(fall/winter 1997: half a year until launch)
AFTER WEEKS OF HOUNDING him (for whatever reason, Reed seemed reluctant to actually sign and date the check), your first investor finally hands you the check that will let you rent an office, hire employees, and buy a few folding tables.
It’s more than that, of course. The check represents the ability to start. It’s the difference between an idea in your head and a company in the world. It’s the difference between nothing and something.
It’s everything. It’s also quite a bit of money.
You scrutinize the check, looking again and again at the dollar amount. You make sure there are enough commas. That the date is correct. That the signature resembles the one you know.
A part of you wants to drive all the way down to Santa Cruz, to the bank with the recessed lighting, the gleaming tile, the golden safe door half-open behind the counter, gleaming from the darkness like a yacht’s steering wheel. To change your shirt into something with a collar, maybe wear a tie—to dress up for the occasion.
One point nine million dollars is a lot of money. You feel nervous handling it, like you’ve robbed it off someone else. Better to go to the closest bank you can find. Who cares if it’s in a strip mall in Los Gatos? You need to get this thing out of your hands, fast.
You begin to feel like a fugitive.
In line at the bank, you touch the check with your sweaty hands, again and again, until it’s damp in your pocket. To anyone else it might look like you’re getting away with something.
You’ve handled money before, of course. And you’ve worked for companies that threw around amounts considerably larger than this.
But you’ve never held it in your hands.
The line moves slowly, but eventually you reach the teller. You think: this will make her day.
You think: I bet she’ll be impressed. I bet she’ll discreetly signal to the manager, and he’ll usher me into a back office, where there will be antique furniture and a Persian carpet. He’ll pour me some champagne and make polite conversation while an underling handles all the details.
One million nine hundred thousand and 00/100 dollars.
You hand it over and there’s nothing. No glimmer of recognition, no hint of surprise on the teller’s face. Business as usual.
“You want any cash back?” she asks.
With Reed’s money in the bank—and with the Pure Atria merger a done deal—we could finally move out of the Best Western. But we didn’t have to move far: I found a place just across the street, in a nondescript office park in Scotts Valley. The lease seemed exorbitantly expensive to me. It was also multiyear, which introduced a note of optimism into the proceedings that I hoped wasn’t entirely foolish.
It was a far cry from the glittering corporate campus I’d known at Borland—or the gleaming blond-wood-and-succulents open-plan monstrosities currently in vogue, which all seem to include fireman poles and beanbag chairs. Our office park was completely anonymous. It looked like the kind of place where a dentist might have his office, or a tax attorney. In fact, there were a few psychiatrists there, and an optometrist. Mostly, though, the office park had been taken over by small startups, which entered and exited leases in a revolving door of boom and bust.
There was a flower bed out front next to the flagpole, and in it were planted perpetually fresh flowers and plants. Nothing really grew there, or was tended to, exactly. Instead, adult, in-bloom flowers were planted into the soil, and when they died they were dug up and replaced with a new round of in-bloom tulips or pansies or daffodils. Cost was no object, as long as the flowers were in bloom. Passing a gardener with a wagon of fully bloomed tulips to be hastily inserted into the earth, it was hard not to see the garden as a particularly perverse metaphor for the life cycle of a startup. Plant, bloom, die…and be replaced.
Our office was a big, open room with a hideous green carpet. It had once housed a small bank, and in fact the walk-in safe was still accessible, its door left unlocked. There were a few offices on a long wall, a conference room, and an office in the corner with views of the parking lot and the Wendy’s across the street. As the CEO, I claimed it. And then had nothing to put in it.
This was not a luxurious space. We spent less than a thousand dollars furnishing it. There were no Aeron chairs, no Ping-Pong tables, no refrigerator full of LaCroix. There were six or seven folding tables, the cheap ones that caterers use. There was a mismatched set of dining room chairs I’d scavenged from my storage unit. If you wanted more than that, you had to bring it from home. I distinctly remember several employees dragging beach chairs into the space, the seats and legs still covered in sand. The first time Lorraine came to the offices, she pointed at our conference table and asked, “Are those our old dining room chairs?”
Instead of furniture, we spent money on technology. We bought dozens of Dells online and had them shipped to the office. We bought our own servers—in 1997, there was no shared cloud—and installed them in the corner. We bought miles of cable, and wired the office after-hours, ourselves. Extension cords and ethernet cables twisted through the office like orange and black snakes. Wires hung down from the ceiling like vines.
I don’t remember our move-in day. We might have ordered some pizzas and made a few Costco runs. But more likely, people just trickled in, bringing with them whatever they needed to do their work. If you stood in the first Netflix office sometime in the fall of 1997, you would have seen a room that resembled some unholy cross between a computer geek’s basement and a politician’s on-the-road campaign war center. And that’s just the way we liked it.
Our office sent a clear message: This isn’t about us, it’s about the customers. The reasons for working there weren’t exotic perks or free food. It was the camaraderie and the challenge, the opportunity to spend your time solving hard, interesting problems with smart people.
You didn’t work for us because you wanted a beautiful office. You worked for us because you wanted the chance to do something meaningful.
At the same time that we were moving into our offices in Scotts Valley, I was contemplating—and ultimately preparing for—a move of my own.
For the first few months of the Netflix experiment, I was living a five-minute walk away, in a tiny rental house. Lorraine and I had moved there in 1995, after years of living up in the mountains. Tired of the thirty-minute drive into Santa Cruz—and my hour-and-a-half trek over the hill to work each day—we’d sold our house in the mountains and moved into a small rental in Scotts Valley, putting away money for the future.
I enjoyed walking to and from work. Being so close to home made it easy for me to leave at dinnertime, rush home to be with my family for a few hours, and then return to the office to finish up the day’s work. But it wasn’t a sustainable solution for the future. I wanted a yard that was larger than a postage stamp, and Lorraine wanted a big house to raise our kids in. There were three of them, and in our tiny rental, it always seemed like they were running into each other. They didn’t have much space to play outside, either, and we were so close to the highway that the noise of cars kept us up at night.
But our attempts to find a new home hadn’t been going anywhere. There were no places in our price range anywhere close to Santa Cruz, and when we looked over the hill, toward San Jose, what we saw was even less encouraging. Realtors, hearing what we had to spend, showed us places that were almost comical in their inadequacy. One place had grass growing on the roof—and it wasn’t on purpose. Another came with a flock of goats.
Then, in October, a three-story house on fifty acres in the hills outside Scotts Valley came on the market. It had once been a vineyard, and in the early twentieth century it had been a country resort. The owners were octogenarians who couldn’t maintain the property anymore. The first time we took a tour, dragging the kids along with us, we fell in love. It was perfect for us: a big house on a lot of land.
It was also just shy of a million dollars.
That night, somewhat panicked, I called my mother for advice. She was a real estate agent and knew my family almost as well as I did.
“We really want this house,” I said. “But it’s a lot of money, more than I’ve ever spent. And I’m just starting this new company. Do I really need the added risk? What should we offer?”
“If you want it, don’t try for a bargain and risk losing it,” she told me. “The anxiety of paying that much won’t last. But the enjoyment of living there will last forever. Go all in.”
So we did.
Did I have buyer’s remorse? Of course I did. Even the night after the papers were finalized, when Lorraine and I were sitting on the deck with a few of our friends, drinking a bottle of wine and watching our kids chase each other in the lengthening shadows cast by the redwoods that towered over our new lawn—even then, when we were ostensibly celebrating our great fortune, I was thinking: Is this the biggest mistake of my life?
What if the company failed? What if I lost my job? What if DVDs-by-mail never took off?
“Remember our post-college days?” Lorraine said that first night, after our guests had driven away. “Our splurges?”
When Lorraine and I were first married, we were about ten thousand dollars in debt. At the time, I was working my first job in direct-mail marketing and making about thirty thousand dollars a year. Lorraine’s income was about the same; she was making cold calls as an entry-level stockbroker. We set a goal to get out of debt in a year, and for the next twelve months we kept a meticulous notebook, counting every single expenditure, no matter how minor. Toothpaste: $1.50. Donut at the train station: 75 cents.
Once a week, we allowed ourselves two big splurges: a square pizza from the Athens Pizza joint down the street, and a case of bar bottle Schlitz. When we’d drunk the beer, we took the bottles back for the rebate.
“We did it once, we can do it again,” I agreed.
By nature, I’m not a cheap man—in fact, much of my behavior in business is a kind of rejection of my own father’s meticulous carefulness when it came to money. The expenditure notebook was an aberration, a reaction to a particular problem. Normally, when there’s money, I spend it. Not wastefully or stupidly—but in the boom-bust cycle of Silicon Valley economics, I’ve always believed that you should spend the money you’re given. Spend it wisely, but spend it.
Although I had quite a bit of startup success early on, I was never a big equity holder—so although I did okay, there weren’t huge rewards. My first actual windfall came when I joined Borland, just a few months after my thirtieth birthday. My timing was good: the products took off, and so did our stock. I was wealthy…but only on paper, since all I really owned were stock options. One night at a bar in Hong Kong, I was bellied up next to Doug Antone, Borland’s senior VP of sales. We were talking about how well the stock had done, and when I shared that I hadn’t realized any of that, he almost spit out his drink.
“What are you waiting for?” he asked. “As soon as any of my stock vests, I sell it. There is plenty more upside if the stock keeps going up. But if it goes down, you’ll be glad you took something off the table.”
From that day on, not only did I adopt that philosophy, but I became one of its biggest advocates. I always told my employees to sell when they could. One of my favorite expressions actually came from Lorraine’s old boss from her entry-level stockbroker days: “Bulls make money. Bears make money. Pigs get slaughtered.”
(That boss was later indicted for insider trading. He might have done better to have actually followed his own advice.)
Despite my professed ambivalence toward money, anytime I paused that first fall at Netflix, anxiety about my finances set in. The only cure, it seemed, was work. I didn’t worry about Netflix’s future when I was deeply engaged in ensuring it. And I didn’t despair about our new house when I was working on it. I spent every Saturday and Sunday for months fixing the place up before we moved in: ripping out vines, clearing out brush with a tractor, removing dead trees that the previous owners had left where they had fallen ten, twenty, even thirty years prior.
I had a vision of bountiful grapes and fruit trees. After an East Coast childhood of canned fruit salad and pears in heavy syrup, I wanted nothing more than to walk out in my backyard, pluck a piece of fruit right from the tree, and eat it standing on land that I owned. But to do that, I needed to do some planting. I needed to clear a space, plant a sapling, and week by week, month by month, nurture the tender thing that grew there under my care.
My daily routine in the fall and winter of 1997, in the months before we moved, was everything I’d ever hoped it would be. I’d wake up and help Lorraine get the kids ready for school, and then I’d hop in my car for the three-minute drive to the office. If the weather was nice and I wasn’t in a hurry, I’d walk there. All day I’d find myself working on an idea I’d come up with, in the pleasant company of a team of people I’d handpicked for their obvious talents. We were deep in the planning trenches. For someone with ADHD and—I’ve long suspected—a mild case of OCD, there are few more pleasant places to be.
Every day at work, I had my pick of hundreds—no, thousands—of problems to work on. And since I was in charge of and surrounded by brilliant people, I could focus on what interested me. That’s one of the great pleasures of being at the helm of a startup in the planning stages. The company is small enough that everyone in it has to wear multiple hats, but big enough that you never have to wear one that doesn’t fit properly.
Here are just a few of the issues that faced us that fall:
1. Setting Up an Office
You never have to think about it when you’re working at a large public company like Borland or Pure Atria, or even when you’re an employee at an established startup. But I was learning that when you’re in charge, it ultimately falls on you to ensure that the most basic elements of office life—telephones, printers, staples for the stapler—are there for your workers. We needed to buy phones. We needed to buy computers. We needed to wire the office so that all of our gadgets actually worked. And even if we spent roughly five minutes total thinking about décor, somebody still had to buy the folding card tables and set them up in something approximating a straight line.
Not only that, I had to make decisions about things I’d never considered. Did we want the office cleaned weekly or biweekly? How do you organize keys? Which bank should we use? Should I hire an outside firm for HR?
In a way, all of these decisions were a kind of microcosm of the problems facing us as innovators in the late nineties. When you’re building a business from the ground up, you start from scratch—from zilch, from nada. And you have to figure out how to make it work. The same was true for a tech startup in 1997, especially one that focused on using the emergent power of the internet to sell a brand-new piece of technology. DVDs were barely in the world, high-speed internet was in its infancy, and there were no premade templates for online sites. If you wanted to do something, you had to build it yourself—from scratch.
2. Building a Team
Now that we were an actual company, we needed to fill out our roster a bit. We had a core of seven people—Christina, Te, Eric, Boris, Vita, Jim, and I—but there were a lot of holes. We needed someone who could connect us with DVD users. We needed someone who could connect us with studios and distributors. And we needed back-end coding and tech talent—the shortest resource in Silicon Valley. We would always need that.
By late fall, I’d somehow convinced Mitch Lowe to join our ragtag bunch. He says, jokingly now, that the reason he finally decided to drive an hour and a half each way to work for us was so that he could finish more of the presidential biographies he was working his way through on tape. He was going chronologically, starting with Washington, and after several years he was only up to John Tyler. (He’s really into presidential history.)
But I think the real reason Mitch joined us was because he’d gotten a little bored with his stores and was starting to realize that his movie kiosk experiments were still a few too many years ahead of their time. The software company he had been pitching when I met him at VSDA, Nervous Systems, Inc., was still a few years away from viability as well.
With Mitch we had an invaluable resource: someone who understood the rental business perfectly, had a deep Rolodex of studio execs and distributors, and knew how to reach customers with the movies they’d want. He brought a wealth of experience and knowledge. I knew as soon as I convinced him that he’d be one of the most important hires I ever made.
His wife, though, still thought it would never work.
To help us connect further with customers, Te brought in Corey Bridges to work on customer acquisition—or, more specifically, on something we jokingly called Black Ops. A onetime English major at Berkeley, he was a brilliant writer with a gift for creating characters. He’d realized, early on, that the only way to find DVD owners was in the fringe communities of the internet: user groups, bulletin boards, web forums, and all the other digital watering holes where enthusiasts met up. Corey’s plan was to infiltrate these communities. He wouldn’t announce himself as a Netflix employee. Posing as a home theater enthusiast or cinephile, he would join the conversation in communities geared to DVD fanatics and movie buffs, befriend the major players, and slowly, over time, alert the most respected commenters, moderators, and website owners about this great new site called Netflix. We were months from launch, but he was planting seeds that would pay off…big-time.
As for tech talent? Through Eric’s contacts, we hired a talented engineer from Pure Atria named Suresh Kumar, as well as a brilliant but eccentric German named Kho Braun. Eric, Boris, and Vita all said Kho was a genius. He usually rolled into the office around three or four in the afternoon and stayed till the wee hours of the morning. Sometimes, if I got to work especially early, I’d see him at his desk at six in the morning, surrounded by dried-out tea bags and half-eaten muesli bars. He was the one to wire the office, completing the whole task himself overnight. He was industrious, creative, and mostly silent. For the entire time we worked together, I’m not sure I heard him say more than twenty words.
3. Building the Basics
I firmly believe that a healthy startup culture arises from the values and choices made by the startup’s founders. Culture is a reflection of who you are and what you do—it doesn’t come from carefully worded mission statements and committee meetings.
You can talk until you’re blue in the face about how your employees are your greatest asset, or about how you want to ensure that your office is a great place to work, but eventually you have to start taking the small steps to put your words into practice.
So once the check had been deposited, I had to make some decisions. How much would we pay people? Would employees get benefits? How about dental?
Not all that much.
Everybody in the early days took a pay cut to work for us. That wasn’t because we were cheap. It was because we didn’t know exactly how long we needed to make our money last—and because we’d need a lot of it to build up our stock of number four on this list.
In those days, I kept a jar of silver dollars on my desk, which I got in rolls of forty from the bank, and at every weekly meeting, I’d hand one out as a “bonus” to the employee who’d made that week’s largest contribution to the company’s success. “Don’t spend it all in one place,” I’d say.
Still, if I was going to ask everyone to sacrifice on behalf of our future success, I wanted them to participate once that success (hopefully!) arrived. While our salaries at that point were well below what might be available elsewhere, each of those early employees received a large stake in the business in the form of stock options. They wouldn’t be making a lot up front—but we were betting on ourselves that the eventual payoff would be huge.
4. Building an Inventory
Our goal was to have the most complete collection of DVDs in the world. It made good marketing copy—and it would separate us from our brick-and-mortar competitors, who were still living in a world where only a handful of their customers owned a DVD player. It barely made sense for them to carry DVDs at all, never mind one copy of every DVD ever released.
Not only was that our goal, but we planned on having multiple copies of popular titles. That way, when renters wanted to watch something, we would never leave them hanging.
But how did we decide how many DVDs of, say, The Mighty Ducks 2 to order? Eventually, of course, we developed complex algorithms to accurately match supply with anticipated demand. But back then, we were just guessing. Or more accurately Mitch Lowe was guessing, using his decades of consumer knowledge to come up with an ideal lending library. (As it would turn out, he was rarely wrong. He knew a blockbuster when he saw one—and he could smell a turkey like it was in the oven in the next room.)
He could also help connect us with distributors. In 1997, DVD distributors were a motley bunch, spread across dozens of states. They were small niche companies, and sometimes it took days to get somebody on the phone. It could take weeks to get a shipment—and half the time it wouldn’t have everything you ordered in it. In our quest to build a library of every DVD in existence, we often spent weeks looking for a single copy of a single hard-to-find title. Even though there were only a few hundred movies available on the format, it took us months to build a sizable library.
And then what? We had to find somewhere to put it.
This was Jim Cook’s territory. Remember that bank vault? He converted it into a storage facility, and for months experimented with different ways to store, locate, and ship what we hoped would eventually be thousands of discs a day.
Shelving? Bins organized alphabetically? Jim’s task those early months was daunting. When I walked back to the vault in the early months, it looked like a cinephile hoarder’s basement. But eventually it began to resemble nothing more than a video store—titles organized alphabetically and by genre, with hot new releases segregated into their own section.
5. Building a Mailer
One of the biggest problems we had to solve before launch was the mailer. My initial test with Reed had been a simple greeting card envelope, but we couldn’t send thousands of DVDs across the country as naked discs inside flimsy envelopes. We needed a real mailer, one that would protect the disc on an unpredictable journey through the interstate postal system. It also had to be sturdy enough that it could be used again, when the customer sent the disc back. We had to make it easy to use. Intuitive to figure out. And it had to be small and light enough to qualify as first-class mail. The moment our mailer veered into fourth-class-mail territory, our costs went up and delivery speeds went down. And neither of those outcomes would be sustainable.
We experimented wildly: cardboard, cardstock, craft paper, Tyvek, plastic. We tried squares and rectangles of all sizes. We inserted tabs. We tried foam pads. Thousands of designs ended up on the cutting-room floor after Christina, Jim, or I deemed them unworkable. There were days I went into the office and couldn’t tell if the table near the back was filled with Netflix mailer materials or the detritus from one of my son’s preschool cut-and-paste projects.
Getting the mailer perfect was key—it was the first physical point of contact we’d have with our users. If our discs arrived broken, or late, or dinged, or scratched—or if a user couldn’t figure out how to mail discs back to us using our packaging—then we were doomed. It was a massively important project, and one that I was heavily involved with in the early days. I stayed late tinkering with prototypes, sketched out ideas on napkins during meals. Sometimes, at night, I dreamed about mailers.
6. Building a Website
This one is probably the hardest to imagine. The advent of the cloud and the proliferation of website-building tools—Squarespace and the like—have made it easy for anyone with a MacBook and an internet connection to buy a domain, upload some photos and text, and throw a website together. But in 1997, at the dawn of the e-commerce age, the idea of a website was still only a few years old. And if you wanted to use the internet to sell something, then you had to build it all yourself.
You had to buy not only server space but…the servers themselves. You had to do more than buy a template for an online store—you had to write the code for one.
That meant thousands of hours of design, coding, testing, and fine-tuning. What did we want the website to look like? How did we want a user to navigate it? How would it look when you searched for a film? How would films be organized on the site? What kind of content did we need displayed for each film?
Once a customer had chosen a movie, what would they see? How would they input their information? What would happen if they made a mistake when entering their state’s abbreviation or their credit card information?
It is no exaggeration to say that the questions were nearly infinite. And to answer them, we had to coordinate two vastly different camps: the designers (mostly me and Christina) and the engineers who actually had to build the thing. Engineers are, by necessity, literal-minded. They will do exactly what you instruct them to do. So Christina very quickly learned that she could leave nothing to chance. She began drawing the site by hand, painstakingly replicating exactly what we wanted for each and every page, along with dozens of notes in the margins about how each piece would interact with the next. Then she’d hand it over to Eric, and his team would build it. We’d look at what they’d built and make further suggestions, which they’d incorporate.
Back and forth, back and forth, back and forth.
We did this for months.
Getting the picture? We had a lot to do.
But there was real pleasure in it: in the planning, in the problems, in the puzzles we had to solve. I had so many tasks set in front of me, so many little pieces I had to prep and build, that there wasn’t much time for anxiety about the future. It all disappeared when I was in those offices. I forgot about the half-finished bedrooms in the new house I could barely afford. I forgot about Logan’s private school tuition bills. I forgot about Alexandre Balkanski frowning and telling me, “This is sheet.”
I felt like my father, working on one of his trains. I found satisfaction in lining up all the tasks, investigating all the problems, and then working to solve them. I was in the basement, building something, knowing that someday in the near future I’d have to invite everyone else in to have a look.