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Before the idea of Netflix took hold, Marc had a thousand ideas from personalized shampoo and surfboard to dog food. Reed, a friend and former investor of Marc who he’s carpooling together, got in the way however, warning him customizing a unique product for every customer is too difficult. And it never gets easier. But he and Reed had to sell something. They want something that can scale, and something that people use over and over again. They wanted something that already exist and take it to sell online because Amazon has proven the potential of e-commerce.

I had no idea what would work and what wouldn’t. In 1997, all I knew was that I wanted to start my own company, and that I wanted it to involve selling things on the internet. That was it. It seems absurd that one of the largest media companies in the world could come from those two desires. But it did.

– MARC RANDOLPH

Eventually, the idea of selling VHS online was born. But it had some serious flaws. First they have to buy the tapes. Plus they have to pay two-pay shipping. Plus when people want the movie, they want it now. Plus, it’s easy to forget how much VHS tapes used to cost.

After crunching the numbers, the team realized it will take 80 rents for them to even break-even. What’s more, they couldn’t rent a title for more than 4 times a month, and chances are the title wouldn’t be a new release anymore by the time they could make some money. Worst, they’re still competing with the industry Goliath, Blockbuster.

On the bright side, movies by mail could work if and that’s a big if, DVD become a popular format. VHS by mail is dead. But DVD by mail has a glimmer of hope. But they needed to validate the idea.

When you’re starting a company, you’re getting other people to latch onto your ideas. You have to convince your future employees, investors and business partners that your idea is worth spending money, reputation and time on. You do that by validating your product ahead of time. You build a prototype, you create a product, you measure traffic or early sales, all so that when you go to potential investors palm out stretched you have numbers to prove that what you’re trying to do isn’t just an idea, but exists and already works….

– MARC RANDOLPH

 

Test the idea and take a calculated risk.

To test whether a DVD would get damaged in the mail, Marc Randolph purchased a music CD from a store and mailed it to Reed Hastings’ house in Santa Cruz, California. The CD was dutifully delivered unharmed a day later, which was validation the idea could work.

 

Startups are risky enough, you don’t have to invest both your time and money.

Having decided the DVD-by-mail idea was worth pursuing, Reed and Randolph came up with a $3 million valuation for their new company, which they would structure as 6 million shares, each worth 50-cents.. They figured it would take about $2 million to get the company off the ground so Reed Hastings agreed to put in the money in exchange for another four million shares. So by the time Netflix was formed, Hastings had 70 percent of the company’s shares in exchange for contributing $2 million and Marc Randolph had a 30 percent shareholding.

 

And check ahead of time whether people love your idea.

As it turned out, Reed Hastings didn’t end up putting $2 million into Netflix. He decided he wanted to check other people thought the idea had merit as well, so he decided he would contribute $1.9 million in seed capital as long as Marc Randolph could raise $100,000 from other people. That proved to be very hard work, but in the end Randolph managed to get more investors to put in $100,000. His last investor was his mother who agreed to contribute $25,000.

 

Come clean and fix things when you screw up.

When President Clinton’s testimony was released, Netflix cashed in with an offer of next-day delivery of that video for 2 cents. However, some customers were shipped pornography instead of the testimonial. It was a big bet and a big miss, for which Netflix came clean, apologizing they’ll mail the correct title instead. Ironically, not a single DVD was returned.

 

You won’t get far without accepting your shortcomings, and letting someone step in.

Reed expressed concern about Marc’s strategic judgment and financial instincts and proposed to take over as CEO while Marc becomes the President. Marc agreed that he had to let Reed take the reins to do what’s best for the company. This partnership would significantly improve the chances for Netflix’s success.

Radical honesty is great until it’s aimed at you.

– MARC RANDOLPH

 

Hire HR to preserve and encourage a culture of ‘Freedom and Responsibility’.

Patty McCord, Netflix’s Head of HR, designed processes that encouraged freedom and fostered Netflix’s unique culture. She pioneered concepts – such as unlimited vacation days – that redefined the field of HR.

 

Big boys are not your enemies, until they turn down your partnership, sorta.

Amazon made an offer to acquire Netflix but neither Reed nor Marc was ready to sell. They knew it was only a matter of time before Amazon began selling DVDs. So they came to an agreement. Amazon would refer renting customers to Netflix while Marc offered to redirect customers to buy on Amazon. It turned out that Netflix was referring way more than it was receiving referrals. And eventually the partnership fell apart.

 

Innovate your way through your problems.

The decision to stop selling and focusing on rentals inflicted heavy financial loss on the company over months. If there were thousands of DVDs lying idly in a warehouse, the team thought, why not have them on customers’ shelves? A monthly subscription model would allow customers to rent a few discs at a time for as long as they wanted. They could return a disc and have the next one mailed to them. In a single stroke, this made Netflix a more accessible way to watch movies than driving down to the nearest Blockbuster store.

People loved the idea of a one month trial, even more instant gratification. 90% of those who clicked on the subscription ad provided credit card information. Sign up rates improved dramatically. The bottom line is Netflix cracked the rental problem with a monthly subscription model that allowed customers to rent discs for as long as they wanted.

 

Be willing to say no and leave money on the table, to focus on your core competency.

Focus is the key weapon of an entrepreneur. The story of Netflix is one of unflinching willingness to abandon parts of the past to make way for the future. Netflix shut down à la carte rental to focus on subscription. They called this the Canada Principle, which came from the idea that, while expanding into Canada could be a seemingly easy and profitable idea in the short term, but could be distracting to the business, dilute its focus, and endanger long term growth.

 

See the world through your customer’s eyes.

Netflix’s goal was to help people find the movies they love. But finding movies on an online store was difficult. Reed and Marc found a way to recommend movies based on the user’s viewing history. The problem was that there were endless factors that existed in establishing similarities between films. So they tested a new algorithm that would make recommendations based on common renting patterns between users. Users can now review movies and the recommendation engine would make predictions on the basis of these qualitative reviews. Talk about legendary Netflix’s crowd-sourced recommendation algorithm.

 

People are not your most important assets. The right people are.

By September 2000, Netflix was worth $100 million and shipped over 800,000 discs a month. Then the Dot Com bubble burst. The company had a rapid burn rate in an environment where funds were difficult to come by, so it had to survive on its own strength.

For many startups, the focus and creativity of the initial team get it off the ground, and growth brings more hiring. Then the team size contracts and skilled generalists are replaced by specialists. Netflix dropped nearly 40% of its workforce. Though painful, it retained top-notch employees to create competitive excellence.  The benefits are twofold. First it gives the remaining team a feeling that they’re one of a few elite members still coming to work. Second it attracted other top-notch talents in the valley.

 

When the dust settles, take a step back and enjoy the sunset.

The Netflix that Marc loved to lead was a small startup with people who tackled a grand challenge. Randolph was able to identify core issues, inspire employees, and make his idea a reality. As the company grew and was no longer that same startup, Randolph knew it was time to leave. Today, he mentors startups as a CEO coach.

Randolph wanted to sell some of his Netflix stock when the company went public. To not create panic, he downgraded his role to Executive Producer and Hastings became the face of the company. When Netflix listed on the NASDAQ in May 2002, the share price was $16.19. The dream had come true, and Randolph’s life was changed forever.

 

Everyone has an idea, but a few takes time and commitment to turn it into reality.

The only way to know if an idea is good is to build it, test it, and sell it. As Nolan Bushnell, Co-founder of Atari, said, “Everyone who has taken a shower has had an idea. But it’s the people who get out of the shower, towel off, and do something about it that makes the difference”.

You’ll learn more in one hour of doing something than in a lifetime of thinking about it.

 

Additional Insights

Most companies don’t keep the same name from ideation to funding to launch. Names are important and sometimes it takes forever to find. Amazon was originally called Kadabra. Twitter started off as Status. You have to allow for serendipity for the right name to come along as you develop your service. Sometimes that takes months. But in the meantime, you typically have the beta name as you use to test your site, setup email accounts and write on bank documents. Some founders choose a name so bad that it’s not possible to use it for real.

 

You want a name with minimum syllables and letters. You need something catchy, something easy to remember. The emphasis should be on the first syllable. Like Google, Facebook. Those names open with the bang.

 

Marc response to a manager asking him if he can work 2 days a week out of town

I don’t care where you work, when you work, work from Mars I don’t care. It makes no difference to me. But if you’re really asking me is to lower my expectations on you so you can spend time with your girlfriend. That’s an easy answer. No.

Where and when you work is entire up to you. If you can run your group effectively on 3 days a week in the office, all power to you. Go ahead. I’m envious. I wish I’m smart enough to do that. Just remember you’re a manager. Part of your job is making sure your team know what you want them to accomplish and why it’s important. Do you think you can do that without being around?

 

Nobody knows anything.

According to Goldman, those three words are key to understanding everything about Hollywood. Nobody really knows how a movie will do until after it’s already done. For instance, how is it possible that you can have a film directed by an academy award winning director Micheal Tomino, starring best actor academy award, Christopher Walken with the can’t-miss script with 50$ million budget and end up with Heaven’s Gate, one of the biggest Hollywood flops of all time.

On the other hand, how can you have a film with a first time director, a handful of amateur actors, no script at all and a budget under $5000 and end up with Blair Witch Project, which after grossing more than 250$ million, is one of the most successful independent films of all time.

It’s all because of a simple explanation. Nobody knows anything. It’s not just in Hollywood. It’s true in Silicon Valley too. Nobody knows anything is a reminder. If nobody knows anything, you have to test yourself. You have to trust yourself and you have to be willing to fail.

 

Silicon Valley brainstorming sessions always start with ‘There’re no bad ideas.’

Marc disagrees. There’re bad ideas. But you don’t know an idea is bad until you try it. And Netflix shows sometimes bad ideas have a way of becoming good ones. Marc knew the idea of Netflix could work. But nobody ever knew how, until it did.

 

Marc didn’t give credit to his intellect but rather to his tenacity for Netflix success.

NWAir knew that being an account executive is a selling job, turning a no into yes type of job. So, they said no to all candidates. And Marc was the only candidate who hadn’t taken no for an answer. It’s also true with his tenure at Netflix. For instance, Blockbuster passed on to acquire Netflix. Microsoft refused to partner with Netflix. But he insisted to give in because he knew some time someone would.

 

Opening day bounce

If Netflix set the price too high on IPO, the public interest will drop, and they will miss their $70 million target. Set it too low, and they leave millions on the table. Another complicating factor is given the choice the bank didn’t mind the price that was too low. Part of the reason the bank fought so hard for a deal with Netflix above and beyond the big commission was an opportunity to give their best customers an opportunity to buy low at the opening and sell low at the closing. Banks call that an opening day bounce.

A bounce is not necessarily a bad thing. A quick jump in price can show the public that their company is hot and it has momentum. But if somebody is going to make a ton of money on day 1, Marc wanted it to be Netflix, not the bank customers. They wanted a healthy bounce, but they didn’t want being launched off the trampoline.

 

Happiness exists on the totally different axis than Money.

Marc grew up around fabulously wealthy, fantastically miserable people. You can spot them a mile away. Impeccable loafers, beautiful bespoke suits and empty half smile on their face.

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Kyaw Wai Yan Tun

Hi, I'm Wai Yan. I love designing visuals and writing insightful articles online. I see it as my way of making the world a more beautiful and insightful place.