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Innovation Mandate: Patrick Byrne Lays It On The Line

Our schools are awful and our financial markets are corrupt, insists Overstock.com's outspoken CEO, so no wonder that U.S. technology innovation is in jeopardy.
InformationWeek: How does that hit home for Overstock.com in terms of your experience as an employer?

Byrne: In the last four years, we've gone from having seven developers to having more than 100, and we're trying to get to 150 this year. To get the kind of engineers we want, we have to hire senior people. These are people who have five to 10 years of experience. Today you have to go to the senior level to get somebody who has the full skill set that we need. I don't think that was true a decade ago. We have a full recruiting team that's all over the country trying to bring in that sort of talent. I'm not talking talent that's super rarefied, where they would otherwise be professors. Yet we have to have an extraordinary recruiting effort to hire 10 new developers. We've gone through everybody in Utah, everybody in the Rocky Mountain Range, and we now go all over the country.

InformationWeek: Do you do any outsourcing?

Byrne: We did at one time. We had people in Russia and India, but we've pulled back all the development we had overseas. We've moved to an agile development model, which we love. It breaks down the wall and the distinctions between business and developers. Business units are now being led by technologists. You can't do that if part of the team is in India and you're having half-hour phone calls each night at odd hours. It took several years to get the culture of the company right for agile development, but it's just so much better than the old waterfall approach. We would never go back.

InformationWeek: Let's go back to your comments about access to capital. Can you explain your battle with Wall Street?

Byrne: I grew up around Wall Street and I worked in the financial services industry. I was exposed to a modest level of what I would call inappropriate behavior within the financial world. That's nothing new, but about four or five years ago, I became convinced that it's being taken to a whole new level. Most importantly, the parts of the system that are supposed to be the checks and balances -- the SEC and the financial press -- had been co-opted. When we set up regulators to protect society from certain industries, sometimes they get captured by those industries. I think that's what happened with the SEC. It's now pretty obvious to anyone with a room temperature IQ that we have deep, systemic problems with our capital markets that went on underneath the SEC's nose.

InformationWeek: Hasn't the financial crisis helped to clear the system and expose all that?

Byrne: Not at all. The current recovery is fugazi -- it's a fake. We're going to be lucky if we're able to just hold here at the current level for three or four years. The deep corruption in our capital markets is only beginning to be exposed. The network of hedge funds all trading on insider information is just the beginning of what will be exposed.

InformationWeek: How does this impact the technology industry and you as a CEO?

Byrne: I don't understand why the venture capital community and Silicon Valley entrepreneurs have put up with it. The IPO system is corrupt. We went public in 2002 with a Dutch auction two years before Google took that route. We were among the first companies [in the U.S.] to go public through a Dutch auction. We turned down banks and did it just on principle.

Any time a human is able to allocate guaranteed profit, you get kickbacks. It doesn't matter if you're talking about a Paraguayan customs official or a white-shoe Wall Street banker. The normal IPO system puts bankers in a position to allocate shares, and there's this whole kickback system associated with that. The Dutch auction eliminates that, which is why Wall Street has fought teeth, toes, and fingernails to prevent the approach from getting any traction.

You have to be out of your mind if you take your company public using the conventional IPO system. It's a system for taking wealth away from the public and the current shareholders and transferring it to favored hedge funds.

InformationWeek: A big part of Silicon Valley's success has been access to financial capital. So has that system really gone wrong?

Byrne: Ten years ago, I read somewhere -- I think it was in The Economist -- that the difference between Europe and the United States is that in the U.S., capitalists will give money to a guy who doesn't own a tie. In Europe, it's all about did you go to the right school. Ten years ago I was a little down on the venture capital community, but I've changed my mind on that.

VCs are out of favor right now, and they are not having good results over the last two years. But the good ones do add a lot of value because the engineers who have the great ideas have so much to learn to make a business work. The good VCs don't just provide capital. They are a constructive force. They professionalize the company and provide strategic guidance just by having some adults there who have been around.

I have friends who I have seen struggling on their own to make a project work. When they come under the umbrella of a VC, they get surrounded by people and guidance and bright board members, and the company gets more professional and starts hitting its marks much more reliably.

InformationWeek: Some look at Google, Amazon, Facebook, Apple, and others and point out that these are all U.S., and mostly Silicon Valley, success stories. Should we really be that down on our prospects?

Byrne: The holes we have dug as a country are bigger than what companies like Apple can get us out of. Overstock.com works with some tremendous, U.S.-based technology vendors. Teradata is unbelievably good and has been a big help to us. Akamai has given us tremendous technology that has helped us forego a lot of capital costs. RightNow has given us leading customer-service capabilities. Look at the move toward the cloud. I think that's an incredible paradigm. So there are a few dozen companies creating this wonderful, leading-edge technology.

But we have to import engineers from India and China to make them tick. Silicon Valley can still be turning out leading-edge technology while the rest of the country is going the way of Detroit. Those are not incompatible possibilities. As we're approaching 50% of people graduating from high school, those people are not going to be able to participate in that world that is being created by Silicon Valley. Do we end up with a country where you have some technological elite, who are generating the value, and then a mass of government that's in the business of transferring that value?

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