534: In Retrospect - The Netflix Story With Marc Randolph

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0:39Just head to omnisend.com forward slash founder without the E to get started. All right, now let's jump back into the show. Hey, founder fam, today we're diving back into the archives to bring you an all-time favorite episode. And this one was with Mark Randolph. He's the co-founder of Netflix and in this interview he's going to share the whole journey from failed business ideas, last minute pivots to being laughed at and even a 50 million dollar pitch to Blockbuster that they turned down. This is an incredible conversation around how Mark was behind building one of the largest companies in the world.

1:21This is a remarkable conversation with the co-founder of a company that is so disruptive that it forced an entire industry to really rethink its approach. All right, let's jump in. Hear the stories, learn the proven methods and accelerate your growth and future through entrepreneurship. Welcome to the Founder Podcast with Nathan Chan.

1:44Awesome. Well, Mark, thanks so much for taking the time to speak with me today. The first question that I ask everyone that comes on is, how did you get your job? Well, I've never counted on someone else to get my job. I usually try and create my own. And unfortunately, that usually doesn't come with very good pay or very good benefits, but it does have flexible hours and you usually get along pretty well with your boss. Awesome. So how did you find yourself doing the work you're doing today? Obviously, you're very well known as one of the co-founders of Netflix and I've heard your story, read your incredible book that would never work and uh even heard you speak at an eo event um so uh yeah look really really interested to hear how all that started but i'd love to go back to humble beginnings because i know you've started like you've been an entrepreneur for over 40 years you've started many successful companies uh so yeah i'd love to hear yeah you know now how entrepreneurship, partly to your credit and also partly to your advantage, is like a thing.

2:53You know, back when I was starting, there was really no such thing as an entrepreneur. I mean, sure, there were entrepreneurs, but they didn't have a name. They certainly weren't movies and podcasts and magazines about them. You certainly could major in entrepreneurship at your university. So then, if anything, it was a compulsion. It was this constant feeling that, why doesn't this work better? Or why isn't there a way to? Or why isn't there someone who could? And then realizing that the best way to get those things was to kind of create them yourself. And I was also fortunate that I was able to start as an entrepreneur in terms of real entrepreneurship within a framework of support.

3:42So, for example, the first two companies that I started were within larger companies. There were companies who were saying we need to get into a different business. Randolph, get us in the mail order business. Randolph Giddison, the magazine business, which required me to kind of go in and figure these things out. But at the time with the support of a paycheck, someone else worrying about, did the telephones work? And did I have a roof over my head? I see. So you were an entrepreneur for your first two startups. Is that correct? Yeah. You know, the very first time, my very first real job, the first job where I actually had a phone and a desk, I was, you know, now they kind of call it chief of staff.

4:32But a better way to think about it, I was a gopher who just followed the CEO around the company all day with a notepad, keeping him honest with the commitments he'd made and people honest for the commitments they'd made to him. But this was in a music publishing company, and I was lucky that I got to see every part of the company, and I got to see how the CEO dealt with things, how he spent his time, how he dealt with his employees, how he dealt with his board members. It was useful that way. But one of the quote-unquote divisions in the company was a mail-order division. And at the time, it was purely two sentences that said, for a list of more great Cherry Lane songbooks, send a self-addressed stamped envelope to so-and-so.

5:17And for some bizarre reason, I wanted that job, which purely consisted of when one of those requests came in, I would Xerox the list of more great Cherry Lane songbooks and stuff it in the self-addressed stamped envelope and mail it out. And when an order came in, I would pick, pack, and ship the order. But again, I was curious and I began experimenting. And I began saying, what happens if I do a double-sided or a four-page insert or a catalog or mailing? And little by little over several years, built this up into a pretty substantial division in the company. So it wasn't just the first startup.

5:56It was also kind of my intro to direct marketing, which ended up being a pretty critical part of my success in Silicon Valley and certainly a pretty critical part of what happened with Netflix. But, you know, from there, same thing happened. I went to a company who was they were in the mail order business and wanted to get into the publishing business. And there I started a magazine for them called Mac User Magazine, again, required learning all these new things. and it was all then I went to a company that was in California and that was the the key place because I ended up at a big software company called Borland launching their direct marketing business and that was fascinating because partly this was doing direct marketing at a different scale a different order of magnitude eventually becoming about 40 percent of the company's revenue.

6:50But more importantly, now I was, well, I was almost in Silicon Valley and I was in the right place at the right time when all of a sudden one evening, one of the engineers came into my office and goes, let me put something onto your computer. And it was the browser from, uh, from Champaign-Urbana university. That was the first web browser. Um, and I was blown away, blown away how cool this was. But more importantly, my little direct marketing insect mind went, this is direct marketing on steroids. The opportunities to reach people, to create a personalized experience for every single individual.

7:36I said, my gosh, people are going to make a fortune selling things this way. And I had no idea even close to how right I would end up Yeah. Wow. Crazy. So a lot of people know the story and your story, but for those that don't, I'd love to get a bit of context around how this idea of Netflix came about. And then I know you've recently working on launching a podcast. I'd love to talk about that and really the concept of ideas, because there's a lot of people that have ideas for a business. And there's a lot of people that just sit on those ideas. And I think you're an incredible example of someone just showing people that it doesn't matter how good the idea is or whether it's a good idea or a bad idea, you really have to see it through and you just never know.

8:31So I'd love to talk about that with you. So yeah, just before we jump in though, I'd love a bit of context. How did Netflix start? Well, you know, after Borland, I ended up starting a small software company with two friends of mine. And we sold that not long afterwards to a much bigger software company called Puratria. And the reason that's significant in the Netflix story is that Puratria had been started and was being run by a gentleman named Reed Hastings. And we all went to work in this big new software company. and the rest of my team ended up in the basement in a business unit. But Reed grabbed me to make me his head of corporate marketing at Puratria.

9:13So I went from the cerebral startup job to boom, all of a sudden I'm running marketing for this multinational huge software company. But the beauty was Reed and I lived in the same town and I was reporting to him and Reed and I began commuting to work together. And we became pretty good friends. And then about six months later, Pure Atria was acquired. And this time, I wasn't so lucky, at least in terms of the same way, but this time I was going to lose my job because they already had a head of marketing. And Reed was going to lose his job because they already had a CEO. So the two of us were going, okay, what's next?

9:56And for me, that was simple. I was going to start another company, of course. Reed wasn't so sure. He thought he wanted to go change the world of education. He was going to become a philanthropist, but he wanted to get a degree, a higher degree in education, so he had some credibility. So he was going to go back to school. But he wanted to keep a finger in this entrepreneurship game. So we came to an arrangement that he would be my angel. I would start and run the company. But we needed the idea. And that's what led us to both being in a car, commuting back and forth from our homes in Santa Cruz, California, up and over the Santa Cruz mountains every day to our offices in Sunnyvale.

10:40And we would pitch ideas to each other or more frequently, I would pitch ideas to read. And this was not like I was a video guy, you know, who I could tell you all the great French directors or anything like that. I was normal. I watched Lion King trying to get a cranky kid to fall asleep. That was my movie experience. But I was a direct marketing guy. I was someone who saw the promise in the internet. I was a believer in personalization. So I was pitching ideas around that. And as you, as you probably know from, you know, that will never work from the book, I pitched him the idea of personalized shampoo, where you cut off a lock of your hair, you mail it in.

11:24Our team of ace hair scientists formulate the custom blend and you subscribe to it. And Reed, he was the analytical one. He would find the holes. He'd challenge me. He'd push me on the numbers and the ideas would get rejected. And then I'd come in the next day full of fire and I'd pitch him custom dog food, you know, for your breed, for its climate activity level, gender, whatever. And he'd shoot that down. I pitched probably a hundred ideas. And one of the ideas I pitched him was video rental by mail. And at the time, this is in 1997, spring of 1997. Back then when you watched a movie, as you probably remember, it came on a VHS cassette.

12:08It was big, heavy, expensive. And so it didn't take a lot for me to realize not going to work. And that got rejected too. So the breakthrough, if there was one, came a few months later when Reed got in the car and said he'd heard about this new technology called the DVD, you know, thin and light. And it wasn't like if we had read about DVD, we would have said, aha, video rental by mail. It was more like, you know, when you're cleaning up your house and you find under the couch a little piece from a jigsaw puzzle. And you go, oh, that's the missing piece from that puzzle I was trying to solve two months ago.

12:51And that's how it was for us. That DVD could be the missing piece to making that video rental by mail idea work. And then here's the, this is what separates my opinion of an entrepreneur from anyone else, is rather than saying, cool idea, let's think this through, or let's go and work on a business plan, or let's put our pitch deck together or any other crap. We just, thinking, just turn the car around right in the middle of the commute, went back down to Santa Cruz to see if we could validate this idea. And we went to look for a DVD and it was a test market. So there weren't any. So we settled for buying a used music CD, went a few doors down and bought a little gift envelope.

13:39like you put a greeting card in, addressed it to Reed's house in Santa Cruz, bought a stamp and popped it in the slot and then went to work. And then the very next morning when Reed came to pick me up to go to work, he just had a little envelope with an unbroken CD that had gotten to his house in less than 24 hours for the price of a stamp. And if there's an, as they say in screenwriting, an inciting event. That was probably it. Yeah. Wow. So then what happened next? So then this, again, this is 1997. So we, after a little bit of, I did a little bit of research into this and we got to the point that every entrepreneur gets to where you go, I can't learn anymore.

14:33I mean, there's no DVD rental by companies I can look at. There's no data on this. And you've got to make that decision, you know, based on the incomplete and inconclusive or, you know, contradictory information and just decide you're going to do it. And so Reed wrote a check for$1.9 million. We raised some money from a handful of other people, including my mother. And I rented a small office in Scotts Valley, California. I hired about a dozen people. We spent six months building a primitive e-commerce website, which you could throw together now in a half an hour. And on April 14th, 1998, so more than 20 years ago now, we launched the company now called Netflix.

15:24Yeah, it's crazy to think about. And everyone knows like, you know, they always talk about not keeping up with the times and what happened to Blockbuster or what happened to Kodak, you know, innovation, not keeping up with the times. And that Blockbuster story is a very well-known one around how Netflix, you know, just came around and just really just, you know, blitz that company. So I'd love to talk around kind of, there's a couple of key stories that I think are really fascinating around Amazon. Almost, you guys almost selling to Amazon. I'd love to hear that one. And then also almost selling to Blockbuster.

16:07Yeah, those are two different kind of bookends about selling the company. You know, and the first one, the Amazon one happened pretty quickly. This was in the summer of 1998, so we were probably less than six months old. And back then, if you can imagine a time when Amazon only sold books, it was a bookstore. But, you know, Jeff Bezos had made no secret of his aspiration to eventually be the everything store. And we were pretty sure that the path to everything would start with music and video. And so when he called, actually when his CFO called and said, you know, Jeff would love you to come up to Amazon and say hello.

16:52Reed and I were pretty sure that this was about a potential acquisition as he decided to either to jumpstart his entry into video. And it was really an important trip for us because, you know, as you know, I called the book, That'll Never Work, because every single person that I pitched that idea to said, that'll never work. You know, my employees, my investors, you know, my wife said, that'll never work. And they were right in a lot of ways. It was a terrible idea. But all of a sudden, six months in, Jeff Bezos, who is the king of e-commerce, is calling us up for potential acquisition. That was worth a hundred, that'll never works, that he saw something in us.

17:42So in one way, it was this incredible validation. But, you know, we went up there, had a really interesting meeting. You know, I don't know if you've heard these stories, but back then, he was in an old warehouse in a really disreputable part of Seattle. You know, there was people passed out in the doorways. There was broken windows. There was glass in the street. You went into this office. It was pizza boxes. There was three people in the same cubicle. It was a mess. and everyone had doors as desks, literally a door with a piece patched where the doorknob would be. But anyway, we make the pitch and at the end, as the CFO is selling us out again, she's saying, this is promising, but I got to set expectations that if we do something, it's probably going to be in the low eight figures kind of thing, which we're guessing is probably in the 14 to 16 million dollars and on one hand I'm going wow that's a lot of money for someone who's only been working on this for six months because I owned at that point like 40 percent of the company but the other thing is we had now built this working e-commerce website over six months we had managed to find a copy of every single DVD available.

19:07We had forged deals with consumer electronics companies to put our coupons in the boxes. I mean, we thought we had this solved. And so in addition to being this validation, it was also kind of a commitment ceremony for Reed and I, where we kind of looked each other in the eye and goes, if we want out, we can get out, but not now. Let's see what we can do. And so dodged that bullet. But you know, the, the, the, everyone called it, that'll, the book's called That'll Never Work. The podcast is called That'll Never Work. Everyone said That'll Never Work. And God damn it, they were right. when we launched that company, it didn't work.

19:55You know, it took us a year and a half, year and a half of testing one thing after another to finally come up with some repeatable, scalable model that actually worked. And that's kind of what leads us to the blockbuster story because the idea that finally worked a year and a half in was a no due dates, no late fees. Keep the discs as long, the DVDs as long as you want. When you want, mail one back and we'll replace it. And it'll be a subscription. So what a bizarre concept. And so to make it palatable, everyone got first month free. And as everyone now knows from subscription businesses, it's an interesting business model because once you get a subscriber, you have this recurring revenue.

20:44But it also means you pay all of your acquisition costs upfront and make it back over time, which has the unfortunate consequences that success is incredibly expensive. And that's what happened. This thing took off. I mean, people were flooding in. They were telling their friends. It was accelerating logarithmically. and every time a new order came in, part of me was like, oh my God, fantastic. We figured it out. We've got product market fit. And the other hand, I'm going, oh my God, we're going broke, paying to acquire all these customers. And then the ultimate crushing blow was that this turned out to be the summer of the year 2000, which those of us of a certain age remember was when the dot the original dot com bubble burst and almost overnight it went from this environment where raising money was as simple as walking out on the highway with a sign and you have semaphore flags and the truck will back up and pour the money in your driveway to all of a sudden the trucks are putting their head down and speeding past you can't raise money especially if you have dot-com in your name and we were screwed and that led us to decide we have to take that classic route of pursuing strategic alternatives as they euphemistically call it which basically means we got to sell this sucker and fast that led us to the obvious uh strategic alternative which was a fateful day when we flew to uh dallas texas one morning uh and ushered up to the renaissance tower to try and pitch ourselves to blockbuster yeah crazy what the details on that one yeah just shortly the quick answer is we went up we went in into this meeting um and it was so hard to get the meeting that the very fact we had got it, we said, we're there.

22:52It's so self-evidently a great deal. They were going to combine the businesses, that they'll run the stores, we're on the online, lots of synergies to accelerate both of them. No brainer. Our problems are solved. And at first it was going great because they were asking all the good questions, you know, leaning in. And then they asked how much. and Reed rehearsed. Reed leans in and goes,$50 million? And basically, they laughed at us. They laughed at us because of the hubris that in the heat of a dot-com meltdown, this upstart direct mail video business would dare be worth$50 million. And it was crushing because we had thought this was the deus ex machina that was going to sit in the movies.

23:49This was all of a sudden when the heroes are in deep trouble, all of a sudden they're plucked from danger. Nope. Now, not only was Blockbuster not going to save us, they were going to compete with us. And it kind of reinforced for Reed and I that, as my dad used to sometimes say, he goes, sometimes the only way out is through, that we were going to have to solve this one ourselves. Are you hesitating to take the next step in your e-commerce journey? Founder Plus has you covered. With proven frameworks tailored to your business needs for fast results, a supportive community of over 30 ,000 like-minded entrepreneurs, and weekly live mentorship sessions, Founder Plus is your key to success.

24:30Try Founder Plus today for just$1 for seven days and start building your dream business with confidence. You can visit founder.com forward slash start dollar trial or click the link in the description to claim your trial. And that's when you eventually reinvented the business model to what Netflix is today, right? Yeah. And Blockbuster, which at the time had 60 ,000 employees and 9 ,000 stores, you know, is now down to one store left. Wow. That's crazy. so I'd love to know like during those years what were some of your biggest lessons of building Netflix I think what was reinforced over and over and over for me was there's no such thing as a good idea you know everyone loves the epiphany that they you know you get the two guys who can't make the rent and then instantly you've got Airbnb but it doesn't work like that that ideas are starting points that they're almost universally bad.

25:36This morning, I was taping one episode of the podcast, speaking with an entrepreneur, and he's had this idea. He's had it in his head for eight years, and he never misses an opportunity to tell his friends it's a great idea. And they, of course, go, gosh, Ed, that's a great idea. But he's never collided that idea with reality. And it was, I mean, you have to deliver tough love sometime. You're going, for God's sake, I don't know if it is a good idea or a bad one, but you're never going to know that until you try it. And that's what I realized at the beginning. You know, when I said that, you know, at the beginning, Netflix didn't work, we tried so many things.

26:17At the beginning, I was this perfectionist, and we had lots of ideas, but the tests would be intricate. They'd take three weeks to put together, and then they'd fail, and you'd say, shit, I just wasted three weeks. And then you accelerate and accelerate and pretty soon you're doing multiple tests in a single day and they're sloppy and awful. But you realize that doesn't make a difference because that three weeks of perfect custom photography and lovingly crafted copy is not going to make the idea work. But if it is a good idea, then no matter how bad it is, the broken links, the misspellings, it still resonates.

26:55So the lesson, to get to the point here, was that it was never about having good ideas. It was about this system and this process and this culture that we created to test thousands of bad ideas. And I think that velocity is what really helped Netflix move so quickly. And it also informs the culture because when you start off with the premise that every idea is a bad one, that you have no idea in advance what's going to work, it democratizes the company because that great idea could come from any place, from anybody. It's not just that the CEO has to be the smartest guy in the room. You come in with this data-driven culture, which is not about, I believe, but more about the data shows.

27:42And that's kind of the key. Anyway, that's my long story about ideas suck. They don't count. So figure out how to test them. That's the genius. I see. And when it comes to, I guess, you now invest in a lot of companies and a lot of ideas, what are the qualities that you look for in the founder or the idea? And is it the idea or the founder that you usually invest in? Oh, you know, there's three important things in a company that I look for. So first is the founder. Then second would be the founder. And then third is the founder. And then 80th is the idea. Ideas do not count for anything. I'm serious.

28:31All the work people do into taking their idea, doing all this research and planning and what's the TAM and what a waste of time. Nothing ever survives that collision with the real customer. It's a starting point. So you're looking for someone who has the persistence to keep going. You're looking for someone with the creativity to run into the dead end and say, what have I learned from this dead end and which direction do I go next? You're looking for somebody with the confidence that he'll attract other people to come with him or her to help them, to lead them. I mean, you're looking for these very, very ephemeral things, and none of it has to do with, look how good my idea is.

29:15It's all about the person or actually more common these days about the team. So that's what I'm almost exclusively looking at. That makes sense. And do you think people need to move to Silicon Valley to be successful or if you want to build a successful tech startup, especially in like today's economy? So, you know, there's two ways to answer that. The first one is that everyone has some excuse. And I've heard them all. I need to graduate. I need a computer science degree. I need to have funding. I need to be in Silicon Valley. And so from that perspective, absolutely not. You can start a company anywhere, anywhere in the world.

30:02The internet is a tremendously democratizing force. And I do a lot of work with early stage entrepreneurs and I see stuff springing up all over the world. It's long since stopped being the domain of Silicon Valley. That said, there are certain advantages to doing it in a tech center, in a startup center, and Silicon Valley isn't the only one. And that largely comes from the rapidity with which ideas spread in those communities. that, for example, if you are really into startups and you have all kinds of neat ideas, but you live in Hartford, Connecticut, and you go to lunch with your buddies, you're there all excited about startups, but they're all talking about their law problems and their banking problems and their insurance problems.

30:51And that's fine. When you come to here, Silicon Valley, around the table, everyone works at a startup. Everyone's into it. And so you get feedback. You say, I have this idea. And rather than your friends going, sounds interesting. People are saying, oh, no, that's been tried. Oh, but have you thought about this? Oh, this person has talked about that. He isn't helping you. And that is a, that's a pretty positive environment for getting support for these things. So necessary? Absolutely not. If that's the excuse for you not doing it, you are deluding yourself. But listen, all things being equal, if you can be here, it makes it a little bit easier.

31:32Because the talent is so good, right? The culture is so pervasive. I mean, you need something. You need an opinion. It is here. And you bump into it all the time. I mean, now if you're seeking it out, even if you are in Hartford, great. You're getting a Zoom call. With enough persistence, you can be on a call with anyone in the world. But that's different. And COVID, of course, has obviously complicated a lot of this. But in general terms, being out to lunch with your friends and having every single person working at a startup or a tech company, it's a pretty powerful way to educate yourself really, really quickly about what the current trends are, what's possible, what's being tried, what's being done, who's working on it.

32:17It makes funding a lot easier and a lot faster. But again, I do not want to be the guy who says you can't do it unless you're here or in New York or in Boston or in name the city around the world that has it. So the lesson here is if you have an idea, the most important thing is to start no matter where you are, no matter what's going on in your life. But yes, is it a bit easier here? The same way it is getting an acting job in Hollywood, but you can do it any place. Yeah, that makes sense. You talked about trends. Interesting to me. it's a real hot button for people I think people are always looking for business trend like like things that are trending because there's this idea if you start a business around something that is trending that it'll be hot higher chance of success I'm curious where if anybody's watching this right now perhaps they have multiple ideas or they don't even have an idea they say I want to start a business.