Netflix was the seventh start-up that Co-Founder Marc Randolph was involved in establishing. But the idea for the company, which began as a DVD-by-mail service, didn’t just happen overnight.

“The idea for Netflix did not come from some moment of anguish over a late fee on a movie,” Marc said at a StartCon-hosted event in Sydney in September. “We were looking for that idea for a long time. That idea was buried in a big pile of bad ideas.”

Marc explained how he, together with Reed Hastings, came up with the idea for Netflix while they were carpooling.

The duo had been working at the same tech company in California and, after figuring out they lived in the same town, would carpool to work each day. During their commute, the pair would brainstorm ideas. When they’d arrive at the office, Marc would do extensive research on the ideas. Then on the ride back home, he would de-brief with Reed everything he’d learned. “We did this for hundreds of ideas,” Marc said.

“Some were immediately dismissed as terrible. Others lingered for a while. We kept on looking for something that would really spark us. One of the ideas was doing video rental by mail. I went into my office and researched it but it was a terrible idea.” At the time, video rental was mainly done on VHS cassettes, which were heavy, expensive and fragile. “That idea became one of the rejects,” Marc added.

Sometime later, however, DVDs began gaining popularity and a new idea took hold of the pair. After mailing a CD in an envelope to Reed’s house and discovering it unscathed, the duo decided to workshop the concept for DVDs. This culminated in the company, Netflix, which offered DVD rentals and sales by mail.

Risking it all

While the DVD sales side of the business quickly boomed, the rental service proved unpopular. “We couldn't get anyone to rent from us,” Marc said. “If they rented from us once, we could never get them to rent again.”

But because the duo realised that other companies such as Amazon could potentially take on the DVD sales idea, they decided to take a risk and focus solely on developing their rental business. But they had to find ways to make it work.

“We had to do one thing, and do that one thing well. But, I had to decide what? Do I pick sales, which is paying 99% of our bills, but is going to go out of business eventually? Or do I bet it all on rental, which, if we can get it to work, is an eight-billion-dollar industry, but right now shows no promise whatsoever? And, quite frankly, as an entrepreneur, that was one of the hardest decisions I've ever had to make.

“In one single day, we pulled the plug, walked entirely away from selling DVDs, and bet everything that we could figure out how to make DVD rental by mail work.”

Netflix Co-founder Marc Randolph speaking at The State Theatre, Sydney
Netflix Co-Founder Marc Randolph at The State Theatre, Sydney

Fail fast

Marc explained how walking away from 99 per cent of the company’s revenue did a good job of focusing everyone’s minds. They worked constantly to find a way to get their rental service to work. The company began by taking a month to roll out a test website, but it failed. Eventually, they decided to have shorter test periods. They would launch a test site in two weeks, then in one week, until eventually the company was doing two to three tests in a day.

“As you can imagine, we're getting pretty sloppy because we were going so fast. We’d have misspellings, we’d have typos, we’d have dead links. We would crash the site; it was a disaster. But, what was amazing is, it didn't make a difference. It turns out, that if it was a bad idea, no matter how perfect the test was, it was still a bad idea. But if it was a good idea, then no matter how poorly implemented it was, people were desperate to have it.”

People would keep rebooting the site or would try calling the company to get the site work, Marc added.

“It was an amazing insight here. It turns out that it was not about having good ideas. It was about building a system and a process and a culture that allowed you to try lots of bad ideas,” Marc said. “And Netflix was unbelievably good at trying lots of bad ideas.”

“It was about building a system and a process and a culture that allowed you to try lots of bad ideas.”

The company continued this process for a year and a half; with one failed test after another. This went on until the company had three ideas left. The first was the possibility of storing DVDs at their customer’s houses. The next was allowing customers to send Netflix a list of DVDs they wanted for the month; when they completed one DVD on the list, Netflix would send them the next. And finally, Netflix toyed with the idea of giving customers a monthly subscription. “When we combined all three, surprisingly, the combination of these weird things worked,” Marc said, “and all of a sudden…the company took off.”

Fast facts:
Be prepared for disruption
In light of Netflix taking over from the likes of Blockbuster, Marc had this to say for CEOs of large corporations: “You never know who's coming after you, and the people coming after you are going to look nothing like you. They're going to attack you not in the things you do well, but in the things you're not doing, or can't do, or are scared to do. So if you cannot figure out how to disrupt yourself, you're leaving it wide open for someone else to come in and do it for you.”

Now, Netflix (which has since incorporated an online streaming service) is a global phenomenon, with more than 130 million subscribers worldwide.

Marc further highlighted how you could come up with an idea for a start-up or business idea. “All you have to do is train yourself to look for pain,” he says.

“You've got to train yourself to see the world as an imperfect place. You've got to constantly ask yourself, ‘What's wrong?’ Don't try and solve these global problems. Start with things you know. Start with things close to home, and you'll be amazed that once you begin seeing the flaws in everyday life, you'll be able to come to all the ideas you need.”

The do’s and don’ts of launching a start-up

Although Marc left Netflix in 2004 to pursue other interests – including his latest analytics software company Looker Data Sciences – he is still involved in the start-up scene as an angel investor.

He shared this advice for launching a start-up:

  • You don’t need to be in Silicon Valley
    “There is tremendous innovation and disruption taking place all over the world. I travel in South America, in Asia, in big cities and small towns, innovation is taking place everywhere.”
  • You don’t need special training
    “You don't need to have a Master's in business. You don't need to have a computer science degree. One of my favourite entrepreneurs dropped out of university; he fought forest fires in Montana, he drove an ambulance in Los Angeles, and then he was ready to start a company.”
  • You don’t need to be particularly smart
    “Some of the best entrepreneurs I know were not the A students or the B students, they were the C students. They're people who did not feel they had to walk a line in their education. They did not get to the end to have had all the risk-taking squeezed out of them.”
  • You need a tolerance of risk
    “Risk-taking is fundamental to any innovation, and I don't mean scary, dangerous risk. I mean the type of risk that says, "I'm going to try something, and I don't know where it goes."
  • You need an idea
    “It doesn’t need to be a new idea… It doesn't even need to be a good idea. Because what is a good idea? Why is it so hard to tell a good idea from a bad idea? You've all had that, right, where you say that is the stupidest thing, and it goes on to huge success. Or you've got one that you absolutely love, and it fails miserably. It is really hard to tell a good idea from a bad idea.”
  • You need confidence
    “The truth is, that most of the time, when someone says, ‘That idea will never work,’ most of the time they're going to be right. But you have to say to yourself, ‘Not this time. I am going to figure this out. And if this test doesn't work, I'll try it again.’ You've got to believe that eventually you're going to solve this problem.”
  • StartCon 2018, the largest start up conference in Australia, kicks off in Sydney on November 30. For more information, click here

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