I finished reading That Will Never Work, the biography about Netflix’s early years. Cofounder and first CEO Marc Randolph’s perspective on taking the company from idea to IPO in seven years is full of wisdom that entrepreneurs will find helpful.

One of his principles I enjoyed was what Marc and Reed Hastings call the “Canada Principle.” For the first twelve years, Netflix served only the United States. But several times during that period, they thought about expanding into Canada. It was close, so shipping costs would be low (it was shipping DVDs then), and the regulatory environment was friendly. Canada looked like low-hanging fruit.

But first appearances were deceiving.

When they dug into it, they learned it would be complicated:

• French is the main language spoken in some parts of Canada, so they’d have translation issues.
• Canadian dollars differ from U.S. dollars, so they’d have to deal with currency issues.
• The postal system in Canada was different, so special envelopes would be necessary.

When they ran the numbers, they learned they’d get a roughly 10% revenue boost by expanding into Canada.

They then considered the “effort, manpower, and mind-power” required to expand into Canada. It would be a big lift for their team. Then they analyzed how much they could increase revenue if they applied the same amount of effort to other aspects of the business.

Using that framework to evaluate the decision made things crystal clear. If they applied that effort in other areas, they could get a far greater return by increasing revenue considerably more than 10%. Expanding into Canada wasn’t the best way to allocate their resources. The return was too low relative to other options requiring similar effort.

They realized that Canada was a short-term, obvious move that would provide short-term benefits. “It would have diluted our focus,” wrote Marc.

After this experience, Netflix adopted what Marc calls the “Canada Principle.” When faced with options, evaluate the potential return of each of them and the effort and resources required to generate it. Pick the highest-return activity and focus on it. Don’t spread yourself thin and lose focus by doing low-return activities.

Marc and Reed realized, through trial and error, that focus is a superpower and that if they could focus on the right high-return activities, they’d have a competitive advantage. The Canada Principle became key to deciding what initiatives to pursue or kill.

The Canada Principle led the company to stop selling physical DVDs and focus entirely on subscription rentals, even though DVD sales were 90% of their revenue. It also helped them decide against pursuing automated DVD rental kiosks, despite promising results from months of testing. (Side note: a team member on the kiosk project helped found Redbox.) All of these were the right decisions. They kept the company focused. They leapfrogged competitors and built a behemoth that’s now publicly traded and has a market capitalization (valuation) of over $410 billion as of this writing.

I didn’t have a name for it when I was building my company, but I applied the Canada Principle several times when making strategic decisions. It was sometimes painful in the short run, but it usually led to the best long-term decision.

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

Cumulative metrics (since 4/1/24):

• Total books read: 55
• Total book digests created: 15
• Total blog posts published: 350
• Total audio recordings published: 103

This week’s metrics:

• Books read: 1
• Book digests created: 0
• Blog posts published: 7
• Audio recordings published: 0

What I completed this week (link to last week’s commitments):

• Read That Will Never Work, a biography about Netflix’s early years
• Helped one of my parents resolve their medical situation

What I’ll do next week:

• Read a biography, autobiography, or framework book
• Catch up on everything from the last two weeks

Asks:

• If you know any full-stack developers interested in working on the software for my current project, please introduce us!

Week two hundred sixty was another week of learning. Looking forward to next week!

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

What I struggled with:

• No material struggles this week related to this project

What I learned:

• This week, I continued helping one of my parents with a medical situation. I learned about neurological rehabilitation, but not much related to this project. 

Those are my struggles and learnings from the week.

Yesterday, I shared what I read in the Netflix biography That Will Never Work about how cofounders Marc Randolph and Reed Hastings divided equity and how the first financing round led to Reed owning 68% of the company to Marc’s 30%. I shared all the math in this post.

The interesting outcome of that scenario was the ownership, voting control, and control of the board. Marc was CEO, but he owned a minority 30% stake in the company and didn’t have voting control. He also didn’t control the board because he wasn’t the board's chairman. Reed wasn’t an employee of the company but owned a majority 68% stake in it, which meant he had voting control. He was also chairman of the board, so he effectively controlled the board, too.

Marc and Reed were friends and had worked together at another company. They spitballed ideas until they landed on the idea that became Netflix. So they were used to working together and being brutally honest with each other.

In the fall of 1998, about a year into the company’s life, Reed sat Marc down and told him that he’d done some good things. Then he added, “I don’t think you’re a complete CEO” and “A complete CEO wouldn’t have to rely on the guidance of the board as much as you do.” Reed proposed that he join the company full-time and become the CEO. He suggested Marc become the president and that they run the company together as a team.

Reed had voting and board control, so technically he could have forced this decision on Marc. Instead, he left it up to Marc. Marc thought about it and in the end decided that Reed was better suited to be CEO and that he himself was better suited to work alongside someone disciplined like Reed. They divvied up duties. Reed focused on what they called “back-end” functions such as finances, operations, and engineering. Marc handled customer-facing things like PR, web design, movie content, partnership relations, and customer service.

With the changes agreed to, there was one last issue: compensation. Reed surprised Marc by requesting that the two cofounders redivide their ownership. Reed wanted 2 million more shares—and he thought they should come from Marc.

Marc doesn’t share exact numbers in the book, but he does say, “In the end, I’d agreed that a third of the shares Reed wanted, if he was to come on as CEO, would come from me. The other two-thirds he was going to have to ask the board for. Which he did – and which he got.”

In the end, roughly one year after the birth of the company, Marc relinquished the CEO title to Reed and Reed received additional shares. By this point, they’d raised an additional $6 million from Institutional Venture Partners, a prominent VC firm in Silicon Valley at the time. I’m not sure what the exact ownership split between the cofounders was, but I’d assume Reed had a significant, majority ownership stake in the company.

That’s the story of how Reed Hastings became the CEO of Netflix, as told from Marc Randolph’s perspective.

I’m making my way through That Will Never Work, a biography about Netflix’s origin. I finally got to the part I’ve been curious about. Marc Randolph is the author and was the first CEO and cofounder of Netflix, along with Reed Hastings. I’ve always considered Reed the founding CEO, and this book is helping me understand why.

A little bit of background first. When they started the company in 1997, Marc and Reed each received 50% ownership. They valued the company—an idea and two guys—at $3 million (pre-money). They issued 6 million shares, with each share valued at $0.50. Here’s how the ownership looked at this point:

• Reed: 3m founder shares *$0.50 per share = $1.5m (50%) ownership stake
• Marc: 3m founder shares *$0.50 per share = $1.5m (50%) ownership stake

To capitalize the company, they raised $2 million from investors. The company was worth $3 million (pre-money) and raised $2 million from investors, so its post-money valuation was $5 million (pre-money plus cash raised). For their $2 million, investors were buying 40% of the company. Here’s the math:

• $3 million pre-money valuation + $2 million raised from investors = $5 million post-money valuation
• $2 million raised from investors / $5 million post-money valuation = 40% ownership

Six million founder shares already existed. To give investors 40% ownership, the company issued 4 million investor shares, increasing the total to 10 million: 6 million founder shares split between Reed and Marc and 4 million investor shares.

Marc had a young family and was working full-time in the business, while Reed was part-time and had ample liquidity from selling another company. Reed believed in the idea and invested $1.9 million of the money they needed, and angel investors contributed the other $100k. Marc didn’t invest any capital. Here’s how the 4 million shares issued to investors were split between Reed and the angel investors:

• Reed: 3.8m shares ($1.9m / $2m = 95%) * 4m investor shares
• Angels: 0.2m shares ($0.1m / $2m = 5%) * 4m investor shares

This is where the ownership between the two founders changed drastically. Reed was a cofounder and investor, while Marc was just a cofounder. Here’s how their ownership changed after this fundraise was completed:

• Reed: 68% = 6.8m total shares (3.8m investor shares + 3m founder shares) / 10m total shares
• Marc: 30% = 3m founder shares / 10m total shares
• Angels: 2% = 0.2m investors shares / 10m total shares

Even though they were cofounders and Marc was CEO, Reed had a majority 68% ownership position in the company and was also the Chairman of the Board. Marc was CEO but had only a 30% ownership.

In the next post, I’ll detail how the ownership and other dynamics led to changes in leadership titles.

I’m still reading That Will Never Work, a biography about Netflix’s origin. The author, Marc Randolph, shares his perspective on the early days as cofounder and the first CEO of Netflix.

Netflix is a household name worldwide. It’s the go-to streaming service for people to watch movies, shows, and other television content. The company is publicly traded and has a market capitalization (valuation) of over $410 billion.

But things didn’t start that way. The company was born in 1997. Users could buy or rent DVDs by placing an order on its website. The orders were all fulfilled via snail mail from its small office in Scotts Valley, California. The launch of Netflix was a big deal that included tons of press. It was so successful that on the first day, the company servers crashed multiple times and the team had difficulty keeping up with and fulfilling all the orders.

What surprised me was how many orders the company processed that day: 137, which seemed low to me. Given the amount of publicity they'd generated before launching, I expected them to have done hundreds or even thousands of orders. But it was only 137, and that exceeded their initial expectations. They thought 15 to 20 people would order DVDs that day.

When I read this section, I thought about where the company is today and that first launch day. My takeaway is that everything starts not just small but really small. It takes time to make people aware you exist, even if you have a great solution. It’s the discipline to get a little better and compound your learning and growth consistently every single day that leads to massive outcomes over a long period. Being a breakout success on day one is the exception, not the norm. Most companies we consider wildly successful started small and got better every single day, year after year.

For the last year, I’ve been enamored with media entrepreneurs and biographies about them. This week, I started reading That Will Never Work, a biography about Netflix’s origin story. It’s written by Marc Randolph, the cofounder and first CEO of Netflix. I always think of Reed Hastings as the first and only CEO—I had no clue Marc was the founding CEO.

I’m early in the book, but I’m enjoying Marc’s recounting of the early days and how he overcame early obstacles.

One thing that resonated with me was his approach to naming the company and the concept of a beta name. Fun fact: the company was originally named Kibble. The logic behind the name was based on an old advertising and marketing saying: “It doesn’t make a difference how good the ads are if the dogs don’t eat the food.”

Marc chose this name because he wanted to remind the team that if the product was lackluster, it wouldn’t matter how well they sold it. He picked “Kibble” as a placeholder to remind his team to focus on building an amazing product that people would love.

Marc realized that picking the right name can take months and that you must give yourself time for serendipity to kick in. Instead of forcing a name at founding, he chose a beta name—a working name you use to get the company up and running (email, bank accounts, website, etc.). The key to a beta name is that it must be something so bad that there’s zero chance you’ll keep it. If you pick something tolerable, he said, your exhaustion and familiarity six months down the road may lead to your just keeping it. But, if you pick something awful, you’ll be forced to rename the company.

Ultimately, his team wanted one word that combined movies and the internet: Net . . . flix.

Marc detailed how hard it is to pick a good name. Here’s what to think about:

• A good name rolls off the tongue. One- or two-syllable words are best; ideally, the emphasis is on the first syllable. His examples: Google and Facebook.
• Too many syllables, too many letters, and people might misspell your website. Too few and they might forget the name.
• A name isn’t great if someone else already owns the domain or the trademark. Double-check before settling on a name.

Even a good name might not be an immediate slam dunk. Marc’s team didn’t initially like “Netflix” because “flix” made some team members think of “porno” or “skin flicks.” When the team was down to the wire and had to decide, they slept on it for a night and agreed it was their best option.

Naming is hard, but it shouldn’t stop you from moving the company forward or building your product or solution. Beta names give you a placeholder and time to find the right name. Marc’s beta name approach is great, and I plan to use it.

I had a great conversation this week and gained some unexpected insights. I was catching up with someone I worked with years ago and haven’t talked to in a few years. He’s a talented software engineer, and I love getting his perspective because it’s so different from mine. Part of our conversation was about my latest project and his projects. He asked some good questions about my project, and I asked him a few about his perspective on my project. One of my questions was about his reading and learning habits.

He shared that he isn’t a big reader of books, but he sees the value in the wisdom recorded in books and he’s interested in the software I'm building. I asked more questions about how he’d use it. Here’s what I learned:

• He has no desire to start reading whole books; it’s too time-consuming.
• The ability to access a repository of solutions would reduce his need to create solutions from scratch. He could leverage what others before him figured out to create better solutions in less time.
• Using a tool like this could accelerate how he learns about specific things without needing to spend hours reading books. He would learn more without materially increasing the time he applies to learning.

This is an interesting use case because I didn’t anticipate nonreaders seeing value in what I’m building. But this conversation showed me that there are likely countless use cases I haven’t anticipated. When you present people with a way to save time, they quickly see the value in it. This software shouldn’t make people change their behavior but should complement what people are already doing (or not doing).

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

Cumulative metrics (since 4/1/24):

• Total books read: 54
• Total book digests created: 15
• Total blog posts published: 343
• Total audio recordings published: 103

This week’s metrics:

• Books read: 1
• Book digests created: 0
• Blog posts published: 7
• Audio recordings published: 0

What I completed this week (link to last week’s commitments):

• Read Empire: The House That John H. Johnson Built, a biography about publishing entrepreneur John H. Johnson
• Got feedback from five people regarding alternative layouts for a list of entrepreneurs on my blog
• Selected one of those layouts

What I’ll do next week:

• Mainly, focus on helping my family resolve the medical situation
• Read a biography, autobiography, or framework book
• Make it possible for software to be hosted in the cloud instead of locally

Asks:

• If you know any full-stack developers interested in working on the software for my current project, please introduce us!

Week two hundred fifty-nine was another week of learning. Looking forward to next week!

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

What I struggled with:

• No material struggles this week

What I learned:

• This week, I helped one of my parents with a medical situation. I learned a ton about medicine, but not much related to this project.  

Those are my struggles and learnings from the week.