Selva Book Club: No Rules Rules by Reed Hastings and Erin Meyer
The below is taken from Selva Ventures’ Q1 2022 Quarterly Investor Letter
This section of our letters will take passages from a relevant investment or business book and share learnings and reflections directly related to Selva.
The fourth installment was inspired by the growing of our team and our desire to build a high-performing culture with candor and creativity. This quarter we read: No Rules Rules by Netflix founder Reed Hastings and Erin Meyer.
Passage: Policies and control processes are put in place to deal with employees who exhibit sloppy, unprofessional, or irresponsible behavior. But if you avoid or move out these people, you don’t need the rules. If you build an organization made up of high performers, you can eliminate most controls. The denser the talent, the greater the freedom you can offer.
Netflix is known for offering a radically high level of trust and low degree of bureaucracy. The idea of “no rules rules” is that structure can stifle performance, but core principles must be in place to remove the typical red tape. The first and most important concept, which we’ll always strive for at Selva, is talent density. Hiring fewer truly great people allows you to instill trust in all team members, and really let them fly. There can be so much temptation to lower the bar when a hole needs filling, but the cost of sacrificing talent density in a hire is far greater than the quality of that one person’s work; it’s the integrity of offering freedom to the whole organization.
Passage: At Netflix, it is tantamount to being disloyal to the company if you fail to speak up when you disagree with a colleague or have feedback that could be helpful. After all, you could help the business — but you are choosing not to.
The first email I ever received from David Bonderman came in my first month at TPG. I had sent my team’s investment memo to the firm and a VP responded with strong opposition to the deal, courteously apologizing for his “voicing of a strong opinion”. David replied all (to the whole firm) saying only: “no apologies for strong opinions”. Such a simple and short note is at the root of a conflict that exists in every investment firm (and company). If I oppose a teammate’s idea, he or she will like me less tomorrow — but doing so will help the firm in five to ten years. It is so important to get those ideas into the open — more information and opinions yields better decisions. It’s fascinating that it takes a culture as radical as Netflix to realize such an openness of ideas.
Passage: I outlined my mistakes in detail and expressed my regret for having hurt the company. This time, not only did I feel more relief and build trust with my staff, but also people began telling me about all sorts of mistakes they made, mistakes they’d been previously sweeping under the rug.
Vulnerability builds trust and invites more vulnerability in return. There are few things more powerful as a manager than sharing your fears and admitting your mistakes to your team; every time I do so I’m amazed by how much I learn immediately afterwards. It takes deep courage and conviction to do so, and Reed Hastings provides just more reason to hold that conviction.
Passage: In the industrial era, the goal was to minimize variation. But in creative companies today, maximizing variation is more essential. In these situations, the biggest risk isn’t making a mistake or losing consistency; it’s failing to attract top talent, to invent new products, or to change direction quickly when the environment shifts.
I love to say that at investment firms, our products are our decisions. We are evaluated by the quality of our decisions; namely how much our projection of how the future will unfold comes true. These decisions are far from cookie cutter; sure, they need process and consistency, but outlier returns need contrarianism, and contrarianism needs creativity and conviction. To build a high level of creativity and conviction means exploring even the most radical of cultures, which makes studying companies like Netflix so interesting, insightful and inspiring.
Please drop a comment on what you think of the format and what suggestions you have for future books. Next quarter’s book will be Becoming Trader Joe by Joe Coulombe.