How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne (Part 2)

SM: What was the genesis of Overstock.com?

PB: I came up with the idea just after I retired and went to Dartmouth. When I was over in China with the American college students, we brainstormed different names for the company. The name Overstock.com from a brainstorming and voting session. There were 20 students in that group.

SM: It was a concept that came out of brainstorming and thought incubation with your students?

PB: The concept actually had come along early. There was a company servicing vendors in the flea market industry. There were about 60,000 people making their living by selling at flea markets. This company was their main supplier. It was originally based on a fax broadcast method. If you were in the flea market business then you would sign up to get the fax product sheets weekly from this company.

Those faxes would list the current product offerings, such as 200 watches, televisions, and other products. People would buy off of those faxes and then resell the products at a flea market. That business was going out of business. so I bought a 60% stake in it. I literally bought a stake in that company the day it was shutting its doors.

The former owners had started a website called DiscountsDirect. I don’t know it if was transactional. I came back from China and had worked over the concepts from the students. In October 1999, I took over running the company and we created a new website, which was Overstock.com.

SM: What kind of products were you selling on Overstock.com in 1999?

PB: There were fewer than 100 products which were very cheap. The math did not work for a variety of reasons, and the economics did not work. The products were novelties or products for less than $100. They were generally the kinds of products you would find at a flea market.

SM: Were people buying?

PB: Back then, the system was set up so that every time we had a sell an email would get broadcast to the office. We had 18 people. When a Casio watch would sell for $35, we would get the email and cheer. An hour later something else would sell. We remember days where we sold $1,000 the entire day. Business did accelerate, and we learned as we went.

SM: What did you learn about your products? How did you know which ones to base a business on?

PB: Watches, home goods, and furniture sold. We would look at what was selling and reinforce that. Apparel did OK early on and then it died. Apparel and handbags did not do well for a long time. In the middle part of the decade we shifted back into apparel, and it has done well for us.

In those early days we made a deal with Safeway. They saw Wal-Mart coming, so they started putting end caps in their stores with overstock merchandise. They made a deal with us that required us to start finding those overstock items for them. That was a nice deal which lasted a couple of years. It helped us to scale quickly.

SM: What was the content of that deal?

PB: We bought products for them that they put in their stores. They could move a large amount of product, so that really helped us become serious buyers. Jewelry was good, and so were sporting goods.

When the dot-com bust occurred, there were a whole bunch of companies that went out of business. We went out and bought their inventory. We got it extremely cheap in bankruptcy deals. We did ToyTime.com, for example. They had 120 truckloads of toys. We did Miadora, which was a jewelry company. We did a bunch of those kinds of bankruptcy deals. We were essentially a bankruptcy liquidator for some time.

This segment is part 2 in the series : How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne
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