Living 6 Months At a Time from Dot Com Bust to IPO

Patrick Byrne, CEO of Overstock.com

Last week’s soapbox with Overstock CEO and Chairman of the Board Patrick Byrne was the first time we had a speaker fly in to join us! It was such an amazing talk and we’re still talking about it around the offices at ZURB. Patrick was very down-to-earth, spending some time with us before his talk and asking tons of questions about what we do and what exactly are the sketches that litter our office whiteboards.

Chatting with Patrick was like talking with a friend over lunch. He shared stories about his mentor and friend, investment guru Warren Buffett. He told us about his three-time brush with cancer and how that shaped how he planned his days. He spoke about how he turned Overstock.com during the Dot Com Bust. And he gave a bit of investment advice, telling us why bankers rake you over the coals during an IPO and how he took Overstock.com to IPO with a successful "Dutch Auction" three years after he took over.

Feel free to listen to the podcast below as you read through some of the highlights of the event below.

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Living 6 Months at a Time

When Patrick was in his 20s, he had one question on his mind: If I’m gong to live for the next six months, what should I do today? That’s because Patrick spent two-and-a-half years in the hospital battling cancer. Once he finally got out, he didn’t want to set any long-term goals because he didn’t know if it would be his last time in the hospital. So he thought about doing six months instead.

If the gods whispered, "If you had six months left, what would you be doing?"

Patrick found that thinking six months ahead forced him to fill his days with meaningful activity and be more focused.

Life Lessons Of Warren Buffett

Patrick once worked for his friend Warren Buffett, leading a company that Buffett invested in. Their friendship began when Patrick was still in school and his father, who worked in insurance, met this "funny guy from Nebraska." They became great friends, and Buffett became Patrick’s great teacher in life.

Patrick characterized Buffett as a philosopher who figured out how the world worked with fundamental lessons for all of us that go beyond how to buy a business at four times cash flow. He shared one of Buffett’s life lessons:

Think of yourself as when you get out of college or whatever as getting a ticket with 20 punches on it. Every time you do something, you’re using up one of your 20 punches on it. When you’re finished with your ticket, you don’t really get to make any changes in your life. And you think that way as you take your first job, or as you get married, or as you make an investment. He says to me now that he got it wrong, he really should’ve reduced the punches from 20 to 10.

In other words, too many people stand at bat, bunting at the pitches instead of waiting for that one juicy and fat pitch.

Patrick also told us about how when he was about 13 or 14, Buffett gave him some stock advice. Patrick was all prepared for a secret mathematical formula, it turned out to be far simpler: if you buy a share of stock, you’re buying a slice of the company and have to ask yourself, "would I buy it even if the market were shutting down for five years tomorrow?"

You’re not thinking of yourself as buying a piece of paper trying to get in on the uptick. Think of yourself as buying a slice of an enterprise. Is this something you would own for five years?

Dot Com Bust to IPO in 3 Years

In 1999, Patrick invested and became the CEO of a company, which was then called D2 Discounts, with a vision to create an online discount store. In order to achieve that vision, the company was in desperate need of money. So six months before the famous Dot Com Bust , Patrick pitched his Overstock.com idea to 55 venture capitalists. And all 55 turned him down. Then the Dot Com Bust hit and an opportunity opened up.

Overstock had the supply chain to handle all these small retailers that went bankrupt during the bust, and the company started buying their inventory and liquidating them. Something that was backed by the very VC’s that turned him down initially. Patrick joked that he was “too mature to take any pleasure in that.”

When "20/20" asked Patrick how he felt about building a business on the backs of other people’s failures, he told them another Buffett life lesson:

If you’re not going to kick a man when he’s down, when are you going to kick him?

In the 12 years since then, Patrick has taken Overstock.com from $500,000 in revenue a year to $1.1B with a successful "Dutch Auction" IPO in 2002, less than three years after he took charge. When it came to why he used a Dutch Auction, Patrick said the problem with the conventional IPO is that it’s an ugly process and that the bankers try to "stick it to you."

In a traditional allocation, investment bankers will say they can get $20 a share, selling $10 million, of which they’ll take 7%, and thereby raise $200 million. Throughout the process, bankers will keep you pepped up until the night of the auction, then turn around, saying there are new numbers from Europe or Japan. Now the cost they can get per share goes down to say $14.

What bankers are actually doing, Patrick said, is stealing money from the company. By reducing the price, bankers are skimming more money off the top. To get an even wider profit margin, bankers will then stack in small bids to jump the stock to $30 a share, taking money from both the company and the public. Then there’s also the kickbacks that get paid out.

Dutch Auction avoids all this. Dutch Auction basically finds the real market clearing price, gets the real owners in the stock from the beginning. it’s a much better system than the conventional IPO.

A bank exec told Patrick that if he did a Dutch Auction, he’d be a "pariah for life on Wall Street." This is a system that has made the banks quite a bit of money and that they don’t want anyone to break into the system. Patrick looked at the entire process with another one of Buffett’s life lessons:

If you’ve been sitting at the poker table for 15 minutes and you haven’t figured out who the pigeon is, it’s cause you’re the pigeon.

Our chat with Patrick continued as we asked him questions about "The Big O" campaign for Overstock.com, the Worldstock division of the company and why women’s income in developing countries has an impact on the weight of children We’d like to thank Patrick for flying down all the way from Utah, regaling us with stories about Buffett, and giving us insight into the IPO process.

Don't Miss Out on Our Next Soapbox

Soapbox transcript

Dmitry: All right. I think people can hear. All right, folks, if you can keep moving towards me here, we're going to start. Well, thanks for coming to ZURBsoapbox. It's a really energetic crowd, lots of voices. Thanks for starting 2012 with us. This is an exciting year.

We have a lot of speakers lined up. If you guys have not been to ZURBsoapbox.com, we laying out the schedule there, all the way through June now. We have Aaron Levie coming up in two weeks, the founder of Box.net. So, just check out ZURBsoapbox.com. Awesome, awesome speakers coming up.

With that, I'd love to introduce Mr. Patrick Byrne, Dr. Patrick Byrne, but not a doctor. Right, Patrick. Just call him Patrick.

Patrick: Right.

Dmitry: One of top 25 influential people in e-business . . .

Patrick: Right.

Dmitry: . . . by Business Week.

Patrick: Knock on wood.

Dmitry: Ninety-two percent CEO approval rating, highest in the country. Of course, the CEO, Chairman of the Board and President of Overstock.com has taken charge of the company at the time of the dot-com bust, right around there. He has turned the company around from $500,000 in revenue to $1.1 billion. He has taken it public in less than three years after taking charge. Amazing story. I want to get into it.

Let's welcome Patrick Byrne to ZURBsoapbox.

Patrick: Thank you very much everybody.

Dmitry: Cool.

Patrick: Wow.

Dmitry: You can sit down.

Patrick: Okay.

Dmitry: Thanks for driving out. I mean, flying out. You came out from Utah, right?

Patrick: It's my home. Yes.

Dmitry: How's the mike? You guys can hear me pretty well, hear him pretty well? Okay. Cool. So, let's get into it. I'd love to kind of start with this six month mentality where you have trained yourself to think in these six . . . what would you do in six months?

Patrick: Well, Dmitry seems to have done a great deal of research. So, he's going to hold me to things that I said back in, but I had cancer three times in my 20s and spent a couple, two and a half years in the hospital. When I got out, of course, I didn't realize it was the last time, and so I figured what do I want to do for six months? If I'm still around after six months, I'll do something else, but I didn't really want to make any really long- term goals.

I probably drifted along like that for five or ten years before I realized that that was a pattern that . . . well, it actually seemed to be a pattern to think in terms of not to assume that you have 10 or 20 years. What is it that you want to accomplish? If God whispered in your ear, "You've got six months left," what would you be doing?

I know if somebody told you that you had a week left, I can sort of guess what you would be doing. It probably wouldn't be too constructive.

Dmitry: Right.

Patrick: If God told you that you had six months, you'd probably try to do something constructive. Anyway, I just realized over the years that that had become a pattern, a pattern of thought probably.

Dmitry: How has that helped you throughout your career that you've taken that?

Patrick: Well, I don't know that it has because there are certainly some thing that you do that you have to that take longer to pay off than that, but I'd say it has added a certain focus.

Dmitry: Okay.

Patrick: It's probably made me work a little harder than I should have, too.

Dmitry: So, Warren Buffett, I've always wondered. How did you meet him, and tell us a little bit about how you worked with him?

Patrick: Okay. I was extremely fortunate. I was 13 years old. My father was in insurance, and this sort of funny guy from Nebraska named Warren who no one had ever heard of at the time started . . . he wasn't this famous guy, met my pop and then I sort of met him coincidentally, and we started talking. We hit it off, and we became great friends. He was my teacher, and I would say, after my parents, he became my great teacher in life.

It was just kind of odd. Over the years, when I was in my 20s and 30s for him to turn into this phenomenon that he's become because I knew him as this, like you would know, this high school teacher. This fellow who I would write him letters and he'd call me, and we would discuss things, or I'd go and visit him when I could.

My parents used to let me skip school whenever he was coming because he would stay with us, actually. I would know he was coming because my mom would go out and get a case of Pepsi. Back then, he always had a hip flask filled with cherry syrup, and he would sit there . . .

Literally, I would skip school, and he would sit around with me for hours and drink his Pepsi, pouring cherry syrup in. Actually, he was a teetotaler, but he always had a hip flask with cherry syrup. And then, Coke came out with Cherry Coke, and his whole world turned upside down.

Dmitry: Wow.

Patrick: But he taught a lot.

Dmitry: You ended up working for him for a little bit?

Patrick: I went to work for him for a couple of years. That was between other things. I worked for him running some apparel manufacturing businesses.

Dmitry: Sum him up for us. What is he like?

Patrick: Well, I think Buffett's great. The right way to understand Buffett is not as a business man. He's a philosopher who figured out the world and figured out a lot of things about the way the world works. He had a great teacher himself, that he's always quoting, Ben Graham. He just applied these principles to business, but his fundamental lessons for us, I think, are not how to buy a business at four times cash flow. There are much deeper, deeper lessons.

In fact, there's a great book on him. The book that gets this across the best, I think, is probably not the most recent book by Alice Schroeder but a book by Roger Lowenstein from about 15 years ago called, "Buffett: The Making of an American Capitalist". It's actually a very good book about how he's really lived his life as an object lesson and proved certain principles. So, I can tell you lots of the details of different lessons he taught me, but that's a . . .

Dmitry: Tell us one. Tell us one.

Patrick: Okay. A business one or a life one?

Dmitry: A life one.

Patrick: A life one is think of yourself as when you get out of college or whatever and you get a ticket with 20 punches on it, and every time you do something, you're using up one of your 20 punches. When you're finished with it, you don't really get to make any changes in your life. And you think that way when you take your first job or as you get married or as you make your investment.

He tells me now that what he got wrong is saying there are 20 punches. You really should reduce it to ten because, in any case, if you thought of your life that way, too many people go along . . . his other metaphor for it is you're standing at bat at a very special baseball game, and there's no umpire calling balls or strikes. However, you do have a whole crowd next to you shouting at you, "Swing you bum; swing you bum."

Too many people go through bunting at every other pitch, and what you have to do is learn to sit there with your bat on your shoulders for years, and you just wait and wait, and somebody throws you a pitch and it looks really juicy, but it's a little high and inside. You let it pass. Somebody throws you another, and it's a little outside. You let it pass, but every once in a while, every few years, you're going to get a pitch thrown to you that is just the juiciest, fattest pitch you could imagine.

When that happens, you come out of your shoes on it. You swing for the fences on it, and yet that is just the opposite of the strategy most people take to life. They're trying too many different things. He talks about how much wealthier he would be if he had avoided the bad pitches, but even he is extremely selective. And even there, he used to say, that's been 10 or 15 years since we've talked about this. But he used to say, six or seven deals had really made him 120% of everything he had made.

Dmitry: Right.

Patrick: And then, the other dozen deals or so had given him the [inaudible 08:34].

Dmitry: Actually, like a kind farmer character.

Patrick: That's what he is. He's like your grandfather farmer, this kindly grandfatherly guy with all these great lessons.

Dmitry: I love it.

Patrick: I'll give you a stock lesson, if you want.

Dmitry: Okay.

Patrick: This is a simple one. I remember when I was about 13-14. He said, "I want to tell you something."

Dmitry: Thirteen.

Patrick: People either get in immediately, or they never get in all their lives, buying stock. I got all ready for some of the complex formulas or something. He said, "Look, you buy a share of stock. When you're buying a share of stock, you're buying a slice of a company. Buy a share of stock if and only if you buy it, even if only the market were shutting down for five years tomorrow.

So, you're not thinking of yourself as buying a piece of paper trying an uptick. You're thinking of yourself as buying a slice of an enterprise as that's something you would own for five years.

Dmitry: That's a good thing to remember.

Patrick: You'll go places after that.

Dmitry: He'll become famous. So, let's come back to Overstock. I've got tons of questions about Overstock. How did you get involved with Overstock?

Patrick: Well, actually I had been working for him, and then I retired, and I was doing a little bit of teaching. You want the theoretical answer or the rubber meets the road?

Dmitry: The rubber meets the road.

Patrick: I knew you were going to say that.

Dmitry: Right.

Patrick: At the fringes of retail, there are people that folks like you and I don't meet. They're called jobbers and they tend to be . . . you see, mainstream retailers optimize quantities of similar goods from smaller suppliers as goods become available. Wal-Mart buys something only if they get 200,000. They don't want small quantities.

Goods do become available in small quantities, and the people who step in and buy are called jobbers. They tend to be bada bing, bada boom who knows a guy who's got this deal going with [Titleist 10:37]. He's got a truckload of Cuisinart blender offer, a good 60% off, a wholesale offer, good for 60 minutes. That's how this whole industry runs. And when you walk down the street in Brooklyn, you see this kind of electronics below wholesale, that's where it's coming from.

The market compensates these jobbers for the fact that they don't have the efficiencies of normal mass retail by letting them buy at half of normal wholesale. So, our idea was let's start a company. It was about this size or smaller in terms of physical space.

Let's get half a dozen of these jobbers in the room. They'll be wheeling and dealing. We'll get a little warehouse in Salt Lake City for putting them on the Internet. We won't have everything that Amazon does, but what we have, we have for half the wholesale. That was the basic rubber meets the road, actually.

Dmitry: So, you get involved, and the next thing you've got to do is raise some capital.

Patrick: Yeah.

Dmitry: Why did you need capital?

Patrick: Well, we get involved, we actually got this started. I actually bought a business that was shutting its doors that day in the flea market industry. There used to be 5,000 people in the country who made their living at flea markets, and this was a supplier to the flea markets. I realized that buying them, this is what we could build Overstock. This company had some of the contacts. They had the jobbers already.

So, we got started in October '99. I came out here Thanksgiving of '99, and we launched our website. We had 100 products on it, and it was pretty rudimentary. And I thought I'd come out here to raise money. It didn't go well. I think you've heard this story.

Dmitry: This was 1999?

Patrick: Right.

Dmitry: This was still before the dot-com bust, money was flowing.

Patrick: This was when I was reading about folks dropping out of Stanford Business School with a business plan on a napkin. They'd go in and raise a hundred million dollars. I was just like, I've worked for Buffett. I'd run some companies for him. I'd run my own industrial torch manufacturer. I'd run different things. This has got to be simple.

I came out here and I went to 55 different venture capitalists to explain this idea and try to raise money, and I was turned down by 55 venture capitalists which tells you what a lousy salesman I am. But then this marvelous thing happened later called the dot-com crash. We discovered what we had built, the supply chain we had built to handle these small lots thing and over orders, and it worked pretty well on bankruptcies, too.

As all these companies went under, we stepped in and started buying them for their inventory and liquidating it, and that's actually how we got our momentum. We bought 18 companies funded by, I should mention, the same folks who turned us down for money.

Dmitry: That's awesome.

Patrick: I'm much too mature to take any satisfaction from that. There was actually a Doonsbury series on it called MyVulture.com, a guy with his business plan, MyVulture.com. He would go out and liquidate other dot-coms, and I did an interview. When the press got tired of writing the story of the crash, they started coming out with stories about us. ABC 20/20 did the story about what we were doing, and Chris Cuomo sat there and said, "I'd like to know how you feel about working on a business model that works on the stress of other people."

I said, "Well, Warren Buffett always taught me that the first rule of business is if you're not going to kick a man when he's down, when are you going to kick him?"

Dmitry: Nice. I like that rule.

Patrick: I don't know if I'm still answering your question.

Dmitry: No. Keep going.

Patrick: But the VCs were great, and I look back and my greatest regret for not getting venture capitalists is, to be honest, it would have been really smooth. We could have had a better board quickly, and it would have saved a lot of trouble. It would have saved us three or four years if we had been able to get venture capitalist money.

Dmitry: What was the pitching session like? They just didn't like the idea or . . .

Patrick: They didn't like the idea. It was December, 1999, through, say, March, 2000. And that's really when people were realizing that something was coming. The actual crash started around April 15th of 2000 as it was actually when people started selling stock and wanted to pay their tax bills. We came up to April 15th and the weeks leading up to that, the two weeks leading up to that, is actually when the bubble burst.

Dmitry: Right. And so, take us from 2000 through IPO, that time building the company up to IPO. Did you plan the IPO date or . . .

Patrick: Well, I was very attracted to Bill Hambrecht. He's a good friend of mine. He had started WR Hambrecht, and I didn't really approve of it. I don't really approve of the normal IPO system.

Dmitry: Yeah, the sort of traditional. I feel Patrick Byrne and traditional don't mix.

Patrick: Yeah. We don't mix. We were actually the first to do. We were the first to do it in 2002. We were the first to do the Dutch auction, and this is why. I'm taking you back to your old college economics, supply and demand.

Dmitry: I remember.

Patrick: Your banker comes in and tells you, okay, we're going to sell $20 a share. We're going to ten million shares, and we'll raise you $100 million, and we the bankers will take 7% of that. What actually goes on . . . So, you spend a million or two million dollars, and you're in a shop with 20-25 people in there. I guess we probably had 50 people, and you spend three or four months.

It's really an ugly process. The KPMG guys come in, and you go through all this due diligence, and the law firms and the bankers have lawyers, and it's an ugly two, three, four month process. You spend a couple million dollars getting ready. You go out on the road with a banker, and for six weeks it's stale ham sandwiches and BO.

You're presenting and you're presenting and then at the end, and this is the big joke if anyone has worked in investing is the pricing meeting because it's when these guys, who have become your close friends, these bankers come in and they stick it to you. They come in and they say . . . The whole time on the road show, oh, we're ten times over subscribed. They love us here. They love us. They keep you all pepped up.

The night before you go public, they come in and they say, "The new numbers are out on the new Euro labor market, and the Euro and the Japanese yen is up, and the sun's rising in the East and this and that and the other thing, and we can only get you $14. What they're doing when they do that is they're stealing this amount from you, from the company, and then they also do something. And this was very famous in the late 1990s, they do something called laddering.

So, they first go and they're going to allocate to a couple of hedge funds with their buddies. They're going to allocate the stock so they get it at $14 and they get that amount. There's a standard kickback in the industry of 30%. With tech deals, it's 40%.

There was a particular well known banker here in town whose guys were . . . his name's Frank, but one of his guys was caught on tape by the DOJ, saying in Frank's deals the cut is 50%. So, there's a kickback, and it comes in the form of excess trading commission. What they also do is the hedge funds that are getting the stock are told to put small bids on here and help take up the stock.

So, when you see these stocks come out at $14 and they run up to $30 right away, anyone with an economic sense knows that's not how things work. They basically have stolen this amount from the company and this from the public, and 30%, 40%, 50% is kickback which is why the last days of Arthur Levitt at SEC, he was all fixated on the subject of excess trading commissions because what they would do is there's a way to do the kickback without leaving fingerprints on it.

So, the Dutch auction avoids all this. The Dutch auction basically finds where's the real market clearing price, gets the real owners in the stock. From the beginning, it's a much better system than the conventional IPO, and we felt something of a moral obligation as strange as that may sound. We felt kind of a moral obligation, we were the first to do this. And we were told: if you do this, you will be a pariah for life. An executive vice-president of a bank said that to me . . .

Dmitry: Wow.

Patrick: . . . because this is a system that has made the banking industry quite a bit of money, and they don't want to see anyone else stand shoulder to shoulder to prevent anyone from breaking into the system.

Dmitry: Got you. Michelle, hopefully you're taking it in wherever you are. Michelle, our office manager, is crazy on IPOs.

Patrick: Warren Buffett says, "Never sit down at a poker table, and in 15 minutes you haven't figured out who the pigeon is, it's because you're the pigeon."

Dmitry: Oh, yeah. I remember that.

Patrick: If you're taking this stuff, unless you're one of those inside valued hedge fund players who are getting the inside scoop, you're the pigeon at the table.

Dmitry: So, you took the company to IPO in less than three years.

Patrick: Does that seem fast? You keep mentioning that.

Dmitry: It seems pretty fast to me. Maybe, these days some people go pretty wild with it, but what was the point where you decided it was time to do the IPO?

Patrick: Well, we had an extraordinary growth. Now, we did lose money, but it wasn't the gobs and gobs of money that most of the Internet retailers had been losing in the late '90s. We were typically running within 1% of breaking even and growing from $500,000 to $2 million the first year, $30 million, $70 and $30, $250, $500.

Dmitry: Oh, wow.

Patrick: Somewhere in there we needed capital, too. We couldn't support that growth out of our own cash flow. We did have positive cash flow, but we were running on a computer . . . our computer was half the size of that, It was an HP N Class box, and it was right when we were $20 or $30 million, but we know we were at $500 million.

It was somewhat like Star Trek, where during the Christmas season when the waves would show up, we'd have people with Star Trek put all our emergency power to the shields. We would actually be shutting off parts of our site and diverting the process. When we had really serious computer scientists come through, they would say everything we see here is literally shaking.

Literally, one guy said, one of the professors, "You have shaken my faith in the entire subject. There's no way. You haven't followed any of the rules. You have sort of slapped it together" and we were just nursing it along, but eventually we had to go out and buy $100 million worth of enterprise systems and do everything right. That was a couple, three year process. And that's really when we had to go out for the big money.

Dmitry: Okay. Let's talk a little about Overstock and how did that idea come about, and what impact has it made? How's it going?

Patrick: Well, thank you. Actually, it's my favorite business idea of which I'm most proud of. It's not intended to be quite a . . . but after two years of Overstock, where I was working really insane hours, I took a vacation and went to Cambodia. I was motorcycling around, and in Cambodia there are a lot of land mine survivors. They get retrained as potters and weavers and silversmiths.

I got to thinking about how great this product is, but it will never really make it into the mass retail system because, as I was looking at it all from the supply chain side, I realized that this is what we had just built, a great supply to handle. We could deal with handling small quantities of disparate products from the fragmented supply base.

So, I came back. We opened up on September 10th, 2001, an auspicious time. I opened up a department called World Stock, and the idea was we would just carry goods of Third World or developing world artisans and sell it at as small a markup as possible and just to cover our costs.

We've actually become . . . I think we might be the largest Fair Trade organization in the world after Oxfam. We do about, I think, $30 million a year. We send $75 million back to our suppliers, over 10,000 artisans in 50 countries. There was a period where we were actually the largest. By '05 or '06 we became the largest private employer in Afghanistan, which is 1500 people, 1300 women. We focus, where possible, on women, female suppliers. Of course, we're with both.

I'm not sure that saying you're the largest private employer Afghanistan is like saying, rich man in Bulgaria. We actually stopped in Afghanistan because of all of the corruption, and it started off with we want $100 to let this container leave to $100 to look at the paper work so the worker can decide the container can leave. So, now we work with the refugee camps there, but we focus on women.

I'm reminded of something I learned at Stanford, yes. My doctorate is actually from Stanford. I spent a lot of time on it there, and there was a development economist named Arthur [Descoop] that I worked under. I remember reading these papers about how they do an experiment where you take the weight of children. It's actually a really good indicator of health in a family.

And so, you take one village and increase the income in the village, and then you look for some change in the weight of children, and it turns out you get nothing. All you get is this economic paper which I thought was funny. He said you get an increase in consumption in alcohol, tobacco and hookers.

I said that to Mr. Buffett once, and he said, "Yeah. Yeah. And the rest of it they waste." Referring, I should be clear to an old line of W.C. Fields that I spent half of my income on whiskey and cigars. The other half, I waste. So, anyway, they do that experiment. You do it with women, and you immediately see this dramatic increase in the weight of children. They've done the experiment across central Asia, Africa and South America, and it's always the same effect.

If you want women invested in the future, they invest calories in their children. And so, if you want them to change the world, I think it's all about women frankly. And so, World Stock focuses, where possible, on women's co-ops. It doesn't come from any real political commitment. It's just a pragmatic . . . if you really want to change things, that's where you want to increase income.

So, World Stock, I think, we recently past about $75 million we sent back to the suppliers. It's just a department so within this website devoted to rapacious capitalism, Overstock, there's one little corner, World Stock, that does this. I understand the same idea has started. There are other companies doing this now. I haven't followed it too closely, but . . .

Dmitry: How do you choose what to sell and who to hire in terms of what they do?

Patrick: We have a wonderful woman who runs this, Angela Ramirez. She's actually originally from Colombia. I tell her she's got every woman's dream job: travel and shop. She's out there around the world. She builds supply chains in central Asia, Latin America, Africa. We have to find the right people to be hooked up with in each country, but we do have people we get hooked up with.

Typically, we avoid the NGO community, especially the big NGOs. But we do work with it sometimes, like in Haiti there was a wonderful NGO that had organized a couple hundred people into workshops. So, we deal with that NGO, but typically we're just going right out and finding co-ops to deal with. They sign and we also have inspections.

Basically, you don't want formal production. It's not factory production. It's household production or small workshops.

Dmitry: Tell me a little bit about what's going on with Overstock now, any new initiatives, anything interesting. You mentioned E20 before.

Patrick: Yeah. About two years ago I got very interested in E20. Well, we had our ups and downs, like all businesses. We had our ups and downs. We got profitable. We actually have been cash flow positive for most of our history. We got gap net income, made $8 million, made $15 million. Last year was a bit of a setback. We haven't announced our numbers yet, but it was a soft year. But it seems to be . . . it's business.

About two years ago, I got very interested in Enterprise 2.0, and there was a book by McAfee. It's that big book on Enterprise 2.0, it's developing platforms and tools and let you all collaborate, and I found a wonderful company out here actually. I have no financial anything in these guys. It's called "Spigot". It's some ex-Stanford guys who modeled the way that ideas flowed up in a healthy organization.

For example, let's put it this way. You've probably all heard of prediction markets. I didn't have the greatest success with prediction markets, and I was very big on prediction markets. Prediction markets are based . . . Let me take another step back. There's a book called "The Wisdom of Crowds", and it is how knowledge and information is scattered everywhere in an organization, and say, if you create a market and you let people bet on outcomes how much more accurate it is than conventional planning.

I didn't find that to be . . . it's true but there's a narrow class of problems that can be solved by that technology. It's what I eventually determined, and intuitively I'm super pro market. I'm a big fan of an economist named Friedrich Hayek. It means I'm very open to this paradigm that there is information.

The Dilbert cartoons are correct. I'm the Dilbert manager, the pointy haired manager sitting in the corner who doesn't know anything. I really think that that's a fair depiction. It's not that I don't want to know more, it's just hard. It's the nature of organizations. You can't know everything that's going on out there. So, if you can create tools that surface the knowledge that is out there, it's healthy.

Well, prediction markets were supposed to do that. I had not the greatest success with them. In the process I came on this company, and I think it's a new type of software. It's been around a few years. It's called Idea Graduation or Idea Management software, and I think they pretty much invented the class although there's a few smaller competitors now.

The idea is something like a prediction market only it's an innovation community. You can enter ideas, other people are commenting on ideas voting them up and down and such, and the better ideas gradually float out of the system. It mimics what's supposed to happen in a healthy organization, and the fact that you voted something up, it matters what other people think of you, positive or negative.

So, it really has a lot of cool technology. Anyway, it turned out to be enormously powerful. I speak positively about them when I can. I have no interest whatsoever in this company, but they seem to have a real powerful new type of technology.

This is how I spend my time these days. For the last two years my focus in the company has been on the Enterprise 2.0 stuff. We went and got SharePoint. Microsoft SharePoint up to 2007 was not considered a very robust or user friendly product. They came out with a new version last year, and it's fantastic. So, there's a common platform. It's a dashboard that everybody in the company, 1500 people, come in and log onto it in the morning. We're making that the platform on which we hang all of this technology that we're building.

We found Enterprise 2.0 to be one of the best investments we've come across. It's a great use of time, and it's very cheap, everything from you log on in the morning. We're trying to make the company more and more agile. Our software development has become agile. I'd love to break up all the departments in the company and have things be based on projects rather than stove pipes and chimneys. We've had a lot of success with this technology.

Every project has a community of people involved in it. And so, it has something like almost a Twitter. It has all this Enterprise 2.0 social networking technologies project by project and you can come in the morning and all your deliverables for all the different projects you're on are all surfaced for you.

If there are any metrics reporting on how various projects are going, we can put up videos. It's just really let us . . . my great problem is how an organization that's grown to 1500 people, how do you keep it from becoming a bureaucracy. I've told you I would love to break our company into a hundred pieces of about 15 each, 15-20 each.

Well, this technology is a step in the right direction. So, I highly recommend exploring Enterprise 2.0 technology, SharePoint being it has about 40% of the market. But there's other very good systems out there that just plug into SharePoint.

Dmitry: Cool. I would love to open it up to the audience if you have questions. Brian is already raising his hand. Go ahead.

Brian: So, I'm really curious about your interest in the world market. Talk to us about the big O [inaudible 35:13].

Dmitry: The big "O".

Patrick: You discovered the secret of the big "O". Well, I have a fabulous colleague named Stormy who walked in off the street for a temp job about ten years ago, a $8 an hour temp job. Within about six months, she had about 100 people. At one point we had a B2B after her. We had people calling stores and selling things, and she was great. She just kind of worked her way up in the company, and after about two years she was a vice-president.

We never did any branding at the time. All of our advertising from the early days in the Internet; well, in the early days of us being online in late 1999, it was all online because we discovered this thing which back then was the secret sauce. Now, everybody knows it, but you could just stamp a cookie with the ID of where somebody came from. And then, you look at how much you're spending on Yahoo versus how much you're spending on MSN, and you do some simple arithmetic, and you figure out which dollar is getting you more.

Believe it or not, in 1999 and 2000 people were not thinking that way. It was amazing. There were enormous arbitrages. We would find misprices of a thousand fold. There were places that something was mispriced by a thousandth of what should have been priced for the market at one particular site. Now, I assume that everybody understands that now, right? Believe it or not in '01, '02. So, we branded.

We never did any branding until this woman came, and she came to me in June of 2003 or 4 and said I've got an idea. Let's start branding, and let's brand the "O". Let's make the "O" what people remember, and some day let's change our name to O.com. And we could even introduce products like Costco has Kirkland. Costco sees that something is selling well. They go to that same factory in Taiwan. They get the same microwave oven made, a couple of buttons are changed, and they call it Kirkland. We could do that. That was the idea.

So, in order to brand the "O" and we didn't use an ad agency. She went down to Hollywood, found a director, found this actress, wrote the script and produced this commercial. That was the one of the woman saying, "Have you discovered the secret of the big O?"

It took about two months. It was brilliant, and that took us from about $100 million to $500 million over a few years, that campaign. The woman in question, her name is Sabina. She's German, if you listen closely. So, anyway, that was the big "O" campaign.

However, as you may have heard last year, we've never been able to get O.com. There's a whole bunch of legal reasons that ICANN is not releasing. They're also not releasing single letter dotcom URLs. They are with other things like dotinfo and such, but they're not doing it with single letters. There was a moratorium put in 1999 which hasn't been lifted.

And so, we did try last year to introduce O.co, and it turned into a big . . . Well, it didn't work well. It didn't work well because what we discovered is we were introducing it as a short cut with the idea that if it caught on, we might eventually see its brand emerge out of Overstock. We weren't really adamant that that would happen. We were going to see if that was possible.

What happened though was in the fourth quarter we discovered that for every 13 people trying to reach O.co, eight were typing O.com. So, we were just throwing away a huge amount of revenue, branding dollars and such. So, we have turned back, and you don't see O.co in our advertisements, or you just see it listed as a short cut. It's not front and center.

So, that's the story of the big "O", Overstock and O.co.

Audience Member: What percentage in your audience is female?

Patrick: About 55. We have really a nice female demographic and a very different shopping behavior than men, too. It's really interesting. If you look at the first [inaudible 40:03] and, of course, I assume everybody knows that as you talk about branding and marketing, it's hard not to lapse into awful sounding generalities.

For example, the average order size of a woman, when she comes, her first order might be $70. Then, she sees if she likes the customer service. Then, she orders something for $90, and it works up like that. When men come, they come several more times before purchasing, but their first order size might be $180. I think it's among the old school marketing. It's breaking things up by demographics because now you can do so much on behavior versus demographics.

There are some patterns in male and female shopping that are quite startling how different they are.

Dmitry: Any other questions? Go ahead up here.

Audience Member: When you just really started, it looked like you leveraged liquidation markets quite a bit. At what point did you need to look to alternatives to [inaudible @41:05] to grow?

Patrick: Well, interesting question. At the beginning, we were buying from jobbers, and then we grew to the size that we'd become a jobber. And then, we became an uber jobber. We started selling to the [inaudible @41:25] supplies. There is a natural limitation on liquidation in that if you're doing true liquidation, you can't really get above about 30 stores because liquidation goods become available in blocks of a few hundred, at the most, five to six thousand.

And there just are not efficiencies. If you're breaking products down, if you've got 100 stores, you're getting 300 of some item, you're sending three to each store, it just gets less and less efficient. So, the pattern has been for liquidation companies to, at some point, go and source in China or source in Asia.

You get something that works. You get a doll that works. You take it to Hong Kong, and you say, "We'll knock it off and we'll leave something out and we'll make it a bit cheaper." That's been the pattern of liquidation. It hasn't affected us as much because in a sense, we have just one store. It's still very efficient for us to buy and bring things in.

However, somewhere along the line we've some suppliers where we started seeing we were buying vacuum cleaners from them month after month. Let's say we were in Chicago. Let's save the expense of you trucking them to us. We'll just open up a hole in the back of our database. You load them up. It'll appear in our site, and we'll send the orders to you electronically and ship.

Of course, everybody knows that now. We were the first. The eBay model is purely like that. We were after eBay. We were the first retailer with that kind of a model. We call it the partner model. That's become 85% of our business. So, 85% of our business is, in fact, jobbers out there. They're small manufacturers who are making the stuff and selling it through our site. 85% of the products on our site are actually not in our warehouses. We don't touch them.

Dmitry: Well, it's right on 1:00 p.m. So, if you guys have questions, come up right after the event, but I'd like to thank Mr. Patrick Byrne for such an awesome talk. It's a great talk. I've loved all the answers. I have tons more questions, but you guys are free to go or come up and chat. There we go.

Patrick: If you have a good offer on something or see a way to do business, call collect. Call collect.