Supernatural Agency: Online business tales

I’ve been following Hecta since they went public in London last year and I spoke with Clark Landry regarding their plans a few months ago. Now, they’ve made a few big purchases of domain portfolios, notably a 60,000 name group bought for $1.42 million US. or about $24 per domain. They project a gross annual revenue of about $750,000. from these domains or an average of $12.50 annually per domain.

Clark told me their business plan was to look for domains that were underdeveloped due to lack of cash or bandwidth to do so. This purchase, even without any idea what domains it includes, looks like a no-brainer. I’m guessing the owner was looking to cash out but selling for 2x revenue doesn’t look that great to me. As has been pointed out by others, domain registrations are going to eat about one third of the revenue each year. I’d guess Hecta will cherry pick the good domains and offload the rest, especially if they are going the development route. It will be interesting to learn more about their approach.

A sale like this should be an increasingly rare event in the domain world going forward. Until recently domainers have looked like land speculators, grabbing swathes of swampy land, marginally improving it and selling off parcels to the next wannabe magnates. As the domain world wakes up to the fact that being a developer is where the big money is they’re going to be keeping the choice pieces for themselves and building luxury condo towers on them. Instead of a nice 300% return (like the Hecta deal), you’re going to be looking at much bigger returns on much smaller portfolios, IMHO.

If this is the case we could see a flattening of the resale market for marginal domain names as big portfolio holders dump the crap. While we don’t sell much, I do watch the auctions, Sedo and Afternic, etc., and it looks like this is already taking place. Personally I’d rather have one strong dot com domain than 1000 oddball ones. The definition of a ’strong’ domain for me is one with an obvious development roadmap and a high potential for monetization.

How much would a domainer think a domain like eBuild.com is worth? $500,000? A million? As a parked domain it might be valued somewhere in those ranges. And if you owned it, as a domainer, you’d probably be pretty happy with that valuation. But what if I told you that its real value is more like $220 million?

Think I’m crazy? Well, what if I told you that, as a comprehensively developed site, it brings in $22 million in annual revenues off of 300,000 unique visitors monthly? Does 10x revenues sound unreasonable?

That revenue number and visitor count are real. The site is a comprehensive source for builders to learn about and source materials and fixtures. So, one more question: Let’s say you invest 2 million into building out a site like this. Say ten full time people working two years and a pretty good PR and PPC budget for promotion. Wouldn’t $22 million in revenues and a big valuation be worth that investment?

Or would you rather sell it for $500,000?

The future of domain valuation is not in type-in, parked, PPC sites, IMHO. It’s development because the stakes, long term, are much higher. This is where the big money is going to go.

This list covers just about everything I’ve ever heard of or thought about for raising cash to get started. If anything it shows the degree of commitment and risk you need to have to get out there and succeed.

This is not an endorsement of all of these techniques!

It’s been a good week for interesting blog posts and Evhead has a great piece on evaluating a business you’re thinking of starting or investing in. They look at these criteria:

• Tractability: How hard will it be to build and bring to market
• Obviousness: Will people ‘get it’ easily?
• Deepness: How much value will you deliver?
• Wideness: How many people will ultimately use it?
• Discoverability: How will people hear about it?
• Monetizability: How will you make money?

and finally,

• Personally Compelling: Do you really want to do it? (whatever you do, don’t skip this one!)

I ran a business plan contest for several years and read hundreds of executive summary plans in the process. Very few (less than 5%) answered even one of these questions. I doubt a single plan would positively address all of them. That’s OK because business planning is the process of learning what business you’re in and whether you want to be in it. We started out thinking we were affiliate marketers and found out that we were domain investors/developers. We changed our focus because domaining was more interesting and broader in potential, a more strategic business.