That Will Never Work

by Marc Randolph

  I was looking at office space in Santa Cruz. But until we had money in hand, we were stuck with the Scotts Valley Best Western.

  That Best Western is still there, by the way. I drove by last week, hoping to sit at the conference room table where we’d ended up spending weeks of time before we had a real office. I wanted to check my memory—how big was the conference table? What color was the worn carpeting? I parked my car and walked around outside the building, trying to be discreet. But when I peered through the window at the first office space Netflix had ever had, I didn’t see a long table, or ergonomic chairs, or the ever-present scratched-up water pitchers surrounded by plastic cups. I saw a room full of things none of us would have had any use for: a sad treadmill, a collection of mismatched dumbbells, a dirty yoga mat unfurled in the corner.

  Time is cruel, and there are no monuments in tech.

  I was spending a lot of time eating lunch that summer. In addition to Hobee’s, I was driving up to Woodside a few times a month, in an ongoing attempt to woo a video store owner named Mitch Lowe.

  I’d first met Mitch in Las Vegas, at the annual conference for the Video Software Dealers Association (VSDA, for short). I’d gone in June on a hunch, with no real plan other than to conduct the most general kind of research. It had seemed prudent, given that we were looking to start an e-commerce business focused on video rental, to acquire something more than a vague idea of what it meant to rent videos. In the back of my mind, I was hoping that someone might sell some kind of software for running rental stores that we might be able to convert to working online.

  I’d had to use a little subterfuge. The VSDA was a “trade show,” which means that ostensibly it was only open to members of the trade, not the general public. So, a month or so before I left for Vegas, when I went to register, I decided that I was now the general manager of “Randolph Video of Scotts Valley, California.” I answered the questionnaire as best I could:

  Employees?: 7.

  Annual revenue?

  That was a hard one—I had no idea how much

  a video store did in business. Let’s see, how about

  $750,000?

  And then a few weeks later, my badge showed up in the mail.

  I don’t know what I expected from the VSDA show. Probably some booths, some roundtable talks, the normal dry business convention I recognized from my years in direct marketing. I think I had the idea that the whole thing would be presided over by stereotypical video store employees. If you’re old enough to remember video stores, you know the type: early twenties, big glasses, permanent sneer.

  What I found was entirely different. VSDA was insane. There were thousands of people there, swarming around hundreds of elaborate, ridiculously appointed booths. Models wandered the convention center, handing out studio swag. Celebrities posed for photos. Bright colors festooned every banner, and spotlights lit up the room. Movie soundtracks blared from gigantic speakers, so loud the floor was shaking. It was like some unholy mix of Disney World, a Hollywood movie premiere, and the Indiana State Fair.

  I stood in front of a green screen, then had my smiling face inserted into a poster for Mission: Impossible. I posed for a picture with Wallace and Gromit. I stood in wonder beneath the thirty-foot Barney standing sentinel at the entrance to the exhibit hall, and watched him open and close his mouth in greeting.

  I felt like I was on hallucinogens.

  For hours, I wandered from booth to booth, essentially trying to figure out how the video store business worked. Who were the major players? Who made money? And how? My strategy was to play the rube—to Columbo my way to an understanding. But I wasn’t getting very far.

  By the end of the day, I’d made my way past the huge booths to what, at these kinds of conventions, is called the “pipe-and-drape” section—so called because each booth is separated from the next by a waist-high framework of metal pipes, draped with curtains to hide the ugliness. This was the home of the lesser-trafficked, lower-real-estate booths. Gone were the fancy electronic displays. There was no sign of John Cusack or Denise Richards. No commemorative mugs or 3-D glasses greeted me. Instead, middle-aged guys sat behind card tables, chatting placidly about return rates and inventory.

  Here were the people I wanted to see. The software guys.

  I ended up at a booth near the back, talking to a nondescript man in his mid-thirties with a mustache. He had a kind expression, a sweet manner, and a hand-lettered name tag that simply said “Mitch.” I laid my Columbo act on thick.

  “At my store, my seven employees and I have been using pad and pencil to keep track of rentals,” I said. “What does this type of software actually do?”

  His smile suggested that he might be on to me, but he didn’t let on. As we talked, I learned that Mitch ran a small chain of video stores called Video Droid. He had ten locations and managed thousands of titles in each one of them. I was interested in the way he talked about the practical challenges of maintaining an inventory of both new and classic films, but what really fascinated me was his deep knowledge of movies and his even deeper connection with his renters. He paid attention to what they liked, what they asked for, and what they wanted. He was a movie buff, and he wanted to help his customers find the kinds of movies they’d love. That meant giving them not only what they thought they wanted but what they didn’t even know they wanted.

  Mitch was a walking, talking IMDb. He watched movies all day at the store, then went home and watched a movie while he was eating dinner, then stayed up late watching even more movies. Unlike the stereotypical video store employee—snobbish and elitist, proud of his vast knowledge—Mitch was gregarious and friendly, eager to share his passion. Over his decades in the business he had talked to thousands of people about what they watched, what they liked and disliked, what else they had seen. It was this deep internal database of movie knowledge and human insight that enabled him to predict exactly the right movie for a person’s mood, interests, and tastes.

  He was a movie sommelier.

  He also wasn’t falling for my Columbo routine. About ten minutes into our conversation, he smiled at me—seemingly guileless, but with a glint in his eye—and said, “What are you really up to?”

  I hemmed and hawed, and then I told him the outlines of my idea for videos by mail. He seemed mildly interested. We exchanged numbers, and I left the booth thinking I might have found a low-profile minor player to bounce ideas off of. What a nice guy, I thought.

  Later that day, looking for a map of the convention center, I opened the VSDA program. On the inside cover was a half-page, full-color photograph of the man from the pipe-and-drape section. Beneath it was printed his name. Mitch Lowe: VSDA Chairman.

  After VSDA, Mitch and I kept in touch. He lived in Marin, so we mostly met by phone, but I kept him abreast of what we were up to, asking him questions if I thought his answers would be helpful. I met him a few times in Woodside for coffee. By the time we were starting to raise money, I was actively recruiting him, and I started buying him lunch at Buck’s.

  Buck’s is one of the temples of Silicon Valley. So many companies have been birthed there—conceived, funded, or otherwise organized—that the owners should probably start demanding a cut. The food is very good, elevated comfort-food diner fare, but the atmosphere is what you go for. Probably the most notable piece of décor—and the place is packed to the gills with stuff—is a motorless car suspended from the ceiling. Remember Soap Box Derby? Home-built wooden cars that you roll down a hill to race, in Boy Scouts? Well, consider this Silicon Valley’s version. Every year, there was a motorless car race on Sand Hill Road in Palo Alto, with multimillion-dollar VC firms fighting for bragging rights. Instead of wooden cars, these were spaceships on wheels. Their sponsors had sought out cutting-edge, hi-tech, carbon-fiber composite materials. They had used their connections to get time in the Lockheed Martin wind tunnels. They had procured bearings that cost thousands of dollars apiece. Even the wheels were lighter, stronger, and more expensive t
han what you would find on a drag racer.

  And in Buck’s, one of these ridiculous contraptions—it had lost at Sand Hill but had once held the downhill motorless speed record—was hanging from the ceiling over you as you ate, a constant reminder that anything was possible with enough effort, enough ingenuity, and enough money.

  Every booth at Buck’s bears the residue of venture financing. The napkins there have felt the imprints of thousands of pens, sketching out improbable ideas that just might work. In a way, it’s the VSDA of Silicon Valley—a crazy, slightly hallucinogenic place that seems engineered to confound outsiders. That’s exactly why I took Mitch there.

  I was gathering intelligence at those lunches. I’d float possible solutions to problems Christina and Te and I had discussed, and just by hearing Mitch shoot them down, I’d learn something. He had the perfect combination of content knowledge and industry knowledge—he loved movies as much as he loved the logistics of renting them.

  Mitch wasn’t—and even now, he isn’t—a Silicon Valley guy. He was a down-to-earth business owner with incredibly progressive ideas. In fact, the very name of his video store chain, Video Droid, was a reference to his very early wager that eventually, movies could be distributed from kiosks. (George Lucas at one point came after Mitch, serving him with a cease-and-desist order, claiming he held the rights to the word droid. That lasted about as long as it took Mitch to demonstrate that his use of the word predated Star Wars by many years.)

  His look and manner screamed “normal guy.” But the more I talked to him, the more hints I got that there was something much more interesting behind the façade. He let slip once that he’d once worked as a smuggler of clothing in and out of the Eastern Bloc under communism. He shyly admitted that his mother had a porn Oscar. Not as a performer, but as a friend to the industry. Mitch’s family house in Muir Woods had been used as a set for dozens of adult movies in the seventies and eighties.

  Eventually, I openly offered him a job. But he politely demurred. He loved running his family’s company. He loved the video business. He wasn’t exactly itching to leave Marin.

  And yet…he kept agreeing to meet me at Buck’s. And it wasn’t because of the bison meatloaf—as good as it was. He was intrigued. He kept giving me advice and guidance. And I kept buying us lunch. I ate so many Reubens that spring and summer wooing Mitch Lowe that I think I gained what I came to call the “Founder’s Fifteen.” I just kept loosening my belt, hoping the calories would pay off.

  5.

  Show Me the Money

  (fall 1997: eight months before launch)

  SPEND ENOUGH TIME AROUND Silicon Valley, and you’ll start to hear a funny acronym: OPM. Particularly if you’re hanging around with battle-scarred entrepreneurs with a couple of startups under their belts, OPM will pepper conversations about early-stage companies. Sometimes it’s used in the context of sage advice: “You want to know the most important principle of starting a company? It’s OPM.” Sometimes you’ll hear it as a cautionary warning: “I know you’re confident, but please stick to OPM.” Sometimes it’s just a mantra, repeated as part of a kind of yogic practice in the conference rooms of office parks across the land: “OPM, OPM, OPM.”

  What’s OPM, you might ask? Just a bit of startup slang.

  Other People’s Money.

  When entrepreneurs implore you to remember OPM, what they’re saying is: When it comes to financing your dream, use only other people’s money. Entrepreneurship is risky, and you want to ensure that the only skin you have in the game is…well, your actual skin. You’ll be dedicating your life to your idea. Let others dedicate the contents of their wallets.

  By dedicating my time—not my money—to our DVDs by mail concept, I was following my own OPM advice. Reed wasn’t. He’d agreed, as we’ve seen, to put up $2 million of his own capital as seed money. But after a few weeks, he reconsidered the amount. He didn’t have cold feet, exactly. But he didn’t want to be the only backer.

  “I like the idea, but I’m worried we might be in an echo chamber,” he said.

  “You’re worried about us getting stuck up our own asses,” I said.

  Reed nodded. “You do have a tendency to get high on your own bullshit.”

  “It’s not bullshit if you believe it,” I said.

  That’s true, by the way. For most of my career, I’ve gotten flack before for my boundless faith in whatever it is I’m selling. Even before Netflix, I’d convinced more than a few people to take pay cuts to work for me, to leave steady work to hop aboard a startup with a slim chance of survival. But in every case, I wasn’t just spewing hot air. Whether it was the latest generation of spreadsheets or DVDs by mail, I genuinely believed in what I was selling.

  I had absolute faith in what Reed and I were doing. But I saw his point. Asking other people for money forced us to allow other voices into the room—to listen to people outside the Pure Atria offices or Reed’s Avalon. It forced us to validate the idea.

  That’s another benefit of using OPM: before you pour your life into starting a company, it’s not a bad idea to get just a little bit of reassurance that you’re not completely out of your mind. Convincing someone to part with their money tends to separate those who are blindly supportive (“I love that idea!”) from those who are supporting you with their eyes wide open. I often counsel young entrepreneurs to start by asking people what they think, but then immediately follow up the inevitable “I love it” reply with the ask: “Can I count on you to invest a few thousand dollars?” The backpedaling is so fast and furious that it makes Lance Armstrong look like my grandmother.

  Plus, it’s never too early to be in contact with future investors you might need later, when you’re raising your next round of funding. The “seed” in seed funding usually refers to the business, newly planted and hoping to grow. But it also refers to investors, who are getting in on the ground floor.

  In the end, Reed reduced his original $2 million pledge to $1.9 million. We would reach out to others for the remaining $100,000.

  I should start by saying that asking for money is hard. Really hard. But it’s nothing compared to what it feels like to beg for spare change on the sidewalks of Hartford, Connecticut.

  When I was in college, I spent two months each summer leading thirty-day backcountry expeditions for the National Outdoor Leadership School (NOLS), a wilderness program that uses the wilderness to teach leadership skills. As a young adult I spent months in the mountains with NOLS, as have my own children, and I’ve remained involved with the school to this day. The program teaches self-reliance, teamwork, and wilderness skills, and has taken me everywhere from the rivers of northern Alaska to the glaciers that ring the peaks of Patagonia. I owe it a lot. It taught me discipline and self-reliance, and imbued in me a healthy respect for the natural world. It taught me knots, navigation, and how to catch a trout with my bare hands.

  Almost everything I ever learned about being a leader, I learned with a backpack on.

  In those college summers, I’d usually spend the third month recuperating at home and visiting family. But the summer after my junior year, I picked up some work at an outfit whose official name was the Wilderness School. Unofficially? They called it “hoods in the woods.” Not politically correct, and, as it turned out—not factually correct, either. While the kids were in fact adjudicated youth, most of the ones I met that summer were bright, curious, and well behaved. But a catchy name sticks.

  My friend, a documentary filmmaker, was making a short film about the program, and he needed somebody to carry around his food, supplies, extra film, spare batteries, a boom mike, and a twenty-pound Nagra tape recorder. (This was 1979—way before camcorders.)

  I was technically a sound guy for a documentary film. But really? I was a mule.

  Still, after that month in the woods, something resonated. I signed up to work the following summer for the Wilderness School as an instructor.

  The Wilderness School took inner-city kids from disadvantaged areas
in Hartford, New Haven, and Stamford and introduced them to wilderness exploration. Many of the kids in the program had never been outside their city—had barely stepped off a sidewalk. The program had them canoeing rivers, climbing cliffs, and hiking the trails of the Catskill Mountains. It taught basic outdoor skills—how to start a fire, how to build a shelter, how to purify drinking water—as a way to teach leadership and teamwork. But the real objective was to put the kids in situations that seemed impossible, and prove to them, over and over, that they were capable of much more than they imagined.

  Working for the Wilderness School taught me a lot about humility. Like most of the other leaders and instructors, I grew up in a leafy suburb, a child of privilege. On the surface, we didn’t have much in common with the kids we’d be leading into the woods. Most of us had grown up well fed, with secure housing and plenty of money. Many of these kids had endured homelessness, unstable housing, and hunger.

  Taking a kid who had never left Hartford—who had grown up in poverty, who had already endured more deprivation than I would ever know—and dropping him into the woods outside Cornwall or Goshen was a huge change, to say the least. To help us better understand what a shock this kind of experience could be, the Wilderness School gave us a number of different training experiences, each designed to be similarly disorienting for us. All of them took place in the cities—Hartford, Stamford, New Haven—where our students were from. All of them were engineered to make us as uncomfortable as our charges.