#33 Marc Randolph (Co-Founder of Netflix) Part 1

The truth is that for every good idea, there are 1,000 bad ones. And sometimes it can be hard to tell the difference. Customized sporting goods, personalized surfboards, dog food individually formulated for your dog. These were all ideas I pitched to Reid, ideas I spent hours working on, ideas I thought were better than the idea that eventually, after months of research, hundreds of hours of discussion, and marathon meetings in a family restaurant became Netflix. The best ideas rarely come on a mountaintop in a flash of lightning. They don't even come to you on the side of a mountain when you're stuck in traffic behind a sand truck. They make themselves apparent more slowly, gradually over weeks and months. And in fact, when you finally have one, you might not realize it for a long time. I just read an excerpt from the book That Will Never Work: The Birth of Netflix in the Amazing Life of an Idea. This is by Marc Randolph, who is the co-founder and first CEO of Netflix. So I've been reading this, this book, actually, funny enough, on the treadmill, they have a Kindle feature. So I can read. And so I have all these highlights, you can actually highlight on the Peloton. So essentially, what I'll do is I'll go on this, and for the first couple minutes, I don't want to read a book. But I go onto the Peloton treadmill, I start reading, and then I just go on, like I get You know, in the groove. I kind of catch on fire in a sense, and I just start reading. And I'll read for over 20 pages at a time in the span of like a 30-minute walk, which is great for my fitness but also for reading. I want to dive into the really just the story or these. This is part one of the Netflix story, and I've read about 70 plus pages of this book, and it's about a 300-page book. I want to take this in parts. I really want to just go through it. as he is telling the story. So he says, As a kid, one of my strongest memories is of my father building miniature steam-powered trains. They weren't the tiny electric models you buy as a kit, the pieces all built to fit together, matched to a track that you just have to plug in. No, these were for the real fanatics, fully functional miniature trains. Their steel wheels powered by steam. Every component, wheels, pistons, cylinders, boils, cranks, rods, ladders, even the miniature shovels, the miniature engineer would use to shovel miniature pieces of, of coal had to be built by hand. About the only pieces you didn't build yourself were the screws that held everything together. That was fine with my father. He was a nuclear engineer who had found that his skill set was much more lucrative as a financial advisor to major firms who were investing in nuclear power and weapons development. His work allowed my family to live in comfort out in the New York City suburbs, But he missed the lab. He missed the instruments, the calculations, the sense of pride in building something. After a long day on Wall Street, he would come home, take off his tie, and change into one-piece work overalls, the kind that real train engineers wore. He collected engineer uniforms from around the world. Then he'd head to the basement. It was, it was time to build. I grew up in a pretty normal upper middle class household. When the youngest of us finally began school, my mother started her own real estate firm. Our house was built on a hill flanked by apple orchards with a big pond in the back. I spent most of my childhood outside roaming through the acres of woods that surrounded our house, but I also spent a fair amount of time indoors reading in my parents' well-stocked library. This is really interesting because throughout the course of all these founders and entrepreneur journeys, whether it's James, James Dyson, Steve Jobs, Elon Musk—they all talk about reading biographies and history. They all talk about reading history and books that essentially have given them, given these founders all these ideas. And that's something that right off the bat Mark Randolph is saying from his childhood, right? His childhood—it's super interesting. And now I want to go into this next part. This is super fascinating, super fascinating. So. If you listen to my episode on Sam's Murray, it might be episode 10 to 15. I can't remember. Actually, I think it's more recent. I think it's in the 20s. But this is really interesting. So I was reading that, and in that book, there's a book on Edward Bernays. I actually just bought it. It's called Propaganda. But what's really interesting is this book essentially tells you this guy is the founder of PR or public relations, and he's also a genius. So he was the guy that All those smoking ads, he basically was the first guy to do that. He said that women were, you know, it was good for women to smoke, which I clearly I don't agree with. The other thing is that Edward Bernays would actually, he would go in and this is super fascinating. He would go in. So Simon and Schuster gave Edward Bernays the task of going in and actually selling more books. They said, we're going to leave it all in your hands, we'll give you a budget, I want you to sell more books for us. So Edward Bernays goes to constructors, right? This is selling books. He goes to the people that are building houses. Why does he do this? Well, back in the '60s, or whenever Edward Bernays was alive, people did not have built-in bookshelves. He asked these, you know, construction people to basically Make these houses and put built-in bookshelves because when people look at these built-in bookshelves, they want to put stuff on it. And what do you put on a bookshelf? Books. So he asked them to do that, and it ended up increasing sales for Simon and Schuster because they were thinking it was like a crisis. We need people to buy more books. So that's a genius way. But this is really interesting. This connects to Mark Randolph because he says, "My family also had a connection to another important 20th century figure." Edward Bernays. Bernays was my grandmother's brother and Uncle Siggy's nephew. If you've ever taken any course in advertising, if you've taken a course in mass media in the American 20th century, heck, if you even watch Mad Men or seen a cigarette ad, then you're familiar with his work. He's also the reason we celebrate Thomas Edison and not Joseph Swan as the inventor of the light bulb. He's the guy who, after helping popularize bananas for United Fruit, turned around and waged a propaganda campaign alongside the CIA To stage a coup in Guatemala, and that relates to our book, the Sam Murray book, The Well, The Fish That Ate the Well by Rich Cohen. Great writer, truly great author. But he talks about this where he goes into more detail on Edward Bernays, and I think it's really funny that the co-founder of Netflix is related to one of the greatest legends in advertising history, especially in America. That he's the Almost father of advertising besides David Ogilvy. I'm still, I still need to read his book, but it's really interesting. And so he goes in, he, I have this highlight in this book, in the book I'm holding, and it says, it did stick in my head that I could do what my father did every night in our basement, use the tools he had been given to create something. So there's this sense of resourcefulness, right? Yeah. He's kind of talking more about his child— childhood now. Over time, I realized that for my dad, it wasn't finishing the train that he liked. It was the years of labor, the days at the lathe— I don't know how to pronounce that— the thousands of hours at the drill press and the milling machine. I don't have many memories of watching those trains run. What I remember are all the times he excitedly called me down to the basement to show me a piece he just built. A piece that when connected with 50 others might amount to a single axle. This is really interesting because people have— a lot of people have different ways of being satisfied. But what I see with Marc Randolph's dad is the attention to detail. He loved the attention to detail. And everyone might not be like that, but that's a trait that are— that's in all these great founders and entrepreneurs. They are focused on the details no matter what. No matter what's thrown at them, they always focus on the details. Whether it's Elon Musk, we went through— I went— I'm putting an episode out next week where one of his quotes is delete, delete, delete. And he's talking about the Falcon rocket ship and the Tesla, you know, factory, right? There's a lot of different founders and entrepreneurs that pay attention to the details. And you look at Steve Jobs and all these founders and entrepreneurs, but what is the important part? Well, Marc Randolph is saying that You know, his dad really focused on the details. And so Mark Randolph is saying he kind of learned that from him. You know, pay attention to the details. And Rick Rubin has this interesting idea where it's the magic. He says he's a lazy workaholic, and I learned that from his recent interview with David Sinra. David Sinra said that it really disappointed him because he was like, "Wait, Rick Rubin, like Rick, what do you mean?" And Rick told him. You know, I actually find it hard to go to work every morning or to make music. And the reason why— the reason why I keep doing it is because there's this little moment of magic. You know, I've really experienced this myself, whether it's making music or making my podcast or reading books. That moment of magic when that hits, paying attention to the details and something that really clicks for you, that's something that you, you can't get anywhere else. So really pursue that. Now, Marc Randolph goes into this idea that he, he's a co-founder with Reed Hastings. I just got Reed Hastings' book. He's also the co-founder of Netflix. So these 2 guys, Marc Randolph and Reed Hastings, they co-founded Netflix. Reed Hastings is still part of the company. Marc Randolph, I think, is still a co-founder. He's worth about $500 million. So he's talking about Reed Hastings in this little section of the book. And he said Reed was busy finalizing the merger and had already started making plans to go back to school as his tenure as CEO was coming to an end. He was already feeling a little burned out. He wanted to change the world, but he was increasingly convinced that he couldn't do so as a tech CEO. If you really want to change the world, he said, you don't need millions of dollars. You need billions. That's really interesting because you look at Steve Jobs. I actually disagree with Reed on this quote. Steve Jobs. I mean, if you get to the point where yes, at some point you need billions to change the world, but even a company like Netflix or Apple, Apple, like Steve Jobs was literally in his basement. I watched a clip from the Steve Jobs movie. It's really interesting. I haven't watched it. I need to watch that. And what's really interesting is this guy from David Hewlett and Packard or That company, a company that Steve Jobs really looked up to. He was calling David Hewer or Packer every single day, right? They send a guy over, and I might be getting the story, you know, a little mixed up. But they send the guy over because he really trusts this other guy, and Steve looks up to this guy, and he's been calling him every day. It's a big tech CEO in Silicon Valley. This guy's friend comes over, and he's like, "Oh wait." This is Apple. And literally it was Steve Jobs with a bunch of his friends literally building computers in his garage. So you don't need a lot of money to change the world. You can start from scratch. So I don't know if that's what Reed Hastings is getting at, but it's really interesting. But what's really interesting too is he wanted to go back to school. And Mark Randolph talks a little bit more. He says, what I needed was the feeling of being deeply engaged with a project. What I needed was purpose. Hence the ideas for a new company. So he was running a ton of ideas by Reed Hastings. They would take drives over to Silicon Valley. They lived about 30 minutes or longer, and both of them would kind of carpool. So one would pick up the other and vice versa. And it was really interesting. And so he would literally pitch dozens, he says hundreds of ideas in this book. He says, I'm an idea guy. Give me hours of empty time in a Silicon Valley office with a fast internet connection and multiple whiteboards. and you're going to need to buy more dry erase markers. I probably would've come up with business plans just to get out of embarrassing myself at the driving range. I mean, he was talking about golf there, which is really funny, but it's really interesting. And he says, like my father in the basement, there was a pleasure in the work. We were designing something. Someday we might get to build it. And he's talking about all these different ideas. Like he wants to be deeply invested in a product and project. And that reminds me of James Dyson. And I got actually updated numbers from my last podcast episode, which is coming out a week from now. What's really interesting is James Dyson actually spent 14 years before any of his products were successful. And if you don't know who James Dyson is, he is the founder of the James Dyson vacuum, which is everywhere now. And he essentially took the old model of the vacuum, which you can look them up, they're these big bags. And he made this cyclone, which basically the dust would— he did. It's very scientific. It's really cool. But he made a better way for the vacuum. And this company is worth $20 billion. They've done headphones. They've done— if you go into an airport and you're drying your hands and it's this air dryer instead of paper towels, that's probably most likely Dyson. And so he owns 100% of this company, never has taken any investors. It is really interesting. That he's talking about this, right? You want to be deeply involved, and it spent you know James Dyson had 14 years before he was successful. So Reed Reed goes on. The interesting thing is that the effort to make a dozen is exactly so. They were going into this idea. Mark Randolph had this idea for basically dog food, right? We could personalize specific dog food. We could ship it out. All these different things. Per dog, right? And Reid says, sure, sure. Reid replied absentmindedly. That's very common in their drives unless he's interested. He says, but the point is that customizing a unique product for every customer is just too difficult. It never gets easier. And this has definitely changed now that AI has come around. AI can definitely customize it per product. We've seen that with ChatGPT. We've seen it with all these AI models. They're learning. Google has been learning how certain people work and some people love it, some people don't. But Reed's point is this, the effort to make a dozen is exactly 12 times the effort it takes to make one. You'll never get ahead, but we have to sell something. So what he wants is a repeatable product where you could have one AI bot. And this is the second part of that quote, right? You want to have one AI bot that can customize to all these people without you having to do extra work to customize to each person. So essentially you want something that scales, something you can sell. And that's something that through all these ideas, they couldn't do that. And so Mark Randolph or Reed Hastings responds with this. He says, sure, but you want something that will scale. He said, you want something where the effort it takes to sell a dozen is identical to the effort it takes to sell one. They go through a lot of questions and he asks this one question. Mark Randolph asks this one question. He says, what's something you use relatively often? Something the same person uses over and over again. And this is really interesting. They go through all these ideas, but this reminds me of the idea of Jeff Bezos. Jeff Bezos had one thing that he would essentially ask, where in 10 years do we want our company to be where we know our customers will still love it? Well, 10 years from now, free shipping is always, always going to be awesome. Discounts are always going to be great. Like people saving money, that's always going to be a big thing. And this reminds me of this quote because it's something that people love, people that, you know, love to use. So back 20 years ago, and we'll get into this into the book, they were— Netflix started out as a DVD company, a DVD company. That's crazy because you look at where they're at now, you know, instant streaming, instant service. You can watch almost everything you want. There's rotating movies. But 20 years ago, They were trying to figure out whether or not they could just ship a DVD without it getting damaged, and they had to come up with those ideas. Now, Mark Randolph goes into this next thing. He says, we need a product that already exists in the world, and this is an answer to what's something you use often. And so he goes in and he says, but that we can help people access online. So this was in 1997. Jeff Bezos did it with books. People said he would never be able to do it. And he finally did. He did. And now the company Amazon's worth, I think, over $1 trillion now. And he says, you don't have to write books to sell them. And this is going to be the idea for movies, right? You don't have to film movies or make movies to sell them. And we're going to go into the whole idea of movies, but there was VHS tapes, which they didn't— the companies didn't make a lot of money on. And then they moved to DVDs and now they're instant streaming. This is really interesting. So Marc Randolph is in a conversation with his wife sometime later, and he's pitching her the idea of Netflix. And she says, that will never work. And I think that's the idea for the book. She says, that will never work. Lorraine's reasons were much the same as the ones Christina and Tay gave me at the end of that week. So Christina and Tay are people that are in a different company working with Marc. And they want to move over to a new company, and they're considering the VHS tapes to sell. But he says the tapes were too bulky to ship. There was no way to guarantee that users would ship them back. There was a high likelihood they'd get damaged in transit. But more than anything, it was expensive. It's easy to forget how much VHS tapes used to cost. Now what's really interesting is with these VHS tapes, and we're going to go into it in a second, they had to wait till it became smaller, which is DVD, and that's why they were able to start their company. So they basically go into the whole studio, um, whether it's Disney, whether it's Warner Brothers, Universal, they were all selling VHS tapes. And he says this about the market. He said they had decided that the only way to respond was to price the VHS high enough that they essentially cap Captured their share of all that rental income. So Netflix is trying to find the idea to basically price these VHS tapes at the right price. But the thing is, they need to buy them in order to own them, in order to rent them out. So they would be an online Blockbuster store essentially, where you can go onto the website because internet is just coming out and you could basically rent it out. But the only thing is you can't get the VHS tape damaged. And also they're super expensive. So DVDs came out at like $15 to $25 per disc per this book. And with the VHS tape, they were selling them for, I think, $60 to $70 if I'm not mistaken. So he goes on, they knew that by raising the price like this, they were saying goodbye to consumer purchases, but it was worth it because people didn't want to own a movie. So at this time, people didn't want to own a movie. That's actually very similar to now when you think about it, when you go onto Netflix. Or you go on Apple TV, you know, you can buy movies for a really good discounted price. But if you get Netflix, you're not going to save— you know, you're paying for the streaming service and they own those movies sometimes. He goes on with this whole studio problem. The studios had learned from their mistake. They wanted DVDs to be like CDs, collectible consumer products. If DVDs were priced low enough, they reasoned, consumers would forget about renting And instead buy movies. So essentially Netflix would fit in the middle where they didn't want to be a renting company that's local. They would be— they would want to be online, but then they would need to undercut. So they would buy these so you can rent it out, and they would need to be cheaper than just buying the DVD. Now these studios basically envision consumers— they envision customers with shelves of movies in their family rooms, avoiding the rental middleman altogether. Cheaper inventory, cheaper shipping. It was looking like movies by mail could work if, and this was a big if, DVD became a popular format. With other huge categories—books, music, pet food—slowly being taken online, the movie rental category, which brought in $8 billion a year, was a tempting target. Betting on DVDs was a risk, but it might also be our way to finally crack that category. With the whole world consumed by VHS rental, We might be able to make a DVD rental by mail work. Now it's interesting, he's trying to essentially find this. So he said VHS by mail was dead, but DVDs by mail could work. So VHS was out of the picture, but the studios, the rental middleman, they could buy these VHS tapes, they could rent 'em out because they're local, they're not scaling and they're not online. So it was super easy, they didn't have to ship anything. Now Netflix can't do VHS, But DVD is just now coming onto the market because they wanted to redo— all these studios wanted to redo the problem that they had with VHS tapes, pricing the VHS tapes too high. They didn't want that to happen anymore, so they moved to DVDs, which is why Netflix bet on that risk so they could buy the $15 to $25 per disc. And then all of a sudden you had all that. And I like this just simple quote On this next page from Marc Randolph, he says, the truth is, I like headaches. I like a problem in front of me every day, something to chew on, something to solve, because they were still in the midst of trying to solve all of this. And he talks about having the idea of Netflix. So he says, we had our idea. Now we just had to figure out how to pay for it. When you start a company, what you're really doing is getting other people to latch onto an idea. You have to convince your future employees, investors, business partners, and board members that your idea is worth spending money, reputation, and time on. Nowadays, you do that by validating your product ahead of time. You can build a website or prototype, you can create the product, you measure traffic or early sales, all so that when you go to potential investors, palms outstretched, you have numbers to prove that what you're trying to do isn't just a good idea but already exists And works. Now, it's really interesting. Back in the day with Netflix, he says it was kind of a catch-22. You couldn't prove to your investors that your idea would work unless they gave you money to prove that your idea could work. You had to sell them on your idea. Now, he says in common parlance, it's typically a good thing when someone says, "Hey, there's a million-dollar idea," but in Silicon Valley, that's not very much. To wit, Netflix is currently worth around 150. Back in 1997 though, Reed and I decided that the intellectual property, or the IP, the idea for DVD by mail, plus the fact that he and I were the ones working on it, was worth about $3 million. That wasn't a ton, but it seemed like enough, enough to take seriously, but not so much that no one would take a risk on it. Now it's interesting. He said, we figured that it would take $2 million to get the company off the ground, $1 million to get the site launched, $1 million for a website. Think about that back in 1997. And another $1 million to run it. While raising our next round of funding, we would need an angel investor. Luckily, both of us knew one. Reid. Reid was an angel investor. Now he goes into more specifics. My risk was time. His risk was money. But by not putting any money in at the outset, I effectively changed my ownership percentage. There's this great quote that says, I'd rather have a smaller piece of a big pie than a big piece of a small pie. And he goes into this actually in a second. That was a quote that just came off my head. Um, but it's really interesting. He says, as I mentioned earlier, Reed and I had assumed the value of Netflix, which at that point was just 2 guys, an idea, was $3 million. So to keep the math easy, I decided that to start, there would be 6 million shares of Netflix stock, each worth 50 cents and representing a small fraction of ownership in the company. One day there were only 2 owners of the company, Reed and I. And we split it down the middle. Each of us received 3 million shares or 50% of Netflix. Now, if nothing had happened since then and I still own 50% of Netflix, my world would have been a little bit different. As I mentioned, Netflix is now worth $150 billion. Owning half of that would be a nice piece of change. But then there comes something called dilution, and this is all common terminology within the stock market. and just private, privately held companies. I believe Netflix, I don't know if they are private or public. I would assume they're public because they're a massive company. But not only that, $150 billion, and this was 2019. I think I looked it up and they're more at the $200 to $300 billion mark, which again is insane for a streaming company, a streaming platform. Now he says, remember, at this point it's just 2 guys and an idea. We needed to build a website. hire people, rent an office, buy whiteboard markers. I really like whiteboard markers. It's funny they put, put that in. So we need money. Reid was willing to give it to us, but he had to receive something of value in return. So what we— what happens is that we sell him stock. We don't sell him shares that we already have. We create new shares and sell him those. And since we've already said that each share is worth $0.50 in exchange for Reid's $2 million, we sell him 4 million shares. So I believe it's a 70/30 split and he goes into this. So Marc Randolph says, we valued at $3 million and the $2 million of cash, but now the ownership has shifted. I still own my 3 million shares, but now there are 10 million total shares. So increased shares. So my percentage of ownership has changed from 50% to 30%. At the same time, Reid's ownership has increased. He now owns 7 million shares. The 3 million shares of his original shares for the idea Plus the 4 million shares he received in exchange for his investment. So it's really interesting. So he's gone from owning 50% of the company to 70%, and now we're 30— now we're 70/30, or now they're 70/30. And he says, this didn't bother me at all. This is the key. This is the key. If you're listening, this is the key. This didn't bother me at all. Dilution is a normal part of the startup world. True, my share had decreased from 50% to 30%. But I'd much rather own 30% of a company that has money to pursue its goals than 50% of a company with no cash on hand. He goes into this whole idea of Silicon Valley and he says, in Silicon Valley, tech talent is the scarcest resource, and an unknown fledgling company can have a hard time attracting top employees. But thanks to Reed, within a few days he'd put us in touch with one of the key players in what would become early Netflix's eccentric, largely foreign natural ops Eric, Eric Meyer, a Muppet-like Frenchman with a frenetic manner who would eventually become our Chief Technology Officer, or CTO. I knew it would take some convincing to get a talented and highly paid software engineer like Eric to join our ragtag bunch. So this is a really good insight. Reed— or sorry, Marc Randolph has this really good insight, and he says, in the meantime, I needed to come up with with something approaching a business plan. Notice that I used the word approaching. I never intended to get there. Most business plans, with their exhaustive go-to-market strategies, detailed projections of revenue, and optimistic forecasts of market share, are a complete waste of time. They become obsolete the minute the business starts and you realize how wildly off the mark you were with all your expectations. The truth is, is that no business plan survives a collision with a real customer. So the trick is that you take your idea and set it on a collision course with reality as soon as possible. Man, that's just a good highlight. And I'm actually going to highlight that right now in my Kindle. I'm using a Kindle. I actually am using this thing called a Daylight, and it doesn't allow blue light. But anyways, Mark Randolph says, all of this might have seemed like it happened fast, and it did. In a matter of weeks, we've gone from a list of nebulous ideas To a semi-coherent plan for moving forward. But here's the thing about Silicon Valley in the late '90s. Everything was fast. You had the invention of the internet. It— you had these things. It's like the boom and bust. It's— you go back to the Carnegie area of trains, you know, trains, that was a rapid development. You just have these booms, right? We had the internet that just came out of nowhere. We have AI. We have podcasts, we have all these different things that come out of these booms. And unfortunately, there's some busts like the dot-com bubble or the thing that happened in 2008. Like, you have all these things, but it's really interesting. Everything was fast. Now, I could— I would say that's what's happening right now with the progression of AI. You have AI going from nothing in like 2022 to like doing everything in 2026 and making money. He says, by the mid-'90s, things had changed. Jeff Bezos' success at Amazon had shown us that it wasn't just more powerful hardware or more innovative software that would lead to future progress. It was the internet itself. You could leverage it to sell things. It was the future. I could say the same thing about AI, but what the other thing I do want to say is that Jeff Bezos, because he succeeded with Amazon, even though people told him he couldn't, That led to Netflix. When you think about it, it's like even though it didn't directly affect— like Jeff Bezos didn't pour a lot of money, he might be an investor in Netflix, I have no idea. But the fact that Jeff Bezos as a different entrepreneur in the same time is coming out with Amazon, even though people couldn't tell him to, and you're never going to take a bookstore online, and he does it anyways, that gave inspiration to Marc Randolph and Reed Hastings. That led them to be, you know, more successful because they knew they could do it at that point. And it's really interesting. He goes into this other quote about the internet. The excitement we felt at the dawn of the internet era was completely rational. Think about that. Completely rational. In AI, we can think, oh, it's irrational. There's going to be apocalypse, all these certain scenarios. But what he's saying with the internet and all these big booms I was actually just listening to another podcast and it was on Founders. It's actually Founders number 83. I'm currently listening to it. It's about Nikola Tesla, Thomas Edison. And someone said this was in when whenever Thomas Edison was around, someone said that the light bulb would never be a thing like the light bulb, even though Thomas Edison had made it, it would never be this massive thing that a ton of people use. And like it would never be made a business, which now it is. And I think Thomas Edison did make a business. Another thing about, you know, Nikola Tesla, he created AC, which is something with the electrical currents. They used to use DC, but he put all of his life force into creating AC. He was a truly brilliant inventor. And what's really interesting about that is another professor of Nikola Tesla's The actually funny story, Elon Musk named the Tesla electric car company after Nikola Tesla. Nikola Tesla was obsessed with electricity, which is a really good nod because that shows you that Elon Musk reads biographies and reads about history. So he knew about Nikola Tesla and named the Tesla car after Nikola Tesla, which is really interesting. But then you think of Nikola Tesla and people are telling him, well, no, AC will never be a thing, and now it's almost in every house. That's what powers big electricity currents, right? It's really interesting. And so it's very interesting that he says it was completely rational, going back to Mark Randolph. And he says we were on the edge of an open green field, unplowed, unplanted. Now, um, he— now something that he's talking about is actually moving from Silicon Valley to Santa Cruz, or moving from Palo Alto to Santa Cruz. So he says, I didn't want to attract just the same group of ambitious young tech workers from over the hill. I wanted free thinkers, people who were slightly outside the box. I wanted things to be different. I wanted life balance for me and my coworkers. That's really interesting. Life balance. He says, if I were going to start my own company, I wanted it to integrate with my life. I wanted my kids to be able to come by the office for lunch. I wanted to be able to drive home for dinner with them without spending hours inching along in a conga line of cars. Now, something that might show up in today's culture, and he, he, he says this in his book, but he says, um, there's this part in this book that it's OPM, and this is Silicon Valley slang for other people's money. He says, when entrepreneurs implore you to remember OPM, what they're saying is when it comes to financing your dream, use only other people's money. Entrepreneurship is risky, and you want to be sure that the only skin you have in the game is, well, your actual skin. You'll be dedicating your life to your idea. Let others dedicate the contents of their wallets. By dedicating my time, not my money, to our DVDs by mail concept, I was following my own OPM advice. Now it's interesting, he says this was really good advice for him, but I think that you need to dedicate time and money. You look at James Dyson, 14 years, truly incredible, failed after I think thousands of prototypes. You look at him and he used his time, his money, 14 years of time, and now time shows a lot of commitment. This idea of using other people's money, it's interesting, but you gotta, you just gotta make sure that you're taking the right steps. Now it's interesting, he says, for most of my career I've gotten flack before for my boundless faith in whatever it is I'm selling. He says, even before Netflix, I'd convinced more than a few people to take pay cuts to work for me, to leave steady work to hop aboard a startup with a slim chance of survival. This is really interesting. This shows me a couple things. It shows that he's a really good leader because obviously he can convince people that he's really good at showing you the vision, the dream. But he's also saying something that almost every founder and entrepreneur needs to have, boundless faith in whatever it is that you're selling. This faith in, I talk about this in my episode that's coming out next week, where you basically have— a ton of faith. You have a ton of these ideas that you need to believe in your product in order to sell it well. I actually go to a story about Phil Knight. Phil Knight is the founder. He wrote the book Shoe Dog, but he's the founder of Nike. Now in this book about Nike, it's very fascinating what happened. He would sell all these other sorts of things to make money and he, he would sell a little bit. But when it came to shoes, specifically shoes, He would go and sell those, and he was so emphatic and you know passionate about it. And I think Rockefeller has a quote about selling: You know, you know, get into business what you're passionate about. And this kind of ties into Mark Randolph and Phil Knight. And Phil Knight would sell a lot more than he did anything else. And eventually he just made that into a business, and then he went from that to eventually Nike. What we all know today, multi-billion dollar industry. that he created. It's shoes. He says, but in every case, I wasn't just spewing hot air. Whether it was the latest generation of spreadsheets or DVDs by mail, I genuinely believed in what I was selling. And that relates back to that Phil Knight, the James Dyson, right? All of these people, all these founders and entrepreneurs, they had absolute faith in what they're doing. And it is really interesting. And he says, I often counsel young entrepreneurs to start by asking people what they think. And then immediately follow up by the inevitable I love it reply with the ask, can I count on you to invest a few hundred thousand dollars or just a few thousand dollars? The backpedaling is so fast and furious that it makes Lance Armstrong look like my grandmother. It's hilarious that he said that. He says, he says that because this whole thing is about OPM, right? Going back to the point, OPM, other people's money. So he's counseling people, young entrepreneurs specifically, on how to ask people For their money. And it's like, if you don't believe in your product, one, you shouldn't be asking other people to invest in your product. And 2, if these people are really good friends of yours or family, you should— he— I'll get to this in a second, but he asked his parents for money to invest into Netflix. That's how desperate they were. So he goes into this whole section of how he actually learned to ask for money? Like, how do you pitch investors? And he says, I should start by saying that asking for money is hard, really hard, but it's nothing compared to what it feels like to beg for spare change on the sidewalks of Hartford, Connecticut. He says, when I was in college, I spent 2 months each summer leading 30-day backcountry expeditions for the National Outdoor Leadership School, or NOLS for short, a wilderness program that uses the wilderness to teach leadership skills. Almost everything I learned about being a leader, I learned with a backpack on. He says that he also sent his kids through this, but it's really interesting. They would basically drop them off in the forest and they'd have to eat something. And so he went into town one time to basically find something to eat. I don't think they were hunting, so they went into town and he basically just had to ask people for their money. He says, how hard could it be? The answer? Very hard. One of the ways people measure a marketing or sales assignment is by analyzing the difficulty of the ask. What are you asking for, and what are you promising in return? Years later, when I was first entering the marketing profession, I looked at bottled water as one of the greatest triumphs of salesmanship. Marketing in its purest form. Give me your money, and I'll give you water. Something that is almost free, and that is almost available everywhere. Something that covers literally 75% of the Earth's surface. He goes on to say, "We're conditioned not to ask for things, but when we do ask for them, we've learned that we have to offer something in return. But asking for money and offering nothing back—no service, no product, not even a song—is truly terrifying. It's like looking into an abyss." And so he goes through this whole story. You you should definitely pick this up. So he basically talks about how he pitched these investors, and he says, "Believe me, after that." That whole experience of asking people, he got more confidence in asking people for money to buy a hot dog or some food. He says, believe me, after that, asking an investor for $25,000 was nothing. He was pitching this guy called Alexandre or Alexander. I'll call him Alexander for short. He's pitching this guy this idea, and this is his thoughts. He says this is a really terrible product. And Mark Randolph was thinking about it. We had almost $2 million on the line, a team of excited people, and a genuine opportunity to be the next Amazon. I looked at Reed, who was staring at Alexandre with an expression with that was impossible to read if you didn't know him. I knew him though. He was worried. Alexandre told us that DVDs were a flash in the pan. No one is adopting this tech long term, he said. The big jump was from analog to digital. Now. The thing is, he goes on and says, once movies are in a digital form, it won't make sense to move the bits around on pieces of plastic. This is incredible because— and Marc Randolph will go into this in just a second— but he's basically saying they're going to go from VHS tapes all the way to digital. Now the thing is, he— Marc Randolph says he is correct. We actually are going to move into streaming, which is genius that this guy thought about it before that. But then what didn't make sense was that there was still a step missing, and that was DVDs. So this could be Netflix's intro into the business, and then they can move into that, which is eventually what they're going to do. But he goes in and Alexandria is still talking. That's terribly inefficient and slow. It's just a matter of time before people are going to be downloading their movies or streaming them at some point, probably soon. You're probably going to be stuck with a warehouse full of useless DVDs. Mark Randolph. Replies to Alexandre. He says, I'm not so sure about that. I think it could be a while before that happens. We've got at least 5 years. Alexandre shook his head. Sooner, he said. Why should I invest in a company that wouldn't be around 5 years from now? And Marc Randolph pulls it back to his narrator view and he says, the thing is, he was right about nearly all of it. DVDs were a middle step between analog VHS tapes and downloads and streaming it. He knew better than anyone that the technology to make DVDs themselves obsolete was just around the corner. It was his field after all, and a cursory glance at Netflix's current business will bear out his theory that eventually viewers would access almost all their movies directly through the internet. He says, but he had the timeline all wrong, and this is the important part. What he didn't understand was Hollywood. We knew that the studios were betting big on the DVD format. Most importantly, were betting on DVD ownership. They didn't want a repeat of the '80s when video stores had established themselves as middlemen to consumers renting the same video out dozens of times, and that's the VHS tapes. Now the other thing is that Alexandre also underestimated the last mile problem. In most of the country, downloading a movie was still functionally impossible, or at least impractical. High-speed internet was only varied, like it's super hard to get And only available some of the time. And frankly, it wasn't even that fast yet. Plus, the internet terminated at the computer, not the television. So even if you could download a movie in less than a few days, there was no way of getting it from your computer to your television. Think about that. It would take a couple days to download the movie. So Alexandre is behind. He's correct in terms of what— where the industry is going to go, but these studios are betting big on DVD. They knew that this is Netflix's big intro, and this is really smart because they've done their market research. Now they're saying that Alexandre had underestimated that last mile. So you could download to your computer, but that wouldn't download onto your TV. So you can't watch on your TV. You'd have to watch on your computer. And at that point, it'd take a couple of days to download a full-size movie. So that's not practical and no one's going to do that. So he goes in, but like most pioneers, Alexandre was too early. That's an important, important key of this whole thing. Now he goes into this whole idea of asking for more money. This whole chapter is about OPM or other people's money, and he's asking about money. Now it's interesting. Now he's going to ask $25,000 from his mother. He says, I was most nervous about asking my mother. Plenty of people ask their parents for money during the seed stage of startups. In fact, back then nobody even called it a seed round. People called it friends and family round. Still, there's something slightly pathetic about being almost 40 years old, married with 3 kids and multiple successful companies to your name, and calling your parents asking for cash. And then this, this is hilarious. Still, I did it. Sales is theater. Every pitch, every call, every interaction in which you, the business person, are trying to convince someone else, the customer, the client, the potential investor, you name it, is a little performance in which each side plays a role. So he eventually got the, the money from his mom, and he didn't ask his dad because he knew his dad would say no. His dad was very frugal with money, whereas his mom was willing to help out whenever. Here's a little bit more of the backstory on basically the first couple months of Netflix. This is about half a year until they officially launch And so he says, when Lorraine and I were married— Lorraine is his wife— we were about $10,000 in debt. At that time, I was working my first job in direct mail marketing. He's talking about basically the history before Netflix because they're going to need to take on some debt or they're going to need to take on something. They want to buy this really nice house, and essentially they've been in debt before, but they were able to basically get out of it. And so what they wanted to do is they wanted to buy this nice new house, but they needed, they were going to go into about $1 million. The house was about $1 million for a really, really nice house. They were going to go in debt. And so he's just basically breaking down this whole story in the sense of how frugal they were. So he says, when Lorraine and I were first married, we were about $10,000 in debt. At that time, I was working my first job in direct mail marketing and making about $30,000 a year. Lorraine's income was about the same, and she was making cold calls as an entry-level stockbroker. This is really interesting because he's essentially setting up the story of how they get out of debt, but also it shows you that they, they started from almost nothing. Like, they had decent jobs, they were very frugal, which I'll go into, but it's really interesting. They were in $10,000 of debt, and it's interesting because a lot of people, a lot of successful people, they start or some successful people who start these businesses and are entrepreneurs, they started from almost nothing and they built up. And so he goes into, we set a goal to get out of debt in a year, and for the next 12 months we kept a meticulous notebook counting every single expenditure, every single cost, no matter how minor. Toothpaste, $1.50. Donut at the train station, 75 cents. Once a week, Now looking at that price, that's super cheap. Once a week, we allowed ourselves two big splurges: a square pizza from the Athens pizza joint down the street and a case of Bauer bottle Schiltz. He says, "By nature, I'm not a cheap man. In fact, most of my behavior in business is a kind of rejection of my own father's meticulous carefulness when it came to money. The expenditure notebook was an aberration, a reaction to a particular problem." Normally when there's money, I spend it. Not wastefully or stupidly, but in the boom-bust cycle of Silicon Valley economics, I've always believed that you should spend the money that you're given. Spend it wisely, but spend it. It's interesting, and I, I would add to this, have money work for you. I would spend that money to— I, I would have that money work for me. If I had money, I would use that to work for me, and that's something I'd add To what he's saying. But he says, although I had quite a bit of startup success early on, I was never actually a big equity holder. So although I did okay, there weren't huge rewards. And I haven't gone too far in the book in terms of his stock percentage, but he's mentioned dilution. And it's really interesting because it's fascinating when you have someone like this. He's worth $500 million now, but he's learned from his past mistakes. If you ever start a company, keep your equity. And I think of James Dyson, who owns 100% of his company. That's really rare. He's the only person in the entire world that owns 100% of his company at the value that his company is worth. James Dyson's company is worth about $20 billion. Here he's saying he's learning from the mistakes of essentially having too little ownership. He says, despite my professed ambivalence towards money, anytime I pause that first fall at Netflix, Anxiety about my finances set in. The only cure, it seemed, was work. I didn't worry about Netflix's future when I was deeply engaged in ensuring it, and I didn't despair about our new house when I was working on it. So he's talking about getting his new house, which was $1 million, and they're in debt. He was talking about that $10,000 of debt that he had, and now this is a lot more debt. They were out of the $10,000. Now he's going into this new house debt for a really nice house. And they're they need to pay it off. But he's also saying that not only does working on the house make him feel better about the house and takes his mind off the finances, but also just working in general. So him working on Netflix, building it, the finances whenever he stopped doing that, that's when it set in those worries, the the panic of his finances and this isn't going to work, which is really interesting. So work can cure a lot of issues if you just Do the work. Actually, there's this great quote from J.D. Rockefeller that I go over in my next episode coming out next week, which you should definitely listen to when it comes out. He says, there's no work about work, just work. I think that's Elon Musk, but the J.D. Rockefeller quote is, you either do the work or you don't. It's super simple. There's no work about work, just work. And you either do the work or you don't. So it's really interesting that You need to just do the work. And if you start fretting, most of the times when you're fretting, it's when you're not working. That's plain and simple. Mark Randolph keeps going. He says, every day at work, I had my pick of hundreds, no, thousands of problems to work on. And since I was in charge of and surrounded by brilliant people, I could focus on what interested me. That's one of the greatest pleasures of being at the helm of a startup in the planning stages. The company is small enough that everyone in it has to wear multiple hats, but big enough that you never have to wear one that doesn't fit. properly. That's a great, great line. He says DVDs were barely in the world, high-speed internet was in its infancy like we talked about earlier, and there was no pre-made templates for online sites. If you wanted to do something, you had to build it yourself from scratch. Now he talks about building a team. We had an invaluable resource, and he's talking about this guy named Mitch, someone who understood the rental business perfectly. We had a deep Rolodex of studio execs and distributors and knew how to reach customers with the movies they'd want. So he's talking and he goes on, he brought, he brought a wealth of experience and knowledge. I knew as soon as I had convinced him that he'd be one of the most important hires I ever made. This is really interesting because when you build a team, you want yourself and others around you to be these deep resources of knowledge in your industry, of your niche. You want to be deep resources of knowledge and people that can solve a lot of problems. And this is what he found in this guy named Mitch. He talks about building the basics or a company culture. He says, I firmly believe that a healthy startup culture arises from the values and choices made by the startup's founders. Culture is a reflection of who you are and what you do. It doesn't come from carefully worded mission statements in committee meetings. I feel like a lot— that's a beautiful statement, but what's happening is like a lot of people still do that. People focus on the committee meetings, the way that these mission statements are worded, and it's like, just get back to work. Just do it. He says, culture is a reflection of who you are and what you do. It doesn't come from carefully worded mission statements. You can talk until you're blue in the face about how your employees are your greatest asset, or about how you want to ensure that your office is a great place to work. But eventually, you have to start taking the small steps to put your words into practice. He says, still, if I was going to ask everyone to sacrifice on behalf of our future success, I wanted them to participate once that success hopefully arrived. While our salaries at At that point, were well below what they might have been available elsewhere. Each of those early employees received a large stake in the business in the form of stock options. They wouldn't be making a lot upfront, but we were betting on ourselves that the eventual payoff would be huge. Now he talks about building an inventory. So he says our goal was to have the most complete collection of DVDs in the world. It made good marketing copy. And it would separate us from the brick-and-mortar competitors who were still living in a world where only a handful of their customers owned a DVD player. Now it's interesting because these were the times that VHS tapes were still around, and it says it barely made sense for them to carry DVDs at all, never mind one copy or every DVD ever released. Not only was that our goal, but we planned on having multiple copies on popular titles. But how do we decide how many DVDs of, say, The Mighty Ducks 2 to order? Mitch Lowe, the guy that we were talking about earlier, was guessing, using his decades of consumer knowledge to come up with an ideal lending library. As it would turn out, he was rarely wrong. That's really nice when this guy has a ton of knowledge in the, in the field. He knew a blockbuster when he saw one. He goes in and says that in our quest to build a library of every DVD in existence, we often spent weeks looking for a single copy of a single hard-to-find title. Even though there were only a few hundred movies available on the format, it took us months to build a sizable library. Now he he talks about building a mailer. So how are they going to mail these? He said they tried everything. They experimented with all these different you know they experimented with cardboard, cardstock, craft paper, plastic. They tried everything and you know they didn't work. He had to experiment a lot just on You know, how do they package it? They had to build a website, you know. And he says, there was a real pleasure in it, in the planning, in the problems, in the puzzles we had to solve. I had so many tasks set in front of me, so many little pieces I had to prep and build, that there wasn't much time for anxiety about the future. It all disappeared when I was in those offices. I forgot about the half-finished bedrooms in the new house I could barely afford. I felt like my father working on one of his trains. I found satisfaction in lining up all the tasks, investigating all the problems, and then working to solve them. I was in the basement building something, knowing that someday in the near future I'd have to invite everyone else to take a look. What a great ending for part 1. I will be doing a deep dive in part 2, but I'm excited to see where Mark Randolph takes us in his journey. But I'm really excited and Thank you for listening to part 1 of this Netflix series, and I will talk to you guys again soon.