That will never work. Mr. Randolph, where did the idea of netflix come from . Guest ideas come from the strangest places, in that will never work i talk about this crazy idea we had and all places carpooling. My cofounder Reed Hastings and i were commuting back and forth to work brainstorming ideas and one of these crazy ideas we had in that ride was maybe we could do video rental by mail using dvds. Rather than rushing home or writing a Business Plan and doing a powerpoint slide show, we decided we would try and take the first step to validate that i did, if turn the car around, drove down to santa cruz will be both live. I went to used music store and bought a little music cd. I think it was patsy cline. We went next door and bought a little gift envelope like you put a greeting card in. We put the cd in mailed it to his house and the next day when he picked me up he had an unbroken cd and envelope that it got into his house 24 hours for the price of the firstclass stamp. If the wasnt aha moment i think that was it. Host to where were you carpooling . Guest read was the founder of a Company Called pure atria which was a big geeky Software Company acquired a softer cover that i was working at. I went to work for him and we spent about nine months working together and as luck added reed and i and i live in the same town so we spent those nine months carpooling together. And then lightning struck. Pure atria was going to be acquired in both reed and i were going to be out of a job and i decide this is perfect, im going to start my next company. Reed wanted to keep a hand in this entrepreneurial thing and so we agreed i would start it and run it. He would be on the board and he would be the biggest financial backer and all we needed was an idea. That led to those crazy car rides we brainstorm everything you could think of. Host where did the title come from . Is that a quote from your life your from your wife . Guest that is a quote from my wife but also quote from the 10,741 of the people that i told that idea too. I think everyone has had that experience where you come rushing in the kitchen and just some great idea to tell your spouse or your Comedy Office with a great idea, and everyone says that will never work. In many ways this book is about the process of taking an idea that no one thinks will work, that my wife said would never work, some of inexplicably turning it into a company which is change the way we watch television. Host before we get into the reasons netflix will never work, theres some lower about the founding of the company and a late fee. What is that . Guest well, people like epiphany moment. They like to the moment that it all became clear. They want newton under the apple tree or archimedes in the bathtub. But the reality is it doesnt happen like that. So of course its been said that all originate with a late band movie and yes, it was a late fanta movie but also some have spent many, many years doing subscriptions. Someone else had done a lot of personalization, somebody else who had lots of experience with computer algorithms, with building websites. We had tons of people who each contribute little bits but when someone asks where the idea come from . They dont want the 310 page book. They want the quick soundbite. In many ways that is what that will never work is about. It is the untold story of netflix. Host were talking 1996. What were the reasons that this was never going to work . Guest so theres lots of reasons everyone told me that will never work but probably the first was the obvious one, is if i was going to do dvd rental by mail admit i was going to be mailing addicts to someone and they would get it two days later us and keep it for a number of days and mail it back. People said thats crazy. Why would anybody wait two days for a movie when they can go to one of the 9000 Blockbuster Stores . The other recent though and perhaps the one that really got into our way at least when it came to raising money was that everyone believed this is a digital format. It was just a matter of minutes for everybody was screaming for downloading. And, of course, Reed Hastings and i knew this was true, that eventually people would be downloading or streaming movies. We just didnt think it would happen quite that quickly. The challenge was how do you build the company which is appropriate now when its impossible to stream or download something . But but i would be in the right place so when that time came along we would be ready. And it took almost ten years before netflix transition into, got into streaming. Host those first few days of the company being online, what was that like . Guest well, that will never work in some ways is a compendium of all the screw ups, all the disasters, all the missteps, all the times we almost went out of business here and youre correct, we had our very, very first disaster in day one. We had spent six months building the simple ecommerce website and we were so excited. This is the moment we were going to go live and we set up a computer in our Conference Room and rigged it up so a bell would wring every time an order came in. And at 9 a. M. On april 14, 1998, our cto hit 50 keys and we were live. It didnt take long and look at that first ding and we cheered and would begin opening bottles of champagne, fn two or three minutes later, ding, ding, ding three more orders and we were so excited at the we cut to more orders and in all the excitement we kind of lost track of things until suddenly noticed that its been a while since the bell had rung. Is there a problem . It turned out in the first 15 minutes of being online with crashed all of our servers. Host so what did you do . Guest so instead of me remembering that day toasting my success with champagne, my memory of april 14 is being at a computer superstore pushing the shopping cart while our cto pilot in all the components we used to live along that website, that first come long day. We had a pool about how many orders we would get in people said ten, 30. We ended that first day with 107 orders, which astounded me. That was my whole first month forecast. But now looking back at 107 orders, that seems pretty trite considering where we are now. Host you spent quite a bit of time perfecting the mailer that netflix used. Guest netflix as i mention took ten years before we got to streaming, which means we were mailing dvds to people. We had to go through the post office that and we had to do ia firstclass stamp and we had to do it in a in a way that didnt mangled or broken or put off to the side. Turns out devising the simple envelope they can also double as a return envelope was a real work of art. We spent hundreds of hours perfecting it, and i couldnt get my mind off it. I dreamed about little red envelopes, and there was one time i remember coming into the office probably ten at night and walking in just to get something and passing a stack of envelopes and this idea struck me. Before even knew what i did, i ran it to my car and get something my wife and i called the restaurant bag here this was the collection of all the tools and toys and tape and staples and crayons that you would use to keep three kids under five abused at a restaurant. I remember pulling this thing open and pulling a paper and tape and markers and reconstructing this in the loop in about two or three hours that night. In handy get off to our Warehouse Manager on way out the door saying all right, give this one a try. Host when netflix first went online, you were mailing these by hand, correct, people were packing them by hand . Guest absolutely. At the beginning it was pretty scrappy. You have no money. We had this tiny little office. We had the smelly green carpet. We had the warehouse being stored in an old safe, and not because of we were scared of it being stolen. This happened to be an old bank and we had used every single square foot we had. We didnt even a furniture. People were bringing in beach chairs and i remember one time my wife came in after dinner when one time coming in to give me and she looked and said wait a minute, are those our dining room chairs next i mean, we were doing everything we had to. So packing dvds by hand was the least of it. Host who funded netflix to begin with . Guest you know, Reed Hastings turned out this is the understatement of the year turned out to been an unbelievable partner but perhaps the most important thing is reed with the first person who really believed in this idea. He was the first person who did not say that will never work. Reed wrote a check for 1. 9 million. You want me to check. He handed it to me and i remember going, oh, my gosh, this is the biggest check ive have her help in my hands. And i took it down to our local wells fargo branch, just a region one, and i remember standing in line with this check wondering whats going to happen. Is the person behind the counter going to hit a little buzzer and then the manager of the bank will come out and bring me back and certain champagne . But it was kind of an anticlimax i headed for the check and all she said was due you want in cash back with that . But reed was 1. 9 million of it but i had to go out and ask other people. I had to ask my mother. I had to ask friends. Theres a reason these are called the friends and family round. Host whats the role of a Venture Capitalist, and is there a negative side to that . Guest Venture Capital is the essential fundraising mechanism that is used in Silicon Valley and pretty much in place people are doing startups. These are people were willing to invest money into business. They are not loaning the money. They are investing the money and doing it under very long odds. The reality is when people say that will never work, most of the time they are right. But a Venture Capitalist is going to take a chance that night at a a tape investments y make are going to fail on the off chance that one of them succeeds. You mentioned is there a dark side to it, and in some ways maybe its not a dark side but you have to know what youre getting into. Because when he Venture Capitalist gives you the money, in fact, Venture Capital is essential in starting and growing netflix, but they are not doing it because they really like the idea and want to see you succeed. Although they do. They are doing it because not only do they expect their money back, they expect their money back times ten and so once you are in that game, you are all in it for the long game. You cant go to them and say, i think ive had enough. No, your commitment is you will do Everything Possible to make sure their investment pays off. Host in your book that will never work you write that check is a true meritocracy. Guest its one of the most wonderful things about tech is that the foundation of tech is coding. Its computer code. Computer code is remarkably transparent. And theres a principle among coders called peer review. You ask one of her peers to sit at and reviewed with you. It doesnt make a difference what you look like. It doesnt make a difference how you dress. It doesnt make a difference what time of the day got to the office and when you leave or even what you smell like. Its all there in the quality of your code, and that ethos has permeated Silicon Valley. We certainly are the beneficiaries of it and that certainly i wouldnt know a line of code if he wrapped it around my neck, but we all get a chance to recognize we can be casual. We will be judged by the quality of her work which is a tremendously refreshing thing. Host april 1997 netflix went online. At what point did you feel financially secure . Guest well, one of the essential ingredients for being an entrepreneur is you never feel secure financially or otherwise. Certainly in terms of the otherwise peace, its inherent in a startup that you struggle, you claw and climb your way to the top of this first deal and uclass in heat when you finally made it only to catch a breath and look up and see and neither bigger hill in front of you. When we start netflix, our goal was to make as as a single blockbuster. 750,000 a year. We hit that goal actually in the first two or three months but then you look up and say, there are 9000 blockbusters. Once we passed blockbuster theres hbo and is comcast and theres amazon. It is never ending. So part of that is recognizing you can never sit back and say we are done. And economically ive never been someone who is motivated by how much money i have. Thats not the point of this. Its the fun of coming into room and sitting down with really smart people and solving really interesting problems. And that i can never get enough. Host at one point blockbuster wanted to buy netflix, is that correct . Guest that is true. One of the most critical things that i advise earlystage entrepreneurs or infect anyone with the business is you cant run out of money. Because then its game over. We had a point this is in 2000 so the company was about two and half years old, and the good news was we were on track to do about 5 million of revenue. The bad news is we were on track to lose 50 million getting there. You dont need to be a financial analyst to understand thats not sustainable. So we decided to do this thing that all prudent entrepreneurs do. Which is called pursue strategic alternatives, which is code for we have to sell this sucker. Our office strategical alternative was blockbuster, but we were 5 million in sales. They they were 6 billion in sales. We were probably at the time 300 employees. They were 60,000 employees. We tried getting this meeting. Nothing. As luck would have it they finally called us for meeting and we were on this corporate retreat in Santa Barbara in the mountains. And we flew from Santa Barbara to dallas for the meeting, but because we were on retreat and because of that casualness, i was in shorts and a tshirt and usher us up into this huge Conference Room. In come the blockbuster folks and we make our pitch about combining the companies. And blockbuster could have bought netflix for 50 million, but they laughed at us. And in some ways it was a disappointment because i was hoping this could be the day that saved us. The instant influx of money or even better making our problem someone elses problems. But in many ways this was the moment we finally said to ourselves, wow, the only way out is through. We are going to have to solve this problem on our own. Host mr. Randolph, you say that Corporate Culture of netflix is freedom and responsibility. Where did that come from and is that a common Corporate Culture in Silicon Valley . Guest its a very common culture for earlystage companies, and thats for obvious reasons. Because as i mentioned before, and earlystage company you have no resources. You have, lets say seven people doing the job of 100 people. Everyone is stretched thin, so there is no time for command and control. Theres no time for me to say heres your job, heres what you have to do, here is how to do it. And then check in with me every few hours and let me know how its going. All you can say is you see that hill over there . Meet you at the top in a week. And they have to figure it out on their own. They have to have the freedom to decide, the ultimate best way to solve the problem, but the responsibility to see that it is solved. Its a fairly easy thing to do when you have seven employees because you can handpick people with the responsibility to handle that. Its a little bit harder when you have 70, and even harder when you have 700. But what truly remarkable about netflix is they still have managed to preserve that culture with 7000 employees, and that is a remarkable thing about netflix and something that is very, very rare. Host something that is continued in a different form but is the subscription model to netflix, correct . That is not something you hit upon right at the beginning. Guest ironically, and i hid myself sometime for for missing that because i am one of those persons who was a 40 year overnight success. Netflix is my sixth startup, and two of the startups were in the publishing business. So i spent many years mastering magazine circulation, mastering subscriptions. But the idea that we could apply subscriptions to video by mail with software out there, the idea of subscription for video with software out there because while to get the consider it took us two and a half years of failed experiments before we finally stumbled on this crazy combination of things, which was the subscription service. It was also the no due dates and no late fees. Finally it was making a list of the movies you want to see so we could ship them to you automatically. But if you asked me on april 14 when we launched the company years earlier what was the business model, i never couldve told you it would be subscriptions. I mean, who knew . Host what do you think of the name netflix . Guest well, its grown on me. One of my early investors actually gave me some great advice, because at the beginning when you just start you dont have a formal name yet but you still have to write checks. You need to get a lease. You need to have the company name and get whats called a baby name which is a name youre going to use while your figure it out. His advice was, pick a baby name which is so bad that when you run into problems finding a really you wont be tempted to use it. Our beta name was kibbles the dog food. One of my favorite sayings was its not a success unless the dogs eat the dog food. You could have the best dog food advertising in the world, but if the dogs dont eat it, nothing happens. I wanted that to be the culture of netflix. It had to work for customers. But as he predicted we got close to april and had to come up with a real name, all the good ones were taken or they were trademarked or the domain name was used ointment something obscene in some foreign language. So in some ways netflix was the last name standing. And okay. It was a little it seems to be okay now. Host video. Take one, take two. Now showing, these are some of the names you all were considering for this company. Describe Reed Hastings. Guest reed is a a genius. What can i say . I will immodestly say im a pretty good earlystage entrepreneur. Im probably in the top 1 , but reed is in the top onetenth of 1 . Not only that, he is phenomenal in the earlystage article and hes phenomenal as a late stage entrepreneur. What was fantastic about working with reed is how the two of us work to