Photo: OC Metro Magazine

Dealtree, Inc. Location: Laguna Hills Founded: 1999 Business: Reverse logistics, online auctions Employees: 12 Status: Profitable Biggest challenge: An early cash crunch Best decision: "Focusing on our technology." Garry Heath and Paul Fletcher, co-founders of Dealtree in Laguna Hills, exemplify the kind of seasoned, high-tech survivors who are taking what they learned in failed enterprises and building successful new companies. They started their online auction business after being laid off from Buy.com, an ambitious Orange County e-tailer that became a boom-and-bust poster child after letting expansion and spending get too far ahead of revenue and profits. Dealtree has been profitable since the first month. "We are extremely focused on profit," says Fletcher. "We've doubled our revenue each year, and the only month we lost money was September 2001, because we couldn't sell anything the second half of the month."

Dealtree operates in conjunction with online auction leader eBay, tapping its 49.7 million registered users to sell open-box and end-of-life inventory for large manufacturers, distributors and retailers.

"Many stores don't reshelf products that are returned after being opened," says Fletcher. "They don't want that open-box environment and they aren't sure if the products are defective. We bring them here, test them, do minor refurbishing and sell them on eBay."

End of life inventory comes from manufacturers and distributors. "Seventy to 80 percent of what we sell is technology products and the depreciation rate is much greater for those kind of goods than for many others. Computers and servers sitting around in a warehouse lose value very quickly.

"Traditionally, a company with 1,000 out-of-date computers sells them to a liquidator for 10 or 15 cents on the dollar. We take those same 1,000 units and sell them to 1,000 different people and get 35 to 70 cents on the dollar. We make money and get a higher return for our customers."

Heath and Fletcher started their business in Fletcher's garage with a couple PCs, some folding chairs and a $79 piece of shareware they downloaded from the Internet.

"We started with seven pallets of Sony laptops and PDAs that Buy.com consigned to us to sell," says Heath. "Just like in the IBM commercial that is on TV, we put the stuff up on eBay and saw the orders immediately start popping up on our computer screens."

Fletcher says the best business decision they made was focusing on developing top-notch technology. "We hired a programmer and developed a system that encompassed everything we knew we needed. We created a platform that allows us to do a lot of stuff with very few people."

Dealtree's proprietary software integrates all aspects of the business from inventory control to processing orders to customer service, allowing a 12-person shop to service, sell and ship more than 10,000 items a month and respond automatically to more than 1,500 e-mails each day.

"We know where every item is at all times and the system won't let us ship until we have been paid," says Heath. "That is how we financed our growth - with our cash flow. We get paid before we ship the consigned goods and we wait 30 days to pay our suppliers."

The pair did run into a temporary cash crunch early on when their online credit card processor held up a big chunk of funds.

"We were making sales but the money wasn't showing up in our bank account," Heath says. "When we called to find out why, they said they were holding the first $50,000 as a security deposit against chargebacks. No one had told us that! We were doing everything on a shoestring and that was a shock."

Fortunately, their cash flow grew fast enough to overcome that speed bump and they have since gotten their money back and kept chargebacks to 1/2 a percent through good quality control and customer service.

Another challenge Health and Fletcher face is converting customers to a new paradigm. "It is hard to go in and tell people they have been doing it wrong," says Heath. "They are used to their way and have relationships with the liquidators and that can be a tough nut to crack."

"Our customers are good at what they do," says Fletcher. "The manufacturers are good at manufacturing, the distributors good at distributing and the retailers good at retailing. But they are not good at dealing with returns. That is our core competency - reverse logistics."

"A lot of people are good at getting product from A to B, but they don't know how to get it from B to A," says Heath. "Microsoft and Sun used to grind up their returns and put them in a dumpster because they weren't prepared to deal with them. We make it easy for companies to handle stuff that comes back. We do all the work and they get a better return on the dollar."

Dealtree also captures customer information for its suppliers, supplying the type of data companies normally get from warranty cards. "Most people don't send in the warranty cards so the companies don't know who they sold their product to. We open the door for them to generate repeat business from known customers."

Dealtree benefits consumers even as it helps its suppliers.

"We got four servers in last Thursday," Fletcher says. "They showed up on our website on Friday and a guy called this morning (Monday) and asked if he could come over and look at them. We tested them after he called and he picked them up a few hours ago. He saved about $35,000."

The technology that allows Heath and Fletcher to turn product over so efficiently is still evolving.

"The system keeps getting better," Fletcher says. "We are doing twice the business today that we did a year ago with the same number of people because the technology is more efficient."

"Last year, we were working 12-and 16-hour days," Heath says. "This year we are working nine and 10-hour days." That's progress.

Read the complete version of this story HERE