Movers & Shakers
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.
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.