Supernatural Agency: Online business tales

Frank Schilling has a great piece on a long time domainer who understands where this whole thing is going. It’s worth the read just to see his sites which blow away the average parked page.

The fascinating thing about this piece is how it demonstrates how primitive and early stage the entire domaining market is. Putting up simple, well-designed affiliate sites on domains puts someone five years ahead of the rest? Frank is a very successful domain entrepreneur so I respect his POV but this is ridiculous- If people are making millions just parking thousands of longtail domains and trading, imagine what the untapped potential is?

Prediction: Some big money is going to come in and back someone with a vision and change the whole model. The challenge is manufacturing highly relevant content and matching it to relevant domains. Parking companies try to automate this but just end up with generic content based on primitive keyword matching. On the other end we have things like blog networks who are figuring out the content generation side but don’t understand business strategy. The people who match these two things and add in a strong monetization strategy that is highly relevant to the domain subject will be the leaders.

This is why our business has a founder who understands SEO, SEM, design and programming and a founder who is a writer/producer with strategic marketing skills. You need both to move beyond what will soon be laughably primitive models like the current parking systems. It will be a lot more work but the values will be exponentially higher.

Paul Graham of Y-Combinator on how the entire environment for doing start-ups has changed. I don’t need to elaborate- just read the post. Brilliant and incredibly important for any entrepreneur.

If anything validates our virtual business model this is it.

The current situation with domains as a business model has led to comparisons with real estate, the Western land rush in the 1860s, the gold rush and other opportunities. Lately, as our focus has increasingly been on our domain portfolio, I’ve been trying build a comparison model between a classic investment portfolio and a domain portfolio. There are similarities:

• You take a risk by investing in unknown potential
• There is an active market based on an auction model (stocks are basically sold in a constant auction)
• There is easy liquidity- the domain can be quickly transferred. This is where the real estate comparison breaks down.

And there are significant differences:

• The cost of entry for domaining is ridiculously low, so low that many domainers start off as hobbyists. This low cost is rapidly creating what we think will be a huge price balloon, comparable to the Tulip Mania that brought down the Dutch economy hundreds of years ago. Regular people used leverage to buy and sell bulbs. The prices went crazy, the smart people got out and the newbies got crushed.
• The market we see today is a tiny fraction of the potential.
• You can change the value of a domain through your own actions. This is the big one. I can’t increase Apple’s share price by buying an iPhone. I can improve the value of a domain through SEO, content, SEM, various monetization strategies etc. Here it does resemble real estate except that the cost of developing domains is only measured in time spent- there are no physical costs to speak of.

I’m pondering this because I’m interested in raising money to expand our portfolios. This is a very different value proposition than raising venture money in exchange for stock. An investor might invest in a specific domain or family of domains and that investment would be used to grow that portfolio’s traffic and revenue (which might be distributed as a kind of dividend or reinvested). At some point the portfolio is sold and proceeds distributed to the owners. We might keep a management fee in addition to our own ownership portion.

I don’t know the legal implications of this kind of offer- these are not securities. When you think about it, we’re in wholly new territory here.

“The other good thing about the tech sector is that it is mostly debt-free. If anything, tech firms are over-capitalized, which is why they’ve been using their huge cash piles to buy back stock during the last few years.
Tech firms don’t have to borrow to fund their growth, which means they aren’t likely to get hurt if corporate credit standards tighten.”

That’s John Shinal from Marketwatch. His point is that in a market meltdown like the one we’re currently experiencing, tech stocks are a refuge because they don’t depend on debt to run their businesses. Why am I writing about this? Because the companies we’re building, and I speak collectively for any Internet-enabled start-up, are fundamentally different than businesses whose ability to function is largely based on their ability to borrow. We don’t make things, nor do we use debt to leverage investments. And neither does Apple, Google, Cisco, etc. They make things but they don’t really. Wha…?

They design and market things. Their computers, iPods, switches and server farms are not made by them, they’re made by contract fabrication companies in Asia. What they make is intellectual property. The interesting thing about IP is it is not capital-intensive, it is brain power-intensive and environment-intensive. By environment-intensive I mean that these companies have created a business environment that nourishes focused creativity, creativity that has a basis in market reality.

The businesses going down this week are banks, mortgage lenders, M&A companies, hedge funds, etc. These businesses are little more than gambling operations. They borrow (or convince investors) and gamble that the can resell the money at an incrementally higher rate. The past few weeks the house has called their bets and the markets have swooned. In the meantime, the tech companies have accumulated piles of cash from selling superior technology and automated digital services and are relatively separate from the fluctuations in capital markets.

Our business model is the same thing, albeit on a microscopic scale in comparison. We provide services that don’t require a lot of bodies and hardware to scale. We don’t need a line of credit, in fact we probably don’t need a real venture round (I may regret committing that to print- wait, there’s always Delete!). We really don’t need anything except time, energy and imagination (and a broadband connection).