Former Netflix CEO: “Hard Work Does Not Matter!” A $278 Billion Company Wasn’t Built On Hard Work!

we were in deep trouble at Netflix and we had losses of about $50 million we have got to sell this sucker fast Mark Randol is an American Tech entrepreneur the co-founder and first CEO of Netflix with a career panning numerous startups and Ventures marks expertise and Innovation leadership and business strategy is unparalleled August 1997 Netflix was founded yes and the reality is the idea was ridiculous it didn't work nobody would rent DVDs by mail but with over 40 years of being an entrepreneur I've learned every idea is bad we just don't know why they're bad

yet the important thing is how clever can you be to come up with a quick and cheap way to test it for example we thought let's just have a subscription and no late fees it was a ridiculous idea but when we tested it people loved it the Netflix DVD service has changed the world you explored selling Netflix to Amazon 2 years after you'd launched for probably 10 to15 million that's not a bad return for 12 to 18 months work but I thought it was much more interesting to take the shot and see what Netflix could

become but all of a sudden in a matter of a week or two in Spring of 2000 we were going to go broke being successful we tried going to Blockbuster for months but they weren't going to save us they were going to compete with us Netflix wouldn't have survived but there's a story which has not really been told which took one of Netflix's biggest impediments and turned it into one of its biggest assets so the DI of AO raffle is about to close anyone that subscribes to the DI ofo before we hit 7 million subscribers

which is probably going to be in a couple of days time you will be included in the raffle and on the day we hit 7 million subscribers we are giving away a lot of money can't buy prizes to all of you so hit the Subscribe button get in before 7 million and I'll announce the prizes and the winners in the comments below when we hit 7 million subscribers [Music] Mark in this season of your life if you could consolidate your mission and the work that you're doing across the content you produce the people you speak

to your professional Endeavors if if you could consolidate that into a singular focused Mission what exactly would that mission be in this season of your life for me at this point in my life it's all about mentorship um you know I've done seven startups I kind of recognized quite a while go I do not have uh the appetite to do another one uh it's that 7 by 24 Focus that I don't want to do anymore I have other things that I would love to have uh spending time on but you can't turn it off uh

I've also realized that over 40 years of being an entrepreneur I've learned a few things about how to actually play this game and so my mission now is how do I pay that forward how do I help other people um either have a shot at it like I did or if they're already playing the game how do I try and increase their odds of success you wrote this book called that will never work why books are painful and hard to write what is it that you want someone who gets to the end of this book

to walk away with I've come to believe that almost all of the information that people receive from the General Media about entrepreneurship is wrong um it glorifies entrepreneurship in what I think is a damaging way you watch these movies that are about entrepreneurship and it's all about driving around in the fast cars and having the parties and that's not it it's a very lonely profession so in a simple answer the reason I wrote the book is I wanted to give people a true story of what it really means to come up with a crazy idea

that everyone thinks is never going to work and the struggle to make it real and if someone reads that book and gets to the end and goes this sounds great then that's the exactly the right person who should be an entrepreneur if someone goes this sounds a lot harder than I expected well then I've done a a service in that way as well which is I've kept someone from getting into this for all the wrong reasons when you when you look back on your your journey to Netflix do you you know I remember hearing in

Steve Jobs speak about the decisions he made in hindsight that in when he reflects on his life resulted in him starting apple and the decisions he made within Apple so obviously you know things he's famous for saying is that he went to a typography class he dropped in and he started learning about design and typography and that shaped him what are those early sort of experiences that in hindsight fed into the creation of Netflix probably the meta thing was the fact that most of these Endeavors were entrepreneurial so for example initially my first foray into

direct response marketing was when uh I asked if I could run the mail order division of this sheet music company that I was working for and so what it meant to run the mail order division was every day you got the mail and if you found someone's asking for a list of great song books you'd make a copy and you'd mail it out and then if an order came in you'd go to the warehouse and pick pack and ship it and that spoke to me and I began experimenting and said okay now what happens if

I do two pages or do it in color what happens if I mail it out and I built this mail order division into a real mail order company so it was this combination of direct response but more importantly it was building something it was creating a company inside a company so there are certainly those preparations from the direct response side hugely formative for at least Netflix uh because if you think about it what direct response marketing is about is all about testing it's all about analytics um and when the internet came along and I saw

what the internet was what immediately popped into my head was oh my gosh this would is the power to do direct marketing but on steroids this is so much more positive I'm doing this personalization but it's very Brute Force personalization I mean it's it's dear Steven wouldn't your friends at 17 Crescent cir it's like this ridiculous personalization what the internet let me do is personalize every web page for one person but one of the direct response Endeavors that I did was I was a circulation director for a magazine we we launched a magazine and that's

subscription and so you go okay well look at this you have someone who's doing Direct marketing and there's someone who's doing subscription and then all of a sudden they're trying to figure out how to do video rental better it's not that big of a leap to say okay it was subscription and it was direct response on the internet so yeah these things were pretty formative so interesting so you on one hand you had this business where you were physically sending things in the post and then you got involved in another business where you were doing

subscriptions and these kind of I guess plant these sort of seeds in your brain to IND industries that you start to understand and it's funny because when people think about creativity I heard someone say before that creativity is essentially collecting lots of different clouds and then connecting them in new new ways so getting lots of different points of inspiration in life and then connecting them in new ways which create a new thing and that kind of sounds like what you're describing there it is and the thing is at the time you don't necessarily know um

you're in the right place at the right time because I certainly wasn't the only person who said wow the internet could be a powerful force for selling things uh Jeff Bezos was one of the first people to recognize the power could have to sell things when did Amazon which at the time was only books but there were a lot of different models we could have looked at and so in terms of Netflix going into video rental and doing video rental by mail that was entirely driven by the fact that I had worked for so long

in a catalog business where I had mailed things in boxes and I had seen I knew a lot about all the shippers and I knew a lot about fast shipping I mean I had this huge repository of of information and experience and I didn't know how it be used but all of a sudden you're looking at a problem and you're kind of in your mind going through how could I possibly solve this in different ways and one of the things that comes up is something you've experienced in the past you launched this company Integrity QA

between sort of 96 and seven and that's ultimately acquired by Reed Hastings by pure by Reed Hastings company yes and that's where you and re Hastings met yes correct who's the other co-founder of Netflix what was that like that first meeting with Reed Hastings meeting Reed was like this instant Junction of two like Minds uh we both recognize something in each other one is that we both approach problems very differently I was very emotional about it I don't mean emotional like I'm running crying from the room I mean empathy that I'm a marketing person uh

when I put something out there I can almost intuitively sense how someone's going to respond Reed his background is mathematics and computer science much more logical much more methodical and we kind of realized as we begin solving problems together how well those two integrated but at the same time as having these differences and approaches we were very similar and that we both shared this commitment to honest y not because we both swore an oath just was our nature that life was too short to shade the truth that if you had something to say you say

it and you say it in a respectful way in an empathetic way and you don't have ulterior motives um and we both were like that and it allowed us to have these really intense interesting conversations where we were trying to find the truth out of something but pushing each other and challenging each each other and it ended up being a very very powerful way to solve problems and we were only at pure Atria together for seven or eight months and then lightning happened to struck again where pure Atria was now being acquired uh and this

time um both Reed and I were going to lose our jobs they already had a CEO they already had a senior VP of worldwide marketing so we were going to be out of a job uh we had six months and Reed was going to go back to school get a higher degree in education I was going to start my next company and Reed wanted to keep a finger in the pie here and we came to an agreement that I would start the company uh he would be my angel investor and he'd be my board chair

and all we needed was the business idea uh and all you needed was a business idea exactly and only that yeah just this that small manner of of needing something to do and thus began this process which went on for months of Reed and I kind of searching for a business idea and we we had a methodology so don't uh don't think this is random um and Reed and I happened to live in the same town we lived in Santa Cruz California together and we had gotten in the habit many months earlier of commuting to

work together and so once we knew we were selling the company once we were were losing our jobs we still were commuting to work but now the conversation in the car shifted and what would happen is Reed would pick me up at my house and we'd barely B my driveway and I get okay Reed I've got one for you personalized shampoo you're going to cut off a lock of your hair you're going to mail it to us and we're going to have a team of hair scientists who are going to formulate a custom blend and

people are going to subscribe to it and the same thing would happen no matter what I pitched is there'd be silence re would be staring out the window just steering the car and you'd think he hadn't even heard me but I knew that kind of behind that stoic face all the calculations were taking place like you know the risk and reward and the costs and the benefits and it might take five minutes 10 minutes of silence but then eventually he would turn to me and go that will never work and he would lay into me

with all the reasons such a bad idea but of course I could come prepared and I'd come right back in him with all the research I had done all the reasons I was sure it was a good idea and we would do one of these arguments all the way to the office and if need be all the way home and until we either decided there was promise or no promise and almost all of the time there was very very little promise in these ideas but next day I'd have another one I could read personalized pet

food Uh custom Sporting Goods vitamins I mean I pitched all those ideas I pitched them on video rental by mail people are going to come to the website they're going to pick out a movie we're going to mail them the movie and they'll keep it for a week and then they'll mail it back and at the time though this was 1996 97 uh video rental you may remember it was on VHS cassettes so there were too big and too heavy and too expensive and so that idea got trashed the exactly the same way that the

dog food and the personalized shampoo did and kept on searching and then the Breakthrough if there was one came one morning or Reed picked me up and I'm on my way out the door out at the driveway I got one for you and he stops me and goes I got to tell you about something I read about there's this technology that came out it's called the DVD it's this little disc that holds a movie and it's thin and it's light and we brainstormed that a little bit and realized this could be the unlock for that

old video rental by mail idea we had talked about six or eight weeks ago and then we did this quintessentially entrepreneurial thing which is midc commute we turned the car around and drove the car back into Santa Cruz to try and validate this idea we did not go to the office and do a business plan we did not work on a pitch deck we tried to collide the idea with real people that day that day midc commute turned the car around went down into Santa Cruz tried to buy a DVD couldn't find one settled for

buying a used music CD same size same weight then went two doors down and bought a little envelope like you'd put a greeting card in and put this CD in the envelope addressed it to Reed's house bought a stamp and dropped it in the mail and went to work and that very next morning when Reed picked me up he held up a little pink envelope with an unbroken CD in it that had got into his house in less than 24 hours for the price of a stamp and that was probably the moment we said this

actually might work we can use the post office um and that shifted everything and that's the point we began saying this could be the idea that we do together so many entrepreneurs and aspiring entrepreneurs are at that exact phase where they want to leave their corporate job their brain everywhere they go now because they W they've wired themselves to be looking for an idea is finding lots of random ideas their dog or like throw up and they'll be like oh new dog food or whatever and they're going through that process and I I think it's

so important to just pause there and try and interrogate what the framework is for knowing if you if you've got a winner or not like how how did you CU presumably you had got yourself passionate about the um shampoo idea so like how do you know when to drop an idea and how do you know when to commit to an idea what was the framework you're using the framework is that every idea is stupid there is everyone you know listen you probably haven't had a corporate job yet in your no thank God yes thank God

is right because there's this thing in corporate uh I say Corporate America corporate world and it's the brainstorming session and they put everyone in a conference room and they go we're going to brainstorm and try to come up with an idea for whatever it is and he goes but first some ground rules for the brainstorming rule number one there is no such thing as a bad idea and I call there's plenty of bad ideas in fact there's no such thing as a good idea every idea is bad we just don't know why they're bad yet

and so the framework I approach I assume all these ideas are ridiculous I assume none of them are going to work but here's the difference the reason I start from that that uh position is I don't want to commit the single worst thing you can do as an entrepreneur which is fall in love with your idea and you talk about the person who sees the dog throwing up and they go I've got a great idea and then what happens nothing they go home and they go this is a great idea and they tell their partner

and their partner goes oh that's brilliant I'd buy that and so they go okay and they begin working on a business plan and they write this 10-page business plan and they're dreaming about how they go They're how amazing it's going to be just think about we have this line of we can do cats too and then giraffes you know they've they've built this incredibly ornate business in their head all based on this feeling that this must be a good idea and you've got to nip that in the bud and the way you nip it in

the bud is you try rather than dreaming how amazing this idea is the first thing you think about the only thing you think about is how can I quickly cheaply and easily Collide this idea with a real person and find out is it in fact a good idea or a bad idea how can I do some kind of hack that will allow me to quickly find out whether customers actually would want this or not and almost always you build this quick cheap down and dirty I don't mean minimal viable product I mean unviable something you

can quickly do like turn the car around and mail a CD to yourself just to find out the the basic premise of can I actually use the US mail to send movies back and forth because if that had failed well great on to the next one and that's such a critical critical step that's the framework that everyone has to to have it is not about having a good idea having ideas is easy and trivial the important thing is how clever can you be to come up with a quick and cheap and easy way to test

it why because I know you and me understand this but I didn't understand this when I started my career so I know that there's a lot of people listening right now that are probably right in the moment you've described they've spent a year building up this thing in their bedroom for anyone that can't see he's got his head in his hands um they' spent a year in their bedroom building and working on this project why is that a terrible idea it's such a waste of time because what happens is two things happen one is this

or idea becomes so large and ornate and complicated in your head that you go okay Mark I need to get started I need to raise $5 million because it's going to have to hire all these people to to build this thing and they're probably building the absolutely the wrong thing uh you you can't you you can't just go ahead and based on what you think is going to happen you've got to start from a position of real information listen perhaps the cleanest way since we have a bit of time is to give you an example

I do a lot of work with University students and uh I was meeting with a young woman who uh at the University and she goes okay Mark I've got this idea um what I want to do is peer-to-peer clothing sharing in other words I've got all this clothing in my closet that I never wear or I don't wear very often and I know my friends have a lot of clothing in their closet and other friends have clothes in their closet it' be great if we had this website and we could all post what we have

and we could borrow each other's clothes and and I'm going okay that's interesting what can I help you with she goes I'm trying to figure out should I drop out of college to do this uh how do I raise the money to hire a team to build this for me and I went whoa you know slow down here okay interesting idea but let's figure out if we can come up with a quick and cheap and easy way to collide this idea with the reality I said do you have a piece of paper she goes yes

smartass I'm a college student I have a piece of paper I go great all right do you have a magic a marker she goes I have a marker do you have a piece of tape she goes got a piece of tape I go all right I want you to write on the piece of paper would you like to borrow my clothes knock and I want you to tape that to the outside of your dormatory room and we're going to find out in the next 24 hours whether the very very first principle behind your idea is

real is anyone going to knock because if nobody knocks well you've learned something very important right there this thing you think is so attractive might not be but let's let's be optimistic let's assume a bunch of people knock great you've learned something but you're also going to learn the next thing which is are there problems with fit are there problems with style are the people who knock and look at your clothes actually going to want any of them all right let's be even more optimistic let's say they do find out ones they want to borrow

well you're going to find out the next piece how do you feel when your favorite blouse comes back stained or torn you're going to find out about the cost of doing dry cleaning you're going to find out all of these things and you're going to find about all this for a piece with a piece of paper a tape and a marker none of this raising money dropping at a school and doing any coding you're going to do something very simple now is this scalable no is this repeatable no but that's fine you're going to do

it all with 3x5 cards or on a pad you're going to do it manually and you're going to start losing your mind but when you finally get to the point where you are ready to go and maybe raise money or drop out of school you're going to know what you're dropping at a school for you're going to know what you're raising money for you're going to be able to tell someone here's my acquisition cost here's my lifetime value here's my CAC here's my you're going to know all of these metrics you're going to know the

complexity you're going to a tried all these different things you're going to know what demographic and you found out all of that for nothing except for your time that's what I mean by figure out some way to validation hack and that is the key to being an entrepreneur you have an idea quickly cheap and easy test it find out it's ridiculous abandon it go on to the next one it's funny because uh obviously I'm a dragon on Dragon Den which is basically a show like Shark Tank where we see 100 pitches a year from entrepreneurs

and what I observe in some of those pitches especially when they're a little bit early on and they haven't got product Market fit quite yet there hasn't been evidence that the market actually cares is a huge amount of delusion to the point that you could give someone some feedback but because they've spent one two years of their life and maybe mortgaged their house and invested it into this business they're they're now in the sunk cost fallacy which is that sort of cognitive bias where you've invested so much in something that you're basically Defending Your bad

decision at all cost and you can't see the light of day and um and that you know my first business was the death of my first business but for many entrepreneurs that I meet it's quite clearly the death of them because if they don't have that humility if they've got romantic they can't take any feedback which is a con conflict with what they want to believe it's it's you're Stephen you're absolutely right it is the single biggest reason that either they don't start because they've built this thing up in their head and it's so big

and complex that to get started is almost impossible or they are so far along they can't stop it's it's tragic in in a lot of ways that which is why you have to start from the belief that your idea is a bad one uh because that makes it easier to walk away from it as soon as you realize you are right um but what happens if you can get this discipline of taking your idea and immediately trying it is almost always takes you in a New Direction yes your original idea was terrible but oh my

gosh did you see how this person did let's try this oh that doesn't work let's try this and that is entrepreneurship it is just leaping from the back of one uh alligator to the next and there those alligators just H long enough to before they sink or before they bite you and you jump to the next one I I I think I found two sort of species of entrepreneur and the real distinction between them is how long they've been doing it and one species of entrepreneur that I know they care entirely about being right which

is their initial hypothesis being correct and that's typically the young entrepreneur and then the the more seasoned entrepreneur cares entire entirely about being successful regardless of whether it's via their initial hypothesis or not they care entirely about like saving time and being successful not being right and I think it's interesting that tenure as an entrepreneur seems to determine which Camp you sit in it's also your personality jumping back to our conversation earlier about What attracted Reed and I to each other was that both of us were in that camp that said we don't care whose

idea it was we just care about getting to the right answer and part of this culture that we had with each other and we built with other people was you could argue like cats and dogs and eventually you'll arrive at what you think is the right way to go and as soon as that happens you all fall in behind and no one says I was right I was wrong and you don't even remember who was right and who was wrong it's a big piece August 29 1997 Netflix was founded by yourself in Reed Hastings from

from that day onwards did did you know at the moment that Netflix was going to ever become what it went on to be what were you thinking it was going to be I am completely astounded and amazed at the direction that Netflix has gone never in a million years could I have dreamed of the company that exists now being the same one that we were thinking about in in August of 1997 it's astounding to me what's happened U and it's the nature of Entrepreneurship you can't predict where these things are going to go uh that

wasn't the point though it wasn't like Reed and I were in the car going uh okay when do we enter the streaming war and when how do we deal with ch no this was a very very simple straightforward problem a video rental in the United States is8 billion a year um it's very unpleasant that the P the company who has the The Lion Share of that market is doing things which customers hate there has to be Blockbuster there has to be a better way that's where it starts from that's the problem you're trying to solve

and trying to solve the problem is this dual thing which is how do you do something that a customer might want solve the problem for the customer but also how do you make a business out of that and that's all consuming uh I remember we had a company meeting early on maybe were two or three months in and I remember getting up in front of the uh company and laying out what I thought was going to be this big hairy audacious goal for us someday we're going to be one of the top 10 largest video

chains in the United States which in retrospect was a ridiculously trivial but from where we stood then it may as well have been saying we're going to ride our bicycles up Mount Everest uh what hubris uh because even the 10th largest chain was many many many millions of dollars a year bigger than we were at the time but something to aim for and we actually passed that one way faster than we thought and then you set your goal you know eventually we're going to be as big as Blockbuster in other words if you were to

set your goals to be what Netflix is now I would be locked up I would have been this most ridiculous flight of fancy hallucination you can imagine they would have thought you were Psy gone psychotic or something if you had ever done a presentation saying Netflix would be as big as it is now you um for people that don't know because the world has moved on so much and there's a generation of people that are listening to this conversation right now that probably don't even know what a like a vcr and a cassette player is

but you launched the business at a time when Blockbuster was the big incumbent and Blockbuster was was a store where you went to a physical location you rented a like cassette VCR what do they call it like a VCR v VHS VHS tape you took it home and then you brought it back the next day and your real Innovation was that you were going to send these DVDs to people in the post on a rental basis that was the that was the Crux of the business right that was the Crux of the business and in

fact when we originally started there was not a lot of business model Innovation there either you know there was due dates and there was late fees the Innovation was it was one centralized store on the internet that served the entire country so that we could have every single movie that was available on DVD we had perfect inventory uh and unlike a video rental store where you can picture it in like a supermarket with rows of shelves each movie could be placed in one place you could either put it in the mystery aisle or in the

Alfred Hitchcock aisle or in the new Rel you had to pick where it was whereas on the internet you could have that same movie listed in 30 different places based on finding movies we thought finding movies would be easier too we had a bunch of things we thought would allow us to take on this incumbent this huge huge huge company but yes it was very very focused there was no streaming if you wanted a movie we mailed it to you we mailed it to you on a little plastic disc it's funny cuz in hindsight when

I think about a lot of these big breakthrough ideas that ended up changing their industry you you you learn in hindsight that there was some big macro factors that caused the timing to be right and I think about in the case of your business Netflix there's a bunch of big macro things that you've already described things like DVDs the internet is there is there any other sort of big macro factors that made the timing right for Netflix those were the two big ones right is that the internet was certainly the big one was that all

of a sudden there was this way to have a single store which served the entire country before for a bricks and mortar as we call it business you want to serve the entire country you've got to build 9,000 different stores and Blockbuster did just that they had 9,000 different stores and then you have to staff those stores and they had 60,000 employees and we served the entire country with one inventory and with a group of 12 to 15 people so that was certainly one big shift uh the DVD was a bet which was at the

time DVD was just getting started and if the DVD had not worked if it had not reached a full household penetration this whole thing never would have worked how many people were watching DVDs at the time when you launched Netflix there was fewer than 200 50,000 DVD players sold that was the total addressable Market was 250,000 DVD players so is that like 1% of America or something yeah there's 130 million households in the United States so and of those 130 million households movie uh but it was Tiny there it was really it created all kinds

of interesting marketing challenges of how do you launch a company when there's so few eligible customers in September 99 you explored selling Netflix to Amazon which is which is shy of two years after you'd launched um what was was that the first time you met Jeff Bezos yes and how does that come to be you know because he's he at the time I guess was was fairly early in the Amazon jour as well but yeah he was and at the time to show you how early Amazon was in its Journey they were only a book

seller so they sold nothing else they were a bookstore but Jeff had made no secret of the fact that his aspirations went way beyond that that he was going to be the everything store that the things they had found about how powerful it was selling books in the internet applied to everything else and it was pretty clear his next two categories we're going to be music and movies and we got a call from uh the CFO at Amazon basically saying hey Jeff we'd love to uh meet with you how about coming on up to up

to Seattle and having a little sit down and Reed and I didn't need to think too long to understand why they might want to meet with us uh it was pretty clear they were going to be entering video and this was going to be a make versus buy analysis would buying Netflix accelerate their entry into video cuz we had done a tremendous amount of work about building out the content and making those things work so there was some value there not to mention the people um and so we all flew up to Amazon and were

ushered into this building which was pretty hard to imagine that this was the headquarters of this world changing e-commerce company because it was a mess you know people were jammed in under stairs and in closets and there was pizza boxes every place and dogs running around and the desks were all the same they were all made from doors that had been laid supported by four wooden posts at Each corner that everyone sat at these doors and uh and in comes Jeff Bezos and we begin to have this conversation about what is Netflix and what's it

all about and uh it went went pretty well and as the CFO is showing us to the door at the end of the meeting um she Saidi just want to set your expectations that in the event we decide to do something our offer is probably going to be in the low eight figures and and we guessed that was probably going to be1 to15 million and at the time we had launched in April of 98 and so we were still pretty young and I remember Reed and I kind of looking at each other and going that's

not a bad return for 12 to 18 months work but at the same time we felt we had already solved the big problems we had built a functioning e-commerce website we had managed to Source every single DVD that was available we had figured out how to make movies go out to customers and bring them back and we weren't quite ready to let Jeff Bezos take over and so in some ways it was less about us going up and deciding whether to sell or not it really ended up being kind of like a commitment ceremony where

Reed and I looked at each other in the eyes and said we can get out if we want and I think both of us decided no let's uh let's go for this would that money have changed your life at that point 1999 you know $400 million that's a hard to say it this is not like I was uh you know living in a trailer uh and deeply in debt and you know I I'd been working I was in my late 30s I'd been working in Silicon Valley for a while and I'd had a number of

startups you know I had G through IPOs before um so I I had I was comfortable don't get me wrong this would have been nice but I'm not sure this would have dramatically changed my life in some profound way I thought it was much more interesting to take the shot and see what Netflix could become than to walk away what was Jeff like what you remember in 1999 uh extremely unpolished really if you see him now I mean he's really buff and he's really thoughtful and someone has definitely worked on his laugh it's it's now

very controlled uh back then it was this almost hysterical hyena like bark and you could hear it from all over the building I'm not going to try and imitate it um but he was tremendously enthusiastic like this bundle of energy and I remember that um the two of us were just going back and forth on all this early startup stuff uh and one thing I remember we had in common is that um uh at our launch we had rigged up a bell to ring every time an order came in and I was telling him that

he was going ah we too we had a bell that was ringing and we had we shared those things and then we were also talking about names and Netflix had started out with a strange name which was kibble kibble and he was saying oh yeah we originally were called Kadabra which he meant to sound like Abracadabra like magic but their lawyer said that Kadabra sounds a little bit too much like kadaver and so therefore Amazon but in other words it was this really interesting us going back and forth and I know Reed was very impatient

he just kind of wanted to get down to business so finally I go okay Reed Reed let's talk to the what we're really talking about here enough enough startup is the next big milestone in the Netflix Journey the dot crash for you uh because there's a there's a problem prob a more profound moment for me that happened um before that uh and that was this trans that was this leadership transition at Netflix uh and that was because the do crash was in the spring of 2000 and this was probably in late 1999 um and Netflix

was still young uh and as I mentioned at the beginning the arrangement that Reed and I had was that he'd be the angel investor he'd be the chair uh I'd be the CEO I'd start and run the company um and I did that and Reed had a day job somewhere else um and one afternoon uh late that year Reed poke his Pok his head in my office uh late afternoon and said Mark we have to talk uh and as you probably can imagine that never bodess well when someone says we have to talk and it

was right and he came in and he had a PowerPoint slideshow and he sat across my desk and spun his computer around and began walking me through a slideshow about how he felt that I was doing as CEO strengths but perhaps a little bit disproportionately weaknesses and I was a little taken back by this and I I I kind of stopped him and go re I am not going to sit here and let you pitch me on how much I suck um and I think he was taken back by that as well and so he

closed the computer but then proceeded to lay out that he was concerned that he had seen minor errors in my judgment that he questioned some of the hires I had made I mean he had seen a lot of the other things i' had done that were good but his point was that we have to execute lawlessly and we're at a point now where things are beginning to accelerate and if there's smoke at this level he was worried there was going to be fire later on and uh eventually he got to his point which is that

uh he wanted to come back to the company fulltime and be CEO and for a moment I thought he was firing me uh CU Reed had more Equity than I did since he was the uh uh original investor and but as I understood what he was proposing it wasn't that he was proposing that he come in as CEO that I stay as coo and that we essentially run the company together and I remember as he finally he left the office and he quietly closed the door and I was so shocked that even though the sun

was going down I sat there in the dark like without the strength to the lights on and just kind of crushed and all I could think at the time was this is so unfair this is my company you know I started this it was my idea I hired the people I got us going and how dare you you know all of a sudden take this from me but as I thought more about it I kind of realized that there was another Dynamic at work here and like most entrepreneurs when we started Netflix I had this

dream of being a successful CEO of this big successful company and I think as I sat there I began to realize that maybe this wasn't one dream maybe this was two different dreams and that the dream of the big successful company might be a different dream than the one of me being CEO and I had to really say to myself does Reed coming in full-time as CEO increase our chances of that happening and it was really hard for me to argue with myself otherwise and I'm not saying this was an easy decision and I you

know I went home that night and sat outside in the porch with my wife and we finished a bottle of wine and I think by the time I went to bed that night I kind of concluded that he was right that if we really wanted to give ourselves the best chances of being successful that I should move over I should step down as CEO and let Reed come in as CEO and we should run the uh the company together and looking back now this was 20 some odd years ago that decision to kind of put

my ego aside for a bit was probably the smartest decision I ever made the entire time I was at Netflix because those years after that when Reed and I did it together that was the Renaissance at Netflix so many of the things that shaped what the company became over the next bunch of years came during those years and certainly looking at what Reed has done with the company since then since I left the company was uh even more astounding and it's funny because one of the roles of a CEO is you've got to make sure

the best people are in the right seats which means say goodbye to a lot of people you'll have someone You Who Came at when you started the company and they were your head of marketing and they worked tirelessly they worked weekend they work nights they did everything you asked but as you get to a different scale you recognize that person is not the right person for what we have to do next but you never think you're going to have to turn that lens onto yourself um and I think a lot of Founders need to ask

themselves that question question all the time I'm the right person for yesterday I might even be the right person for today but am I the right person for tomorrow and the number of Founders that I can think of and I'll bet you you will Echo this when you think about all the founders you've spoken to who are great early stage entrepreneurs and great late stage entrepreneurs it's a very very small set um and in my case uh I was very very comfortable recognizing that this was the right thing to do for the company when you

when you think back to that moment and that conversation with Reed where he comes into your office with your hindsight and wisdom now do you think there's a better way that he could have approached the situation of course Reed as I mentioned before what made Reed and I work so well together as we were left brain and right brain and that's not Reed's strong suit um that's my strong suit you know I pitch I know how to frame things in the right way I know how to deliver bad news I know how to uh communicate

effectively and I can intuitively know what's going to upset someone or not upset someone that's not what Reed's great at but what Reed has and what we share is he cares Reed was doing this not with some ulterior motive this was not I want to push Mark out and become CEO this was he genuinely believed this was the right thing for the company and because we had this extremely strong relationship based on trust I heard him that way and fundamentally that's way more important than the style in which the message was delivered what was it

that he thought he had that would suit the company in the next phase of the company's Journey that he felt you didn't have he had already taken a company through an IPO he had already scaled a company from two employees up to a thousand employees from a local company to a multinational company uh he had he had already shown that he could hire extremely talented people to work for him he wasn't saying that he didn't think I it was impossible for me to do this and who knows would have happened this was all about what

increases our odds for success and then perhaps if you want to drill down to something which in the big scheme of things is small but in the time was large is we had to raise money uh Netflix was a very very expensive company to get started we required large amounts of venture money and Reed had this reputation of someone who would already made a ton of money for some VCS because of taking his prior company public and they would bet on him whereas I was a little bit more of an unknown one of the things

you talk about in your book that he said to you in that conversation is you don't appear tough and candid enough to hold strong people's respect yeah it's um I'm better at that now does that count uh it is the empathy um I as I said what makes direct marketing Marketing in general is an interesting discipline because it requires you to send something out and you're not going to ever see the person's face as they react to it you're not going to be there as they're reading this and either getting confused or excited you have

to imagine those things and as you're writing a direct response letter you're picturing how is someone going to react when they read these things how are they going to react when they're watching this direct response television commercial that's a it's it's a gift in some ways and it's also a gift when it comes to salesmanship and negotiation is before I say something I know how it's they're going to react and I can cater that but what it does mean is that when something's going to really hurt somebody it's really hard for me it's very painful

for me to deliver very bad news I've never considered that before but it does appear to be completely true that people who are great marketeers um have therefore have empathy and therefore struggle more with delivering bad news because they just have a better ability of putting themselves in the other person's shoes you feel it you feel it you know I've and as I said I've gotten way better at it um I'd say I'm good at it now um I'm I can be a complete ass when I how does someone train that muscle is there a

way to go you know if you think about how you went from where you were with that to where you are now is there anything that's helped you stop being I guess a bit of a people pleaser or caring a little bit about people's feelings when there's a big I've stopped searching for a way to do it that doesn't hurt and as as with most decisions a lot of times people get caught in this paralysis where they're trying to come up with some Solution that's an Optimum solution and this is one more example of that

is that you go this is going to hurt it's going to hurt me I have to just do it anyway there's no way to avoid this and for example you know jumping way ahead there was T after this doc layoff which we'll talk about in just I mean doc com crash which we'll talk about maybe in a moment we had to lay people off and I cry with every single one of them but I bring them in and I gotten very very good at telling people uh it's time to go but doesn't mean that I

don't hurt hardest thing let's hope that if you're a manager that's the hardest thing you ever have to do have you forgiven Reed for that that moment that day the way he delivered what he said 100% uh this is going to sound silly but it came from love it didn't come from Madness or jealousy or anger it as much as it was possible for something to hurt Reed in delivering bad news that's got to have been one of the toughest things he's had to do is have that conversation with me and I have so much

respect for the fact that he had the courage and discipline to say I've thought of something I could I've thought of a way to mail the DVDs more inexpensively I've thought of a way to the no he goes I've thought of a way to make the company more successful but it's really going to hurt what is it about Reed then that makes Reed successful because I asked you the question about yourself but now to turn that on Reed what is it that makes him so unique see you used the analogy for creativity earlier in our

conversation about having all these clouds of information these clouds of connections and seeing that there are these interconnectivities between them Reed sees that stuff so well I consider myself really good at that he's even better than I am he will have a very complicated problem with many moving pieces and he'll jump immediately to we can do this and I won't see that until a little bit later and then even everyone else sees it it's just an amazing ability to see how things might shape about and which one is the right path to take uh extremely

analytical um extremely non emotionally driven can make very very hard decisions because uh less driven by that by the emotional piece of it he's he's a he's he's remarkable what about hard work does it matter well since you ask it so simply I'd say no or it certainly is not the most important thing in fact I think hard work leading to success is a myth that and let me let me give you two examples okay um the first is to qualify what I mean um I work with a lot of as he spoke earlier before

we actually began the session um about how younger people are different places in their life than older people especially with career and how they think about it and um earlier in my life I used to do triathlons you know the races that combin swimming and then biking and then running and back when I used to do them they don't do it quite the same way anymore it would be a mass water start you have four or 500 people who with the gunun sounds and all 500 of them plow into the water simultaneously not a phase

start and as you can imagine it is a show you mean you're getting kicked and your goggles are being knocked off and you're being held underwater and you quickly realize that if you want to be able to survive in this Mass Dart you're going to Sprint for those first four five 600 yards to get yourself far enough in the front of the pack that you have open water and in my opinion work life is kind of like that when you're younger when you don't really know what you're doing when you have to go down a

lot of false ends because you're not just productive you better work your ass off you better Sprint you better work three times harder than everybody else in the company so it's essential but ideally you get yourself far enough ahead that you recognize I can't can't go at this pace for the entire te of the triathlon I needed to to get myself some breathing room but now I can back off so yeah at certain points in your career you need hard work at certain points in the trajectory of your business you need hard work your fundraising

you can't say oh we're closing around I'm taking vacation for two weeks uh we're doing m&a I'm going to be uh I'm only going to work a couple hour no you're going to have to grind it but that's not the answer all right one more little story which is part two to this which is why I say that it's a myth for hard work um so during one part of my career I lived in Europe uh I was doing International marketing for a big software company we had an office in Paris uh I lived in

Paris and but I was meeting every week with the marketing people in our other branches so probably four days out of five I was flying fly to Copenhagen one day then I'd fly down to Milan then I might fly to London then I might fly to Madrid in one week so I spent a lot of time at the airport and um because I'm sometimes not that organized uh I'd be late and you would find me just sprinting Down The Concourse in my uh in my Blazer and my wool coat trying to desperately make the plane

and what I found out was that probably 49% of the time I'd pull up to the gate and the plane was delayed and i' have to wander onto the plane no problem at all I could have made it on crutches and instead I'd sit there marinating in my sweat for another hour before the plane took off or the other 49% of the time I'd come sprinting Down The Concourse and you'd see the plane halfway out in the runway about to take off and what I realized is didn't make a difference whether you ran for a

plane or not that you're either going to make it or you weren't going to make it and that running didn't make the difference and I vowed then and there I'd never run for a plane again and I never have and I'm telling you that story because it's a metaphor in that so many entrepreneurs spend all this time running for planes they are up all night polishing their deck they're reviewing the work of people to make sure the spelling is correct they're double-checking every detail they are working so hard but I know from experience that it's

like running for the plane most of the time doesn't make a difference you don't lose the deal at 2 o'cl that morning because you didn't check the fonts you lost that deal four weeks ago when you didn't have some fundamentals right or you just weren't the right company to begin with no matter how hard you worked you weren't going to change the outcome and that is the key to having some balance in your life as an entrepreneur is this recognition that if you're smart about the things that you choose to focus on you make 99%

of the difference and that all that extra work does not really change the outcome any and in that analogy of running for the plane is the is the key thing to have just better prepared further Upstream I you know if we stick to the analogy just have made a better decision to leave the house at a better time yes it does absolutely I mean if you want to make the plane you you know you leave earlier and again it's not sometime listen you're going to scroll down The Concourse you not don't need to run and

if if the plane left on time running's not going to make the difference if the plane's late running didn't make the difference either way you made it or didn't make it the amount of times that running for it was the gating item between whether you made it or not is like infantes so what's the point of running and that's and I really fundamentally believe that is that if I can be really smart about my which problems I choose to focus on I'll make the difference I do not need to get everything right because most things

don't make a difference some things do some things do and some of the the small things that made a difference to your business seem to have been discovered through a process of sort of experimentation and failure when I look back through your story at you trying to get sort of Netflix to work and get product Market fit you referenced it a second ago this idea of no late fees seem to be quite pivotal an idea you had to remove the late fees I I find this interesting because there's going to be entrepreneurs that build their

idea and then bang their head against the wall and it doesn't work and then I hear so often whether it's from Brian chesky at Airbnb or from someone else Daniel at Spotify that there seemed to be this one change that was quite pivotal to their business at some point so my question becomes like how do I know how do I find the thing so can you explain to me why this no late fees thing and and any of these other small changes that change the game and how what was the system that led you to

them you know we're talking about really finding product Market fit product Market fit if I have to give a definition is when you recognize you finally have something that customers actually do want and it's recognized because all of a sudden the momentum of your business dramatically shifts all of a sudden things go into high gear all of a sudden iring customers is so much easier all of a sudden they're sticking around it's just this instantaneous oh my God we found it and up until that point it is this constant struggle of trying one thing after

another trying to increment your way closer and closer and closer you know when I mentioned that um you know at the beginning there wasn't a lot of business model Innovation with Netflix we if you ordered a disc we mailed it to you we charge you a due give you a due date if you missed the due date we had late fees and the reality is the idea was ridiculous it didn't work um nobody would rent from us and if you did rent from us once you didn't rent from us again um and we kind of

had this realization that okay we got to begin figuring things out and thus began this year and a half long process of trying to figure out some way to get people to rent DVDs by mail from us and and we tried almost everything you could think of um hundreds of things and um I kind of talk about this a bunch that I had no shortage of ideas I mean I had lots of things I wanted to try and if there was any if there was a problem that I had it was that I was a

bit of a perfectionist back then and so all these tests that I'd want to run I'd want them to be perfect so we would you know lovingly argue over every word of copy and we would do custom photography and we would check every link and we'd stress test the site and it might take us three weeks or a month to prepare for this test and we' test this new idea and then it would not work wouldn't do anything and we'd kind of look at each other and go we just wasted a month so okay faster

and then we do a test in two weeks and it would still fail okay okay faster and we do it in a week and faster we eventually started getting to the point we could do do a test every day or multiple tests every day and it turns out that um once you go that fast things get very very sloppy so we would have the wrong image or it would have the watermark on it or the pages we had greed would still be greeked you know not uh we'd have bad links we'd crash the site and

then but that was such an incredibly big insight for us because it turns out that it didn't make a difference that if it was a bad idea even spending a month crafting this perfect test wasn't going to make it a good idea but if it had even an inkling of being a good idea no matter how bad the test was it shown through customers would immediately perk their head up they'd raise their hand they fight to do it they'd call us they'd reboot the site it was this incredibly loud signal that there was something there

and it goes back to what we said before which is that it's not about having a good idea it's about building this whole process and this culture and this system to try lots of bad ideas and we got really really good at trying lots of bad ideas one after another hundreds of them each one informing us to some little some little bit about what to try next and eventually we got to this point where we had these two big Ideas left and one of them was uh at that point uh Netflix was pretty big we

had probably in our warehouse several hundred thousand DVDs and I remember one day we were Reed and I were in the warehouse and looking at all these DVDs and going it's such a shame that all these DVDs are here in the warehouse where they're not doing anyone any good I wonder if there's a way to store them at our customers houses let them keep them and then when they're done they mail it back we'll just replace it and rather than having them have to pay each time they replace it let's just have a monthly fee

a subscription and they can rent as often as they want there's no due dates and no late fees and it was a ridiculous idea but when we tested it it was that mythical product Market fit it it worked people loved it they couldn't get enough of it they told their friends they did not cancel their subscriptions what part of it worked and why did it work God knows yeah but in in retrospect what it did was it took one of Netflix's biggest impediments and turned it into one of its biggest assets you know we referred

to my book it's called that will never work and there was two reasons it's called that's will never work work it it's because that's what every single person told me when I pitched the idea and they had two reasons why they said it um and one of course was uh streaming they said oh it's a digital medium it's just a matter of days before everyone's streaming these who needs DVDs and we realized that was not the case it was inevitable but it could be years but the other reason was was Blockbuster why on Earth would

anybody want to order a movie have it mailed to them get it 3 days later uh and then keep it a week and mail it back when you can drive to a Blockbuster in 20 minutes and have the movie immediate gratification and what happened when we did the no due dates no late fees is it shifted because before with an all a cart system you would order it yeah you get it three days later or you drive to Blockbuster in 20 minutes but now when it was no due dates no late fees you could order

your movies they'd sit on top of your TV you keep them as long as you want when you want to watch a movie this lag time is zero compared to 20 minutes to go to Blockbuster because you could order a couple I imagine three you could order three okay and so you always had something to watch when you're done you put it in the mail and instantly you know two days later another one replaces it so all of a sudden we weren't two and a half days slower than Blockbuster we were faster faster than Blockbuster

and I think that was the convenience and the thing is that when we did the analysis at the beginning about Blockbusters Achilles heel it was the late fees everyone hated them uh that was the single biggest thing that people would say about Blockbuster I hate the late fees and by being able to get rid of that it was a huge competitive advantage and it was baked into the Blockbuster business model they couldn't easily get out of it again so for someone that might not be aware of Blockbuster the late fees are if I didn't bring

back this tape of this movie I would get charged per hour or per day or something yeah it's usually three or four dollars a day okay which is a lot of money for a DVD it's a huge amount of money for for that but it was also this feeling of uh I was okay paying the initial fee to rent the movie because I want but now I've watched the movie and I just couldn't get it back in time and now oh my God now I got to pay more just to return it it just felt

like this unwarranted unpleasant punishment for the customer I was thinking about something that Daniel conman the famous sort of psychologist um talked about in his paper when he wrote about loss aversion and the tldr of it the too long didn't read part of this is that Daniel Carman discovered that people have a real disdain for feeling like they've lost something and in his studies he shows that if you drop $10 on the floor you don't need to find $10 to make up for the pain of losing 10 you'd actually need to find 20 or 30

and and so he has this wonderful graph where he talks about that we just loss to us is so much more painful than a gain so in the case of Blockbuster a late fee is is is money I literally lost for nothing right so it's not losing $4 in in the context of it's actually losing like $12 it's that painful exactly it was it was a really really hated aspect of the video rental experience back then and also it made me think about the peak and which is you remember the uh which Uber discovered in

their Labs where they say that people remember the peak in the end of an experience and so if my end of an experience with Blockbuster is getting charged getting punished that's really interesting I've never heard that before but that fits entirely it was the perfect denoma to having an experience with Blockbuster is to go in and have someone say thanks for returning your movie now you owe us $8 or $12 just like a horrible end experience custom and that's why I think a no no due dates no late fees was so profoundly game-changing for us

and it marked the beginning of that that was it that's what the company became for the next five or six seven years and it was more than just no duties late fees but the transition to a subscription business was huge and this is you know now everything's a subscription business every piece of software you buy is a subscription every everything subscription back then that was not the case uh there was book clubs which were subscription there was record and tape clubs of subscription there was magazines and that's all and in some ways when you look

back at what some of the huge Netflix Innovations were one of them was demonstrating you could apply subscription to something which is reasonably unintuitive and it came from this fact again this disconnected little piece of my past that I happen to had a year and a half of experience really understanding subscription economics when you were looking forward so I I'm so fascinated by this test that you did which which changed Netflix's fortunes there's a couple of them that you've described but when you did you know looking forward that it would have that much of an

impact and I'm saying this because that helps me to understand whether I should just conduct a a lot more tests or I should do what I think most companies do where we sit in a boardroom and we spend hours and hours trying to find the perfect test is the game just conduct more tests if I didn't have to sit by the microphone I'd get up and hit you upside the head for that comment God no you should not be sitting in the boardroom debating what to do you should be running more tests you should always

be running more tests you don't know you don't know I mean you don't your customers do but they even they don't know what they want and the only way to figure it out is to throw all kinds of things at them and see what direction they're interested in but so did I have any idea subscription was a big thing absolutely not and once it began to work and it worked like crazy we still had no idea how to optimize it and we Netflix still 20 plus years later spends ungodly amounts of time on testing all

kinds of things about subscription Dynamics what does it take to get someone to do it what does it take to get someone to stay what influence is these it's unbelievably complex but it's unbelievably important but subscriptions there's a reason why it's it's eating the world it's an incredibly compelling business model and uh the fact that we stumbled onto it and that it worked so well just was a very very positive uh thing you know it's interesting on the testing point just to close off there I embodying the position of most companies or employees or Founders

listening to this the reason why they don't want to run tests or don't have a culture of it is because it involves failure and failure then in most companies results in blame and blame makes people feel bad so it disincentivizes them but creating a culture where failing is a positive and it's celebrated is quite a challenge I guess oh it certainly is it's it's a career for me I mean I uh I do a lot of public speaking keynote speaking all over the world and a lot of them are big companies who are going our

whole world's being turned upside down our whole Workforce is risk of Mark get in here and help us figure out how to make everyone a bit more risk tolerant but you know what do they do uh they'll go okay Mark your theme today is we're trying to get everyone to be bigger Risk Takers to take chances we want to celebrate risk uh so but before you go on we're going to celebrate the sales leaders and bring them up and reward them for the trips to Hawaii it it's like you said you have to let people

know that failling is not not only okay it's expected and it's a good thing and we found we we learn from it and I don't even cons listen I don't even consider it failures they're not failures they're tests that didn't necessarily work but they worked in the sense that you learn something from them and you just keep doing those over and over again and again if you go back to this my first principle is how do you learn how to do tests which are quick cheap and easy you can do tons of them talking about

giving speeches there just a week before the do com Bubble Burst you gave a speech in um New York City and your dad was there yeah my dad was the anti- entrepreneur uh he was extremely risk averse uh he was an investment adviser he worked for a uh managing money for people in a company whose whole principle was fundamentals long long-term value he had no clue whatsoever about why I was doing what I was doing and this whole Venture world it was just completely made no sense to him um but that speech in New York

City was actually fairly interesting because what I was doing was speaking to the DVD manufacturers Association I think it was about what we' learned about more effective ways to expand their business and on one hand I think my dad was extreme ex proud to see that all the stuff that I'd been saying which he thought was all a bunch of hooie was actually important and interesting to people but unfortunately it was also um he happened to be in New York that time to get treatment for a brain tumor which he had just realized he had

and um so it kind of was this beginning of this my dad understanding for the first time what I was good at and at the same time the end of not of our relationship but it marked the beginning of this saying goodbye to him so it was kind of this very very Bittersweet uh Bittersweet time in 2000 at 42 years old when you were 42 years old um he just just one week before the dot crash your father passes away right I mean the timing is is um is is extremely unfortunate but also just the

impact that must have on one's perspective to lose their father at that that in that season of Life yeah I guess it's part of you go well what else can go wrong and you find out plenty but the tragic this is going to sound tried I suppose but one of the tragic things about my father dying before the dot collapse is he missed seeing that he was right he missed seeing that in fact this was a lot of hooie that this apparent defying of Gravity by all of those do companies commanding these ridiculous valuations with

no revenues and even even less profit um which he thought he could not understand how this could possibly be real well as we all found out a week later it wasn't real and I think he would have really loved seeing that in fact he was right um but it was kind of this double hit for me you know reeling in fact from the death of my dad and then all of a sudden having to worry now about the death of my company did it change your perspective losing your father on what matters in life I'm

gonna say no because what was great about my father was that he was very true to himself he was very comfortable being an iconic clast about holding different opinions uh even as we just mentioned with the do bubble when everyone else was saying this was the next big thing and he's going this makes no sense whatsoever and he held to it and he lived his whole life that way and so in some ways when he died there was this sense that it is possible to be true to yourself and um and be fulfilled that you

do not need to chase the trends was reminding me that that can happen when I started my first job when I was like um and I was probably 22 my first real job where I actually had to go sit in an office uh my dad called me into the den um and tore a page off of a yellow pad and on the page he had written in pencil the Randolph rules of success and he goes this these are the things that I have learned over my career as a business person and I think I want

you to see these as you start your career as a business person and I wasn't quite sure what to expect as I was looking at them and what was interesting was that these were not business rules this wasn't like you know Buy Low and sell high or happiness is positive cash flow or anything like that these were basically rules that said it's possible to be a decent person and still be successful I mean it was simple things like you know do 10% more than you're asked it was um be prompt it was um don't knock

don't complain stick to constructive serious criticism it was don't express opinions about things that you don't have the facts for I mean that's who my dad was that he um felt that those were the important things to communicate to me which is Mark be a mench then the dotom bubble happens most of us can't remember I think I was how old was I must have been seven or seven or so seven years old so I can't really remember what happened yeah but I know it was bad well it was especially bad for us I we

were talking a moment ago about subscriptions and how subscription economics are amazing and what makes them amazing is that you acquire your customer and then that customer gives you money for months after afterwards ideally for years afterwards but because a subscription customer is willing to give you money for years afterwards you can invest more in acquiring that customer you can spend $100 to bring that customer on board with the confidence they're going to give you $10 a month month after month after month after month but it means in month one you spent 100 and you

made 10 so when you have a subscription business which is booming which is going crazy when customers are flooding in the door well money is flooding out the door the cash required to service those bring those customers in for their first month huge the revenue from them not so much not to mention we had a first month free policy and that wasn't a problem in uh March of 2000 that was the era of irrational exuberance that was where you had these companies where had no Revenue no real business model worth hundreds of millions of dollars

where I could go out on the highway with a green flag and wave it and a dump truck of money would pull off and back up to my driveway and I just need to come out with the wheelbarrows and bring the money in it was ridiculous until the dotom crash and all of a sudden in a matter of a week or two completely dried up and all of a sudden having a.com on your name was no longer the road to riches it was The Scarlet Letter um and we were in deep trouble we were basically

going to go broke being successful and when that happens as you've seen with other entrepreneurs you do something called pursue strategic Alternatives which is code for we have got to sell this sucker fast and we had an obvious strategic alternative which was Blockbuster how you losing money at that point oh my God yes how much roughly uh at that point we had accumulated losses of about $50 million and what were your revenues $5 million and you you you accumulated losses what was your sort of annual yearly burn rate how much money were you burning every

year uh well there we were only in business for we'd only been in business for 2 and a half years so it most of that 50 had been in the previous 12 months I mean that's I mean on paper that's not a good business well not just on yeah it's a terrible business you know they they say that one of the goals of any startup is to receive a repeatable scalable business model that is not what we mean by repeatable scalable business model um it's disastrous and you have lots of businesses which go we're going

to make it up in volume or once we just get the get the eyeballs then we'll monetize it later so it's it when all of a sudden the opportunity for all those things goes away it's disastrous we're just completely upside down our economics did you go to Blockbuster or did they come to you no we tried going to Blockbuster for months we tried reaching out to them but this was this ultimate listen we were doing five million a year they were doing $6 billion dollar a year okay so you we had 150 employees they had

60,000 that we were like a gat you know to them to an elephant they you know their tail flipped around what's this thing Buzz no interest in US whatsoever it took months and finally we got the call and as luck would have it we got the call we were at a corporate retreat uh at a place called The alisol Ranch there's a a a city called Santa Barbara on the coast of California pretty rural alisol Ranch is way back in the mountains it's a dude ranch you know horses so we're on Retreat and you also

know that in silic and Valley that we're pretty casual and when you're on Retreat you have to work at it to be even more casual so all I had with me was shorts uh t-shirts uh thong sandals you know that's that's all I had with me and that's when Blockbuster calls goes we'll like to see you tomorrow in Dallas and I remember turning to Reed and going there's no way uh we can't fly non-stop out of Santa Barbara uh the time zones are different we can't possibly get to Dallas by tomorrow and so we did

the prudent thing you do when you're $50 million in the hole and we chartered a corporate jet uh a rounding error I think they call that uh we fly to Dallas um go up to in the 27th 28th floor of this massive glass and steel skyscraper into this huge cavernous conference room there's a big hardwood table made of I'm sure out of some endangered Amazonian hardwood or something it was horrendous the whole thing and I'm there in shorts and a t-shirt and your thong sandals and and the sandals and Reed I was jealous he had

a Hawaiian shirt he had buttons anyway in come the Blockbuster guys and we make our pitch we go we'll combine forces um you'll run the stores we'll run the online business we'll build a blended model which our research has shown is a GameChanger and everything will work out and it was going good you know they were asking good questions they're leaning in they're and we're going okay this is this is rolling and then they asked the big question you know how much and of course we'd rehearsed on the plane we figured we're $50 million in

the hole so $50 million and there's this silence in the room and I'm looking at uh Blockbuster exec trying to piece together what the reaction is and it finally Dawns on me they're trying to suppress laughter they're trying trying to keep a straight face at the hubris that this little company $50 million in debt at the trough of the Meltdown could possibly be worth $50 million so as you can imagine meeting goes downhill pretty quickly after that long quiet ride in the cab back to the airport even quieter ride on the jet back to Santa

Barbara and I I so profoundly remember sitting there on the plane just my head down like not talking just thinking ah I I was so confident that if we just got the meeting that this Blended model was so self-evidently great that they'd save us but now they weren't going to save us they were going to compete with us and we were in trouble did they make you an offer uh no they just rejected the $50 million offer and you know my Dad one of the things he sometimes to say to me is like you know

when I was struggling with some particularly nasty problem and came to him for the solution he' go you know sometimes the only way out is through that you got to take these problems and just go right at them there's no no way around and this was such a classic case of that there was no easy way out of this the only way we were going to survive was be to compete with them that and we had a put ourself in a position we could do that when we laid people off we dropped entire lines of

uh adjunct little businesses completely focused it in and and survived and eventually you know as eventually um passed Blockbuster and eventually um Blockbuster went into bankruptcy I don't know how Blockbuster couldn't have just looked over and seen your business succeeding at some point and gone okay we've got 6 billion Revenue a year which will just destroy them will'll just you know overpower them with advertising or something it's a big piece of innovators dilemma um in their case uh a couple things going on um number one imagine you are the CEO of Blockbuster okay called John

wasn't it John antioco so you've got6 billion dollar coming in through your standard business model which is serving these bricks and mortar stores all over the world $6 billion and someone comes to you and goes we need to build an online component and John goes well what do you think that could do in Revenue the first year and you go $2 million so would you say okay take our very best Engineers let's put them on this project no you go okay figure here's a hand figure it out and you could put the the B team

is on it and of course it doesn't Netflix wasn't a movie company company it was a software company I mean we had Silicon Valley we had people who had spent their whole life building software you can't compete with that even with their a team it would have been challenging but they put the B and the C team on it and they did that a second time and then a third time and finally each time we're stronger and stronger and stronger and eventually they go we got to fix this and they pick a team they resource

it adequately they say get out of the building go across town set up here's the money come after these guys and it's one of it's a story which has not really been told very well but they came really really close to taking down um Netflix they were in a they that Blended model which we knew was a killer which a blended model means you can rent from Blockbuster and you can either return it in the mail or you can return it at the store or you can go pick it up at the store or you

can have it mailed to you and we couldn't compete with that we didn't know the stores and it really really came close to taking Netflix down until all of a sudden they had all kinds of unrelated corporate shenanigans that made them decide change CEOs we're going to dource this online business and walked away from it what was I saw you talk about this on your Instagram recently um when John quit the business so John was the CEO of Blockbuster and him quitting the bussiness for a variety of reasons is much of the reason that you

think Netflix actually ended up not getting killed by Blockbuster correct can you explain that so and I'm not going to get this entirely right but there basically were people who are corporate Raiders who would buy large amounts of a company's stock and take seats on the board um take multiple seats on the board and begin to try and dictate things to make a company more short short term profitable that happened to Blockbuster and one of the acts they did was deny John ano's bonus he was the CEO of Blockbuster yep and he said you can't

do that and they go well we need to we're g to no we're not going to pay you the bonus that we you were promised in your previous agreement and so he goes well in that case I quit and then they went to find a replacement and they brought in a person who had all of their experience at retail stores at convenience stores and his vision was we have 9,000 stores in almost every community in the country in the world why aren't we selling gum and clothing and and what are we wasting money on this

digital stuff and there's a this is super movie geeky so pardon me for the segue um Step Spielberg who I'm sure you're familiar with his film school project was a movie about a robot and the robot operates kind of on a cost benefit analysis and there's the penultimate scene in the movie where the robot is chasing somebody and he's getting closer and closer and closer and he's just about the obot to reach up and grab the person's ankle and you see the sunk cost of the robot's time get to break even and he stops and

walks away an instant before he grabs the person that's what blockbuster did they were within seconds of grabbing Us by the ankle and yanking us off the ladder when something happened unrelated to that and they just turned and walked away and we just scampered to safety they lost Focus yep so that's there's a lot of reasons Netflix Blockbuster didn't go down because of Netflix only but Blockbuster went down because they had a business model which was very very difficult to change and they didn't have the courage and the persistence to be willing to do the

things that would have made it change perfect Ted has quite frankly taken the nation by storm a small green energy drink that you've probably seen popping up to a Tesco or to a weight Ros they've grown by almost 10,000% in a very short period of time because people are sick and tired of the typical unhealthy energy drinks and they've been looking for an alternative perfect Ted is the drink that I drink as I'm sat here during the podcast because it gives me increased focus it doesn't give me crashes which sometimes might happen if I'm having

a 3 four five six hour conversation with someone on the podcast and it tastes amazing it's exactly what I've been looking for in terms of energy that's why I'm an investor and that's why they sponsor this podcast and for a limited time perfect ter have given Diary of a CEO listeners only a huge 40% off if you use the code diary 40 at checkout don't tell anybody about this and you can only get this online for a limited time so make sure you don't miss out you left the day after the IPO in May 2002

the IPO happens the company is valued at a big number um I guess your life has changed indefinitely from that point because it's a lot of money for someone to have um and you go on you know leave the company for the reasons you expressed earlier and you go on and do other things and I think at that point really the streaming War has been has been now won by by Netflix and now many others as we sit here in 2024 but at that point was really when you know Blockbuster are effectively dead I think

they went oh they went bankrupt what eight years after the I didn't they was those Wars raged for a while okay so you you go public in 2002 right they continue pursuing you y um but ultimately they they ran out of steam eight years later and go bankrupt in 2010 you leave Netflix you leave Netflix you're a wealthy man you've achieved success that almost everybody on planet Earth will never see in terms of business at that point what matters what matters in life uh the day of the IPO I remember we left the trading floor

where we had gone public New York City my young my son uh who actually with me today uh oh yeah in the back was was with me he was a young much younger man and uh I remember the two of us sitting in the in the taxi going downtown in New York we were going to get pizza because I figured he's a California Kid he'd better experience New York Pizza uh and I was sitting there going my life has changed you know I I do have the option if I want to to not have to

work again and I be in the cab seeing all these people who were going about their lives and going am I different or not and part of it you then you realize I like what I do I I'll take the day take a day or two but I'm going to be going back to work I still have problems to solve we still have to make this company successful and I did I went back to work and it was not uh it wasn't as profound that my life changed like the IPO is held up as this

be all end all but it's just one more Milestone along the way you know Netflix still had a lot to do and it it still has a lot to do um the the more profound thing was was actually leaving and realizing that I could be as I mentioned before could now begin spending my days doing the things that I really loved doing and I have I've been incredibly lucky able to do that you know since leaving Netflix I do get to spend every day working with other early stage companies I did start another company after

uh Netflix which did really really well um I have a great life and I still get a chance to spend time with my family and I still get a chance to get out and do all the outdoors things that make me whole was there grief associated with leaving and and that's sort of the months after you leave is there a grieving process because you're surprisingly no there's uncertainty you know I I I've spent most of my professional career in Silicon Valley and as most people there do I know dozens if not hundreds of people who

have economic outcomes there that would allow them to not work another day in their life if they wanted to but it if you do a simple survey of the friends of yours who've been put in that position the vast majority of them go back to work they start another company and you realize that we are entrepreneurs not because we have to do it to earn a living we do it because we love that process of solving problems we love that process of making and building a company we love that process as I described earlier of

sitting around the table with really smart people solving really interesting problems and if success is nothing else it's the ability to be able to do the kind of things you want to spend your time doing and doing another company is the most thrilling thing in the world and if I get a chance to do that why wouldn't I want to do that so in that period after leaving I didn't say I'm retiring I didn't say I'm starting another company I said I'm going to take some time and think about it and in my case I

decided I didn't think I had enemy to start another company um I was going to spend my time helping other people do it it turns out that I was wrong I got sucked into starting another company that's a whole another podcast but uh this whole thing is not about the IPO it's not about success uccess it's not about money the thing that makes this the best job in the world is how cool it is to take something which hasn't been done before and figure out how to do it and I just feel blessed and I

imagine you do too and the people you speak to are all blessed that we are allowed to spend our days doing that one of the things that always inspired me and that I've mowed over for many years is the culture that was created in Netflix because it was so pioneering and it's so sort of spad in the face of the way that we were told things were supposed to be done you know cuz when we when I started my first business it was all about family and all of this stuff and then I remember that

day that I read Netflix's sort of culture handbook which is quite famous and viral now called freedom and responsibility and it was everything that I it was the opposite of everything that I thought a business was supposed to be you know it was this radical Freedom that people were given but then there was a really high bar and I want I've always been curious like a where did that come from B is that for every company is that the right way of company culture um and I guess see what is the the unknown part because

we all saw the deck but we don't get to see the actual Implement so I'll take your middle part first which is this for everybody and the answer is no um culture as I often say is not aspirational culture is observational culture is not something that you dream up what you want it to be that you aspire to it to be it's not brainstorming what our culture should be and now let's print up 40 posters and put them in the breakroom that is not what culture is culture is how you as the founders behave it's

how you as the senior Executives behave people are watching you and they're modeling off of you that is what culture is that's where culture comes from so if you aren't a certain way you can't have your culture be that way and it's perfectly okay to say that we're a family if that's really the way you behave and want to build your company it's entirely appropriate that's not the way I wanted to behave or build my company so I never said that but I'll get to that in just a minute but it comes from this so

this whole radical honesty thing at Netflix that just came from the way Reed and I always treated each other and the way we treated our employees the way we wanted held them accountable to treat their employees um so it has to come from how you genuinely are um you can police that you can hold each other accountable you can say we want to hear from everybody and then have your HR person pull you aside after the meeting and go Mark Reed you were always saying you really want to hear from everyone of those meetings what

percentage of the words do you think came out of your mouths then and go be right Patty we'll do better next time I you want you want your actions to match your words so that's the core thing of culture is it can't be something alien it means you have to be accountable to it because it spreads Beyond you that the culture of the first 10 people is modeled off first two of you the next 90 is off the first 10 the next 900 is off that first 100 and so on so if you let it

slip if you say our most one of our principles is no unless they're our best salesperson or the Irreplaceable CFO well then then it's different no you've got to be consistent because everyone sees that anyone with kids knows kids don't model what you say they model what you do the other piece this whole freedom and responsibility thing is not novel it's almost every early stage company has this because there's just aren't the resources to do otherwise you have let's say 10 people but you have the work of a hundred there is not time to say

okay Stephen here's what you have to do and here's here's what you have to do and check you can't do that you just go all right here's what I need you see that mountain over there I'll meet you there in two weeks and I need you to have this finished here's what you need two weeks meet you there and then I'm not going to talk to you for two weeks and you're going to have to struggle and figure things out and overcome obstacles based on what you have to accomplish it'll be different things and this

person has to accomplish but I trust that you're going to get to that Mountaintop with the stuff done in two weeks that's the responsibility part but I'm giving you the complete Freedom how to get there so that's an easy thing when you have 10 people it's a little harder when you have a hundred it's really hard when you have a thousand and the reason is that there's an innocent thing that happens so get to a point and you're at the mountain and someone shows up like three or four days late and you go oh this

isn't good I can't have this okay from now on I need everyone to give me a daily status report so I know in advance if this problems and every person goes oh status reports okay and now everyone shows up on time but then someone shows up and they spent too much money and you go oh I can't have this okay everyone I need to pre-approve all expenses over $5,000 and all these people who you're counting on to be responsible you're treating them like an infant you're going I'm giving you this you have a $10 million

quarterly sales nut but I don't trust you to make a decision about what type of Hotel you can stay in or what money you can spend to achieve come on treat me like an adult that's free and responsibility is I I'm going to treat you like an adult but most companies do is they put these guard rails in place to keep people from making errors of judgment and the Netflix experiment is simply is rather than building guard rails to protect ourselves from people with bad judgment let's build a culture where there are no guard rails

and only hire people with good judgment and that's sit in a nutshell and you know I'm sure you you've seen the deck but you know you know what the travel policy is there there isn't one you know the expense policy is there isn't one you know what the vacation policy is you know there isn't there aren't any policies the policies are all summed up as use your best judgment that's freedom and responsibility now that only works if someone has the judgment to be treated that way so you have to to be diligent about saying if

you don't have the judgment to be able to make decisions effectively you shouldn't be here but it turns out there's a magic to this I worked for a big multinational software company back when I was doing direct response marketing and um we had a big competitor with like Microsoft and we had a big corporate campus and it was beautiful had tennis courts had squash courts it had a big Health Club really wonderful Cafe an Olympic swimming pool and a hot tub and one day myself and Patty McCord who was the HR person at Netflix we

were walking back from lunch and we saw some of the engineers in the Hut tub and we swung by to say hello and as we got close to the hot tub we could tell they were all bitching about the company and we thought it was pretty funny that here they are sitting in this magnificent hot tub at the the company complaining about it but it triggered this conversation which is if it's not the amenities that make people want to work someplace what is it and the answer is it's not the fireman pole and the nap

pods and the kombucha on tap or any of the other ridiculous thing that people throw at it's they want to be treated like adults they want to have agency in their life and in their jobs they don't want to be told what they can and can't do they want to be given a clear responsibility and given the freedom to achieve it and that is such a huge unlock for Netflix it's more important than how much you pay someone it's more important than almost anything I have been through this so I my first business started with

the same set of polic policies and rules especially as it relates like holiday so we've always had unlimited holiday even in the company that you're in you you're part of now the 40 people that work for the ders now we have un limited holiday what I came to learn interestingly over time is that the reason you end up changing these rules is because 5% of people it's really like just a few people that don't exercise the Judgment you're talking about so what you end up doing is going okay well I have to change a rule

for everybody because of this small group maybe three or four people that can't seem to execute really great judgment and and it's funny cuz I found myself at one point several times over my career going right okay we have to get rid of the unlimited holiday because Tom and Dave and Nigel of 200 people in an office can't make fair and responsible judgment and it's kind of just dawned on me as you speaking what what I actually need to do is just address the three people you need to fire those people you're going to you're

going to go the opposite way you're going to start looking at all the other policies you have and go I'm going to take get rid of those too I'm going to get rid of and little by little but again it's only if that's you it has to match how you want the company to feel it can't be artificial no it is it's always been because I've the reason why I'm an entrepreneur is because I'm impossible to employ because I'm I hate jobs so I tried to create a company where I would want to work in

which means that if you show up late good because I'm probably going to be late too and but the maybe the reason I was late is because I was working late on something and that actually doesn't matter so what time you arrive doesn't matter it's you know cuz responsible people someone like Jack you haven't got to tell Jack when to work Jack is so focused on the mission Jack will figure out when he needs to get how and when he needs to get his job done um and you don't end up making the rules for

people like Jack job at Netflix for you no but he's one of those people because he's like a Founder here he like founded this thing with me so we have that kind of mentality but yeah you're right you end up making it's so interesting it is it's it's it's all about taking down the guard rails and and what happens is taking the guard rails down great means those three people can't work here but it makes the other 97 really want to work there it makes other people because most places don't do that it's like uh

doesn't make it I don't care when you work I don't care what hours you work I don't care whether you're home or in the office I do care that once we've agreed what responsibilities you have that you achieve get those things done and if you can do it in six hours a week because you're so smart and talented all power to you the last thing I wanted to talk to you about is actually something that I read on on LinkedIn which went viral which was you talking about your relationship with your wife and your commitment

to date night on Tuesdays right the post went viral because I think it struck a cord with a lot of people who have really burnt themselves out because of their job what is that principle you have with your wife and how long have you kept it for so right when I was you know in my late 20s I was working like a dog I was working all the time nights weekends and not cuz I had a slave dropper boss but because I CU I loved what I was doing I just was totally into it and

I was in a relationship at the time with the woman who's now my wife and it kind of slowly dawned on me perhaps with a little bit of help from her that this wasn't as satisfactory for her as it was for me and it kind of made me realize that if I really wanted to have a sustainable long-term relationship I had to uh figure something out and that I realized that I had to have more balance in my life uh and we began this policy of saying I'm not I'm going to prioritize my relationship with

my girlfriend and who's now my wife and that has taken a lot of forms but the one that I referred to was I had this policy at Netflix before Netflix after Netflix that every Tuesday uh I'd leave work at 5:00 sharp my wife would get a sitter or before we had kids we' just go out and we'd spend the evening together had a date night and this was sacren that I don't care what's going on I'm leaving at 5 um if there's a crisis we're going to wrap it up by five if you have to

talk to me well we're going to talk in the way to the car but I'm leaving at 5: and um it was kind of remarkable because after a while uh crisis stopped happening after o00 on Tuesday and all of a sudden people were able to solve their own problems uh after 5:00 on Tuesday but there was a secondary benefit which is that I did talk a lot about the importance of balance that I didn't want this to be all encompassing that there were other aspects to what was important everyone's lives and by modeling this I

was walking the walk I was showing that in fact um you could run a company and have a relationship and it wasn't easy this is a startup so a lot of times you know i' have date night we get back late and I'd have to go back and into the office at 10 o'clock or uh a lot of times I'd come home have dinner with my kids go back and work for a couple hours but I carved out the time to be present and do those things and in my life um it's maybe even a

bit more challenging a startups are hard and I have a family but I also have this passion for outdoor stuff you know I love Backcountry skiing and climbing and kaying and mountaineering all this stuff that's really hard to do between your five o'clock call and your 7 o'clock meeting so I had a really structure my life in a way that I could have meaningful time in all three of these areas of my life and it's been really really hard was there a risk of losing the relationship at some point yeah probably when I was in

the my right that that point when I was 2930 where am I I was becoming clear she was going I'm not going to put up with this you know if you're not going to be here for me what's the point how did you take that at first very sobering I mean it really makes you think how important is this to me um and I know some people might say it's not that important my what my work is the most important thing it's the only thing that's important to me I decided otherwise that um that having

a relationship was important to me and more importantly that I thought it was probably possible that I could do both um again it's part of the running not running for planes it's saying I don't need to be there all the time I can prioritize well I can um uh distribute work to other people I can make this work and not only that not only can I do the work and have the relationship with my wife and my family I can get out and do outdoor stuff which is what I need to make myself whole and

listen this is a great way for me to wrap this in a way but you know I've had a amazing entrepreneurial career as I you know I've had six seven companies depending upon how you count it I've had a three IPOs you know two multi-billion dollar companies so proud of that but um way more proud of the fact that I managed to do all that while staying married to the same woman while having my kids grow up knowing me and as best I can tell liking me um and still getting out to Backcountry ski mountain

bike uh and all the things that I need to make me whole and that I'm proud of in the grand scheme of your happiness you've got your business Endeavors you've got your fantastic relationships with your wife and your family what does matter more oh it's a trick question I mean it's so I guess I'll answer in the counterintuitive way way you need all three you know I I think had I said had my wife said some ultimatum like I need to quit and you know you were going to move to Montana and you're going to

be a mailman and and we'll have a great I would have been unhappy and I mean I've had a great relationship but she knows that she knows I can't turn this off I can't turn it off there's something about seeing problems and wanting to fix them and having to pick one and say that's all I'm going to do that's no life either um that's why I think you know again before we started you said what do you what's your big focus and I said balance uh I think about it every day I think about it

every week they're all important and I do what I have to do to make that happen Mark we have a closing tradition on the podcast where the last guest leaves a question for the next guest not knowing who they're leaving it for and the question that was left for you is what in your life were you most wrong about and what did you learn from it uh so one of my big regrets is I mentioned before that I had all this Magazine subscription experience uh I knew circulation I knew the subscription business and it took

me more than almost two years to figure out that maybe we could use this stupid thing for Netflix and I think of all the time and all the money that we wasted because I never even occurred to me to try that and God I wish I could kick myself and go back and say for God's sake try this sooner try this sooner hindsight's a wonderful thing it is isn't it and it fills you with wonderful lessons and wisdom and all of that wisdom has been encapsulated in this wonderful book that will never work in various

ways as you go through the Journey of founding Netflix but also the life that's lived in amongst those pages it's one of the most interesting fascinating Timeless books I've read because it's about true principles the true principles from your father from your journey and from everything you've learned along the way so thank you so much for writing such an incredible book Mark um I'll link it down below it's called that will never work the birth of Netflix and the amazing life of an idea and thank you so much for the work you do for entrepreneurs

across all your social channels across your your work and your mentorship because it really is um looking back down the ladder and helping pull other people up with your wisdom and that's an incredibly incredibly generous thing for you to do so thank you so much Mark thanks Stephen [Music] oh [Music]