonna go broke being successful. And when that happens, as you've seen with other entrepreneurs, you do something called pursue strategic alternatives, which is code for, "We have got to sell this sucker fast." And we had an obvious strategic alternative, which was Blockbuster.

    13. SBSteven Bartlett1:24:24

        H- Were you losing money at that point?

    14. MRMarc Randolph1:24:25

        Oh my God, yes.

    15. SBSteven Bartlett1:24:26

        How much, roughly? Do you, do you remem- do you remember?

    16. MRMarc Randolph1:24:28

        Uh, at that point, we had accumulated losses of about $50 million.

    17. SBSteven Bartlett1:24:35

        And what were your revenues?

    18. MRMarc Randolph1:24:36

        $5 million.

    19. SBSteven Bartlett1:24:38

        And you, you a- you accumulated losses. What was your sort of annual yearly burn rate? How much money were you burning every year?

    20. MRMarc Randolph1:24:44

        Uh, well, th- there, w- we were only in business for, uh, we'd only been in business for two and a half years.

    21. SBSteven Bartlett1:24:49

        Okay, so ... (laughs)

    22. MRMarc Randolph1:24:49

        So i- i- most of that 50 had been in the previous 12 months.

    23. SBSteven Bartlett1:24:54

        I mean, that's ... I mean, on paper, that's not a good business.

    24. MRMarc Randolph1:24:57

        Well-

    25. SBSteven Bartlett1:24:57

        (laughs)

    26. MRMarc Randolph1:24:58

        ... not just on p- yeah, it's, it's a terrible business.

24. 1:25:00 – 1:32:36

    Getting the call from Blockbuster to buy Netflix

    1. SBSteven Bartlett1:25:00

       (laughs)

    2. MRMarc Randolph1:25:00

       You know, they, they say that one of the goals of any startup is to receive a repeatable, scalable business model. That is not what we mean by repeatable, scalable business model.

    3. SBSteven Bartlett1:25:09

       Mm-hmm.

    4. MRMarc Randolph1:25:10

       Um, it's disastrous. And y- you have lots of businesses which go, "We're gonna make it up in volume," or, "Once we just get the, get the eyeballs, then we'll monetize it later." So it's, d- y- it, when all of a sudden the opportunity for all those things goes away, it's disastrous. We're just completely upside down, our economics.

    5. SBSteven Bartlett1:25:30

       Did you go to Blockbuster, or did they come to you?

    6. MRMarc Randolph1:25:32

       No, we tried going to Blockbuster. For months, we tried reaching out to them. But this was at this ultimate ... I mean, listen, we were doing 5 million a year. They were doing $6 billion a year.

    7. SBSteven Bartlett1:25:42

       Okay, so you were 10 times ...

    8. MRMarc Randolph1:25:43

       We had 150 employees. They had 60,000.... that we were like a gnat, you know, to them, to an elephant. They had, you know, their tail flopped around, "What's this thing buzzing?" N- no interest in us whatsoever. It took months, and finally, we got the call, and as luck would have it, we got the call when we were at a corporate retreat, uh, at a place called the Alisal Ranch. There's a, a, a s- a city called Santa Barbara on the coast of California, pretty rural. Alisal Ranch is way back in the mountains. It's a dude ranch, you know, horses. So we're on v- retreat, and you also know that in Silicon Valley, that we're pretty casual. And when you're on retreat, you have to work at it to be even more casual.

Episode duration: 2:01:06