Former Netflix CEO: “Hard Work Does Not Matter!” A $278 Billion Company Wasn’t Built On Hard Work!
01 Aug 2024 (2 months ago)
Intro
- Mark Randol, the co-founder and first CEO of Netflix, shares his experience of launching the company in 1997. He emphasizes that the initial idea of renting DVDs by mail was considered ridiculous and unlikely to succeed.
- Randol highlights the importance of testing ideas quickly and cheaply, citing the example of introducing a subscription model with no late fees, which proved to be popular with customers.
- Despite initial success, Netflix faced a financial crisis in 2000, with the company on the verge of bankruptcy. Randol reveals that they explored selling Netflix to Amazon for a relatively small sum but ultimately decided to continue operating, believing in the potential of the company.
What’s your mission?
- The speaker, a former CEO, reflects on his career and acknowledges that he no longer has the desire to start another company, preferring to focus on mentorship instead.
- He emphasizes that his current mission is to share his knowledge and experience gained over 40 years as an entrepreneur, helping others succeed in their endeavors.
- This mission involves guiding individuals who are new to entrepreneurship and providing support to those already established in the business world, aiming to increase their chances of success.
Why did you write this book?
- The author wrote the book because he believes that the general media portrays entrepreneurship in a misleading and damaging way, often glorifying it with images of fast cars and parties.
- He wanted to provide a realistic and honest account of what it truly means to be an entrepreneur, highlighting the struggles and challenges involved in bringing a seemingly impossible idea to life.
- The author hopes that readers who finish the book and find the story inspiring are the right people to become entrepreneurs, while those who find it too difficult might be better suited to other paths.
Your journey to Netflix, what got you there?
- Early entrepreneurial experiences shaped the creation of Netflix. The speaker's first foray into direct response marketing involved running a mail order division for a sheet music company. This experience taught him about testing, analytics, and building a company within a company. He also worked as a circulation director for a magazine, which involved managing subscriptions. These experiences, combined with his understanding of direct response marketing and subscription models, laid the foundation for his later ventures.
- The speaker recognized the potential of the internet for direct marketing. He saw the internet as a powerful tool for personalization and analytics, building upon his experience with direct response marketing. He was not alone in this realization, as Jeff Bezos also recognized the potential of the internet for selling products.
- The speaker's experience with catalog businesses and shipping influenced the creation of Netflix's video rental by mail model. His knowledge of shipping, fast delivery, and catalog businesses provided a framework for solving the problem of video rental. He drew upon his past experiences to develop a unique solution, demonstrating the importance of connecting different points of inspiration to create something new.
Meeting your Netflix co-founder
- The speaker met Reed Hastings, the co-founder of Netflix, while working at Pure Atria, a company that was later acquired by Hastings' company.
- The speaker describes their first meeting with Hastings as an instant connection of two like minds, despite their different approaches to problem-solving. The speaker, with a marketing background, was more empathetic and intuitive, while Hastings, with a background in mathematics and computer science, was more logical and methodical.
- Despite their differences, they shared a commitment to honesty and a willingness to challenge each other in their pursuit of the truth. This dynamic allowed them to have intense and productive conversations that led to effective problem-solving.
- After Pure Atria was acquired, both the speaker and Hastings were set to lose their jobs. Hastings planned to return to school, while the speaker intended to start a new company. They agreed that the speaker would start the company, Hastings would be the angel investor and board chair, and all they needed was a business idea.
Searching for a business idea
- Reed Hastings and Marc Randolph, the founders of Netflix, spent months searching for a viable business idea. They had a structured approach, brainstorming ideas during their daily commute.
- Randolph would pitch ideas to Hastings, who would meticulously analyze their feasibility. Hastings would often shoot down Randolph's ideas, but Randolph would come back with research and arguments to support his proposals.
- One of the ideas that initially failed was video rental by mail. The technology at the time, VHS tapes, was too bulky and expensive for this model to work. However, when DVDs were introduced, they saw a new opportunity to revisit the idea. They immediately tested the concept by sending a CD in an envelope via mail, proving the feasibility of their vision. This pivotal moment marked the beginning of their journey to build Netflix.
How to know if you’ve got a winning business idea
- Every idea is initially stupid: The speaker emphasizes that every business idea should be approached with skepticism. He compares this to the common corporate practice of brainstorming, where the rule is that there are no bad ideas. He argues that this is a dangerous mindset, as it can lead to entrepreneurs falling in love with their ideas without proper validation.
- Don't fall in love with your idea: The speaker warns against getting emotionally attached to a business idea. Instead, he encourages entrepreneurs to focus on quickly and cheaply testing their ideas with real people. This involves finding a way to collide the idea with reality and see if it resonates with potential customers.
- Focus on testing, not dreaming: The speaker stresses that the key to success is not having a good idea, but rather having the ability to test ideas quickly and cheaply. He suggests using a "hack" or a minimal viable product (MVP) to gather feedback and determine if the idea has merit. This approach allows entrepreneurs to move on from bad ideas quickly and focus their energy on those with potential.
The importance of stress testing your idea
- It's crucial to stress test your idea before investing significant time and resources. Spending a year developing a complex idea in isolation can lead to building the wrong thing. Instead, focus on validating your idea quickly and cheaply.
- Use a simple, low-cost method to test your idea's core principles. The example given is a student testing their peer-to-peer clothing sharing idea by simply writing "Would you like to borrow my clothes?" on a piece of paper and taping it to their dorm room door. This allows them to quickly gather real-world feedback on the idea's viability.
- This process helps you understand the real-world implications of your idea. By testing your idea in a simple way, you can uncover potential problems, such as fit issues, style preferences, and the cost of cleaning borrowed items. This knowledge is invaluable when deciding whether to pursue the idea further.
Being too romantic about your idea
- Entrepreneurs often fall into the "sunk cost fallacy": They become overly attached to their initial idea, even when evidence suggests it's flawed. This is because they've invested significant time, money, and effort into it. This can lead to a lack of objectivity and an inability to adapt to new information.
- Starting with the assumption that your idea is bad can be beneficial: This mindset allows for greater flexibility and a willingness to pivot when necessary. It encourages entrepreneurs to test their ideas quickly and iterate based on feedback.
- Successful entrepreneurs prioritize success over being right: They are willing to abandon their initial ideas if they prove ineffective and embrace new directions that lead to better outcomes. This contrasts with less experienced entrepreneurs who may be more focused on validating their original vision.
Netflix’s early years
- Netflix's founding was driven by a simple problem: The video rental market was dominated by Blockbuster, which had a poor customer experience. Reed Hastings and Marc Randolph saw an opportunity to create a better way to rent movies.
- Early goals were modest: The initial goal was to become one of the top 10 largest video chains in the US, which seemed ambitious at the time but was ultimately surpassed quickly. The idea of Netflix becoming as large as it is today was unimaginable.
- Netflix's innovation was in its business model: It offered a centralized online store that served the entire country, eliminating the need for physical locations and allowing for a wider selection of movies. The company also leveraged the emerging DVD technology, which was still in its early stages of adoption. The timing was crucial, as the internet and DVD technology were both rapidly gaining traction.
Exploring the potential of selling to Amazon
- Netflix explored selling to Amazon in 1999, shortly after launching their service. Amazon was still a relatively young company, focusing solely on book sales at the time, but Jeff Bezos had already expressed his ambition to become the "everything store." Amazon's CFO reached out to Netflix, recognizing their potential in the video streaming market.
- The meeting with Jeff Bezos took place in Amazon's then-unassuming headquarters. The environment was chaotic, with employees working in makeshift spaces and dogs running around. Despite the unconventional setting, the conversation about Netflix's potential went well.
- Amazon's offer was in the low eight figures, estimated to be between $10 and $15 million. While this was a significant sum for a company that had only been operating for a year and a half, Netflix's founders, Reed Hastings and Marc Randolph, ultimately decided against selling. They felt they had already overcome the major challenges of building their business and were confident in their ability to achieve greater success independently.
What was Jeff like in 1999?
- In 1999, Jeff Bezos was described as "extremely unpolished" with a "hyena-like bark" that could be heard throughout the building. He was also incredibly enthusiastic and energetic.
- Both Jeff Bezos and Reed Hastings, the former CEO of Netflix, had bells that rang every time an order came in at their respective companies. They also discussed the origins of their company names, with Netflix initially being called "Kibble" and Amazon originally being called "Kadabra."
- Reed Hastings was impatient and wanted to move on from the startup talk, prompting the speaker to shift the conversation to the dot-com crash and its impact on Netflix.
Stepping down as CEO
- Mark Randolph, the co-founder of Netflix, recounts the time when Reed Hastings, the company's other co-founder, decided to take over as CEO. This occurred in late 1999, shortly before the dot-com crash. Randolph had been serving as CEO, while Hastings was the chairman and an angel investor.
- Hastings presented Randolph with a PowerPoint slideshow outlining his concerns about Randolph's leadership. He felt that Randolph was making some errors in judgment and questioned some of his hiring decisions. Hastings believed that Netflix needed to execute "lawlessly" to succeed in the rapidly growing market.
- Randolph initially resisted Hastings's proposal, feeling that it was unfair to be replaced as CEO of a company he had founded. However, he eventually realized that Hastings's vision for the company's future might be different from his own. He recognized that Hastings's leadership could potentially lead to greater success for Netflix, and ultimately decided to step down as CEO. This decision, while difficult, proved to be a wise one, as Netflix experienced a period of significant growth and success under Hastings's leadership.
What was it that he had that he thought was better?
- Reed Hastings, the former CEO of Netflix, believed he possessed qualities that would better suit the company's future growth. He had already successfully taken a company through an IPO and scaled it from a small local business to a multinational corporation with a thousand employees.
- Hastings had a proven track record of attracting and hiring highly talented individuals. He was not suggesting that the speaker was incapable of achieving similar success, but rather that Hastings' experience and reputation increased the odds of success for Netflix.
- One key difference was Hastings' ability to raise capital. Netflix required significant venture funding to get started, and Hastings had a reputation for generating substantial returns for venture capitalists due to his previous company's successful IPO. This made him a more attractive investment prospect compared to the speaker, who was relatively unknown in the venture capital world.
Having tough conversations
- Empathy and Delivering Bad News: The speaker, a former Netflix CEO, discusses the connection between empathy and the ability to deliver bad news. He believes that people who are good at marketing and sales often have a high level of empathy, making it difficult for them to deliver negative messages because they can easily put themselves in the other person's shoes.
- Overcoming the Difficulty: The speaker acknowledges that he has struggled with delivering bad news in the past but has learned to be more direct and assertive over time. He emphasizes that there is no easy way to avoid the pain of delivering bad news, and it's important to simply do it, even if it's difficult.
- The Importance of Honesty and Courage: The speaker shares an anecdote about a time when he had to lay off employees at his company. He describes the emotional toll it took on him but emphasizes the importance of being honest and direct with employees, even in difficult situations. He also expresses respect for his former colleague, Reed Hastings, for his courage in delivering difficult news, even though it was painful for both of them.
What makes Reed so successful?
- Reed Hastings' success is attributed to his exceptional ability to see connections and interrelationships between seemingly disparate pieces of information. He can quickly identify solutions to complex problems, often before others, demonstrating a remarkable ability to anticipate future outcomes and choose the most effective path.
- Hastings is described as highly analytical and not easily swayed by emotions. This allows him to make difficult decisions objectively, without being influenced by personal feelings.
- The speaker emphasizes that Hastings' success is not solely based on hard work, but rather on his unique ability to see patterns and make strategic decisions.
Hard work: does it matter?
- Hard work is not the most important factor for success. The speaker argues that hard work is often overemphasized and that it's a myth that hard work alone leads to success. He uses the analogy of a triathlon to illustrate this point, explaining that while sprinting at the beginning is essential to get ahead, it's not sustainable for the entire race. Similarly, in business, hard work is crucial in the early stages, but it's not the only factor for long-term success.
- Focusing on the right things is more important than working harder. The speaker uses the analogy of running for a plane to emphasize that sometimes, no matter how hard you work, the outcome is predetermined. He argues that entrepreneurs often spend too much time on trivial details, like checking fonts, when they should be focusing on the bigger picture and making strategic decisions. He believes that by focusing on the right problems, you can make a significant difference, even without working harder.
- Being smart about your choices is key to achieving balance. The speaker emphasizes that being smart about your choices and focusing on the right things can lead to a more balanced life as an entrepreneur. He suggests that instead of working harder, entrepreneurs should focus on making better decisions and being more strategic in their approach. This will allow them to achieve success without sacrificing their well-being.
How to find the perfect product-market fit
- Finding product-market fit is crucial for business success. It signifies a point where customers genuinely desire your product, leading to rapid growth, increased customer retention, and ease in acquiring new customers.
- Product-market fit is often discovered through experimentation and failure. Netflix's journey to success involved numerous failed attempts before they stumbled upon the pivotal idea of eliminating late fees. This highlights the importance of trying various approaches and iterating based on customer feedback.
- Speed and agility are essential in finding product-market fit. Netflix initially spent significant time perfecting each test, leading to slow progress. However, they realized that even a poorly executed test could reveal a promising idea if it resonated with customers. By accelerating their testing process, they were able to identify successful concepts more quickly.
The moment Netflix turned on subscriptions it changed everything
- The idea of a subscription model for DVD rentals was initially considered ridiculous. The former Netflix CEO, Reed Hastings, had the idea while looking at a warehouse full of DVDs. He thought it would be more efficient to store the DVDs at customers' homes and have them mail them back when finished. This led to the concept of a monthly subscription fee, allowing customers to rent as many DVDs as they wanted without due dates or late fees.
- The subscription model proved to be a huge success, exceeding expectations. Customers loved the convenience and flexibility of the subscription model, and it quickly became a popular alternative to traditional video rental stores like Blockbuster.
- The subscription model addressed a major pain point for customers: late fees. Blockbuster's late fees were a major source of customer frustration, and Netflix's subscription model eliminated this issue entirely. This gave Netflix a significant competitive advantage and helped to solidify its position in the market.
How many tests should we be conducting?
- The speaker emphasizes that companies should not spend excessive time debating the perfect test but instead focus on conducting more tests.
- The speaker argues that customers often don't know what they want, and the only way to discover their preferences is to experiment with various options.
- The speaker uses the example of Netflix's subscription model to illustrate how even successful businesses continue to test and optimize their offerings, highlighting the importance of ongoing experimentation.
Getting employees to conduct more tests
- The speaker explains that many companies and employees are hesitant to conduct tests because they fear failure, which often leads to blame and negative feelings.
- The speaker emphasizes the importance of creating a culture where failure is not only accepted but celebrated, as it provides valuable learning opportunities.
- The speaker highlights the challenge of implementing this culture, as many companies still reward success and punish failure, creating a disincentive for risk-taking and experimentation.
Your dad passing away
- The speaker's father was an investment advisor who was risk-averse and did not understand the speaker's venture capital work.
- The speaker's father passed away from a brain tumor just before the dot-com bubble burst, which was a bittersweet time for the speaker as he was both proud of his father's understanding of his work and grieving his loss.
- The speaker's father's death, while tragic, reinforced the speaker's belief that it is possible to be true to oneself and be fulfilled without chasing trends.
- The speaker's father's "Randolph Rules of Success" were not traditional business rules but rather focused on being a decent person and doing the right thing, which the speaker believes is important for success.
The dot-com crash
- The dot-com crash had a devastating impact on the company, despite its success in acquiring subscribers. The company was heavily reliant on subscription revenue, which dried up quickly during the crash.
- The company had a "first month free" policy, which was not a problem during the era of irrational exuberance, but became a major issue when the market crashed.
- The company was losing money rapidly, accumulating losses of $50 million with only $5 million in revenue. This was due to the high cost of acquiring customers and the lack of revenue in the early months.
- The company was burning through cash at a rapid rate, with most of the $50 million in losses occurring in the previous 12 months. This unsustainable situation forced the company to seek a strategic alternative, which was to sell the company to Blockbuster.
Getting the call from Blockbuster to buy Netflix
- Netflix's initial attempts to partner with Blockbuster were unsuccessful. Despite reaching out for months, Blockbuster, a giant in the video rental industry, showed no interest in Netflix, a small startup with a $5 million annual revenue compared to Blockbuster's $6 billion.
- A chance meeting with Blockbuster executives at a corporate retreat led to a pitch for a partnership. Netflix, facing a $50 million debt, proposed a combined model where Blockbuster would manage physical stores and Netflix would handle the online business. However, Blockbuster executives found the $50 million valuation for Netflix absurd and rejected the offer.
- Blockbuster's failure to recognize Netflix's potential and their reluctance to invest in online technology ultimately led to their downfall. Blockbuster's focus on their traditional brick-and-mortar business model prevented them from effectively competing with Netflix's innovative online platform. They underestimated the power of software and failed to allocate sufficient resources to develop their online presence. This ultimately allowed Netflix to surpass them and eventually lead to Blockbuster's bankruptcy.
Blockbuster nearly took Netflix down, until their CEO left
- Blockbuster's CEO, John Antioco, was forced out by corporate raiders who wanted to make the company more short-term profitable. These raiders denied Antioco his bonus, leading him to resign.
- The new CEO, who had experience in retail, focused on selling non-movie related items in Blockbuster stores, ignoring the potential of the online business. This decision, coupled with the company's rigid business model, prevented Blockbuster from adapting to the changing market.
- Blockbuster was on the verge of acquiring Netflix, but ultimately chose to abandon the deal. This decision, combined with their lack of focus on the online market, allowed Netflix to survive and eventually surpass Blockbuster.
Leaving Netflix
- The speaker, a former Netflix executive, reflects on the impact of the company's IPO in 2002. While it brought significant wealth, he realized that his life didn't fundamentally change. He still enjoyed the challenge of solving problems and building a successful company.
- Leaving Netflix, despite the financial security it provided, wasn't a difficult decision. The speaker, like many successful entrepreneurs, found fulfillment in the process of creating and growing businesses. He saw it as an opportunity to continue solving interesting problems and working with talented individuals.
- The speaker emphasizes that the true reward of entrepreneurship lies not in the money or the recognition, but in the thrill of building something new and challenging the status quo. He feels fortunate to be able to spend his days pursuing this passion.
Netflix culture
- Netflix's culture is not aspirational, it's observational. It's not about creating a culture you want, but rather how the founders and senior executives behave. People model their behavior after those in leadership positions.
- The "freedom and responsibility" culture at Netflix stemmed from the founders' genuine approach to work. They treated each other and their employees with radical honesty and held them accountable for their actions. This approach was not a conscious decision, but rather a natural consequence of their own behavior.
- The "freedom and responsibility" model works best in early-stage companies where resources are limited. It's easier to trust employees to get the job done when there's not enough time to micromanage. However, as companies grow, it becomes harder to maintain this approach because of the potential for misuse by a small percentage of employees.
Your relationship and commitment to date nights
- The former Netflix CEO, Reed Hastings, emphasizes the importance of prioritizing relationships and achieving balance in life. He shares his personal experience of realizing the need for balance in his relationship with his wife, leading him to establish a "date night" policy on Tuesdays. This policy involved leaving work at 5:00 PM sharp every Tuesday, regardless of work demands, to spend quality time with his wife.
- This policy, while initially met with resistance, ultimately proved beneficial for both his relationship and his work. It demonstrated his commitment to his wife and family, fostering a healthier work environment and encouraging others to prioritize their personal lives.
- Hastings believes that achieving balance in life is crucial for overall happiness and fulfillment. He acknowledges the challenges of balancing work, family, and personal passions, but emphasizes the importance of making time for all three. He believes that neglecting any one of these areas can lead to unhappiness and ultimately hinder success in other areas of life.
The last guest’s question
- The guest asked Mark Randolph, former Netflix CEO, what he was most wrong about in his life and what he learned from it.
- Randolph shared that he regretted not realizing sooner that his experience with magazine subscriptions could be applied to Netflix.
- He emphasized that hindsight is a valuable teacher and that his book, "That Will Never Work," encapsulates the lessons he learned throughout his journey with Netflix.