SM: What was the source of your own financing?
PB: We were turned down by 55 venture capitalists. I do not intend for that to be a dig at them. In retrospect, I have a much more positive view of the venture capital industry than I did back then. That just tells you how bad of a salesman I am. At the height of the dot-com boom, when anyone was getting financing, I went around to all those venture capitalists and was turned down.
I put money into it. There has always been a group of investors that I could go to that had made money in the other dozen or so deals I had done in the previous decade. I pretty much went all in myself and a lot of other people I knew put in money. Over the first few years it took $30 million. We went public in 2002. The initial funding was friends, family, and people who had done business with me before.
SM: With that initial financing, you won bankruptcy auctions and picked up inventories from failed dot-coms like Miadora. Jewelry happens to be a pretty profitable category, right?
PB: Yes. It is a good category. You want something where the shipping costs do not overwhelm the price of the product. Toys tend to be somewhat poor. It costs $40 to ship a $35 Barbie Dream House. However, you can ship a $10,000 diamond tennis bracelet for $10.
SM: What other categories have you found meet those criteria? Clothing can be in the high end, but in the low end it is not.
PB: Correct. Early on that was our problem; we had low-end clothing. We did acquire some in bankruptcy [clothing] that worked, but after that we were just buying low-end, unbranded.
SM: There is a lot of brand dilution concern among designers. They do not give inventory to discounters.
PB: Right. We learned that if there is a $200 Nicole Miller leather jacket that we could sell for $100, or an identical no-name leather jacket that could be sold for $50, people would not buy the $50 jacket. They would buy the Nicole Miller jacket. We did not have a continuous supply of those kinds of goods. We only got them through bankruptcies. When we ran out of bankruptcy deals, we discovered that we could not do those leather jackets.
Over time, Overstock became a good enough brand that people trusted it enough to buy brands that were not high-end. That only developed later. Later on, the high-end brands did start selling to us because we represented a channel that they needed. We now do have a lot of really good brands on our site.
SM: Is that the reason your apparel sales have grown for you again?
PB: Yes, that is accurate.
SM: Did you ever experience difficulty getting inventory when it came to jewelry?
PB: Jewelry is not such a branded product, other than watches. As a result we did not have nearly as much difficulty getting into the jewelry business.
SM: What about consumer electronics? That is a branded category.
PB: In electronics there are six major brands. We had a lot of trouble getting them to open up to us. We have all of the electronic brands, but there are limits as to what types of products we can get. They will not open up their fresh running products to us.
This segment is part 3 in the series : How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne
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