Of all places carpooling. My cofounder Reed Hastings and i were committing back and forth to work and brainstorming ideas and one of the crazy ideas we had in that ride was maybe we could do video rental by mail using dvds. Rather than rushing home and writing a Business Plan or hurrying to the office and doing a powerpoint slide so we decided we would try to take the first step to validating that idea so each turned the car around, drove down to santa cruz where we both lived and went to a used music store and bought a little music cd. I think it was patsy cline. We went next door and bought a gift envelope like you put a greeting card end. We mailed it to read towels in the next day when he picked me up he had an unbroken cd and it envelope that i got to his house within 24 hours for the price of a firstclass stamp. If there was an aha moment, that was it. We want to where were you carpooling . Guest reed was the founder of a Company Called pure atria which is of a Software Company and it required a Software Company that i was working at called integrity qa. I went to work for read and spent about nine months working together and as luck had it we lived in the same towns we spent those nine months carpooling together and then lightning struck. It would be acquired and both read and i would be out of a job. I decided this was perfect and i will start my next company and reed wanted to keep the hand on this entrepreneurial thing and so we agreed that i wouldnt start and run it and 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 that where we brainstormed everything we could think of. Host where did the title come from . Guest that will never work as a quote from my wife, lorraine, but also a quote from the 10741 other people that i told that idea too. I think everyone has had that experience where you come rushing in the kitchen and great idea to tell your spouse and come into the office and everyone says that will never work. In many ways this book is about the process of taking an idea that no one things will work and my wife said whenever work and somehow inextricably turning it into a company which has change the way we watch television. Host before we get into the reasons netflix will never work there is some allure about the founding of the company and a late fee. What is that lower . Guest people like the officiant moment. They like to hear the moment it all became clear and they want newton under the apple tree or archimedes in the bathtub but the reality is it doesnt happen like that. Of course its been said it all originated with the late fee on a movie and yes there was but there was also someone who spent many years doing subscriptions and someone else who had done personalization and someone else who had lots of experience with computer algorithms and building websites and tons of people who each contribute little bit and when someone asks where did the idea come from they dont want the 310 page book. They want the quick sound bite but in many ways that is going to never work. That is the untold story of netflix. Host mr. Randolph, were talking 1996 so what was the reasons that this was never going to work . Guest lots of reasons everyone told me this would never work. The first one was the obvious one that if i would do dvd rental by mail it meant i would be emailing a disk to someone and they would often get it two days later and keep it for a number of days and mail it back and people said that is crazy so why would anyone wait two days for a movie when they could go to one of the 9000 Blockbuster Stores and the other reason and perhaps the one that really got in our way when it came to raising money is that everyone believes this is a digital format and just a matter of minutes before everyone was streaming or downloading and of course Reed Hastings and i knew this was true but eventually people would be downloading and we just did not think it would happen that quickly and the challenge was how do you build a company which is appropriate for an out when impossible to stream or download something and how to get it in the right place when they came along we would be ready. It took almost ten years before netflix transitioned into streaming. Host those first few days of the company being online what was that like . Guest that will never work in some ways is a continuum of all the screw ups and disasters and missteps and almost the times we went out of business. We had a very first disaster in day one and we spent six months building the simple ecommerce website and we were so excited this was the moment we would go live and we set up a computer in our Conference Room and we had a bell ring anytime in order came in and at 9 00 a. M. On april 14, 1998 our cto hit it into the live and it did not take long when we got that first thing and we cheered and and two or three minutes later three more orders we were so excited and then we got two more orders and in all the excitement we lost track of things until someone noticed it had been a while since the belt was wrong and unplugged and is there a problem and it turned out in the first 15 minutes of being online we crashed all our servers. Host what did you do . [laughter] guest instead of me remembering that day toasting my success with champagne my memory of it is been fried electronics the computer superstore pushing a shopping cart while our cto piled in the components we would use to limp along that website that first long day. We had this pool of how many orders we would get in people said ten, 30 but we ended that first day with 107 orders. It astounded me. That was my whole first month forecast. Now looking back 107 orders seems pretty trite considering where we are now. Host Marc Randolph, you spent quite a bit time perfecting the mailer that netflix used. Guest netflix, as i mentioned, took ten years before i got to streaming which means we were mailing dvds and we had to go to the post office and do it for a first class and do it in a way that did not get mangled or broken and it turns out the visine the simple envelope that can double as a return envelope was a real work of art. We spent hundreds of hours perfecting it and i could not get my mind off it and dreamed about little red envelopes. There was one time i remember coming into the office at tonight and i to come back after dinner just to get something in passing a stack of envelopes and this idea struck me. Before i even knew what i did iran out to my car and got something my wife and i called the restaurants back. This was the collection of all the tools and toys and tape and staples and creams that you would use to keep three kids under five amused at eight restaurants. I remember pulling this thing open and pulling out paper and tape and markers and reconstructing this envelope in about two, three hours that night. And handing it off out the door and saying give this one a try. Host when netflix first went online you were mailing by hand, correct . People were packing them by hand. Guest absolutely. At the getting it was pretty scrappy. You have no money and we have this tiny Little Office and this smelly green carpet and the warehouse being stored in an old safe and not because we were scared of them being stolen but this happened to be an old bank and we had to use every single square foot we had prayed we did not even have furniture. People were bringing in beach chairs and i remember one time my wife came in after dinner and she was coming to get me and looked and said wait a minute, are those are dining room chairs . We were doing everything we had to so packing dvds by hand. Host who funded netflix to begin with . Guest Reed Hastings turned out this is the understatement of the year turned out to be an unbelievable partner. The most important thing was reed was 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 and wrote me a check and handed it to me and i remember going all my gosh, this is the biggest check i have ever held in my hand and i took it down to our local wells fargo branch, retail one, and i remember standing in line with this check wondering what will happen . For the person behind the counter hit a buzzer and then the manager of the bank will come out and bring me back and serve me champagne but it was an anticlimax so i handed her the check and she said do you want cash back without . Reed was 1. 9 million of its but i also had to go out and ask other people. I had to ask my mother and ask friends. Theres a reason these are called the friends and family around. Host watches the role of a Venture Capitalist and is there a negative side for that . Guest Venture Capital is the essential fundraising mechanism used in Silicon Valley pretty much any place people are doing startups. These are people willing to invest money into a business and not loaning the money but they are investing the money in doing it under erie long odds. The reality is when people say that will never work most of the time they are right but a Venture Capitalist is willing to take a chance that nine out of ten investment they make will 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 you are hitting into because when a Venture Capitalist uses the money and in fact, Venture Capitalists was 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 but they expect their money back times ten. 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. Your commitment is you will do every thing possible to make sure their investment pays off. Host in your book you write that tech is a true meritocracy. Guest it is one of the most wonderful things is that the foundation of tech is coding. Its computer code. Computer code is remarkably transparent and theres a principal among coders called peer review. After you have written something you ask appear to sit down and review it with you and it doesnt make a difference what you look like. Does not matter how you dress and doesnt make it matter what time you got to the office, what time you leave, or what you smell like but its in the code. We certainly are the beneficiaries of that and that certainly i would not know a line of code if you wrapped it around my neck but we all get a chance to recognize we can be casual and ultimately will be judged on the quality of our work which is a tremendously refreshing thing. Host Marc Randolph, 1997 netflix went online and at what time did you feel financially secure . [laughter] guest one of the essential ingredients of being an entrepreneur is you never feel secure financially or otherwise. Certainly in terms of the otherwise piece it is inherent in the start up that you struggle and claw and climb your way to the top of the first hill and collapse in a heap when you finally made it only to catch a breath and look up and see an even bigger hill in front of you. When we started netflix our goal was to be as big as a single blockbuster. 750,000 a year and we hit that goal in the first two, three months but then you look up and say there is 9000 blockbusters. Once we pass blockbuster theres hbo and comcast and amazon. It is never ending. Part of that is recognizing you can never sit back and say you are done. Economically ive never been someone motivated by how much money i have. That is not the point of this. Its the fun of coming into her room and sitting down with really smart people and solving really interesting problems. That i can never get enough of. Host at one point blockbuster wanted to buy netflix. Is that correct . Guest that is true. One of most critical things i advised early stage on for newers or anyone with the business is you cant run out of money. Then its game over. We had a point and this was in 2000 so the company was 2. 5 years old and the good news was we were on track to do about 5 million in revenue. The bad news is we were on track to lose 50 million getting there. You dont mean to be a financial analyst to understand that is not sustainable. We decided to do this thing that all entrepreneurs do which is called pursue Strategic Alternatives which is code for got to sell this sucker. Our obvious strategic alternative was blockbuster but we were 5 million in sales and there were 6 billion sales. We were probably at the time 300 employees and they were 60000 employees so we tried getting this meeting but nothing. As luck would have it they finally called us for meeting and we went on this corporate retreat in Santa Barbara in the mountains and we flew from Santa Barbara to dallas for the meeting because we were on retreat and because of that casualness i was in shorts and a tshirt and they usher us up into this huge Conference Room and in come the blockbuster folks and we make our pitch about combining the companies. Blockbuster could have bought netflix for 50 million. But they laughed at us. In some ways it was a disappointment because i was hoping this could be the thing that saved us and that instant and punks of money or even better making someone elses problems our problems but this was the moment we said to ourselves the only way out is through and we will have to solve this problem on our own. Host you say the culture, Corporate Culture, a netflix is freedom and responsibility and where does that come from and is that a common Corporate Culture in Silicon Valley . Guest its a very common culture for earlystage companies and that is for obvious reasons because as i mentioned before in our earlystage comedy you have no resources and you have, lets say, seven people doing the job of 100 people and everyone is stretched thin so there is no time for command and control and no time for me to say here is your job and heres what you have to do and here is how to do it. All you can say is you see that hill over there and i will meet you at the top in a week. They have to grit out on their own and have the freedom to decide the ultimate best way to solve the problem with the response fully to see it solved. Its a fairly decent thing to do when you have seven employees because you can handpick people with the responsibility to handle that. Its harder when you have 70 and even harder when you have 700 but what is truly remarkable about netflix is they still have managed to preserve that culture with 7000 employees and that is the remarkable thing about netflix and something that is very rare. Host and something that is continued in a different form but is the subscription model to netflix, correct . That is something you not you hit upon on the beginning. Guest ironically i myself for missing that because im one of those persons who was a 30 year overnight success but not flex was my fixed startup and two of the startups were in the Publishing Business though i had spent many years mastering magazine circulation and subscriptions. The idea we could supply magazine subscriptions to video by mail was so far out there and i mail it was so far out there that it took us a while to get there. It took us two and a half years before we finally stumbled on this crazy commendation of things which was the Subscription Service and also the no due dates and no late fees and finally making a list of movies you want to see so we could ship them to you automatically but if you had asked me on april 14 when we launch the company years earlier what worked the Business Model what would it look like i would never have told you it would be subscriptions. Who knew . Host what do you think of the name netflix . [laughter] guest it is growing on me. One of my early investors gave me great advice when you just start you dont have a formal name yet you still have to write checks and you need to have a company name it was a beta name which is the name you will use while youre figuring it out his device was pick a beta name which is so bad that when you run into problems finding your real name you wont be tempted to use it. Our beta name was kimball like the dog food. That was because one of my favorite sayings was, it is not a success unless the dogs eat the dog food. You couldve 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. As he protected we got close to april and had to come up with their own name and all the good ones they were trademarked or the domain name was used and so in some ways netflix was the last name standing it was a little like porn with that f and the acts they are but it seems to be okay now. Host now showing these are some of the names that you all were considering for this company. Describe Reed Hastings. Guest reed is a genius. I will immodestly say im a pretty good earlystage entrepreneur and im probably in the top 1 but reed is in the top 1 so hes phenomenal and hes a late stage on for nora. He has the whole package but what was fantastic about working with reed is how the two of us Work Together because in many ways we brought accommodation of skill sets and attitudes. I came from the marketing where my entire expertise how things we said and did will be received by customers and reed brought understanding of how he could deliver a new and different ways and ultimately do it at scale and we brought a culture which we shared the radical honesty and we could argue cats and dogs but as soon as we stumbled on the right thing immediately forget whose idea it might have been and who had raised one objective and immediately fall behind what was so obviously the right idea. He was a great partner and weighs one of the smartest things i read it and flex was make room for him to come in fulltime and i did. Host in 1998 he said to you im losing faith. Guest yes, it was a difficult moment