from selling in order to focus everything we had on rental ,” Randolph recalls . “ We had lots of great ideas on how we could make rental work . At first , I was testing them in a very comprehensive way . I was doing a perfect test , custom copy , custom photography , stress-testing the site . But it would take me three weeks to do that , and the test would fail .”
Eventually , Randolph hit upon what he calls “ validation hacking .” “ We don ’ t have to build a real test ,” he says . “ We can fake it . We can do something that makes no sense in the long-term model but is a great way to find out whether it works or not in a quick and cheap way .” The point wasn ’ t to give the idea the best possible chance to thrive . If that happened , it would only allow delusions to fester . Instead , making an idea prove its mettle quickly and in adverse circumstances was an effective way to kill Netflix ’ s proverbial darlings . “ If it was a bad idea , no matter how much polish we put into the test , it wasn ’ t going to make it a good idea ; but if it was a good idea , it immediately sprang out to us . Then we knew what we had to fix .”
‘ This Is Not For The Long Term ’
While Netflix may have taken validation hacking to never-before-seen heights , it was actually an idea Randolph first learned from a mentor during his days running a mail-order company called MacWarehouse . “ One of the pieces we needed was a huge computer because back in those days , if you wanted to take orders for a mail-order company , you had to buy a half-million-dollar IBM mini mainframe to do it ,” Randolph says .
Randolph went to his mentor , who was also the largest stockholder in the company , and asked for the money to buy the computer .
“ That ’ s crazy ,” the mentor replied . “ Why don ’ t we just do contract fulfillment ? Let ’ s do everything through a third party .”
“ That ’ s a good idea ,” Randolph answered , “ but that ’ s going to cost us $ 25 –$ 30 an order , and our margin is probably $ 15 an order , which means we lose $ 15 per order .”
“ Of course ,” his mentor responded . “ But this is not for the long term . It ’ s not something repeatable or scalable , but this will allow you to learn if your idea is good for $ 15 an order . You can do that 1,000 times , and it will only cost you $ 15,000 if you ’ ve made a bad decision .”
Would you rather spend $ 15,000 to test your idea or $ 500,000 ? The answer to that question is self-evident , and it certainly helped instill in Randolph a willingness to experiment with every facet of Netflix rather than simply being enchanted with the emotion of the core idea .
The Last DVD Rental
Just as Randolph is willing to tease apart an idea to find its shortcomings , he ’ s also unafraid to take a hard look at himself . In 1999 , he famously stepped down from the CEO role at Netflix and turned the chair over to Hastings , who remains in place to this day . The move was one that required Randolph to do some self-reflection in a hurry .
In “ That Will Never Work ,” he recounts in excruciating detail the conversation when he realized he would no longer be the CEO of the company he helped to start . “ I knew that a lot of what he was saying was true ,” Randolph writes of his conversation with Hastings . “ But I also thought that we were talking about my company . It had been my idea . My dream . And now it was my business . While Reed had been off at Stanford and TechNet , I ’ d been pouring my entire life into building the company . Was it realistic to expect anyone to get every decision right ? Shouldn ’ t I be allowed to work my way through mistakes ?”
In the moment , his sense of indignity is easy to empathize with . Who wouldn ’ t feel as though the rug they had woven was being yanked out from under them ? Over time and through introspection , however , he realized the decision was best for everyone involved . “ I love Netflix , and it ’ s my baby ,” he says . “ Of course I want to be there forever , but there are people who are way better at it than me . Just like a child , at some point , it has to stand on its own without you . The best thing you can do sometimes is get out of the way . It really comes down to parsing two different dreams that are melded together : I want to build and grow a company . Which is more important ? That it ’ s you doing the building and growing , or that the company gets built and grows ? If you ’ re really honest with yourself , do they have to be joined ?”
From Mentee To Mentor
His emotional wisdom may be easily replicable , but Randolph credits mentors throughout his career with helping to cultivate his business savvy . “ I ’ ve always been somebody who glommed onto anyone who knew what they were talking about ,” Randolph reveals . “ It ’ s part of this insatiable curiosity I have .” Having never attended business school , he had to learn by doing . “ I was fortunate in that I bumped into two or three phenomenally good entrepreneurs who I enlisted as mentors . From each of them , I
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