Netflix is today a company whose valuation hovers around $130 billion, but it was, of course, once a little startup, and in his new book “That Will Never Work,” Netflix’s co-founder and its first CEO Marc Randolph takes readers on a fun and surprisingly vivid journey through the streaming giant’s earliest days.
It’s also instructive, though this is more memoir than business book, and Randolph, who is the great nephew of Edward Bernays — a public relations pioneer — turns out to be a very compelling writer, explaining in sometimes humbling detail how and why the company eventually outgrew him, and the reason he doesn’t regret stepping away when he did.
In fact, rather than lament past decisions, Randolph seems to relish his longtime work as a startup advisor, one who often has no financial ties to the companies he helps. As he explains it, there is a “role for someone in a founder’s life who isn’t a board member or an investor or an employee. The role of a founder-CEO is extremely lonely. You can’t always be fully forthcoming with your board or investors or employees. And if you go to your peers and you bring them an issue, they don’t really understand. So it’s very valuable for a founder who doesn’t have an ulterior motive but also understands a problem well enough that they can give really good advice.”
We had a chance to catch up with Randolph earlier today to discuss the book and his current relationship with his Netflix co-founder Reed Hastings, who he met when the company that Hastings began running in 1991, Pure Atria, acquired Randolph’s company, Integrity QA Software, (They both found themselves searching out the next big thing when Pure Atria was itself acquired.)
Randolph also shared why it took him 16 years to tell his story about what has become one of the most impactful companies in the history of television.
TC: We’re still zipping through the book but there is a lot of great storytelling here, from scenes with you and Reed carpooling to the office together, to some of earlier startup ideas you ran past him and he didn’t think much of, including customized baseball bats. Did you write this alone?
MR: Of course, I had help, you can’t write about something as important as Netflix by yourself. Over the course of one-and-a-half years, I spent tons of time on the phone and [engaged in] email correspondence and in meetings with everyone I could track down, because I wanted to hear all those stories again. But this isn’t a ghostwritten book and it’s not a as-told-to book. I did write it with the help of a great editor. In fact, the book was originally conceived as more of a self-help book, but my editor came back and said, “You shouldn’t do this as a ‘you’ book. Make it a ‘me’ book. Make the lessons you’ve learn over your career implicit instead of explicit.”
But I’ve been writing all my life. I was a direct marketing guy [before founding Netflix]. I had to restrain myself from writing things like, “Frankly, I’m puzzled,” and “But wait! There’s more!”
TC: You left Netflix in 2003. Why not write a book sooner?
MR: I needed to wait all that time. Even though I needed to tell the story, I didn’t really understand the lessons. It has taken me working with other early-stage companies and mentoring them and investing in them to make these connections. Why did Netflix work? What were my failings? What could I have done better?
TC: You’re pretty candid in the book about not being punctual and not having great attention to detail, but these are minor offenses.
MR: Yes, and Netflix was my sixth startup so I’d figured out how to address those things by relying on the people I work with. But there’s a part of the book where we’re raising our Series B and the pitches aren’t going well. Reed, at that time, was my largest investor and the chairman of the company [having written the company its first check], and he was coming with me on these pitch meetings and reviewing the financials, but he wasn’t actively involved in the company.
Then, one evening, while I’m sitting at my desk, he pops his head in and delivers those words that no one wants to hear, which is, “Marc, we need to talk.” He was worried about errors in judgment, errors in [my] financial management. These are things you don’t want to hear because you’re thinking, “I’ve got this.” I began thinking that maybe he wants to can me. Then, I realized what he was proposing: that maybe we run the company together, that he be the CEO and I be the president and that we split things. And that was really hard. This was my dream, to be the CEO and to make this company successful.
But what this very honest conversation made me realize was that I could either pursue the dream of me running it or the dream of this company being successful. And I realized that the dream wasn’t mine anymore. There were people working weekends at that point and busting their tails and it was their dream and it belonged to our investors and customers, too. And I realized that he was right, that it would be stronger if he were CEO. Later, sitting on the deck [of my house] with my wife, drinking a glass — well, a bottle — of wine, I knew it was the best thing to do.
TC: This is a memoir, but you do manage to convey many learnings, including to distrust epiphanies. Why? It seems that after cycling through various business ideas, you knew you were onto something when you sent Reed a CD of Patsy Cline’s greatest hits and it arrived undamaged.
MC: Epiphanies are short-hand for the emotional truth behind an idea, but the reality isn’t so simple. On the one hand, there was this guy (me) who’d learned all about subscription marketing and personalization over his career and shipped a million things using the U.S. Postal Service. Then you had this other guy who was really good at algorithms and who really understood software (Reed). Then there are the other people who worked at video stores. And it was by mixing all these pieces together that the idea began to evolve. And even then, people said, “That will never work,” and they were right.
TC: Were they?
MC: They were right that my first idea, mailing out VHS cassettes for people to rent and return, would never work. But even when we [focused on] DVD rentals and we first launched the site, no one came or, if they rented, they never rented again because we had due dates and late fees. The only innovation at that point was that we were an online store, so we had many more DVDs available to rent [than a single Blockbuster store] and in 17 or 18 locations versus one. The innovation stopped there. If you didn’t send your DVD back to us in time, we dinged you for it. It took one-and-a-half years for [us to offer] no due dates, no late fees, subscriptions to a list of movies in a queue so when you returned one, another came.
TC: Early in the book, you tell readers that when Reed wrote that first angel check, you were diluted meaningfully, even while you explain that this was fair. Why was this important to address straightaway?
MR: I wrote that to be instructional. People say things to me all the time. “You must be so upset or bitter.” And I go, “No. A smaller piece of a much bigger pie is the nature of the game.” In the book, I wanted to walk people through this using the simplest example I could [to highlight] what dilution means.
Now, there comes a point where there was a more complicated version of me giving back stock, and that one is more emotionally complex. But people thinking about money left on the table are missing the point. I was never in this for the money or to be famous or to be on “Shark Tank.” I always did it, and still do, because I love solving problems with really smart people. It’s not about the stock or valuation or your percentage of a company. I’m the luckiest guy in the world because I’ve gotten to see this dream come true, and I’ve gotten to work with scores of other early-stage entrepreneurs to help realize their dreams.
I have an amazing life and it would be absurd for me to be bitter because I didn’t make more money.
TC: You left a year after the company went public in 2002. Why?
MR: I was a startup guy. I just happen to have this weird set of skills [that are impactful at] really early-stage companies, I’m really good at sensing what are the two or three things that if I get these right, the other things don’t matter. I also love the puzzles of early-stage companies. I love the teams. And Netflix, after the IPO, was on a different course. It was no longer a startup. We had hundreds upon hundreds of employees. I realized that even though I loved this company the way you’d love a child, I was no longer enamored with what I was doing there and I was in a place to choose to do what I really enjoy.
It took me a year or two to put together a model that works for me, mentoring other early-stage companies, but I still get to do that and sit with really cool people and I still get to go home at five o’ clock, which is also nice.
TC: Did you ever consider launching a traditional venture fund?
MR: Some of my friends are VCs, but it’s a very different personality type than me. I’m too hands-on. It’s very frustrating to me to go in, give advice, then come back a few months later and see what happens. That’s why I can only mentor a few companies at a time, because I really go in deep. I know the founders, the co-founders, the employees. I can give really informed advice.
Also, there is a role for someone in a founder’s life who isn’t a board member or an investor or an employee. The role of a founder-CEO is extremely lonely. You can’t always be fully forthcoming with your board or investors or employees. And if you go to your peers and you bring them an issue, they don’t really understand. So it’s very valuable for a founder who doesn’t have an ulterior motive but also understands a problem well enough that they can give really good advice.
My model is: I won’t invest in the same companies that I mentor. I won’t serve on the board at the beginning. I don’t want to be conflicted. If a founder asks, “Should we raise debt or equity” or “What about these terms?” I want my advice to be fully untainted.
TC: Do you still talk with Reed Hastings?
MR: All the time. We live in the same town. Our kids go to the same school. We [are in the same social circles].
TC: Do you talk about the company’s current battle to beat back the competition?
MR: All the time, though I can’t talk with you about that.
TC: Then what do you make of these streaming wars and the risk and opportunity they present for Netflix?
MR: I see the streaming wars as incredible validation for this crazy idea that no one, including my wife, thought would work and that has now really changed television. I think what’s happening is great for people who deliver content and people who create content and people who consume content. I don’t watch just Netflix, by the way. I didn’t boycott (HBO’s) “Game of Thrones.”
TC: In the book you mention that one of your three kids moved to San Francisco recently to start a company. Would you like all your children to be entrepreneurs?
MR: I’d be delighted if any of my kids chose to be entrepreneur if they were doing it for the right reasons. If it’s to be rich and famous, those are the wrong reasons. If someone is coming out here [to the Bay Area] for the parties and the pitching and they think they’re going to make a lot of money [that’s a mistake].
When our oldest son said he wanted to give it a shot, I said, “That’s great, but I want you to come out here first and intern for a startup — not Facebook, not Google, but a tiny company with a great CEO. And I want you to work in any role that you can so you can see what a founder does every day. And if you like that, then do it.”
He spent a year with a four-person team, sitting next to the CEO and watching [the CEO] grinding away, testing things, abandoning things, and that lit him up. Then I knew.
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