That Will Never Work: Netflix Co-founder on How They Beat the Odds

Marc Randolph is the co-founder and founding CEO of Netflix. He also served on the board of Netflix up until 2003. And Netflix wasn't his only startup, he's founded or co-founded 6 other successful startups. He is also the author of the bestselling book, That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea.

From very early on Marc was entrepreneurial. As a kid he was always trying to find problems and unique ways to solve them. He sold seeds door to door, did candy arbitrage, he even carried a notebook around with him to write down invention ideas he had. He was always starting clubs and groups and coming up with products throughout high school and college. And as Marc shares, one of the keys to being an entrepreneur is practice, practice, practice.

In his early career Marc had a small startup that he was helping run. After the company was sold he had to find something else to do so he went to work at another startup company which just happened to be led by a man named Reed Hastings.

How Netflix came to be

Marc and Reed ended up carpooling to work each day so they got to know each other pretty well. One day they found out that the startup they were working for was being acquired and they both would be losing their jobs in the merger. So they had to figure out their next move.

Marc had several more ideas for products and companies so he wanted to continue his successful journey with startups (he had done 5 previously). But Reed wasn't as eager to start another company, he had other plans. But they came to an agreement that if Marc came up with a great idea Reed would be the angel investor and he would share the board.

So Marc got to work to come up with the next winning idea. And as they carpooled into work Marc would pitch Reed his ideas. And after many not so great ideas such as personalized dog food and customizable shampoo, Marc pitched an idea that at the time didn't make sense, but that later on would become Netflix. They both agreed that in theory the idea was a great one. The only problem was that at the time he came up with the idea of video rental by mail the only video format was the VHS cassette which was heavy and expensive to ship. So that idea at the time was discarded with the dog food and the shampoo.

It just so happened that at a later date Reed found an article about a new technology called the DVD and realized this could be the missing piece to an otherwise great business idea. So they went and got a used music CD and a small envelope and they mailed it to themselves to see what would happen. And in less than 24 hours they had the small envelope with an unbroken CD in their mailbox and they knew they had something.

How to scale culture

As Marc shares culture is not just what you say, it's not something that you put up on posters around the office, or some catch phrases that you come up with in a meeting. He says, "Culture is how you act. It's how you are, it's the things you do. And even more importantly, culture springs from how the founders and the early employees act with each other, with their employees, with their customers. And so, huge amounts of the Netflix culture arised organically, from the way that Reed and I behaved, the way that I treat people, the way I worked with people before."

When Netflix first started as a company they had a very small staff of around 20 or so people and most of them had worked together before in other companies. So it made it easier to maintain a culture at that point. Marc says he knew that he could ask an employee to take ownership of a project due in two weeks and then know that in two weeks they would show up with the results no matter what. The small team worked really well together and had a culture of mutual respect, trust, and ownership.

But that gets hard to maintain when your company grows and you have 100, 500, or 1,000+ employees.

"When you get bigger, something happens where someone shows up late, or they show up but don't have everything done. And a lot of managers would say, Oh, this isn't good. Okay, we can't have that happen. Everybody, I want status reports. I need to know if there's gonna be a problem in advance. So everyone needs to send status reports. And everyone goes, Oh, status reports. And then someone else shows up and they're there on time with it all done, but they spent too much. And many managers will go, Oh, I can't let that happen. Okay, I need to pre-approve anything over $100 to make sure you don't make a spending mistake. I need everyone to send expense reports. And then everyone goes, oh, god expense reports."

And as Marc goes on to share what happens over time is you build the company in a way that protects you from people with bad judgment, but along the way with these added rules, steps, and processes you are simultaneously driving the people with good judgment crazy. And that is how you lose good employees.

So what the team at Netflix decided early on was that they would build a company just for people with good judgment. People that they knew they could count on, people that weren't afraid to work hard and take ownership of things and in exchange the leadership team could give employees freedom and the ability to make their own decisions. And while Marc admits there was a time when they almost lost the culture as they grew, ultimately they have been able to keep it with intentionality, even now with almost 9,000 employees.

How Netflix overcame a 40% decrease in workforce

Up until the spring of 2000 Netflix was doing great. They had been offering monthly subscriptions, they had no due dates and no late fees and people were loving it. But then the dot com bubble burst and they were in trouble. They were on the brink of going broke and they needed help fast. Marc and his team were actually exploring selling Netflix at that point.

But they also had another idea that they felt could save the company from ruin and that was to pitch an idea to Blockbuster. And while it may seem odd now because Blockbuster isn't even around anymore, back in 2000 business was booming for them. They had 9000 locations and Netflix saw an opportunity to make a partnership. Basically they were hoping that Blockbuster would agree to a blended model, which would mean they would continue their current in-store business, but they would also give customers the option of ordering a movie online, having it delivered to their house, and then dropping it back off to a Blockbuster location in person or vice versa, picking a movie up in person and then mailing it back in.

But Blockbuster wasn't interested. They said no to Netflix, and they decided to use that model but to do it on their own. So not only did Netflix not get the rescue they were hoping for, but now they had another competitor. But that didn't stop them. They realized there would be no one to save them, they would have to save themselves and that just pushed them to work harder.

But even though they were working hard to figure out a solution, they were still bleeding cash. Marc and his team knew they had a tough decision to make. They were going to have to say goodbye to some people on the team. They had to lose 40% of the employees. And as Marc shares it was the most painful decision he has ever had to make, especially because a lot of these people were hired by Marc himself.

After reducing the workforce the Netflix team went into survival mode. They got back to the nitty gritty of the business to figure out ways to bring costs down, turn visitors into subscriptions more quickly, and how to run things more effectively. Marc says they had some big breakthroughs, but they also had a lot of luck involved in bringing them out of this tough time.

The greatest lesson Marc has learned

Marc has started six successful businesses, he has mentored hundreds of early stage entrepreneurs, he has been a CEO, a board member, and an investor. Along the way he has learned a lot, but his biggest piece of advice for leaders looking to create great companies where people want to work is to empower people to make mistakes.

He says, "The thing that I've learned over and over and over again, is that there's no such thing as a good idea. That too many companies believe that there are good ideas and the people who have them, that the proportion of good ideas commensurate with how high you are in the company. And I learned that's just ridiculous, and that the only way to find out whether ideas are good or bad is to try them. And so the trick is not building an organization just good at coming up with ideas, but building an organization which is tremendously good at trying thousands of bad ideas."

In order to do that leaders not only need to allow their people to make mistakes, but they also have to give people the power to make decisions. This is incredibly hard to do, but as Marc shares just because it is hard doesn't change the importance of doing it. Marc believes that the most effective way to build a culture of innovation and risk taking is to demonstrate it at the top.

Also, when it comes to entrepreneurship Marc believes that while anyone can have a good idea, "The singular difference between an entrepreneur and someone else is a predisposition to action. Everyone thinks of ideas, a small number of people say let's do something about it."

Randolph's Rules for success

Marc's dad imparted eight rules for success to him as a young adult, and he still looks at this list everyday, in fact it's hanging up above the sink in his bathroom. So I asked Marc to share what these eight rules are. They are:

1. Do at least 10% more than you are asked
2. Never, ever, to anybody present as fact opinions on things you don't know. Take great care and discipline.
3. Be courteous and considerate always--up and down
4. Don't knock, don't complain--stick to constructive, serious criticism
5. Don't be afraid to make decisions when you have the facts on which to make them
6. Quantify where possible
7. Be open-minded but skeptical
8. Be prompt