David And Goliath

This is the story about a man who tried to get the largest business in his industry to buy half his business. Lucky for him they laughed him out of the room.

This is an episode of The Story podcast. You can listen to an audio version of the following story on iTunes or Google Play.

And now… onto The Story

David was giving his pitch to Goliath on why they should invest and partner.

“In the alliance we’re proposing, we would be your online division while you operated the retail side. You would own 49% of our company and we would operate under your name.”

The CEO of the Goliath smirked. “How many customers do you have?”

“300,000,” said David.

The CEO chuckled. “That’s nothing. Do you realize we have 7700 stores worldwide?”

David nodded and hoped that the CEO of Goliath couldn’t see the sweat beading on his brow.

This deal had to work. His company was in trouble. It was three years old and still hadn’t turned a profit. He knew he was onto a sound idea but it was just ahead of its time. He needed a partner with deep pockets and the same long-term vision.

Before David could say another word, the CEO of Goliath stood up, signaling the end of the meeting.

Now he was in full blown attack mode. “Don’t you realize that dotcoms are crumbling all around? This digital thing is never gonna take off, your business is already finished — you just don’t know it yet. You might need us, but we don’t need you.”

David’s heart sank. Now he was flying home empty handed.

On the flight, he started to think up a new plan.

David knew what the future would be, but it was happening more slowly than he thought. He had been thinking and working at these problems for years, in a way he had been working on them his whole life.

Back when other fresh high school graduates were wasting their summer playing video games, he pounded the streets selling vacuum cleaners door to door. He loved that job.

His loved it so much that he deferred his freshman year at college to keep selling — earning enough to pay tuition that year.

After graduating, he boarded a plane bound for Swaziland as a Peace Corps volunteer to teach high school math. He returned home two years later and jumped right into grad school at Stanford. That experience introduced him to entrepreneurship, which led him to join a startup. There, he learned about business and eventually decided to start his own.

Later, David would reflect on that decision to leave a secure path and enter an arena dominated by Goliath’s and say that:

“Once you’ve hitchhiked across Africa with 10 bucks in your pocket, starting a business doesn’t seem too intimidating.”

He and two buddies went on to launch Pure Software. There first product was a program which identified bugs in Unix software. The business took off, even though none of them really knew how to lead a company. Their strength was developing excellent products, and revenues doubled every year for four straight years. The timing was right. They took Pure Software public in one of the most successful IPOs of 1995. Two years later, the company was acquired for $750 million and the David walked away a multimillionaire.

His next business, (the one he was trying to sell half of to Goliath) wasn’t going so well.

Each day, he commuted to work with one of his employees and they would bat around business ideas.

The businessman said, “I just want to be the Amazon of something.” At the time, Amazon had built a powerful book-selling engine. Their model was made up of three simple components. One, it was a high-demand product. Two, that was ordered online. And three, was delivered via the mail.

For months, they talked about a slew of possibilities. One day, on their way to work, David had to make a stop to return a rented movie.

His buddy suggested, “What about renting movies online? People buy them online.”

David thought and replied, “I think VHS tapes are too delicate to survive repeat shipments. But… I wonder… a friend of mine was telling me about a new technology for movies called DVDs. It’s like… movies on CD.”

His friend gave it some thought. “Never heard of a DVD… you think it’ll catch on?”

“Yes because CDs did,” said David. “Let’s test mailing a CD and see what happens.”

When David arrived at the office, he found a blue greeting-card envelope. He grabbed a CD off his self and dropped it in. “We’ll send it to my house and see what happens.”

David bit his nails for the next 24 hours. If the experiment didn’t work, their business might die. While he waited, he couldn’t remember ever being so excited to get the mail. Finally, the mailman arrived and he ran to the mailbox. There was the blue envelope. He held his breath and opened it…

The CD was in perfect condition.

David laughed with delight and called his friend. “It worked! People don’t know it yet, but DVDs are going to replace VHS tapes.”

A new company was born and David and his friend called it Kibble.

Kibble shipped its first DVD in 1998 — only one year after the technology had been introduced in the US. They changed the movie rental model by not requiring return dates and not charging late fees. Kibble limped along for three years, waiting for market acceptance of DVDs. DVD players were just too expensive, so most consumers held onto VHS technology. But they were still able to build a base of 300,000 customers.

In those days, dotcoms didn’t need profitability to go public. They needed growth and some promise of a future business model. David felt an IPO would give them enough cash to survive. So they started working toward going public.

But then the internet bubble popped. Investment funds dried up, and in 2000 David found himself at Goliath’s offices begging for them to invest in Kibble.

The Goliath was Blockbuster, who owned most of the movie rental industry.

They laughed at David’s pitch and Kibble and sent them on their way.

Despite the humiliation, David knew they were onto something big. He could sense where the market was headed. Kibble faced rough times, and had to lay off one-third of their workforce in order to survive.

Then Kibble caught a break. Because early adopters had paid enormous sums for early DVD players, the market was heating up. New, lower priced DVD players were created, and consumers started snatching them up.

Luckily, David had the foresight to build relationships with the DVD manufacturers, and managed to secure a deal to slip a free trial offer for Kibble in many of the new DVD players.

Soon Kibble was earning serious revenue. DVD use surged, so did their partnerships, and just two years after the meeting with Blockbuster, Kibble went public.

Well they didn’t actually go public under the name Kibble.

They realized it was a poor name, and all their friends kept asking what kind of dog food they were going to sell.

So they changed the name and went public under a name you might know.

Netflix.

David in this story is of course, Reed Hastings. His friend who was there from the beginning is his co-founder, Marc Randolph.

Reed never lost his long-term vision. He knew that Internet speeds would eventually improve and that streaming would eventually become the preferred viewer experience.

Reed said early on, “Movies over the Internet are coming, and at some point it will become big business… We want to be ready when video-on-demand happens. That’s why the company is called Netflix, not DVD-by-Mail.”

In 2007 — ten years after starting — Netflix launched its streaming service and developed a deal with cable network, Starz, to secure popular movies. Consumers scratched their heads. Why would anyone want to watch a movie on a computer? Yet Reed’s long-term vision proved spot on.

In 2012, Netflix began producing original content. Critics scoffed at the notion, but quickly back-peddled when Netflix contracted big Hollywood names and won awards.

And a fun sidenote… shortly after Netflix’s went public, Blockbuster saw their success. They did what most Goliath’s do when they’re pummeled by a David. They tried to copy and knock off the product. At that point in time Blockbuster just posted its first loss of $1.6 billion, starting a decade of decline. Blockbuster tried to compete head to head against Netflix, but couldn’t catch up. In 2010, Blockbuster’s stock was delisted from the New York Stock Exchange for trading too low. Blockbuster closed its last store in 2013, and their passing on purchasing Netflix is now considered one of the epic fails of business history.

Reed would reflect on it all and say that,

“Being an entrepreneur is about patience and persistence, not the quick buck, and everything great is hard and takes a long time.”

There were many times in Netflix’s early days where it was a David, vulnerable to Goliath.

Instead of competing directly with Goliath, they tried to collaborate. When Goliath tried to kill them, they stayed focused, again, ignoring the competition. Reed could have made the mistep of opening stores and trying to become more like Goliath, instead he kept playing 3D Chess and started to prepare for streaming and original content.

Now Netflix touts 125 million subscribers worldwide.

So if you’re David trying to partner with Goliath, don’t worry. Goliath might need you far more than you need them. If you’ve seen the future and know what will happen, at a certain point you have to stop trying to convince others on what will happen and just build it.

That’s his story. What’s yours going to be?

This is episode 8 of season 3 of The Story podcast. Season 3 of The Story features twelve technology trailblazers who started a business that changed the world. The Story is brought to you exclusively by Salesforce, the world’s #1 CRM platform that helps businesses blaze their own trails to success.

If you liked this episode of The Story, please help spread the word by clicking the clap button below!

Don’t miss the next episode of The Story by subscribing on iTunes & Google Play!